The following table provides the number of shares of common stock subject to outstanding stock options and restricted stock units held at December 31, 2008.2009.
PROPOSAL TWO
APPROVAL OF AMENDMENT TO THE 2002 EMPLOYEE1995 STOCK PURCHASE PLAN
The Company’s stockholders are being asked to approve amendments to the 1995 Stock Plan (the “1995 Plan”) which will (i) increase in the number of shares of common stock reserved for issuance by 10,600,000 shares, (ii) amend the counting provisions for full value equity awards, and (iii) the decrease the maximum term of stock options to seven (7) years.
As of March 22, 2010, options to purchase an aggregate of 10,990,835 shares of the Company’s common stock were outstanding under all of our equity plans, with a weighted average exercise price of $8.78 per share and a weighted average term of four years. In addition, a total of 2,551,857 restricted stock units issued under all plans had not yet vested. In 2004, stockholders approved the use of up to 1,800,000 forfeitures in the 1995 Plan from the 1999 Non-Statutory Option Plan. As of March 22, 2010, only 739,013 shares were available for future grant under the 2002 Employee Stock Purchaseequity plans, including 87,820 shares from potential additional forfeitures from the 1999 Plan (the “ESPP”)(excluding the 10,600,000 shares subject to approval at the Annual Meeting). The Company intends to make annual optionand/or restricted stock unit awards to current employees during its open trading window period in February 2011 and the planned grant of these awards would not be possible unless this amendment is approved by 2,000,000 shares.stockholders.
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Equity Plan Information as March 22, 2010 | | |
|
Stock Options | | | | |
1995 Stock Plan | | | 8,853,248 | |
1999 Non-Statutory Stock Plan (the “1999 Plan”) | | | 1,690,795 | |
C-Cube Microsystems 1994 Stock Option Plan (the “the 1994 Plan”) | | | 58,792 | |
2002 Director Stock Plan (the “2002 Plan”) | | | 388,000 | |
| | | | |
Total Stock Options Outstanding | | | 10,990,835 | |
Restricted Stock Units not yet Vested | | | | |
1995 Stock Plan | | | 2,551,857 | |
| | | | |
Shares available for future grant under all plans | | | 739,013 | |
The ESPP1994 Plan was initially adoptedassumed in connection with the Company’s acquisition of the DiviCom business of C-Cube Microsystems Inc. in May 2000. Awards of options from the 1999 Plan were discontinued in 2004 and shares remaining as available for grant were transferred to the 1995 Plan. No further shares are available for grant under any of the above plans except for the 1995 Plan and the 2002 Plan.
Proposed Amendments
The 1995 Plan currently permits us to grant a broad range of equity awards to eligible employees and consultants of the Company. We established the 1995 Plan in order to assist the Company in attracting, retaining and motivating the best available personnel for the successful conduct and growth of the Company’s business. The Company believes that the 1995 Plan is an essential tool to link the long-term interests of stockholders and employees and serves to motivate executives to make decisions that will, in the long run, give the best returns to stockholders. The Company has, therefore, consistently included equity incentives as a significant component of compensation for a broad range of the Company’s employees. In addition, the Company believes this practice is critical to the Company’s ability to attract and retain employees in a highly competitive market for managerial and technical talent. The Company’s geographic location in Silicon Valley exposes it to particularly intense competition in the labor market from both private and public companies. Equity incentives are offered by most companies with which the Company competes for employees, and the Company believes it is essential to provide restricted stock unitsand/or stock options to both new and existing employees.
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In April 2010, our Board of Directors in March 2002 and was approved by our stockholders in May 2002. Amendments toamending the ESPP, adopted in May 2004 and May 2006, increased the maximum number of shares available for issuance under the ESPP by an additional 4,000,000 shares. If this proposal is not approved by our stockholders, the ESPP is scheduled to run out of shares available for issuance in January 2010.
Our Board of Directors approved an amendment to the ESPP,1995 Plan subject to obtaining stockholder approval toat this Annual Meeting. These proposed amendments would increase the number of shares of common stock availablereserved for issuance thereunder by 2,000,000. The number10,600,000 shares to a total of 26,400,000 shares, amend the counting provisions for full value equity awards, and decrease the maximum term of our common stock currently reserved and available for issuance under the ESPP is 993,009. Ifoptions to seven (7) years, subject to stockholder approval at this proposal is approved by our stockholders, the shares reserved and available for issuance under the ESPP for offering periods commencing on or after July 1, 2009, would be increased by 2,000,000 shares.
Approval of this proposal requires the affirmative vote of the holders of a majority of the shares of our common stock that are present in person or by proxy and entitled to vote at the Annual Meeting.
Our named executive officersBoard also approved a change in the 1995 Plan share counting provisions to provide that each award with an exercise price below 100% of the fair market value on the grant date (or no exercise price) will debit the 1995 Plan reserve 1.5 shares for every unit or share granted. Conversely, any forfeitures of these awards due to their not vesting will result in a credit to the 1995 Plan reserve of 1.5 shares for every unit or share forfeited.
Our Board also approved a change in the 1995 Plan to reduce the term of the options granted on or after approval of this proposal by our stockholders to seven (7) years from ten (10).
The changes in accounting provisions and employee directorsthe option term are also subject to shareholder approval.
The Company’s Named Executive Officers have an interest in this proposal becauseas they are eligible to participate inmay receive awards under the ESPP.1995 Plan.
Purposes and Effects of the Proposal
Encouraging employees to acquire equity ownership in the Company assures a closer alignment of the interests of employees participating in the ESPP with those of the Company’s stockholders. The proposed adjustments to the ESPP will enable the Company to continue to use the ESPP as a valuable tool for attracting and retaining key personnel and aligning the interests of ESPP participants with those of the Company’s stockholders. The Company believes that the ESPP remains an essential element of a competitive compensation package, especially in Silicon Valley, and these plans are offered by most public companies with which we compete for employees. Currently, approximately sixty-eight percent (68%) of our employees are participating in the ESPP.
DESCRIPTIONSUMMARY OF EMPLOYEE STOCK PURCHASETHE 1995 PLAN
The following is a summary of the principal features of the ESPP1995 Plan, as proposed to be amended, and its operation. This summary is qualified in its entirety by reference to the 1995 Plan, as set forth in Exhibit 1.
Purpose. Purposes
The purposepurposes of the ESPP is1995 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees with an opportunityand consultants, and to promote the success of the Company’s business.
Term
The 1995 Plan will expire on March 1, 2018.
Types of Awards
The 1995 Plan provides for the grant of options to purchase shares of our common stock, through payroll deductions.
Administration. The ESPP is administered by the Board of Directors or a committee appointed by the Board of Directors (in either case, the “Administrator”stock appreciation rights (“SARs”). The Administrator has full, restricted stock (“Restricted Stock”), performance shares (“Performance Shares”), performance units (“Performance Units”) and exclusive discretionary authoritydeferred stock units (“Deferred Stock Units”) to construe, interpretemployees and apply the termsconsultants of the ESPP, and the Administrator’s findings, decisions, and determinations are final and binding upon all parties.
Eligibility. EachCompany. As of ourMarch 22, 2010, there were approximately 844 employees and each employee of our designated subsidiaries, whose customary employment with the Company or the designated subsidiary is at least twenty (20) hours per week and more than five (5) months in any calendar year, is(including officers) eligible to participate in the ESPP. As1995 Plan. Options granted under the 1995 Plan may either be “incentive stock options” as defined in Section 422 of the date hereby, approximately 670 employees, includingInternal Revenue Code of 1986, as amended (the “Code”), or nonstatutory stock options.
Administration
The 1995 Plan may be administered by our executive officers, were eligibleBoard of Directors or its Compensation and Equity Ownership Committee (the “Committee”). Subject to participate in the ESPP. This number excludes approximately 230 employees who we added through our recent acquisition of Scopus Video Networks Ltd., who will become eligible to participate in the ESPP effective July 1, 2009. No employee who owns stockand/or holds outstanding options to purchase stock that is equal to or greater than five percent (5%)other provisions of the total combined voting power1995 Plan, the administrator has the authority to: (i) interpret the 1995 Plan and apply its provisions; (ii) prescribe, amend or value of all classes of our stock or any of our subsidiaries may participate. Moreover, no employee may participaterescind rules and regulations relating to the 1995 Plan; (iii) select the persons to whom awards are to be granted; (iv) subject to individual fiscal year limits applicable to each type of award, determine the number of shares to be made subject to each award; (v) determine whether and to what extent that they may purchase stock under all employee stock purchase plansawards are to be granted; (vi) prescribe the terms and conditions of each award (including the provisions of the award agreement to be entered into between the Company and the grantee); (vii) amend any outstanding award subject to applicable legal restrictions; except for the reduction of the exercise price of an option or SAR (unless stockholder approval is obtained); (viii) authorize any person to execute, on behalf of the Company, any instrument required to effect the grant of an award; and (ix) subject to certain
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limitations, take any other actions deemed necessary or advisable for the administration of the 1995 Plan. All decisions, interpretations and its subsidiaries at a rate which exceeds $25,000other actions of fair market value (determinedthe committee shall be final and binding on the first dayall holders of any offering period) in any calendar year.options or rights and on all persons deriving their rights therefrom.
Shares Available for Issuance. As of March 23, 2009, there are approximately 993,009 shares of our common stock are reserved and available for issuance under the ESPP. If our stockholders approve this proposal, an additional 2,000,000 shares will become reserved and available for issuance in Offering Periods commencing on or after July 1, 2009.Eligibility
Offering Period. The ESPP currently has offering periods (“Offering Periods”)1995 Plan provides that have a duration of approximately six (6) months commencing onawards may be granted to the first trading day on or after each January 1Company’s employees and July 1 and terminating on the last trading dayindependent consultants. Incentive stock options may be granted only to employees. Any optionee who owns more than 10% of the period ending approximately six (6) months thereafter. Our Boardcombined voting power of Directors has the power to change the commencement dateand/or the durationall classes of future Offering Periods without stockholder approval, if such change is announced prior to the scheduled beginningoutstanding stock of the first Offering Period to be affected thereafter. Each Offering Period will contain a purchase period during which sharesCompany (a “10% Stockholder”) is not eligible for the grant of our commonan incentive stock may be purchased on behalfoption unless the exercise price of the participant in accordance with the terms of the ESPP.
Participation. To participate in the ESPP, an eligible employee must authorize payroll deductions pursuant to the ESPP. Payroll deductions are withheld in whole percentages only and cannot exceed ten percent (10%) of a participant’s compensation he or she receives on each pay day during the Offering Period. A participant may not make any additional payments into his or her account other than by payroll deductions. To the extent necessary to comply with Section 423(b)(8) of the Internal Revenue Code and eligibility limitations pursuant to the ESPP, a participant’s payroll deductions may be decreased to zero percent (0%). A participant may increase or decrease the rate of payroll deductions, except the Administrator may, in its discretion, limit the natureand/or number of participation rate changes during any Offering Period.
Grant. The number of shares of our common stock a participant purchases in each Offering Period is determined by dividing the total amount of payroll deductions withheld from the participant’s compensation on or prior to the last day of the purchase period by the purchase price; however, a participant may purchase no more than 3,000 shares in any Offering Period.
Exercise. The Internal Revenue Service views participants in our ESPP as receiving options. The price per share of the shares subject to the option is the lower of (i) eighty-five percent (85%)at least 110% of the fair market value of ourthe common stock on the first daydate of grant.
Limitations
Section 162(m) of the Offering Period,Code places limits on the deductibility for federal income tax purposes of compensation paid to certain executive officers of the Company. In order to preserve the Company’s ability to deduct the compensation income associated with options and SARs granted to such persons, the 1995 Plan provides that no employee may be granted, in any fiscal year of the Company, options and SARs that relate to more than 600,000 shares of common stock.
We have designed the 1995 Plan so that it permits us to also issue other awards that qualify as performance-based under Section 162(m) of the Code. Thus, the Committee may make performance goals applicable to a participant with respect to an award. At the Committee’s discretion, one or more of the following performance goals may apply: annual revenue, cash position, earnings per share, net income, operating cash flow, operating income, return on assets, return on equity, return on sales and total shareholder return. Except for cash position and total shareholder return, these performance goals may apply to either Harmonic or to one of our business units. These performance milestones may be established in accordance with U.S. generally accepted accounting principles (“GAAP”), or may exclude items otherwise includible under GAAP, as specified by our Committee.
Terms and Conditions of Options
Each option granted under the 1995 Plan is evidenced by a written stock option agreement between the optionee and the Company and is subject to other terms and conditions, as set forth below.
Exercise Price; No Repricing. Our Board of Directors or the Committee determines the exercise price of options at the time the options are granted. However, the exercise price of any stock option must not be less than 100% of the fair market value of the common stock on the grant date. In addition, no option granted under the 1995 Plan may be repriced, without stockholder approval, including by means of an exchange for another award.
Form of Consideration. The means of payment for shares issued upon exercise of an option is specified in each option agreement and generally may be made by cash, check, other shares of common stock of the Company owned by the optionee, delivery of an exercise notice together with irrevocable instructions to a broker to deliver the exercise price to the Company from sale proceeds, or by a combination thereof.
Exercise of the Option. Each stock option agreement will specify the term of the option and the date when the option is to become exercisable. However, in no event shall an option granted under the 1995 Plan be exercised more than 7 years after the date of grant (ten years in the case of options granted prior to February 27, 2006). Moreover, in the case of an incentive stock option granted to a 10% Stockholder, the term of the option shall be for no more than five years from the date of grant. To date, most options granted under the 1995 Plan have vested 25% on the first anniversary from the date of grant and1/48 per month thereafter.
Termination of Employment. If an optionee’s employment terminates for any reason (other than death or permanent disability), then all options held by such optionee under the 1995 Plan expire upon the earlier of (i) such period of time as is set forth in his
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or her option agreement, or (ii) eighty-five percent (85%)the expiration date of the option. The optionee may exercise all or part of his or her option at any time before such expiration to the extent that such option was exercisable at the time of termination of employment.
Permanent Disability. If an employee is unable to continue employment with the Company as a result of permanent and total disability (as defined in the Code), then all options held by such optionee under the 1995 Plan shall expire upon the earlier of (i) 12 months after the date of termination of the optionee’s employment or (ii) the expiration date of the option. The optionee may exercise all or part of his or her option at any time before such expiration to the extent that such option was exercisable at the time of termination of employment.
Death. If an optionee dies while employed by the Company, his or her option shall expire upon the earlier of (i) 12 months after the optionee’s death or (ii) the expiration date of the option. The executors or other legal representative of the optionee may exercise all or part of the optionee’s option at any time before such expiration to the extent that such option was exercisable at the time of death.
Termination of Options. Each stock option agreement will specify the term of the option and the date when all or any installment of the option is to become exercisable. Notwithstanding the foregoing, however, the term of any stock option shall not exceed 7 years from the date of grant. No options may be exercised by any person after the expiration of its term.
Limitations. If the aggregate fair market value of all shares of common stock subject to an optionee’s incentive stock option which are exercisable for the first time during any calendar year exceeds $100,000, the excess options shall be treated as nonstatutory options.
Other Provisions. The stock option agreement may not contain such terms, provisions and conditions that are inconsistent with the 1995 Plan as may be determined by the board of directors or the committee.
Terms and Conditions of Other Awards
Exercise Price and Other Terms of Stock Appreciation Rights; No Repricing. The committee, subject to the provisions of the 1995 Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the 1995 Plan. However, no SAR may be repriced, including by means of an exchange for another award, without stockholder approval.
Payment of Stock Appreciation Right Amount. Upon exercise of a SAR, the holder of the SAR shall be entitled to receive payment from us in an amount determined by multiplying (X) the difference between the fair market value of a share of our common stock on the purchase date. Unless a participant withdraws fromdate of exercise over the ESPP or an employee’s employment terminates with us or a designated subsidiary, a participant’s option for the purchase of shares is exercised automatically on each purchase date. No fractional shares may be purchased and any accumulated payroll deductions not sufficient to purchase a full share is retained in the participant’s account for the subsequent Offering Period.
Ifexercise price; times (Y) the number of shares with respect to which options arethe SAR is exercised.
Payment upon Exercise of Stock Appreciation Right. At the discretion of the committee, and as specified in the agreement evidencing the SAR, payment to the holder of a SAR may be exercised exceedin cash, shares of our common stock or a combination thereof. In the event that payment to the holder of a SAR is settled in cash, the shares available for saleissuance under the ESPP on1995 Plan shall not be diminished as a purchase date or commencementresult of the settlement.
Stock Appreciation Right Agreement. Each SAR grant shall be evidenced by an Offering Period,agreement that shall specify the Administrator mayexercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the committee, in its sole discretion, make a pro rata allocationshall determine.
Expiration of SARs. SARs granted under the 1995 Plan expire as determined by the committee, but in no event later than seven (7) years from date of grant. No SAR may be exercised by any person after its expiration.
Grant of Restricted Stock. Subject to the terms and conditions of the shares available for purchase1995 Plan, Restricted Stock may be granted to our employees and either continue the Offering Period then in effect or terminate the Offering Period then in effect. The Administrator may make such pro rata allocation of shares notwithstanding any authorization of additional shares for issuance under the ESPP by our stockholders subsequent to the commencement of an Offering Period.
Withdrawal; Termination of Employment. A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the ESPPconsultants, at any time and from time to time as shall be determined by written notice to the Company. If a participant withdraws from an Offering Period, no further payroll deductions willcommittee, in its sole discretion. Restricted Stock shall be made during the Offering Period under the ESPP and payroll deductions will not resume at the beginning of the succeeding Offering Period. Additionally, payroll deductions credited to the participant’s account during the Offering Period but not yet used to exercise the option will be returned to the participant or,issued in the caseform of his or her death,units to the person or persons entitled thereto, and the participant’s option will automatically terminate. Withdrawal from an Offering Period has no effect upon a participant’s eligibility to participate in succeeding Offering Periods which commence after terminationacquire shares of the Offering Period from which the participant withdrew, or in any similar plan which we may thereafter adopt. If a participant fails to remain as our employee or an employee of a designated subsidiary, or ceases to meet the ESPP eligibility requirements, he or she is deemed to withdraw from the ESPP.common stock. The committee shall have complete
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Adjustments Upon Changes in Capitalization and Certain Transactions. Any increase or decrease indiscretion to determine (i) the number of shares subject to a Restricted Stock award granted to any participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on continued provision of services but may include a performance-based component, upon which is conditioned the grant or vesting of Restricted Stock. However, no participant shall be granted a Restricted Stock award covering more than 200,000 shares in any of the Company’s fiscal years. Until the shares are issued, shares of our common stock resulting from a stock splitno right to vote or payment of a dividendreceive dividends or any other increase or decreaserights as a stockholder shall exist with respect to the underlying shares.
Restricted Stock Award Agreement. Each Restricted Stock grant shall be evidenced by an agreement that shall specify the purchase price (if any) and such other terms and conditions as the committee, in its sole discretion, shall determine; provided; however, that if the Restricted Stock grant has a purchase price, such purchase price must be paid no more than seven (7) years following the date of grant.
Grant of Performance Shares. Subject to the terms and conditions of the 1995 Plan, Performance Shares may be granted to Service Providers at any time and from time to time as shall be determined by the committee, in its sole discretion. The committee shall have complete discretion to determine (i) the number of shares of our common stock effected without our receiving consideration proportionately adjusts:
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| • | the number of shares of common stock covered by each ESPP option, |
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| • | the number of shares each participant may purchase in an Offering Period, |
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| • | the number of shares of common stock available for sale under the ESPP, and |
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| • | the price per share of common stock covered by each ESPP option. |
Any other issuance by us of shares of stock of any class, or securities convertible into shares of stock of any class, will not affect the number or price of shares of common stock subject to an ESPP option.a Performance Share award granted to any Service Provider, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Shares. However, no participant shall be granted a Performance Share award covering more than 200,000 shares in any of the Company’s fiscal years.
Performance Share Award Agreement. Each Performance Share grant shall be evidenced by an agreement that shall specify such other terms and conditions as the committee, in its sole discretion, shall determine.
Grant of Performance Units. Performance Units are similar to Performance Shares, except that they shall be settled in cash equivalent to the fair market value of the underlying shares of our common stock, determined as of the vesting date. The shares available for issuance under the 1995 Plan shall not be diminished as a result of the settlement of a Performance Unit.
Performance Unit Award Agreement. Each Performance Unit grant shall be evidenced by an agreement that shall specify such terms and conditions as the committee, in its sole discretion, shall determine. However, no participant shall be granted a Performance Unit award covering more than one million dollars in any of the Company’s fiscal years, except that a newly hired participant may receive a Performance Unit award covering up to two million dollars.
Deferred Stock Units. Deferred Stock Units shall consist of a Restricted Stock, Performance Share or Performance Unit Award that the committee, in its sole discretion permits to be paid out in installments or on a deferred basis, in accordance with rules and procedures established by the committee. Deferred Stock Units are subject to the individual annual limits that apply to each type of award.
Non-Transferability of Awards
Unless determined otherwise by the committee, an award granted under the 1995 Plan may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the recipient, only by the recipient. If the committee makes an award granted under the 1995 Plan transferable, such award shall contain such additional terms and conditions as the committee deems appropriate. In no event may an award be transferred to any third party for value, unless separately approved by our stockholders in advance. In the event of a proposed dissolution or liquidation ofthat the Company an Offering Period is shortened by setting a new exercise date and terminated immediately prior to the consummationacquired in any merger, consolidation, acquisition of the proposed dissolutionassets or liquidation unless the Administrator provides otherwise.
In the event of a merger or change of control,like occurrence, each outstanding optionaward granted under the ESPP will1995 Plan shall be assumed or an equivalent optionright substituted by the successor corporation or a parent or subsidiary of the successor corporation. If the successor corporation refuses to assume or substitute for the option, any Offering Period then in progresssuch awards granted under the ESPP is shortened by setting a new exercise date and terminated before the date of the proposed merger or change of control. The Administrator will notify each participant in writing1995 Plan are not assumed, they become fully vested prior to the new exercise date that hisclosing of such merger or her option will be automatically exercised on the new exercise date, unless prior to such date the participant has withdrawn from the Offering Period.
Amendment or Termination. The Administrator may at any time and for any reason terminate or amend the ESPP, except that no terminations can affect options previously granted other than certain terminations specified in the ESPP. Without stockholder approval and without regard to whether any participant rights may be considered to have been adversely affected, the administrator is entitled to:
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| • | change the Offering Periods, |
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| • | limit the frequencyand/or number of changes in the amount withheld during an Offering Period, |
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| • | establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, |
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| • | permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in our processing of properly completed withholding elections, |
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| • | establish reasonable waiting and adjustment periodsand/or accounting and crediting procedures to ensure that amounts applied toward the purchase of our common stock properly correspond with amounts withheld, and |
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| • | establish such other limitations or procedures as the administrator determines in its sole discretion advisable which are consistent with the ESPP. |
In the event the Administrator determines that the ongoing operation of the ESPP may result in unfavorable financial accounting consequences, the Board may, in its discretion, without stockholder approval or the consent of any participant, and to the extent necessary or desirable, modify or amend the ESPP to reduce or eliminate such accounting consequence including, but not limited to (i) increasing the purchase price for any Offering Period including an Offering Period underway at the time of the change in purchase price, (ii) shortening any Offering Period so that Offering Period ends on a new exercise date, including an Offering Period underway at the time of the Board action, and (iii) allocating shares.consolidation.
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NUMBER OF SHARES PURCHASED BY CERTAIN INDIVIDUALS AND GROUPSAdjustment Upon Changes in Capitalization, Corporate Transactions
GivenIn the event that the numberstock of shares that may be purchased under the ESPPCompany is determined, in part, on our common stock’s market value at the beginningchanged by reason of an Offering Period and at the end of a purchase period (or upon a purchase date within an Offering Period) and given that participationany stock split, reverse stock split, stock dividend, recapitalization or other change in the ESPP is voluntary oncapital structure of the part of employees,Company, appropriate proportional adjustments shall be made in the actual number of shares that may be purchased by any individual is not determinable. For illustrative purposes, the following table sets forth (a) the numberand class of shares of our common stock that were purchased duringsubject to the 1995 Plan, the individual fiscal year 2008 by our Named Executive Officers (“NEOs”)limits applicable to restricted stock, performance share awards, SARS and by all employeesoptions, the number and class of shares of stock subject to any award outstanding under the ESPP1995 Plan, and (b) the average per share purchaseexercise price paid forof any such shares.outstanding option or SAR or other award. Any such adjustment shall be made upon approval of the Compensation and Equity Ownership Committee of the board of directors whose determination shall be conclusive. In the event that we are acquired in any merger, consolidation, acquisition of assets or like occurrence, each outstanding award granted under the 1995 Plan shall be assumed or an equivalent right substituted by a successor corporation. If such awards granted under the 1995 Plan are not assumed, they become fully vested prior to the closing of such merger or consolidation.
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| | Employee Stock Purchase Plan
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| | Transactions 2008 | |
| | Number of
| | | Weighted Average
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| | Purchased Shares | | | Purchase Price | |
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Robin N. Dickson | | | 420 | | | $ | 7.86 | |
Matthew Aden | | | 1,530 | | | $ | 8.17 | |
Nimrod Ben-Natan | | | 282 | | | $ | 7.86 | |
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All executive officers as a group (6 persons)(1) | | | 2,232 | | | $ | 8.08 | |
All employees, including current officers who are not executive officers, as a group (512 persons) | | | 468,545 | | | $ | 7.88 | |
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1. | | No other executive officers participated in the ESPP during 2008. |
TAX ASPECTSAmendment, Suspensions and Termination of the 1995 Plan
The following briefBoard of Directors may amend, suspend or terminate the 1995 Plan at any time; provided, however, that stockholder approval is required for any amendment to the extent necessary to comply withRule 16b-3 promulgated under the Securities Exchange Act of 1934(“Rule 16b-3”) or Section 422 of the Code, or any similar rule or statute.
Federal Tax Information
Options. Options granted under the 1995 Plan may be either “incentive stock options,” as defined in Section 422 of the Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize taxable income either at the time the option is granted or upon its exercise, although the exercise may subject the optionee to alternative minimum tax. Upon the sale or exchange of the shares more than two years after grant of the option and one year after exercising the option, any gain or loss will be treated as long-term capital gain or loss. If these holding periods are not satisfied, the optionee will recognize ordinary income at the time of sale or exchange equal to the difference between the exercise price and the lower of (i) the fair market value of the shares at the date of the option exercise or (ii) the sale price of the shares. A different rule for measuring ordinary income upon such a premature disposition may apply if the optionee is also an officer, director, or 10% Stockholder of the Company. Any gain or loss recognized on such a premature disposition of the shares in excess of the amount treated as ordinary income will be characterized as long-term or short-term capital gain or loss, depending on the holding period.
All other options which do not qualify as incentive stock options are referred to as nonstatutory options. An optionee will not recognize any taxable income at the time the optionee is granted a nonstatutory option. However, upon its exercise, the optionee will recognize taxable income generally measured as the excess of the then fair market value of the shares purchased over the purchase price. Any taxable income recognized in connection with an option exercise by an optionee who is also an employee of the Company will be subject to tax withholding by the Company. Upon resale of such shares by the optionee, any difference between the sale price and the optionee’s purchase price, to the extent not recognized as taxable income as described above, will be treated as long-term or short-term capital gain or loss, depending on the holding period.
The foregoing is only a summary of the effect of federal income taxation upon athe participant and the Company, with respect to the shares purchased under the ESPP does not purport to be complete, and does not discuss the tax consequences of athe participant’s death or the income tax laws of any municipality, state or foreign country in which thea participant may reside.
The ESPP, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Internal Revenue Code. Under these provisions, an employee will not haveStock Appreciation Rights. No taxable income is reportable when the shares of commona stock are purchased, but the employee generally will have taxable income when the employee sells or otherwise disposes of ESPP shares.
appreciation right is granted to a participant. Upon sale or other disposition of the shares, the participant will generally be subject to tax in an amount that depends upon the holding period. If the shares are sold or otherwise disposed of more than two (2) years from the first day of the applicable Offering Period and one (1) year from the applicable date of purchase,exercise, the participant will recognize ordinary income measured asin an amount equal to the lesseramount of (a) the excess ofcash received and the fair market value of theany shares at the time of such sale or disposition over the purchase price, or (b) an amount equal to 15% of the fair market value of the shares as of the first day of the applicable Offering Period. Any additional gain will be treated as long-term capital gain. If the shares are sold or otherwise disposed of before the expiration of these holding periods, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price.our common stock received. Any additional gain or loss on such sale orrecognized upon any later disposition willof the shares of our common stock would be long-term or short-term capital gain or loss, depending on how longloss.
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Restricted Stock, Performance Units and Performance Shares. A participant will not have taxable income upon grant. Instead, he or she will recognize ordinary income at the time of vesting equal to the fair market value (on the vesting date) of the vested shares or cash received minus any amount paid for the shares have been held from the date of purchase. The Companyour vested common stock.
Tax Effect for Us. We generally is notwill be entitled to a tax deduction for amounts taxed asin connection with an award under the 1995 Plan in an amount equal to the ordinary income or capital gain torealized by a participant exceptand at the time the participant recognizes such income (for example, the exercise of a nonqualified stock option). Special rules limit the deductibility of compensation paid to our Chief Executive Officer and to each of our four most highly compensated executive officers. Under Section 162(m) of the Code, the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, we can preserve the deductibility of ordinary income recognized by participants upon a sale or dispositioncertain compensation in excess of shares prior$1,000,000 if the conditions of Section 162(m) are met with respect to the expirationawards. These conditions include stockholder approval of the holding periods described above.1995 Plan and performance goals under the 1995 Plan, setting individual annual limits on each type of award, and certain other requirements. The 1995 Plan has been designed to permit the committee to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to continue to receive a federal income tax deduction in connection with such awards.
OURStock Issuances
The Company is unable to predict the amount of benefits that will be received by or allocated to any particular participant under the 1995 Plan. The table that follows shows as to each of the Company’s executive officers named in the Summary Compensation Table of the Executive Compensation and Additional Information section of this Proxy Statement and the various indicated groups, the restricted stock units and the options granted to purchase common stock under the 1995 Plan and other employee option plans during 2009 together with the weighted average purchase price paid per share for stock options.
| | | | | | | | | | | | |
Plan Benefits | |
| | | | | Stock Option Plan | |
| | | | | Securities
| | | Weighted Average
| |
| | | | | Underlying
| | | Exercise Price Per
| |
| | Restricted Stock
| | | Awards Granted
| | | Share
| |
Name | | Units | | | Shares | | | ($/sh) | |
|
Patrick J. Harshman | | | 105,000 | | | | 195,000 | | | $ | 5.63 | |
Robin N. Dickson | | | 38,500 | | | | 71,500 | | | $ | 5.63 | |
Matthew Aden | | | 35,000 | | | | 65,000 | | | $ | 5.63 | |
Neven Haltmayer | | | 42,000 | | | | 78,000 | | | $ | 5.63 | |
Charles Bonasera | | | 35,000 | | | | 65,000 | | | $ | 5.63 | |
All executive officers as a group (6 persons) | | | 290,500 | | | | 539,500 | | | $ | 5.63 | |
All employees, including current officers who are not executive officers, as a group (837 persons) | | | 1,667,000 | | | | 825,000 | | | $ | 5.70 | |
For the full text of the 1995 Plan, please see Exhibit 1.
VOTE REQUIRED AND RECOMMENDATION
The affirmative vote of a majority of the Votes Cast will be required to approve the amendment to the 1995 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “FOR” THE APPROVAL OF THE AMENDMENT TO THE 2002 EMPLOYEECOMPANY’S 1995 PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK PURCHASE PLAN.RESERVED FOR ISSUANCE UNDER THE 1995 PLAN BY 10,600,000 SHARES, TO AMEND THE COUNTING PROVISIONS FOR FULL VALUE EQUITY AWARDS AND TO DECREASE THE MAXIMUM TERM OF FUTURE OPTIONS GRANTED TO SEVEN (7) YEARS.
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PROPOSAL THREE
AMENDMENTS TO THE 2002 DIRECTOR OPTION PLAN
The Company’s stockholders are being asked to approve the increase in the number of shares of common stock reserved for issuance by 400,000 shares to the 2002 Director Stock Plan (the “2002 Plan”).
Proposed Amendments
In 2008, our Board of Directors approved 2002 Plan amendments permitting the grant of restricted stock units and also providing that the general mix and terms and conditions of initial and annual automatic grants to our non-employee directors can be set by our Board of Directors. The Board of Directors also approved an amendment permitting discretionary grants under the 2002 Plan.
We are seeking stockholder approval to increase the number of shares issuable under the 2002 Plan by 400,000 shares and to change the 2002 Plan share counting provisions to provide that each award of restricted stock units will debit the 2002 Plan reserve 1.5 shares for every unit granted. Conversely, any forfeitures of unvested restricted stock units will result in a credit to the 2002 Plan reserve of 1.5 shares for every unit forfeited.
Approval of this proposal requires the affirmative vote of the holders of a majority of the shares of our common stock that are present in person or by proxy and entitled to vote at our 2010 Annual Stockholders’ Meeting.
Our Company’s non-employee directors have an interest in this proposal as they may receive options or restricted stock units under the terms of the 2002 Plan.
SUMMARY OF THE 2002 PLAN
The following is a summary of the principal features of the 2002 Plan, as proposed to be amended, and its operation. This summary is qualified in its entirety by reference to the 2002 Plan as set forth in Exhibit 2.
Purposes
The purposes of the 2002 Plan are to attract and retain the best available personnel for service as non-employee directors of our Company and to encourage their continued service on the Board of Directors.
Term of Plan
The 2002 Plan will expire on May 14, 2018.
Eligibility
Only non-employee directors are eligible to receive awards under the 2002 Plan. Currently, our Board of Directors consists of eight (8) directors of whom seven (7) are non-employee directors. Mr. Harshman, our current President and Chief Executive Officer, is not eligible to receive awards under the 2002 Plan.
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Shares Subject to the Plan
The maximum aggregate number of shares which may be currently optioned and sold under the 2002 Plan is 800,000 shares. If this proposal is approved by our stockholders, an additional 400,000 shares will become available to be awarded under the 2002 Plan. The shares may be authorized, but unissued, or reacquired common stock.
Share Counting Provisions
If approved by our stockholders, each award of restricted stock units will debit the 2002 Plan reserve 1.5 shares for every unit granted. Conversely, any forfeitures of unvested restricted stock units will result in a credit to the 2002 Plan reserve of 1.5 shares for every unit forfeited.
No Repricing
No option granted under the 2002 Plan may be repriced without stockholder approval, including by means of an exchange for another award.
Administration
The 2002 Plan provides for grants of awards to be made in three ways:
| | |
| 1. | Automatic Initial Grant. Except as otherwise determined by our Board of Directors, each non-employee director is automatically granted a stock option or restricted stock units (or combination of options and restricted stock units) on the date upon which he or she first becomes a non-employee director, whether through election by our stockholders or appointment by our Board of Directors to fill a vacancy. An employee director who ceases to be an employee director but who remains a director will not receive this initial award. |
|
| 2. | Automatic Annual Grant. Except as otherwise determined by our Board of Directors, each non-employee director is automatically granted a stock option or restricted stock unit (or combination of options and restricted stock units) on the date of our annual stockholders meeting each year if on such dates he or she shall have served on our Board of Directors for at least the preceding six (6) months. The automatic annual grants of stock options or restricted stock units to directors on the date of our annual meeting each year have currently been suspended. |
|
| 3. | Discretionary Grants. The Board of Directors may make discretionary grants of stock options or restricted stock units (or a combination of options and restricted stock units) to any non-employee director. |
Terms of Awards
Each award of restricted stock units or stock options is evidenced by written option agreements between us and the relevant non-employee director in such form, and subject to such terms and conditions, including vesting provisions, as the Board shall approve. Options are subject to the following terms and conditions:
| | |
| 1. | Option Term. The term of options may not exceed seven (7) years. |
|
| 2. | Exercise Price. The exercise price per share may not be less than 100% of the fair market value per share of our common stock on the grant date. |
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| | |
| 3. | Termination of Continuous Status as Director. If a non-employee director’s status as a director terminates, all of their vested options expire upon the earlier of the options’ original maximum term or three (3) years following such termination of employment. |
|
| 4. | Nontransferability of Options. Options granted under the 2002 Plan are not transferable other than by will or the laws of descent and distribution, and may be exercised, during the non-employee director’s lifetime, only by the non-employee director. |
Terms of 2010 Awards
If this Proposal Three is approved by our stockholders, our Board of Directors expect to make equity awards to incumbent non-employee directors. The timing and amounts of these awards have not yet been determined.
Adjustments upon Changes in Capitalization, Dissolution, Merger orChange-in-Control
In the event of a stock split, reverse stock split, stock dividend, or any combination or reclassification of our common stock, or other similar change in our capital structure effected without receipt of consideration by us, proportionate adjustments will be made to the number of shares covered by each outstanding award, the number of shares authorized for issuance that remain available to be granted under the 2002 Plan, and the exercise price of each outstanding stock option. For this purpose, any conversion of convertible securities is not considered effected without our receiving consideration.
In the event of a proposed dissolution or liquidation of our Company, any unexercised options and unvested restricted stock units will terminate prior to the consummation of such proposed action.
If a successor corporation assumes or substitutes the options under the 2002 Plan as a result of a merger of our Company with or into another corporation or aChange-in-Control of our Company, such options will remain exercisable in accordance with the 2002 Plan. In the event of aChange-in-Control, all options and restricted stock units held by non-employee directors immediately become fully vested.
Amendment and Termination of the 2002 Plan
The Board may at any time amend, alter, suspend, or discontinue the 2002 Plan to the extent such actions do not impair the rights of any recipient of awards under the 2002 Plan, unless he or she consents. To the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, our Company must obtain stockholder approval of any 2002 Plan amendment in the manner or to the degree required.
Certain Federal Income Tax Information
Stock Options. Options granted under the 2002 Plan are nonstatutory options and do not qualify as incentive stock options under Section 422 of the Code. An optionee will not recognize any taxable income at the time of grant of a nonstatutory option. However, upon its exercise, the optionee will recognize ordinary income for tax purposes measured by the excess of the fair market value of the shares on the date of exercise over the exercise price. Because the optionee is a director and therefore subject to Section 16 of the Exchange Act, the date of taxation (and the date of measurement of taxable ordinary income) may be deferred unless the optionee files an election under Section 83(b) of the Code. Upon resale of such shares by the optionee, any difference between the sales price and the exercise price, to the extent not recognized as ordinary income as provided above, will be treated as capital gain or loss. We will be entitled to a tax deduction in the amount and at the time that the optionee recognizes ordinary income with respect to shares acquired upon exercise of an option.
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Restricted Stock Units. A participant will not have taxable income upon grant of a restricted stock unit. Instead, he or she will recognize ordinary income at the time of settlement equal to the fair market value of the delivered shares. We will be entitled to a tax deduction in the amount and at the time that the non-employee director recognizes ordinary income with respect to shares acquired upon settlement of a restricted stock unit.
The foregoing summary of the federal income tax consequences of the 2002 Plan transactions is based on federal income tax laws in effect on the date of this Proxy Statement. This summary is not intended to be complete and does not describe foreign, state, or local tax consequences.
The following table summarizes the approximate dollar value and number of restricted stock units granted under the 2002 Plan in 2009 to (i) each director who is not an executive officer and (ii) all directors who are not executive officers as a group. Only directors who are not also executive officers are eligible to receive restricted stock units under the 2002 Plan.
| | | | | | | | |
| | 2002 Director Stock Plan(1) | |
| | | | | Number of
| |
| | | | | Restricted Stock Units
| |
Name | | Dollar Value(2) | | | Granted | |
|
Harold Covert | | $ | 89,801 | | | | 14,209 | |
Patrick Gallagher | | | 89,801 | | | | 14,209 | |
E. Floyd Kvamme | | | 89,801 | | | | 14,209 | |
Anthony J. Ley | | | 89,801 | | | | 14,209 | |
William F. Reddersen | | | 89,801 | | | | 14,209 | |
Lewis Solomon | | | 89,801 | | | | 14,209 | |
David R. Van Valkenburg | | | 89,801 | | | | 14,209 | |
Non-Executive Officer Director Group (7 persons) | | $ | 628,606 | | | | 99,463 | |
| | |
1. | | Future benefits under the 2002 Plan are not determinable because the value of options and restricted stock units depends on the market price of our common stock on the date of exercise. |
|
|
2. | | Indicates the value of restricted stock units granted under the 2002 Plan based on $6.32, the closing price of our common stock on December 31, 2009. |
VOTE REQUIRED AND RECOMMENDATION
The affirmative vote of a majority of the Votes Cast will be required to approve the amendments to the 2002 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE BY 400,000 SHARES AND TO AMEND THE ACCOUNT PROVISIONS.
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PROPOSAL FOUR
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP, independent registered public accounting firm, to audit the financial statements of the Company for the year ending December 31, 2009.2010. PricewaterhouseCoopers LLP has served as the Company’s independent registered public accounting firm since 1989 and has provided certain tax and other audit-related services. PricewaterhouseCoopers LLP has rotated Harmonic’s audit partners in compliance with current SEC regulations.
Stockholder approval is not required for the appointment of PricewaterhouseCoopers LLP, since the Audit Committee of the Board of Directors has the responsibility for selecting an independent registered public accounting firm. However, the Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to the stockholders for ratification as a matter of good corporate practice. In the event of a negative vote on the ratification of PricewaterhouseCoopers LLP, the Audit Committee of the Board of Directors may reconsider its selection. Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting and will have the opportunity to make a statement if they so desire. The representatives also are expected to be available to respond to appropriate questions from stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2009.2010.
Independent Registered Public Accounting Firm
Aggregate fees for professional services rendered for the Company by PricewaterhouseCoopers LLP for the years ended December 31, 20082009 and 20072008 were:
| | | | | | | | | | | | | | | | |
| | 2008 | | 2007 | | | 2009 | | 2008 | |
|
Audit Fees | | $ | 1,968 | | | $ | 2,481 | | | $ | 1,942 | | | $ | 1,968 | |
Audit-Related Fees | | | 412 | | | | 126 | | | | 292 | | | | 412 | |
Tax Fees | | | 859 | | | | 58 | | | | 920 | | | | 859 | |
All Other | | | 2 | | | | — | | | | 3 | | | $ | 2 | |
| | | | |
| | | | |
Total | | $ | 3,241 | | | $ | 2,665 | | | $ | 3,157 | | | $ | 3,241 | |
AUDIT FEES
The audit fees for the years ended December 31, 20082009 and 20072008 were for professional services rendered for the audits of the consolidated financial statements of the Company and statutory and subsidiary audits, issuance of comfort letters, consents, and assistance with the review of documents, including registration statements, filed with the SEC.
AUDIT-RELATED FEES
The audit related fees for the years ended December 31, 20082009 and 20072008 were for due diligence assignments in 2009 and 2008 and 2007 andcertain audit work related to the auditopening balance sheet of an acquired company in 2007.2009.
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TAX CONSULTING FEES
The tax fees for the years ended December 31, 20082009 and 20072008 included services related to the preparation of tax returns, discussions with tax authorities, claims for tax refunds, assistance with indirect tax issues and assistance with tax audits and appeals. For the yearyears ended December 31, 2009 and 2008, approximately $435,000 and $345,000, respectively, of the tax fees shown above were for advisory services related to the Company’s international support center and intercompany research and development cost-sharing arrangements.
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ALL OTHER FEES
All other fees for the yearyears ended December 31, 2009 and 2008 were for seminars and license fees for various technical accounting reference software, respectively.software.
Consistent with its charter, our Audit Committee pre-approves all audit and non-audit services from our independent registered public accounting firm and did so in 2008.2009. Pre-approval authority may be delegated by the Audit Committee to the Chairman of the Audit Committee.
The Audit Committee has considered whether the services provided by PricewaterhouseCoopers LLP are compatible with maintaining the independence of PricewaterhouseCoopers LLP, and has concluded that the independence of PricewaterhouseCoopers LLP is maintained and is not compromised by the non-audit services provided.
The Audit Committee has engaged PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009.2010.
Report of the Audit Committee of the Board of Directors
In accordance with a written charter adopted by Harmonic’s Board of Directors posted on the Company’s website atwww.harmonicinc.com the. The Audit Committee of the Board of Directors of Harmonic serves as the representative of the Board of Directors for general oversight of the quality and integrity of Harmonic’s financial accounting and reporting process, system of internal control over financial reporting, audit process, and process for monitoring compliance with related laws and regulations. The Audit Committee engages the Company’s independent registered public accounting firm and approves the scope of both audit and non-audit services. Harmonic’s management has primary responsibility for preparing financial statements and the financial reporting process.
Harmonic’s independent registered public accounting firm, PricewaterhouseCoopers LLP, is responsible for performing an independent audit of the Company’s consolidated financial statements and internal control over financial reporting in accordance with the standards set by the Public Company Accounting Oversight Board (“PCAOB”) and to issue reports thereon.
The Audit Committee of the Board of Directors has:
| | |
| 1. | Reviewed and discussed the audited consolidated financial statements and certifications thereof with Company management and the independent registered public accounting firm, and management has represented to the Audit Committee that Harmonic’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States; |
|
| 2. | Discussed with PricewaterhouseCoopers LLP the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1 AU section 380), as adopted by the PCAOB in |
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| | |
| | Rule 3200T, including discussion of the quality and acceptability of Harmonic’s financial reporting process and controls; and |
| | |
| 3. | Received the written disclosures and letter from PricewaterhouseCoopers LLP required by applicable requirements of the PCAOB regarding PricewaterhouseCoopers LLP’s communications with the Audit Committee concerning independence, discussed with PricewaterhouseCoopers LLP its independence and also considered whether the provision of the non-audit services described above was compatible with maintaining their independence. |
The Audit Committee meets regularly with the Company’s independent registered public accounting firm, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal control over financial reporting and the overall quality of the Company’s accounting principles and practices.
In performing all of these functions, the Audit Committee acts only in an oversight capacity and necessarily relies on the work and assurances of Harmonic’s management, which has primary responsibility for preparing financial statements and the financial reporting process, and the independent registered public accounting firm, which, in their report, express an opinion on the conformity of Harmonic’s annual consolidated financial statements to accounting principles generally accepted in the United States and of the Company’s internal control over financial reporting in accordance with the standards set by the PCAOB. In reliance on the reviews and discussions referred to in this report, and in light of its role and responsibilities, the Audit
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Committee recommended to the Board of Directors, and the Board of Directors has approved that the audited financial statements of Harmonic for the three years ended December 31, 20082009 be included for filing with the Securities and Exchange Commission in the Company’s Annual Report onForm 10-K for the year ended December 31, 2008.2009.
The Audit Committee
Harold Covert
Patrick Gallagher
William Reddersen
EXECUTIVE COMPENSATION AND ADDITIONAL INFORMATION
COMPENSATION DISCUSSION AND ANALYSIS
Role of the Compensation and Equity Ownership Committee
The Compensation and Equity Ownership Committee (“Compensation Committee”) of our Board of Directors is responsible for approval of the Company’s executive compensation policies, compensation paid to executive officers, and administration of the Company’s equity ownership plans. The Compensation Committee currently consists of Messrs. Van Valkenburg, Kvamme, and Reddersen, none of whom is an employee of the Company, and each of whom is independent under applicable NASDAQ listing standards and for the purposes of Section 162(m) of the Internal Revenue Code and Section 16 of the Securities and Exchange Act of 1934, as amended. The charter of the Compensation Committee was adopted by our Board of Directors and is posted on Harmonic’s website atwww.harmonicinc.com.
The Compensation Committee has retained the services of Meyercord Associates (“Meyercord”), an independent compensation consulting firm, to assist the Compensation Committee in the evaluation of appropriate cash and equity compensation
26
for executive management. Meyercord provides no other services to the Company. Meyercord makes recommendations to the Compensation Committee on the design and implementation of compensation plans, assists in determining the appropriate number of shares to be used for equity awards granted under the Company’s equity plans, reviews data and recommendations provided by management and also reviews specific compensation proposals for each of the Company’s executive officers named in the Summary Compensation Table in the “Executive Compensation and Additional Information” section of this Proxy Statement (“NEO”). Meyercord attends all or part of certain Compensation Committee meetings, as requested by the Compensation Committee.
Role of Management
Our CEO, assisted by our Vice President of Human Resources, works with the Compensation Committee to establish meeting agendas. Our CEO makes recommendations to the Compensation Committee with respect to the compensation of other members of executive management and the design and implementation of incentive compensation programs for NEOs and all other employees. For 20082009 executive compensation, these recommendations were developed with the assistance of Top Five Data Services (“Top Five”),Compensia, an independent consultant engaged by the Company. The Compensation Committee considers the recommendations of management but is not bound by such recommendations. The CEO does not make recommendations to the Compensation Committee with respect to his own compensation and is not present at portions of Compensation Committee meetings when his compensation is discussed or when the Compensation Committee elects to meet in executive session.
Compensation Philosophy and Programs
The Company’s executive compensation programs are designed to attract, motivate and retain executives who will contribute significantly to the long-term success of the Company and the enhancement of stockholder value. Consistent with this philosophy, the following goals provide a framework for our executive compensation program:
| | |
| • | provide a competitive total compensation package to attract, retain and motivate executives who must operate in a demanding and rapidly changing business environment; |
17
| | |
| • | relate total compensation for each executive, consisting of base salary, annual cash bonus and equity awards, to overall company performance as well as individual performance; |
|
| • | reflect competitive market requirements and strategic business needs in determining the appropriate mix of cash and non-cash compensation and short-term and long-term compensation; |
|
| • | put at risk a significant portion of each executive’s total target compensation, with the intent to reward superior performance; and |
|
| • | align the interests of our executives with those of our stockholders.stockholders |
Management of Risk Arising from Incentive Compensation Policies
The Compensation Committee has considered whether the Company’s overall compensation program for employees creates incentives for employees to take excessive or unreasonable risks that could materially harm the Company. The Committee believes that our incentive plans are typical for our industry and conservative in nature and that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the Company. Several features of our compensation policies for management employees appropriately mitigate such risks, including a mix of long- and short-term compensation incentives that we believe are properly weighted, the uniformity of compensation policies across the Company, caps on payments from the plans and the use of our business plan, which the Compensation Committee regards as setting an appropriate level of risk for the Company, as a baseline for our incentive bonus plan targets. We also believe the Company’s internal legal and financial controls appropriately mitigate the probability and
27
potential impact of an individual employee committing the Company to inappropriate transactions in exchange for short-term compensation benefits.
Elements of Compensation
In order to achieve the above goals, our total compensation packages include base salary and annual bonus paid in cash, as well as long-term equity compensation in the form of stock options or restricted stock units, or a combination thereof. We also make available benefit plans to our executive officers which are generally provided to all regular full-time employees of Harmonic. We believe that appropriately balancing the total compensation package and ensuring the viability of each component of the package is necessary in order to provide market-competitive compensation. We focus on ensuring that the balance of the various components of our compensation program is optimized to motivate executives to improve our results on a cost-effective basis. The factors which are used to determine individual compensation packages are generally similar for each NEO, including our CEO.
Top Five surveyed for management the compensation practices of our peers inIn order to assess our competitiveness. Top Five gathered data fromcompensation competitiveness against peer companies, Compensia recommended a peer group, established in consultation with management, and reviewed by the Compensation Committee, which included approximately twenty-four (24) companies. These peer companies were selected from the telecommunications equipment industry based principally on revenue and market capitalization data whichthat placed Harmonic approximately in the middle of the range.
The Compensation Committee then asked Meyercord to develop its own recommendations as to an appropriate peer company group for Harmonic. Meyercord selected the peer group consisted ofcompanies based principally on revenue and market capitalization data, including many technology companies in the following companies:
| | |
Name | | |
|
ADTRAN, Inc. | | Inter-Digital Communications Corp. |
Avanex Corp. | | Inter-Tel, Inc. |
BigBand Networks, Inc. | | Ixia |
Blue Coat Systems, Inc. | | InterVoice, Inc. |
Bookham, Inc. | | MRV Communications, Inc. |
C-COR Inc. | | Opnext, Inc. |
Ciena Corp. | | Polycom, Inc. |
EMS Technologies, Inc. | | SeaChange International |
Extreme Networks, Inc. | | Sonus Networks, Inc. |
F5 Networks, Inc. | | Tekelec |
Finisar Corp. | | Westell Technologies, Inc. |
Foundry Networks, Inc. | | Zhone Technologies, Inc. |
Company’s immediate geographic area with whom the Company competes for executive talent. These peer group datarecommendations from Compensia and Meyercord were reviewed and discussed by the Compensation Committee and a final list was approved by the Compensation Committee as shown below. Data prepared by Compensia for the approved peer group was used by management in formulating recommendations for 20082009 cash and equity compensation to the Compensation Committee. Information from Top FiveCompensia was also used in formulating the CEO’s recommendations to the Compensation Committee with respect to the design and implementation of compensation packages and for specific proposals related to the individual elements and total compensation packages for other NEOs, as well as for other employees. In order to independently evaluate the competitive position of the Company’s compensation structure, the Compensation Committee in 20082009 reviewed Top Five’sCompensia’s cash and equity compensation data with Meyercord, including the data on CEO compensation. Additionally, the Compensation Committee asked Meyercord to develop a separate peer company group for comparison to the peer group data provided by Top Five. Meyercord selected the peer group companies based principally on revenue and market capitalization
18
data, including many technology companies in the Company’s immediate geographic area with whom the Company competes for executive talent. The Meyercordapproved peer group consisted of the following companies:
| | |
Name | | |
|
Arris Group, Inc.ADTRAN | | Micrel, Inc.Infinera |
BigBand Networks, Inc.Arris Group | | Microsemi CorporationInterDigital |
C-COR Inc.Big Band Networks | | Openwave Systems, Inc.Ixia |
Cirrus Logic, Inc.Blue Coat Systems | | PMC-Sierra, Inc.MRV Communications |
Genesis Microchip, Inc.Bookham | | Power Integrations, Inc.Opnext |
Integrated Device Technology, Inc.Ciena | | SeaChangePolycom |
EMS Technologies | | Seachange International |
IXYS CorporationExtreme Networks | | Semtech CorporationSonus Networks |
Lattice Semiconductor CorporationFinisar | | Standard Microsystems CorporationStarent Networks |
LTX-Credence CorporationF5 Networks | | TriQuint Semiconductor, Inc. |
Mattson Technology, Inc. | | Zoran CorporationTekelec |
Base Salary
Base salaries for NEOs, including that of the CEO, were set according to the responsibilities of the position, the specific skills and experience of the individual and the competitive market for executive talent. The Compensation Committee reviews salaries annually and adjusts them as appropriate to reflect changes in market conditions, individual performance and responsibilities,
28
and the Company’s financial position. The aggregate value of our total cash compensation (base salary and bonus) for executives is generally targeted at approximately the fiftieth (50)(50th) percentile of executive compensation at comparable companies,of the approved peer group with the intent that superior performance under incentive bonus plans would enable the executive to elevate his total cash compensation to levels that are above the average of comparable companies. Following a review of the above factors and the data regarding our peer groupsgroup provided by Top 5Compensia and reviewed with Meyercord by the Compensation Committee, the Committee decided that no action should be taken to increase base salaries at the beginning of Messrs. Haltmayer, Harshman2009, in part because the Committee believed that significant adjustments were unnecessary, and Ben-Natan were increased in 2008part because of management’s desire to control expenses in response to the global economic recession and its impact on the Company’s business. Subsequently, in June 2009, following recommendations from 2007.management, the Committee approved a 4% increase in the base salary of Mr. Bonasera, who at that time took on additional responsibilities in his role as Vice President, Operations. Base salaries for NEOs are disclosed in the Summary Compensation Table on page 23.34.
Incentive Bonus Plan
The Company’s annual incentive bonus plan in which NEOs participate reflects the Compensation Committee’s belief that a meaningful component of executive compensation should be contingent on the performance of the Company, thereby introducing a significant element of “pay for performance” and appropriate incentives to produce superior results. In 2006,2007 and 2008, the Company’s incentive bonus plan for key employees, including NEOs, was weighted more heavily towards attainment of ananon-GAAP operating income target (excluding certain non-cash and non-recurring charges and credits) in order to incentivize management to returnincrease the Company toCompany’s profitability from the operating loss incurredlevel achieved in 2005.2006 and 2007, respectively. Operating income was weighted at 70%60% and revenue at 30%40%. Following the Company’s return to profitability in 2006, the Compensation Committee moved the weighting of the 2007 and 2008 incentive bonus plan measures to sixty percent (60%) operating income and forty percent (40%) revenue in order to provide greater incentive for revenue growth as well as the continuation of profitability. A target bonus was established for each NEO participant by reference to the data from boththe peer groupsgroup for the relevant year, and such targets were reviewed with Meyercord. In addition, the 2008 and 2009 incentive bonus planplans had minimum thresholds for each component which had to be met in order for any payout to be made, and a cap of 200% of target bonus for any individual, including NEOs. Total payouts for all participants, including NEOs, from the 2008 and 2009 incentive bonus planplans were limited to ten percent (10%) of pre-bonus operating income, as defineddefined. In 2009, the Compensation Committee changed the weighting of operating income and revenue from the60/40 ratios in 2007 and 2008 to 50/50. The Compensation Committee believed that, with management having achieved targeted operating income levels in 2008, increased revenue weighting would provide an appropriate incentive for greater revenue growth. For 2009, the 2008Compensation Committee approved the following targets for the incentive plan:
| | | | | | | | |
| | | | | Non-GAAP Operating
| |
$ Millions | | Revenue | | | income (as defined) | |
|
Threshold | | $ | 320.0 | | | $ | 15.0 | |
Target | | $ | 360.0 | | | $ | 36.3 | |
Maximum | | $ | 420.0 | | | $ | 73.1 | |
For performance between these levels, bonus plan.payouts would be determined by straight line interpolation. No payments would be made under any component of the 2009 incentive plan ifnon-GAAP operating income fell below $15 million. We do not publicly disclose operating income targets or revenue targets for the current year because such information is an integral part of our business plan, and as such is highly confidential commercial and business information. In addition, we believe that the disclosure of such targets could be confusing and misleading to investors as the Company does not provide annual revenue or operating income guidance to investors. Disclosing specific targets would provide competitors and other third parties with insights into our planning process and would therefore cause competitive harm. The Compensation Committee believed that the 20082009 bonus targets were challenging but achievable based on their review of the Company’s operating plan for 2008,2009, their experience of the Company’s historical performance in a business heavily dependent on the capital spending plans of a limited number of large customers uncertainty related to the performance of Scopus Video Networks in acquisition in March 2009, and their assessment of the generalvery difficult economic environment.environment which prevailed at the beginning of 2009. In fiscal 2008,2009, we failed to meet the threshold established for revenue; we exceeded our goals establishedthe threshold for both revenue and operating income. income, but without meeting the target.
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As a result, the incentive pool was funded at one hundred fiftytwenty-eight percent (150%(28%) of the total targeted amount. Bonus payments from the 20082009 incentive bonus plan were approved by the Compensation Committee and
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made to executive officer participants in February 2009,2010, as disclosed in the Summary Compensation Table on page 23.34. All bonus amounts paid to NEOs with respect to 20082009 were paid pursuant to the 20082009 incentive bonus plan.
Equity Compensation Plans
The Compensation Committee believes that equity compensation plans are an essential tool to link the long-term interests of stockholders and employees, especially the Chief Executive Officer and executive management, and serve to motivate executives to make decisions that will, in the long run, deliver the best returns to stockholders. Stock options have been historically granted when an employee, including an NEO, joins the Company, and on an annual basis thereafter. These stock options vest over a four year period and are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The size of an initial stock option grant is based upon the position, responsibilities and expected contribution of the individual, with subsequent grants also taking into account the individual’s performance, potential contributions, and, to a lesser extent, the vesting status of previously granted options. This approach is designed to maximize stockholder value over the long term, as no benefit is realized from the option grant unless the price of the Company’s common stock has increased over a number of years.
The Compensation Committee has awarded stock options to most employees, including NEOs, on an annual basis.basis until 2009, when the use of stock options was replaced by restricted stock units for most non-executive employees. In prior years, the total pool of annual grants to be made to all employees, including NEOs, was determined principally by reference to guidelines published by shareholder advisory firms such as Institutional Shareholder ServicesRiskMetrics (“ISS”RM”) and in part to historic practice. The guidelines generally refer to metrics such as total annual grants as a percentage of shares outstanding and total outstanding options as a percentage of fully diluted shares. Historically, the Compensation Committee has set the total pool of equity awards to result in the Company’s use of options being substantially lower than the guideline amounts. In 2007, the Compensation Committee concluded that Harmonic should increase the equity component of officer compensation in order to protect the Company from the potential loss of executive talent to companies with more generous equity compensation policies. In January 2007, aan analysis by Top Five, analysisan executive compensation consulting firm, of equity awards at peer group companies was presented by management to the Compensation Committee. The Compensation Committee considered these data, reviewed it with Meyercord, and in conjunction with other information, including experience with other public company equity compensation programs, the Compensation Committee concluded that it should increase both the total pool of option awards for 2007 and individual awards to each NEO. The Compensation Committee adopted the same policy in determining the total amount and distribution of 2008 and 2009 awards. In February 2009, the Compensation Committee approved the grant of a blend of restricted stock and stock options to NEOs and certain other key employees and made the aggregate value of the awards consistent with the 65th percentile of the peer group companies. In addition, the Compensation Committee desired to recognize the efforts of management, including the NEOs and selected key employees, in their execution of various strategic initiatives in 2009, in particular the integration of Scopus Video Networks following its acquisition in March 2009. Consequently, a special award of RSUs was made to each NEO and selected key employees in February 2010.
Executive officers are also eligible to participate in the Company’s 2002 Employee Stock Purchase Plan (ESPP). The ESPP is available on a broad basis to the Company’s employees. The ESPP allows eligible employees to purchase the Company’s common stock at a price equal to 85% of the lower of the fair market value at the beginning of an Offering Period or the fair market value at the end of the purchase period, six months later, with the purchase amount limited to the lesser of ten percent (10%) of base salary or 3,000 shares per purchase period, or as specified by applicable IRS regulations.
Statement 123R (“SFAS 123R”)Financial Accounting Standards Codification Topic 718, of the Financial Accounting Standards Board (“FASB”FASC Topic 718”) requires the Company to record a charge to earnings for equity compensation. However, the Compensation Committee believes that the Company should continue to operate its equity compensation plans in spite of the significant non-cash charges
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incurred by the Company as a result of the application of SFAS 123R.FASC Topic 718. The Compensation Committee continues to monitor the impact of the accounting standard on Harmonic’s earnings, changes in the design and operation of equity compensation plans by other companies, particularly those with whom the Company competes locally for employees, and the attitude of financial analysts and investors towards these significant and potentially volatile non-cash charges. In order to mitigate the impact of this new standard on earnings, the Company has implemented changes to our option grant policy and ESPP structure that lessens the expense against earnings that the Company recognizes on these awards. The Company reduced the term of employee option grants from ten (10) years to seven (7) years for grants made on or after February 27, 2006. In addition, the Board of Directors and stockholders approved an amendment to the Company’s ESPP in 2006 to reduce the “look-back” feature from twenty four (24) months to six (6) months. More recently, the Compensation Committee has continued to review, with the assistance of Meyercord, equity grant practices by peer companies. Having noted a trend towards increasing use of restricted stock awards by many other companies rather than stock options, the Compensation Committee determined in early 2009 that for new equity awards, it would award a preponderance of restricted stock units and limit the use of stock options.
However, In 2009, most employees who received equity awards, other than NEOs, received them in the form of restricted stock units, which practice generally results in lower and more predictable accounting charges. The Compensation Committee continues to believe that broad-based equity plans remain an essential element of a competitive compensation package, as such plans are offered currently by most public and private technology companies in Silicon Valley with whom the Company competes for both executive and non-executive employees. OverApproximately ninety nine percent
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(99%) of employees currently hold stock options or restricted stock units, and approximately sixty eight percent (68%) are currently participating in the Company’s ESPP.
Equity Compensation Grant Practice
The Compensation Committee approves all stock option or restricted stock unit grants, except for certain grants made to non-executive employees in the ordinary course of business, for which it has delegated authority to the CEO within pre-approved parameters pursuant to an Employee Equity Issuance Policy, and the Compensation Committee reviews all grants made pursuant to the Employee Equity Issuance Policy. Initial hire grants of stock options that are within the CEO’s approved range are made on the first Friday following the employee’s start date, and initial hire grants of restricted stock units are made on the second Friday of each month and any other grants made by the CEO pursuant to authority granted by the Compensation Committee are made on Fridays of the week of such grant. Stock options are granted at 100% of the closing price of our stock on the NASDAQ Global Select Market on the date of grant.
Initial hire grants that are for executives reporting to the CEO or grants which are above the CEO’s approved range are approved by the Compensation Committee, with the grant date being the day of approval by the Compensation Committee and, if in the form of a stock option, the exercise price being the closing price of the stock on the NASDAQ Global Select Market on that date. The initial grants are effective as of the date of grant, with vesting generally beginning on the date of commencement of employment. Annual grants are usually made in the first half of the year, and in 2008,2009, these grants were made on May 15.February 24. This timing enables management and the Compensation Committee to consider performance by both the Company and the individual and balance it against our expectations for the current year.
We do not time the granting of stock options or restricted stock units with any favorable or unfavorable news released by the Company. The timing of initial grants is driven by the date of hire of our new employees. The Board of Directors and Compensation Committee meeting schedules, for review and approval of annual grants, are usually established several months in advance for the calendar year. Proximity of any awards to an earnings announcement or other market events is coincidental.
Retirement Benefits
The Company does not provide pension benefits or deferred compensation plans to any of its employees, including NEOs, other than a 401(k) deferred compensation plan which is open to all regular, full-time U.S. employees.
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The Company made matching contributions to the 401(k) plan of up to $1,000 per annum per participant in 2008 2007 and 2006.2007. Matching contributions were suspended throughout 2009 and to date as a result of the economic recession and its impact on the Company’s financial performance. NEOs were eligible for these matching contributions on the same basis as other plan participants. Details of Company contributions for executives in 2008 2007 and 20062007 are included in the “All Other Compensation” column in the Summary Compensation Table on page 23.34. The Compensation Committee reviews regularly the performance of, and changes to, the 401(k) plan. As part of a cost control program in the current economic environment, the Company has temporarily suspended its matching program for all employees with effect from February 2009.
Change of ControlChange-of-Control Agreements
The Company does not have employment agreements with any of its NEOs. However, as a historical practice, it has generally provided change of control severance agreements to its NEOs. These agreements are designed to incentivize continuing service to the Company by NEOs in the event that the Company may be in discussions regarding strategic transactions and to provide short-term benefits in the event that ana NEO’s position is eliminated or responsibilities or compensation are reduced following a change of control.
As of December 31, 2008,2009, the Company had entered into change of control severance agreements with each of the NEO’s. Under the terms of the respective NEO’s change of control severance agreement, in the event of termination within eighteen months following a change in control of the Company other than for cause (as defined in the relevant change of control severance agreement), Mr. Harshman will receive a lump-sum payment of twice his annual salary plus a bonus payment and benefits, Mr. Dickson will receive a lump-sum payment of one and a half times his annual salary plus a bonus payment and benefits, and the other NEOs will receive a lump-sum payment of one year’s salary plus a bonus payment and benefits. These agreements also provide for out-placement assistance and the full acceleration of unvested stock options and any restricted stock awards held by the respective NEO in the event of such termination, subject to certain limitations. During 2008, the Compensation Committee approved the change of control severance agreement for Mr. Ben-Natan and amended Mr. Dickson’s previous agreement to conform with the aforementioned descriptions.
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Other Compensation
Other elements of executive compensation include life and long-term disability insurance and health benefits. These benefits are available to all regular, full-time U.S. employees of the Company on the same basis and similar benefits are provided to most employees in other countries. All NEOs have access to a supplemental medical plan which provides coverage of additionalout-of-pocket medical costs up to an annual limit of $15,000 and one NEO has a monthly car allowance. Management periodically reviews the level of benefits provided to all employees and adjusts those levels as appropriate. Company payments for NEOs pursuant to these other elements of compensation in 2009, 2008 2007 and 20062007 are included in the “All Other Compensation” column in the Summary Compensation Table on page 23.34.
Approvals
In February 2008,2009, the Compensation Committee approved the 20082009 cash compensation for all NEOs. The Company’s CEO was not present during the portion of the meetings during which his compensation was discussed and approved. Equity compensation awards were approved by the Compensation Committee on May 15, 2008.February 24, 2009.
Stock Ownership Guidelines
The Company currently has no stock ownership guidelines for its NEOs.
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Financial Restatements
The Company has never restated its financial statements and does not have an established practice regarding the adjustment of bonus payments if the performance measures on which they were based are restated in a manner that would change the amount of an award.
Section 162(m)
We have considered the potential future effects of Section 162(m) of the Internal Revenue Code on the compensation paid to our NEOs. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for the Chief Executive Officer or any of our next four most highly compensated executive officers, unless such compensation is performance based. For fiscal 2008,2009, no executive officer received compensation subject to Section 162(m) in excess of $1.0 million. We have adopted a policy that, where reasonably practicable, we will seek to qualify the variable compensation paid to our executive officers for an exemption from the deductibility limitations of Section 162(m).
Report of the Compensation and Equity Ownership Committee of the Board of Directors on Executive Compensation
The Compensation and Equity Ownership Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Proxy Statement. Based on the Compensation Committee’s review of and the discussions with management with respect to the Compensation Discussion and Analysis, our committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2008.2009.
The Compensation and Equity Ownership Committee
David R. Van Valkenburg
E. Floyd Kvamme
William Reddersen
The information contained above under the captions “Report of the Audit Committee of the Board of Directors” and “Report of the Compensation and Equity Ownership Committee of the Board of Directors on Executive Compensation” shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference to such filing.
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