UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

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NETAPP, INC.

(Name of Registrant as Specified In Its Charter)

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

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NETAPP, INC.
495 East Java Drive
Sunnyvale, California 94089

 

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held October 14, 2009

 

 

 

 

You are cordially invited to attend the Annual Meeting of Stockholders (“Annual Meeting”) of NetApp, Inc., a Delaware corporation (“NetApp” or “Company”), which will be held on October 14, 2009, at 3:00 p.m. local time, at the Company’s headquarters, 495 East Java Drive, Sunnyvale, California 94089. We are holding the Annual Meeting for the following purposes:

 

1. To elect the following individuals to serve as members of the Board of the Directors for the ensuing year or until their respective successors are duly elected and qualified: Daniel J. Warmenhoven, Thomas Georgens, Nicholas G. Moore, Jeffry R. Allen, Alan L. Earhart, Mark Leslie, Nicholas G. Moore, George T. Shaheen, Donald T. Valentine and Robert T. Wall;

 

2. To approve an amendment to the 1999 Stock Option Plan (the “1999 Plan”) to modify the number of shares of Company common stock (“Shares”) that may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs;

 

3. To approve an amendment to the Automatic Option Grant Program (the “Program”) contained in the 1999 Plan which permits the Plan Administrator to implement an election program so that a nonemployee director may elect to receive his or her automatic equity grants either in the form of all stock options or in a combination of stock options and restricted stock units;

 

4. To approve an amendment to the Company’s Employee Stock Purchase Plan (“Purchase Plan”) to increase the share reserve by an additional 6,700,000 shares of common stock;

 

5. To approve an amendment and restatement of our Executive Compensation Plan (“Compensation Plan”) to provide the plan administrator with discretion to determine the length of any performance period under the Compensation Plan, while still retaining the deductibility of the compensation pursuant to Section 162(m), and to limit the maximum award that any participant may receive pursuant to the Compensation Plan to $5,000,000 in any fiscal year; and

 

6. To ratify the appointment of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending April 30, 2010.

 

The foregoing items of business are more fully described in the Proxy Statement that accompanies this Notice. The Board of Directors has fixed the close of business on August 17, 2009 as the record date for determining the stockholders entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof.

 

In accordance with the Securities and Exchange Commission (“SEC”) rules, we have elected to provide access to our proxy materials over the Internet. Accordingly, the Company will mail, on or about August 26, 2009, a Notice of Internet Availability of Proxy Materials to its stockholders of record and beneficial owners. The Notice of Internet Availability of Proxy Materials will identify the Web site where the proxy materials will be made available; the date, time and location of the Annual Meeting; the matters to be acted upon at the meeting and the Board of Directors’ recommendation with regard to each matter; a toll-free telephone number, an e-mail address, and a Web site where stockholders can request a paper or e-mail copy of the Proxy Statement, our Annual Report to stockholders and a form of proxy relating to the Annual Meeting; information on how to access the form of proxy; and information on how to obtain directions to attend the meeting and vote in person. These proxy materials will be available free of charge.

 

To assure your representation at the Annual Meeting, you are urged to cast your vote, as instructed in the Notice of Internet Availability of Proxy Materials, over the Internet or by telephone as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer. Any stockholder of record attending the Annual Meeting may vote in person, even if she or he has voted over the Internet, by telephone or returned a completed proxy card.

Thank you for your participation.

 

BY ORDER OF THE BOARD OF DIRECTORS,

 

Thomas Georgens
Chief Executive Officer and President

 

Sunnyvale, California

August 20, 2009

 

YOUR VOTE IS EXTREMELY IMPORTANT. TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU ARE URGED TO VOTE BY TELEPHONE OR INTERNET AS PROMPTLY AS POSSIBLE. ALTERNATIVELY, YOU MAY REQUEST A PAPER PROXY CARD, WHICH YOU MAY COMPLETE, SIGN AND RETURN BY MAIL.

 

PROXY STATEMENT

 

 

FOR THE ANNUAL MEETING OF STOCKHOLDERS OF
NETAPP, INC.
To Be Held October 14, 2009

 

 

General

 

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors (“Board” or “Board of Directors”) of the Company, of proxies to be voted at the Annual Meeting of Stockholders (“Annual Meeting”) to be held on October 14, 2009, or at any adjournment or postponement thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. Stockholders of record on August 17, 2009 will be entitled to vote at the Annual Meeting. The Annual Meeting will be held at 3:00 p.m. local time at the Company’s headquarters, 495 East Java Drive, Sunnyvale, California 94089.

 

In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each stockholder of record, we are now furnishing proxy materials to our stockholders on the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the proxy materials. Instead, the Notice of Internet Availability of Proxy Materials instructs you as to how you may access and review all of the important information contained in the proxy materials. The Notice of Internet Availability of Proxy Materials also instructs you as to how you may submit your proxy on the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a printed copy of our proxy materials you should follow the instructions for requesting such materials included in the Notice of Internet Availability of Proxy Materials.

 

It is anticipated that the Notice of Internet Availability of Proxy Materials will be available to stockholders on or about August 20, 2009.

 

Record Date and Shares Outstanding

 

The close of business on August 17, 2009 was the record date to determine the stockholders who will be entitled to vote at the Annual Meeting and any adjournments or postponements thereof. At the record date, the Company had approximately 336,223,737 shares of its common stock outstanding and entitled to vote at the Annual Meeting and approximately 934 registered stockholders. No shares of the Company’s preferred stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held by such stockholder on August 17, 2009.

 

Quorum Requirement

 

A majority of the shares of common stock issued and outstanding and entitled to vote, in person or by proxy, constitutes a quorum for the transaction of business at the Annual Meeting.

 

Votes Required for Proposals

 

For Proposal No. 1, the 9 director nominees receiving the highest number of affirmative votes will be elected. Approval of each of Proposal Nos. 2, 3, 4, 5 and 6 requires the affirmative vote of a majority of the number of Votes Cast. Votes will be tabulated by a representative of Broadridge Financial Solutions, Inc., the independent inspector of elections appointed for the meeting, who will separately tabulate affirmative and negative votes, abstentions and broker nonvotes. Voting results will be published in the Company’s Quarterly Report on Form 10-Q for the second fiscal quarter of 2010, which will be filed with the SEC.

Abstentions and Broker Nonvotes

 

While there is no definitive statutory or case law authority in Delaware as to the proper treatment of abstentions, the Company believes that abstentions should be counted for purposes of determining both (1) the presence or absence of a quorum for the transaction of business and (2) the total number of shares entitled to vote in person or by proxy at the Annual Meeting (Votes Cast) with respect to a proposal. In the absence of controlling precedent to the contrary, the Company intends to treat abstentions in this manner. Accordingly, with the exception of the proposal for the election of directors, abstentions will have the same effect as a vote against the proposal. Because directors are elected by a plurality vote, abstentions in the election of directors have no impact on the election of directors once a quorum exists.

 

Broker nonvotes (that is, votes from shares held of record by brokers as to which the beneficial owners have given no voting instructions) will be counted for purposes of determining the presence or absence of a quorum for the transaction of business, but will not be counted for purposes of determining the number of Votes Cast with respect to the particular proposal on which the broker has expressly not voted. Accordingly, broker nonvotes will not affect the outcome of the voting on a proposal that requires a majority of the Votes Cast (such as the approval of an amendment to an option plan). Thus, a broker nonvote will make a quorum more readily attainable, but the broker nonvote will not otherwise affect the outcome of the vote on a proposal.

 

If your shares are held in street name and you do not instruct your broker on how to vote your shares, your brokerage firm, at its discretion, may either leave your shares unvoted or vote your shares on routine matters. The election of directors (Proposal No. 1) and the proposal to ratify the appointment of our independent registered public accounting firm for the current fiscal year (Proposal No. 6) should be treated as routine matters. To the extent your brokerage firm votes your shares on your behalf on these two proposals, your shares also will be counted as present for the purpose of determining a quorum. The proposals to approve Proposal Nos. 2, 3, 4 and 5 are not considered routine matters and, consequently, without your voting instructions, your brokerage firm cannot vote your shares.

 

Methods of Voting

 

Stockholders may vote by proxy. The Company is offering stockholders of record four methods of voting: (1) you may vote by telephone; (2) you may vote over the Internet; (3) you may vote in person at the Annual Meeting; and (4) finally, you may request a proxy card from us and indicate your vote by completing, signing and dating the card where indicated and by mailing or otherwise returning the card in the prepaid envelope that will be provided. Each stockholder is entitled to one vote on all matters presented at the Annual Meeting for each share of common stock held by such stockholder. Stockholders do not have the right to cumulate their votes for the election of directors.

 

If a proxy card is voted by telephone or Internet or signed and returned by mail, without choices specified, in the absence of contrary instructions, subject to the limitations described in Rule 14a-4(d)(1) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the shares of common stock represented by such proxy will be voted FOR Proposal Nos. 1, 2, 3, 4, 5 and 6 and will be voted in the proxy holders’ discretion as to other matters that may properly come before the Annual Meeting.

 

Revocability of Proxies

 

Any stockholder giving a proxy has the power to revoke it at any time before its exercise. You may revoke or change your proxy by filing with the Secretary of the Company an instrument of revocation or a duly executed proxy bearing a later date or by attending the Annual Meeting and voting in person.

 

Solicitation of Proxies

 

The Company will bear the cost of soliciting proxies. Copies of solicitation material will be made available upon request to brokerage houses, fiduciaries, and custodians holding shares in their names that are beneficially owned by others to forward to such beneficial owners. The Company may reimburse such persons for their costs of forwarding the solicitation material to such beneficial owners. The original solicitation of proxies may be supplemented by solicitation by telephone, electronic communication, or other means by directors, officers,

employees, or agents of the Company. No additional compensation will be paid to these individuals for any such services. The Company may retain a proxy solicitor to assist in the solicitation of proxies, for which the Company will pay an estimated fee of $10,000 plus reimbursement of expenses.

 

Annual Report

 

The Notice of Annual Meeting, this Proxy Statement and the Annual Report of the Company for the fiscal year ended April 24, 2009 have been made available to all stockholders entitled to vote at the Annual Meeting. The Annual Report is not incorporated into this Proxy Statement and is not considered proxy-soliciting material. The Annual Report is posted at the following Web site address: http://investors.netapp.com/

 

Stockholder Proposals

 

The Company’s stockholders may submit proposals that they believe should be voted upon at the Company’s 2010 Annual Meeting of Stockholders. Stockholders may also recommend candidates for election to our Board of Directors for such Annual Meeting (See “Corporate Governance and Nominating/Corporate Governance Committee”).

 

Pursuant to Rule 14a-8 under the Exchange Act and subject to the requirements of our bylaws, stockholder proposals may be included in our 2010 proxy statement. Any such stockholder proposals must be submitted in writing to the attention of the Corporate Secretary, NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089, no later than April 28, 2010, which is the date 120 calendar days prior to the anniversary of the mailing date of the proxy statement for the fiscal 2009 Annual Meeting.

 

Alternatively, under the Company’s bylaws, a proposal that a stockholder intends to present for consideration at the meeting but does not seek to include in the Company’s proxy materials for the 2010 Annual Meeting (whether or not it relates to nominations to the Company’s Board of Directors) must be received by the Corporate Secretary (at the address specified in the immediately preceding paragraph) not less than 120 calendar days prior to the date of the 2010 Annual Meeting. The stockholder’s submission must include the information specified in the bylaws.

 

Stockholders interested in submitting such a proposal are advised to contact knowledgeable legal counsel with regard to the detailed requirements of applicable securities laws.

 

If a stockholder gives notice of a proposal or a nomination after the applicable deadline specified above, the notice will not be considered timely, and the stockholder will not be permitted to present the proposal or the nomination to the stockholders for a vote at the meeting.

 

Householding

 

The SEC has adopted rules that permit companies and intermediaries, such as brokers, to satisfy delivery requirements for proxy materials with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for stockholders and cost savings for companies. The Company and some brokers household proxy materials unless contrary instructions have been received from one or more of the affected stockholders. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate proxy statement, or if you are receiving multiple copies of the proxy statement and wish to receive only one, please (i) mark the designated box on your Proxy Card, (ii) follow the instructions provided when you vote over the Internet, or (iii) contact Broadridge Financial Solutions, Inc., either by calling toll free at (800) 542-1061 or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717.

 

PROPOSAL NO. 1:

 

ELECTION OF DIRECTORS

 

At the Annual Meeting, 9 directors constituting the entire Board are to be elected to serve until the next Annual Meeting of Stockholders or until successors for such directors are elected and qualified, or until the death, resignation or removal of such directors. It is intended that the proxies will be voted for the 9 nominees named below for election to the Company’s Board unless authority to vote for any such nominee is withheld. There are 9 nominees, each of whom is currently a director of the Company. All of the current directors were elected to the Board by the stockholders at the last Annual Meeting. Each person nominated for election has agreed to serve if elected, and the Board has no reason to believe that any nominee will be unavailable or will decline to serve. In the event, however, that any nominee is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who is designated by the current Board to fill the vacancy. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the nominees named below. The 9 nominees receiving the highest number of affirmative votes of the shares entitled to vote at the Annual Meeting will be elected directors of the Company. The proxies solicited by this Proxy Statement may not be voted for more than 9 nominees.

 

Nominees

 

The nominees for directors of the Company, and their ages as of June 26, 2009, are as follows:

 

 

 

 

DANIEL J. WARMENHOVEN has been a member of the Board of Directors since October 1994 and was appointed Chairman of the Board of Directors in March 2008. Mr. Warmenhoven currently serves as Executive Chairman of the Company and was Chief Executive Officer from October 1994 to August 2009. Prior to joining the Company, Mr. Warmenhoven served in various capacities, including president, chief executive officer, and chairman of the Board of Directors of Network Equipment Technologies, Inc., a telecommunications equipment company, from November 1989 to January 1994. Prior to Network Equipment Technologies, Mr. Warmenhoven held executive and managerial positions at Hewlett-Packard from 1985 to 1989 and IBM Corporation from 1972 to 1985. Mr. Warmenhoven is a Director of Aruba Networks, Inc., sits on the Bechtel Board of Counselors, is vice chairman of the board of the Tech Museum of Innovation in San Jose, CA and is a trustee of Bellarmine College Preparatory in San Jose, CA. Mr. Warmenhoven holds a BS degree in electrical engineering from Princeton University.

 

NICHOLAS G. MOORE has been a member of the Board since April 2002 and Lead Independent Director since August 2009. Mr. Moore served as Global Chairman of PricewaterhouseCoopers from July 1998 until June 2001, and Chief Executive Officer of PricewaterhouseCoopers LLP from July 1998 until June 2000. Prior to that, he served as Chairman and Chief Executive Officer of Coopers & Lybrand LLP from October 1994 until June 1998, when it was merged into PricewaterhouseCoopers LLP. Mr. Moore is a member of the board of Wells Fargo, Gilead Sciences and Bechtel Corporation. Mr. Moore received a BS degree in accounting from St. Mary’s College and a JD degree from Hastings College of Law, University of California.

JEFFRY R. ALLEN has been a member of the Board since May 2005. Prior to joining the Board, Mr. Allen was the Executive Vice President of Business Operations at the Company. Mr. Allen joined the Company in 1996 as the Chief Financial Officer and Vice President of Finance and Operations. Before coming to the Company, Mr. Allen served as Senior Vice President of Operations for Bay Networks, where he was responsible for manufacturing and distribution functions. From 1990 to 1995, he held the position of Controller for SynOptics Communications and subsequently became Vice President and Controller for Bay Networks, the new company created via the merger of SynOptics and Wellfleet Communications. Previously, Mr. Allen had a 17-year career at Hewlett-Packard Company, where he served in a variety of financial, information systems, and financial management positions, including controller for the Information Networks Group. Mr. Allen holds a BS degree from San Diego State University.

 

ALAN L. EARHART has been a member of the Board since December 2008. He has more than three decades of financial and accounting expertise that includes close involvement with many technology companies, including Cisco Systems, Legato, Varian and Polycom. A former PricewaterhouseCoopers office managing partner, he began his career as a certified public accountant in 1970 with Coopers & Lybrand’s San Francisco office. There he rose through the company to become regional managing partner before its merger with Price Waterhouse. After the merger, he was named managing partner for PricewaterhouseCoopers’ Silicon Valley offices. In addition, he previously served as chair of Coopers & Lybrand’s National Venture Capital Industry Group. Mr. Earhart, who retired from PricewaterhouseCoopers in 2001, also serves on the board of directors of Brocade Communication Systems, Inc. and Rovi Corporation (formerly known as Macrovision Solutions Corporation). Mr. Earhart is currently an independent consultant and retired partner of PricewaterhouseCoopers.

 

THOMAS GEORGENS is the Company’s Chief Executive Officer and President and has been a member of the Board since March 2008. Mr. Georgens joined the Company in 2005 and served as the Company’s Executive Vice President of Product Operations from January 2007 until February 2008 and as President and Chief Operating Officer from February 2008 until August 2009. Prior to January 2007, Mr. Georgens served as the Company’s Executive Vice President and General Manager of Enterprise Storage Systems. Before joining the Company, Mr. Georgens spent nine years at Engenio, a subsidiary of LSI Corporation, the last two years as Chief Executive Officer. He has also served in various other positions, including President of LSI Corporation Storage Systems and Executive Vice President of LSI Corporation. Prior to Engenio, Mr. Georgens spent 11 years at EMC in a variety of engineering and marketing positions. Mr. Georgens holds a BS degree and an ME degree in computer and systems engineering from Rensselaer Polytechnic Institute as well as an MBA degree from Babson College.

 

MARK LESLIE has been a member of the Board since July 2004 and has served as the managing director of Leslie Ventures since 2001. Mr. Leslie was the founding CEO of Veritas Software. He joined the board of Directors of Veritas Software in May of 1988, and became the Chairman, President and CEO when Veritas was restarted as a software company in 1990. Mr. Leslie currently serves on the boards of a number of privately held high-technology corporations, including, Doostang, Librato Software, Model N Software, Servo Software, SeaMicro Systems, Sugar CRM, Wall Street Systems and Xsigo Systems, and is on the boards of non-profit organizations Leslie Family Foundation, Chairman of the NYU Science Advisory Board and NYU FAS Board of Overseers. Mr. Leslie has been a lecturer at Stanford Graduate School of Business since 2001, teaching courses in entrepreneurship and sales. Mr. Leslie received a BA degree in physics and mathematics from New York University in 1966 and completed Harvard Business School’s program for management development in 1980.

 

GEORGE T. SHAHEEN has been a member of the Board since June 2004. He was the Chief Executive Officer of Siebel Systems, Inc. from April 2005 until January 2006. He was the Chief Executive Officer and Global Managing Partner of Andersen Consulting, which later became Accenture, from 1989 to 1999. He then served as the CEO and Chairman of the Board of Webvan Group, Inc. from 1999 to 2001. Mr. Shaheen serves on the boards of 24/7 Customer, newScale, Voxify, PRA International, and Univita. He is a member of the Advisory Board of the Marcus & Millichap Company and the Strategic Advisory Board of Genstar Capital. He has served as an IT Governor of the World Economic Forum and he has served as a member of the Board of Advisors for the Northwestern University Kellogg Graduate School of Management. He has also served on the Board of Trustees of Bradley University. Mr. Shaheen received a BS degree and MBA from Bradley University.

DONALD T. VALENTINE has been a member of the Board since 1994 and Lead Independent Director since January 2008. Mr. Valentine was Chairman of the Board of Directors from September 1994 to January 2008. Mr. Valentine has been a general partner of Sequoia Capital, a venture capital firm, since 1972. Mr. Valentine holds a BA degree from Fordham University.

 

ROBERT T. WALL has been a member of the Board since January 1993. Since August 1984, Mr. Wall has been the Founder and President of On Point Developments, LLC, a venture management and investment company. Mr. Wall was a founder and, from November 2000 to December 2006, the Chairman of the Board of Directors of Airgo Networks, Inc., a Wi-Fi wireless networking systems company that was acquired by QUALCOMM, Inc. in December 2006. From June 1997 to November 1998, he was Chief Executive Officer and a member of the board of directors of Clarity Wireless, Inc., a broadband wireless data communications company that was acquired by Cisco Systems, Inc. in November 1998. Mr. Wall was Chairman of the Board, President, and Chief Executive Officer of Theatrix Interactive, Inc., a consumer educational software publisher, from April 1994 to August 1997. Mr. Wall has been a member of the Board of Trustees of the Fine Arts Museums of San Francisco since June 2007 and a member of the Visiting Committee, Arts of Africa, Oceania, and the Americas at the Metropolitan Museum of Art in New York since March 2007. He received an AB degree in economics from De Pauw University and an MBA degree from Harvard Business School.

 

CORPORATE GOVERNANCE

 

The Company’s Board of Directors has adopted policies and procedures that the Board believes are in the best interests of the Company and its stockholders as well as compliant with the Sarbanes-Oxley Act of 2002, and the rules and regulations of the SEC and NASDAQ.

 

In particular:

 

Independent Directors

 

 

Nominating/Corporate Governance Committee

 

 

 

 

Compensation Committee

 

 

Audit Committee

 

 

 

Stockholder Meeting Attendance Policy for Directors

 

 

Stockholder Approval of Equity Compensation Plans

 

 

Code of Business Conduct and Ethics

 

 

Personal Loans to Executive Officers and Directors

 

 

Stockholder Communications Policy

 

Stockholders may contact any of the Company’s directors by writing to them whether by mail or express mail, c/o NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089. Employees and others who wish to contact the Board or any member of the Audit Committee to report questionable accounting or auditing matters may do so anonymously by using this address and designating the communication as “confidential.”

 

Meetings and Committees of the Board of Directors

 

The Board of Directors held eight regular meetings and five special meetings during fiscal 2009. Each member of the Board of Directors during fiscal 2009 attended more than 75% of the aggregate of (1) the total number of meetings of the Board of Directors held during such period and (2) the total number of meetings held during such period by all Committees of the Board on which he or she served. There are no family relationships among executive officers, directors or nominees of the Company. The Board of Directors has an Audit Committee, a Nominating/Corporate Governance Committee, an Investment Committee and a Compensation Committee.

 

During fiscal 2009, the Board consisted of 11 members. On April 1, 2009, Carol Bartz, one of the Company’s independent directors, resigned from the Board and the Board amended the Company’s bylaws to reduce the number of Board seats from 11 to 10. On July 17, 2009, Edward Kozel, also one of the Company’s independent directors, notified the Company that, due to personal time constraints and other commitments, he does not intend to stand for re-election to the Company’s board of directors. On August 17, 2009, the Board approved an amendment to the bylaws, effective immediately prior to the Annual Meeting, to reduce the number of Board seats from 10 to 9.

 

The members of the committees for fiscal 2009 are identified in the following table:

 

 

 

 

During fiscal 2009, the Audit Committee was composed of Directors Shaheen, Earhart, and Moore, all of whom are independent in accordance with the requirements of applicable SEC and NASDAQ rules and regulations. The Company’s Board has determined that Mr. Moore and Mr. Earhart qualify as “audit committee financial experts” under the rules and regulations of the SEC. The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company’s auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of the Company’s auditors, the accounting practices of the Company and other such functions as detailed in the Audit Committee Charter, which can be found on the Company’s Web site at www.netapp.com. The Audit Committee of the Board of Directors held nine regular and five special meetings during fiscal 2009.

 

During fiscal 2009, the Nominating/Corporate Governance Committee was composed of Directors Moore, Leslie and Valentine, all of whom are independent in accordance with applicable NASDAQ rules, and former Director Bartz, who was independent in accordance with such rules during her tenure on the committee. Mr. Wall was appointed to the Nominating/Corporate Governance Committee following Ms. Bartz’s resignation from the committee. The committee evaluates and recommends to the Board of Directors candidates for Board membership and considers nominees recommended by stockholders. The committee also develops and recommends corporate governance policies and other governance guidelines and procedures to the Board of Directors. The Nominating/Corporate Governance Committee held one meeting during fiscal 2009.

 

During fiscal 2009, the Investment Committee was composed of Directors Allen, Earhart, Leslie, and Wall and Director Kozel, who, as noted above, has decided not to stand for reelection as a director. The Investment Committee was formed for the purpose of reviewing, evaluating, and approving acquisitions and divestitures for the Company. The Investment Committee held seven meetings during fiscal 2009.

 

During fiscal 2009, the Compensation Committee was composed of Directors Wall and Kozel, both of whom are independent in accordance with applicable NASDAQ rules, and former Director Bartz, who was independent in accordance with such rules during her tenure on the committee. Mr. Wall succeeded Ms. Bartz as Chair of the Compensation Committee. The Compensation Committee establishes salaries, incentive compensation programs, and other forms of compensation for officers; creates the compensation guidelines under which management establishes salaries for nonofficers and other employees of the Company; and administers the incentive compensation and benefit plans of the Company. The Compensation Committee of the Board of Directors held eight meetings during fiscal 2009. In addition, the Committee approved stock option and award grants as needed by means of unanimous written consents.

 

On August 17, 2009, the Board of Directors appointed new committee members as follows:

 

 

 

 

DIRECTOR COMPENSATION

 

The Compensation Committee evaluates the compensation and form of compensation for nonemployee directors annually and recommends changes to the Board when appropriate. The nonemployee directors receive annual retainers and stock options for their service on the Board. Details of the compensation are discussed in the narrative below. Employee directors do not receive any compensation for their services as members of the Board.

 

The table below summarizes the total compensation paid by the Company to the nonemployee directors for the fiscal year ended April 24, 2009.

 

 

 

 

 

 

Summary of Director Compensation Policy for Fiscal Year 2009

 

The following table sets forth a summary of our total compensation policy for our nonemployee directors for fiscal year 2009:

 

 

Nonemployee directors are eligible to receive stock options under the Automatic Option Grant Program in effect under the 1999 Plan, under which option grants to purchase shares of common stock are made automatically upon such director’s first election or appointment, and at each Annual Stockholders Meeting thereafter to directors who are re-elected and continue to serve, at an exercise price equal to 100% of the fair market value of the option shares on the grant date. Nonemployee directors who served as the Chair of one of the committees of the Board received an additional stock option grant under the Discretionary Grant Program under the 1999 Plan with a per share exercise price equal to the fair market value on the date of the grant. Each option grant has a term of seven years measured from the grant date, subject to earlier termination following the Director’s cessation of service, and is immediately exercisable for all the option shares. However, any shares purchased upon exercise of the option are subject to repurchase by the Company, at the option exercise price paid per share, should the Director cease service prior to vesting in those shares. The shares subject to each such share grant will vest (and the Company’s repurchase right as to those shares will terminate) upon the Director’s completion of one term of service measured from the grant date and continuing through the day immediately preceding the next Annual Stockholders Meeting.

At the 2008 Annual Stockholders Meeting held on September 2, 2008, each of the following individuals reelected as a nonemployee Board member at that meeting received an option grant for the number of shares indicated below as compensation for his or her services as a Board member, Lead Independent Director or Committee Chairperson, as applicable, in accordance with our director compensation policy described above:

 

 

 

 

Ms. Bartz resigned her position as Chair of the Compensation Committee, and all other Board committee positions, on February 12, 2009, and resigned her position as a nonemployee Board member on April 1, 2009. Under the terms of Ms. Bartz’ option agreements, she has a period of one year from her resignation date to exercise options which were vested and exercisable as of her resignation. Any unvested options were cancelled as of her resignation date. Upon Ms. Bartz’ resignation, Mr. Wall was nominated as Chair of the Compensation Committee and received an additional $5,000 for serving as Chair after Ms. Bartz resigned, as well as a grant of options to purchase 5,000 shares of common stock on April 23, 2009 at an exercise price of $18.36 per share (the fair market value per share of common stock on the grant date) and with such other terms with respect to vesting and termination as described above.

 

Summary of Director Compensation Policy Changes for Fiscal Year 2010

 

After conducting a survey and peer group analysis of our Compensation Peer Group, the Compensation Committee approved the following changes to our nonemployee director compensation policy. Such changes are effective upon the 2009 Annual Meeting of Stockholders to be held on October 14, 2009.

 

 

All other cash and equity compensation amounts for nonemployee directors and committee members remain unchanged.

 

In addition, the Compensation Committee may approve a deferral program for our nonemployee directors, which will allow each nonemployee director to elect to defer the receipt of his or her annual cash retainer until a later date in accordance with applicable tax laws. If the nonemployee director does not elect to defer his or her cash compensation, he or she will continue to receive his or her cash compensation as set forth above. Furthermore, assuming Proposal No. 3 set forth in this Proxy Statement is approved by the stockholders (which would permit the implementation of a program which would allow our directors to elect to receive his or her automatic equity grants

either in the form of all stock options or a combination of stock options and restricted stock units), then to the extent a nonemployee director elects to receive his or her automatic equity grant in the form of restricted stock units, the director may be permitted to elect in accordance with federal tax laws when he or she will receive the payout from his or her earned restricted stock units and defer income taxation until the award is paid. Please note that an election to defer the payout of the earned restricted stock units is not intended to increase the value of the payout to the nonemployee director, but rather gives the nonemployee director the flexibility to decide when he or she will be subject to taxation with respect to the award. Any election to defer payment of any earned restricted stock units will not alter the other terms of the award, including the vesting requirements.

 

Vote Required

 

Directors are elected by a plurality vote. The 9 nominees for director receiving the highest number of affirmative votes of the shares entitled to be voted for them shall be elected as directors. Votes against, abstentions and broker nonvotes have no legal effect on the election of directors due to the fact that such elections are by plurality.

 

The Board of Directors Unanimously Recommends That Stockholders
Vote FOR Proposal No. 1.

 

PROPOSAL NO. 2

 

AMENDMENT TO MODIFY THE NUMBER OF SHARES ISSUED PURSUANT TO THE STOCK ISSUANCE, AND PERFORMANCE SHARE AND PERFORMANCE UNIT PROGRAMS UNDER

THE COMPANY’S 1999 STOCK OPTION PLAN

 

Summary

 

We are asking our stockholders to approve an amendment to the 1999 Stock Option Plan (the “1999 Plan”) to modify the number of shares of Company common stock (“Shares”) that may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs. The Board has approved this amendment to the 1999 Plan, subject to approval from our stockholders at the Annual Meeting. Approval of the amendment to the 1999 Plan requires the affirmative vote of a majority of the Votes Cast. Please note that this proposal is separate and distinct from Proposal No. 3 relating to proposed changes to the Automatic Option Grant Program contained in the 1999 Plan. Accordingly, a vote for this proposal will not affect your vote for or against Proposal No. 3, and how you vote on Proposal No. 3 will not affect your vote for or against this proposal.

 

The 1999 Plan currently provides that the number of Shares that may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs is limited to 30% of the sum of (i) the number of Shares to be added to the 1999 Plan at the 2008 Annual Meeting, (ii) the number of Shares available to be granted pursuant to awards under the 1999 Plan (i.e., reserved but unissued) as of May 23, 2008, and (iii) the number of Shares subject to outstanding awards as of May 23, 2008 that actually return to the 1999 Plan pursuant to its terms. We are asking our stockholders to amend the 1999 Plan so that the number of Shares that may be issued under the Stock Issuance and Performance Share and Performance Unit Programs would equal 8,893,237 plus the sum of:

 

(i) 50% of the number of Shares subject to outstanding awards as of August 17, 2009 that actually return to the 1999 Plan pursuant to its terms, and

 

(ii) 50% of the number of Shares that are added to the 1999 Plan upon approval of the stockholders after the 2009 Annual Meeting.

 

Approval of this amendment will not increase the number of Shares available for issuance under the 1999 Plan, but will increase the number of Shares that may be issued through the Stock Issuance and Performance Share and Performance Unit Programs.

 

We are asking our stockholders to approve this amendment so that we will have sufficient flexibility to structure our compensation programs to attract and retain the best available personnel and to provide additional incentives to our employees. In the last couple of years we have begun to use restricted stock units, in addition to

stock options, on a greater basis as these awards provide an effective tool to retain our employees even if the price of our common stock declines, and such restricted stock unit awards are less dilutive than stock options. This shift was evidenced in connection with our recently completed stockholder-approved option exchange program where underwater options were exchanged for awards of restricted stock units. We believe that the grant of restricted stock units should be an important part of our equity compensation program. Nevertheless, we believe that stock options will continue to play an important role in the compensation of our employees, especially for those individuals in positions with a greater opportunity to have an effect on our business as a whole, as stock options align the interests of our employees with that of our stockholders because an economic benefit is only realized if the value of our common stock increases.

 

The 1999 Plan is designed to assist us in recruiting, motivating and retaining talented employees who help us achieve our business goals, including creating long-term value for stockholders. If the stockholders do not approve this proposal, we will be limited in the number of Shares that may be granted pursuant to certain types of awards, even if it is in our best interests to make such grants. If we are unable to maintain flexibility in granting equity awards, it may be difficult to recruit and retain talented and qualified employees and potentially will limit our growth and future success.

 

Description of the 1999 Plan

 

The following paragraphs provide a summary of the principal features of the 1999 Plan and its operation, including a description of the amendment to the 1999 Plan if stockholders approve this Proposal No. 2 of this Proxy Statement. This summary does not reflect the requested changes to the Automatic Option Grant Program set forth in Proposal No. 3. The 1999 Plan is set forth in its entirety and has been filed as Appendix A to this Proxy Statement with the SEC. The following summary is qualified in its entirety by reference to the complete text of the 1999 Plan. Any stockholder who wants to obtain a copy of the actual plan document may do so by written request to the Corporate Secretary at the Company’s principal offices in Sunnyvale, California.

 

Background and Purpose of the 1999 Plan

 

The 1999 Plan is divided into five separate equity programs:

 

1. Discretionary Option Grant Program — Under the Discretionary Option Grant Program, the Plan Administrator is able to grant options to purchase Shares at an exercise price not less than the fair market value of those Shares on the grant date.

 

2. Stock Appreciation Rights Program — Under the Stock Appreciation Rights Program, the Plan Administrator is able to grant stock appreciation rights that will allow individuals to receive the appreciation in the Shares subject to the award between the date of grant and the exercise date.

 

3. Stock Issuance Program — Under the Stock Issuance Program, the Plan Administrator is able to make direct issuances of Shares either through the issuance (or promise to issue) or immediate purchase of such Shares or as a bonus for services rendered by participants on such terms as the Plan Administrator deems appropriate. In addition, the Plan Administrator is able to make grants of restricted stock units on such terms as the Plan Administrator deems appropriate.

 

4. Performance Share and Performance Unit Program — Under the Performance Share and Performance Unit Program, the Plan Administrator is able to grant performance shares and performance units, which are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest.

 

5. Automatic Option Grant Program — Under the Automatic Option Grant Program, option grants are automatically made at periodic intervals to nonemployee directors. Please see Proposal No. 3 for a summary of the proposed changes to the Automatic Option Grant Program.

 

The 1999 Plan is intended to increase incentives and to encourage Share ownership on the part of eligible employees, nonemployee directors and consultants who provide significant services to the Company and its affiliates.

Administration of the 1999 Plan

 

The Compensation Committee of the Board of Directors (“Compensation Committee”) administers the 1999 Plan (“Plan Administrator”). The members of the Compensation Committee qualify as nonemployee directors under Rule 16b-3 of the Exchange Act of 1934, as amended, and as outside directors under Section 162(m) of the Internal Revenue Code (“Code”) such that the Company can receive a federal tax deduction for certain compensation paid under the 1999 Plan.

 

Subject to the terms of the 1999 Plan, the Plan Administrator has the sole discretion to select the employees, consultants, nonemployee directors and other independent advisors who will receive awards, determine the terms and conditions of awards (for example, the exercise price and vesting schedule), and interpret the provisions of the 1999 Plan and outstanding awards, provided, however, that the Company is unable (without the approval of stockholders) to reduce the exercise price of any outstanding stock options granted under the 1999 Plan or cancel any outstanding stock option and immediately replace it with a new stock option with a lower exercise price. Administration of the Automatic Option Grant Program will be self-executing in accordance with the terms of the program, but the Plan Administrator will have discretion to revise the amount or type of award made under the program on a prospective basis. Subject to the terms of our Compensation Committee Charter, the Compensation Committee may delegate any part of its authority and powers under the 1999 Plan to one or more directors and/or officers of the Company, subject to Section 16(b) of the Exchange Act (such officers are referred to herein as “executive officers”), but only the Compensation Committee itself can make awards to participants who are executive officers of the Company.

 

Shares Subject to the 1999 Plan

 

A total of 89,330,429 Shares has been reserved for issuance under the 1999 Plan. Following our Stock Option Exchange in June 2009, we reduced the number of Shares in the 1999 Plan from 101,100,000 to 89,330,429 because we did not return all of the cancelled Shares from the Stock Option Exchange to the 1999 Plan. As of June 26, 2009, 45,407,321 Shares were subject to outstanding awards granted under the 1999 Plan, 16,383,828 Shares remained available for any new awards to be granted in the future and 27,539,280 Shares have been issued pursuant to awards thereunder. The closing price of our common stock was $19.40 on June 26, 2009.

 

If an award expires or is cancelled without having been fully exercised or vested, the unvested or cancelled Shares generally will be returned to the available pool of Shares reserved for issuance under the 1999 Plan. Also, in the event any change is made to our common stock issuable under the 1999 Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, merger, reorganization, consolidation, recapitalization, exchange of shares, or other change in capitalization of the Company affecting the common stock as a class without the Company’s receipt of consideration, appropriate adjustments will be made to (1) the maximum number and/or class of securities issuable under the 1999 Plan, (2) the maximum number and/or class of securities for which any one individual may be granted stock options, stock appreciation rights, stock issuances, restricted stock units or performance shares and performance units under the 1999 Plan per calendar year, (3) the class and/or number of securities and the purchase price per share in effect under each outstanding award, and (4) the class and/or number of securities for which automatic option grants are to be subsequently made under the Automatic Option Grant Program. The Plan Administrator will make adjustments to outstanding awards to prevent the dilution or enlargement of benefits intended to be provided thereunder.

 

Discretionary Option Grant Program

 

A stock option is the right to acquire Shares at a fixed exercise price for a fixed period of time. Under the Discretionary Option Grant Program, the Plan Administrator may grant nonstatutory stock options and/or incentive stock options (which entitle the recipients, but not the Company, to more favorable tax treatment). The Plan Administrator will determine the number of Shares covered by each option, but during any calendar year, no participant may be granted options and/or stock appreciation rights covering more than 3,000,000 Shares.

 

The exercise price of each option is set by the Plan Administrator but cannot be less than 100% of the fair market value of the Shares covered by the option on the date of grant. The exercise price of an incentive stock option

must be at least 110% of fair market value if on the grant date the participant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its subsidiaries.

 

An option granted under the Discretionary Option Grant Program cannot be exercised until it becomes vested. The Plan Administrator establishes the vesting schedule of each option at the time of grant. Options become exercisable at the times and on the terms established by the Plan Administrator. To the extent the aggregate fair market value of the Shares (determined on the grant date) covered by incentive stock options first becomes exercisable by any participant during any calendar year is greater than $100,000, the excess above $100,000 will be treated as a nonstatutory stock option. Options granted under the 1999 Plan expire at the times established by the Plan Administrator, but not later than seven (7) years after the grant date.

 

Stock Appreciation Rights Program

 

A stock appreciation right is the right to receive the appreciation in fair market value of the Shares subject to the award between the exercise date and the date of grant. We can pay the appreciation in either cash or Shares. Stock appreciation rights will become exercisable at the times and on the terms established by the Plan Administrator, subject to the terms of the 1999 Plan. No participant will be granted stock appreciation rights and/or options covering more than 3,000,000 Shares during any calendar year. The exercise price of each stock appreciation right is set by the Plan Administrator but cannot be less than 100% of the fair market value of the Shares covered by the award on the date of grant. A stock appreciation right granted under the 1999 Plan cannot be exercised until it becomes vested. The Plan Administrator establishes the vesting schedule of each stock appreciation right at the time of grant. Stock appreciation rights granted under the 1999 Plan expire at the times established by the Plan Administrator, but not later than seven (7) years after the grant date.

 

Stock Issuance Program

 

Stock issuances are awards where Shares are or will be issued to a participant and the participant’s right to retain or receive such Shares will vest in accordance with the terms and conditions established by the Plan Administrator. Restricted stock units are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest. The number of Shares covered by a stock issuance award or restricted stock unit awards will be determined by the Plan Administrator, but during any calendar year no participant may be granted an award covering more than 200,000 Shares. Assuming our stockholders approve this proposal, no more than 8,893,237 plus of the sum of (i) 50% of the number of Shares subject to outstanding awards as of August 17, 2009 that actually return to the 1999 Plan pursuant to its terms, and (ii) 50% of the number of Shares that are added to the 1999 Plan upon approval of the stockholders after the 2009 Annual Meeting, may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs. In determining whether an award should be made and/or the vesting schedule for any such award, the Plan Administrator may impose whatever conditions to vesting as it determines to be appropriate. For example, the Plan Administrator may determine to make an award only if the participant satisfies performance goals established by the Plan Administrator.

 

Performance Share and Performance Unit Program

 

Performance shares and performance units are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest. The Plan Administrator will establish organizational, individual performance goals or other vesting criteria at its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid to participants. No participant will receive performance units with an initial value greater than $2,000,000 and no participant will receive more than 200,000 performance shares during any calendar year. Performance units will have an initial dollar value established by the Plan Administrator prior to the grant date. Performance shares will have an initial value equal to the fair market value of a Share on the grant date. Assuming our stockholders approve this proposal, no more than 8,893,237 plus the sum of (i) 50% of the number of Shares subject to outstanding awards as of August 17, 2009 that actually return to the 1999 Plan pursuant to its terms, and (ii) 50% of the number of Shares that are added to the 1999

Plan upon approval of the stockholders after the 2009 Annual Meeting, may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs.

 

Performance Goals

 

The Plan Administrator (at its discretion) may make performance goals applicable to a participant with respect to an award intended to qualify as “performance-based compensation” under Code Section 162(m). At the Plan Administrator’s discretion, one or more of the following performance goals will apply: annual revenue, cash position, earnings per share, individual objectives, net income, operating cash flow, operating income, operating profit, return on assets, return on equity, return on sales and total stockholder return. The Plan Administrator may utilize other performance criteria for awards not intended to qualify as “performance-based compensation” under Code Section 162(m).

 

Automatic Option Grant Program

 

Please note that the following summary does not reflect the terms of the proposed amendment to the Automatic Option Grant Program that is discussed in Proposal No. 3. Please see Proposal No. 3 for a summary of the proposed changes to this program.

 

The terms of the 1999 Plan provide that our nonemployee directors will receive annual, automatic grants of nonstatutory stock options. Nonemployee directors are also eligible to receive discretionary awards pursuant to the other equity programs under the 1999 Plan. The Plan Administrator, in its discretion, may change and otherwise revise the terms of awards granted pursuant to the Automatic Option Grant Program for awards granted on or after the date the Plan Administrator makes such change.

 

Each new nonemployee director receives an option to purchase 55,000 Shares as of the date he or she first becomes a nonemployee director. Each nonemployee director who is to continue to serve as a nonemployee director also receives an option to purchase 20,000 Shares on the date of each annual stockholder meeting, provided that he or she has been a nonemployee director for at least six months prior to the grant date and remains an eligible nonemployee director through each such meeting.

 

The exercise price of each option granted to a nonemployee director is equal to 100% of the fair market value of the Shares covered by the option on the date of grant. The option granted to a nonemployee director when he or she first becomes a nonemployee director vests over four years, with 25,000 Shares vesting on the first anniversary of the date of grant and 10,000 Shares vesting on each anniversary thereafter (assuming that he or she remains a nonemployee director on each scheduled vesting date). An option granted under the Automatic Option Grant Program is immediately exercisable. However, any Shares purchased under the option program are subject to repurchase by the Company if the nonemployee director ceases Board service prior to vesting. All options granted thereafter to the nonemployee director become 100% vested on the day preceding the Annual Stockholders Meeting following the grant date subject to the nonemployee director’s continued service on such date. If a nonemployee director terminates his or her service on the Board due to death or disability his or her options would immediately vest.

 

Options granted to nonemployee directors generally expire no later than seven (7) years after the date of grant. If a nonemployee director terminates his or her service on the Board prior to an option’s normal expiration date, the option will remain exercisable for 12 months to the extent it has vested. However, the option may not be exercised later than the original expiration date.

 

Awards to be Granted to Certain Individuals and Groups

 

The number of awards that an employee, nonemployee director, or consultant, may receive under the 1999 Plan is at the discretion of the Plan Administrator and therefore cannot be determined in advance. The following table sets forth (1) the aggregate number of Shares subject to options granted under the 1999 Plan during fiscal 2009, (2) the average per Share exercise price of such options, (3) the aggregate number of Shares subject to awards of

restricted stock units granted under the 1999 Plan during fiscal 2009, and (4) the dollar value of such Shares based on $19.40 per Share, the fair market value on June 26, 2009.

 

AMENDED PLAN BENEFITS
1999 Plan

 

 

 

 

Limited Transferability of Awards

 

Awards granted under the 1999 Plan generally may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the applicable laws of descent and distribution. However, participants may, in a manner specified by the Plan Administrator, transfer nonstatutory stock options (1) to a member of the participant’s family, (2) to a trust or other entity for the sole benefit of the participant and/or a member of his or her family, (3) to a former spouse pursuant to a domestic relations order.

 

Federal Tax Aspects

 

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of awards granted under the 1999 Plan. Tax consequences for any particular individual may be different.

 

Nonstatutory Stock Options

 

No taxable income is reportable when a nonstatutory stock option is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the Shares purchased over the exercise price of the option. Any taxable income recognized in connection with an option exercise by an employee of the Company is subject to tax withholding by the Company. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

 

As a result of Section 409A of the Code and the Treasury regulations promulgated thereunder (“Section 409A”), nonstatutory stock options granted with an exercise price below the fair market value of the underlying stock or with a deferral feature may be taxable to the recipient in the year of vesting in an amount equal to the difference between the then fair market value of the underlying stock and the exercise price of such awards

and may be subject to an additional 20% tax plus penalties and interest. In addition, certain states, such as California, have adopted similar tax provisions.

 

Incentive Stock Options

 

No taxable income is reportable when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case taxation is the same as for nonstatutory stock options). If the participant exercises the option and then later sells or otherwise disposes of the Shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the Shares before the end of the two-year or one-year holding periods described above, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the Shares on the exercise date (or the sale price, if less) minus the exercise price of the option.

 

Stock Appreciation Rights

 

No taxable income is reportable when a stock appreciation right is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

 

As a result of Section 409A of the Code, however, stock appreciation rights granted with an exercise price below the fair market value of the underlying stock or with a deferral feature may be taxable to the recipient in the year of vesting in an amount equal to the difference between the then fair market value of the underlying stock and the exercise price of such options and may be subject to an additional 20% tax plus penalties and interest. In addition, certain states, such as California, have adopted similar tax provisions.

 

Stock Issuance, Restricted Stock Units, Performance Units and Performance Shares

 

A participant generally will not have taxable income at the time an award of stock, restricted stock units, performance shares or performance units is granted. Instead, he or she will recognize ordinary income in the first taxable year in which his or her interest in the Shares underlying the award becomes either (1) freely transferable or (2) no longer subject to substantial risk of forfeiture. However, the recipient of an award of restricted stock may elect to recognize income at the time he or she receives the award in an amount equal to the fair market value of the Shares underlying the award (less any cash paid for the shares) on the date the award is granted.

 

Tax Effect for the Company

 

The Company generally will be entitled to a tax deduction in connection with an award under the 1999 Plan in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to our Chief Executive Officer (“CEO”) and to certain other of our most highly compensated executive officers. Under Section 162(m) of the Code, the annual compensation paid to any of these specified executive officers will be deductible only to the extent that it does not exceed $1,000,000. However, the Company can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include stockholder approval of the 1999 Plan, setting limits on the number of awards that any individual may receive and for awards other than stock options, establishing performance criteria that must be met before the award actually will vest or be paid. The 1999 Plan has been designed to permit the Plan Administrator to grant awards that qualify as performance-based compensation for purposes of satisfying the conditions of Section 162(m), thereby permitting the Company to continue to receive a federal income tax deduction in connection with such awards.

 

Amendment and Termination of the Plan

 

The Board generally may amend or terminate the 1999 Plan at any time and for any reason, subject to stockholder approval if applicable.

Summary

 

We believe strongly that the approval of the amendment to the 1999 Plan to permit granting up to 8,893,237 plus the sum of (i) 50% of the number of Shares subject to outstanding awards as of August 17, 2009 that actually return to the 1999 Plan pursuant to its terms, and (ii) 50% of the number of Shares that are added to the 1999 Plan upon approval of the stockholders after the 2009 Annual Meeting, is essential given the increasing volatility of the economic climate. The 1999 Plan is designed to assist us in recruiting, motivating and retaining talented employees who help us achieve our business goals, including creating long-term value for stockholders. If the stockholders do not approve this proposal, we will be limited in the number of Shares that may be granted pursuant to certain types of awards, even if it is in our best interests to make such grants. We are asking our stockholders to approve this amendment so that we will have sufficient flexibility to structure our compensation programs to attract and retain the best available personnel and to provide additional incentives to our employees.

 

Vote Required

 

The affirmative vote by a majority of the Votes Cast is required to approve this proposal. The effect of an abstention is the same as that of a vote against the proposal. Unless you indicate otherwise, your proxy will vote “FOR” the proposal.

 

The Board of Directors Unanimously Recommends That Stockholders
Vote FOR Proposal No. 2

 

PROPOSAL NO. 3:

 

AMENDMENT TO THE COMPANY’S AUTOMATIC OPTION GRANT PROGRAM
UNDER THE 1999 STOCK OPTION PLAN

 

The Company is asking the stockholders to approve an amendment to the Automatic Option Grant Program (the “Program”) contained in the 1999 Stock Option Plan (“1999 Plan”). The Board has approved this amendment to the 1999 Plan, subject to approval from our stockholders at the Annual Meeting. Approval of the amendment to the 1999 Plan requires the affirmative vote of a majority of the Votes Cast by our stockholders. Our nonemployee directors have an interest in this proposal. Please note that this proposal is separate and distinct from Proposal No. 2 relating to the increase of the number of shares that may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs of the 1999 Plan. Accordingly, a vote for this proposal will not affect your vote for or against Proposal No. 2, and how you vote on Proposal No. 2 will not affect your vote for or against this proposal.

 

Introduction

 

The terms of the Program currently provide that our nonemployee directors will receive automatic stock option grants as partial compensation for their services to the Company. We are asking our stockholders to approve an amendment to the Program which permits the Plan Administrator to implement an election program so that a nonemployee director may elect to receive his or her automatic equity grants in the form of all stock options or in a combination of stock options and restricted stock units. The remainder of this Proposal No. 3 assumes the Plan Administrator elects to implement such a program pursuant to the terms described herein. This change will apply only to the automatic equity grants granted under the Program and not to any discretionary grants that our nonemployee directors may receive under other programs of the 1999 Plan. If this proposal is not approved, our nonemployee directors will continue to receive automatic stock option grants as currently provided under the Program and will continue to be eligible to participate in all other programs under the 1999 Plan. Approval of this proposal is not intended to increase the compensation provided to our nonemployee directors through the Program, but will instead give the Plan Administrator the discretion to allow our nonemployee directors the flexibility to determine the form of equity grant they will receive.

 

We believe this proposal is important to the Company’s ability to attract and retain qualified and experienced individuals to serve on our Board. Because restricted stock units provide a guaranteed benefit to the recipients upon vesting, restricted stock units provide an effective tool to retain our nonemployee directors even if the price of the

Company’s common stock declines. Additionally, restricted stock units permit an individual to defer income taxation until the value of the award is paid (which is not the case with options). The Company’s compensation philosophy reflects its belief that the grant of restricted stock units can be an important part of the Company’s director compensation program, and permitting the nonemployee directors to elect to receive a portion of their automatic grants in the form of restricted stock units reflects this philosophy. However, because restricted stock units do provide a benefit even if the Company’s stock price declines, the Company did not feel it appropriate to allow its nonemployee directors to elect to receive an automatic grant solely in the form of restricted stock units or in an equal number of options and restricted stock units. Under the proposed amendment, if a nonemployee director elects to receive his or her automatic grant through a combination of stock options and restricted stock units, the nonemployee director would receive a lesser number of restricted stock units, receiving one restricted stock unit for every three stock options subject to the award.

 

While the Company feels it is important to permit nonemployee directors to elect to receive a portion of their automatic equity grants in the form of restricted stock units, stock options will continue to play an important role in the compensation of our nonemployee directors. The grant of stock options aligns the interests of our nonemployee directors with that of our stockholders because the nonemployee directors will only receive a benefit from their stock options if the value of the Company’s common stock increases. The Company is not permitting our nonemployee directors to elect to receive their entire equity grant in the form of restricted stock units because the Company feels it is important that a portion of the nonemployee director’s compensation be dependent upon an increase in the value of the Company’s common stock.

 

The Board has carefully considered the proposed change to the Program weighing both the potential added recruiting and retention value that restricted stock units provide, as well as the benefit to the interests of our stockholders by aligning the value of the nonemployee directors’ compensation with an increase in our stock price. The Board believes that permitting a nonemployee director to elect to receive his or her annual equity grant either in the form of stock options or a combination of stock options and restricted stock units will provide the best method to attract and retain highly qualified individuals to serve on the Board as well as to align the interests of our stockholders and the nonemployee directors.

 

Description of the Proposed Change

 

The terms of the Program currently provide that each individual who is first elected or appointed to serve as a nonemployee director is automatically granted a stock option to purchase 55,000 shares of our common stock on the date of the initial election or appointment (the “Initial Grant”). Additionally, on the date of each Annual Stockholders Meeting, each individual who is to continue to serve as a nonemployee director (and provided the individual has served as a nonemployee director for at least six months) receives a stock option to purchase 20,000 shares of our common stock (the “Annual Grant”). The Program currently provides that the Initial and Annual Grants are granted in the form of nonstatutory stock options. Please see the section titled “Automatic Option Grant Program” contained in Proposal 2 for a more complete description of the current Program.

 

We are asking our stockholders to approve an amendment to the Program to permit the Plan Administrator to implement a program so that our nonemployee directors may elect to receive the automatic equity grants provided for by the Program in one of two ways:

 

 

The change described above will apply only to the automatic grants made through the Program.

The proposed change to the Program will apply to the automatic equity grants granted pursuant to the Program at our 2009 Annual Meeting and will apply prospectively to future grants, subject to stockholder approval of this proposal. If this proposal is not approved, our nonemployee directors will continue to receive automatic equity awards comprised solely of stock options pursuant to the current terms of the Program as previously approved by our stockholders.

 

Summary of Director Compensation

 

For a complete summary of our nonemployee director compensation program, including a summary of other recent changes to such compensation, please see “Director Compensation” on page 10.

 

Description of the 1999 Plan

 

Please refer to the summary of principal features of the 1999 Plan and its operation as set forth in Proposal No. 2. That summary is qualified in its entirety by reference to the 1999 Plan as set forth in Appendix A to this Proxy statement.

 

Federal Tax Aspects

 

For a summary of the general federal income tax consequences to U.S. taxpayers and the Company of awards granted under the 1999 Plan, please see the disclosure titled “Federal Tax Aspects” under Proposal No. 2 above.

 

Summary

 

We believe strongly that the approval of the amendment to the 1999 Plan to permit the Plan Administrator to implement a program to allow our nonemployee directors the opportunity to receive a portion of their automatic equity grants in the form of restricted stock units is essential to the success of the Company. If the stockholders do not approve this proposal, our directors will continue to receive their automatic equity grants solely in the form of stock options and it may be difficult to recruit and retain talented and qualified nonemployee directors. If the Company is not able to attract and retain these types of individuals for service on our Board, it potentially will limit the Company’s growth and future success.

 

Vote Required

 

The affirmative vote by a majority of the Votes Cast is required to approve this proposal. The effect of an abstention is the same as that of a vote against the proposal. Unless you indicate otherwise, your proxy will vote “FOR” the proposal.

 

The Board of Directors Unanimously Recommends That Stockholders
Vote FOR Proposal No. 3

 

PROPOSAL NO. 4:

 

AMENDMENT TO THE COMPANY’S EMPLOYEE STOCK PURCHASE PLAN

 

Introduction

 

The Company is asking the stockholders to approve an amendment to the Company’s Employee Stock Purchase Plan (“Purchase Plan”), which will increase the number of Shares authorized for issuance under the Purchase Plan by an additional 6,700,000 Shares.

 

The purpose of the amendment is to ensure that the Company will continue to have a sufficient reserve of Shares of the Company’s common stock available under the Purchase Plan to provide eligible employees of the Company and its participating affiliates (whether now existing or subsequently established) with the opportunity to purchase Shares at semiannual intervals through their accumulated periodic payroll deductions.

The Purchase Plan was adopted by the Board on September 26, 1995, and became effective on November 20, 1995, in connection with the Company’s initial public offering of its common stock.

 

The terms and provisions of the Purchase Plan, as most recently amended, are summarized below. This summary, however, does not purport to be a complete description of the Purchase Plan. The Purchase Plan is set forth in its entirety and has been filed as Appendix B to this Proxy Statement with the SEC. The following summary is qualified in its entirety by reference to the complete text of the Purchase Plan. Any stockholder who wants to obtain a copy of the actual plan document may do so by written request to the Corporate Secretary at the Company’s principal offices in Sunnyvale, California.

 

Description of the Purchase Plan

 

The Purchase Plan is administered by the Compensation Committee of the Board, serving as the plan administrator. As plan administrator, such committee has full authority to adopt administrative rules and procedures and to interpret the provisions of the Purchase Plan.

 

Share Reserve

 

The maximum number of Shares reserved for issuance over the term of the Purchase Plan is limited to 30,200,000 Shares, assuming stockholder approval of the 6,700,000 Share increase that is the subject of this Proposal No. 4. As of June 26, 2009, 22,630,633 Shares had been issued under the Purchase Plan, and 7,569,367 Shares were available for future issuance, assuming stockholder approval of the 6,700,000 Share increase. The closing price of our common stock was $19.40 on June 26, 2009.

 

The Shares issuable under the Purchase Plan may be made available from authorized but unissued Shares or from Shares of common stock reacquired by the Company, including Shares purchased on the open market.

 

In the event that any change is made to the outstanding common stock (whether by reason of any stock split, stock dividend, recapitalization, exchange or combination of shares or other change affecting the outstanding common stock as a class without the Company’s receipt of consideration), appropriate adjustments will be made to (1) the maximum number and class of securities issuable under the Purchase Plan, (2) the maximum number and class of securities purchasable per participant on any one semiannual purchase date, (3) the maximum number of Shares purchasable in total by all participants on any one purchase date (if applicable) and (4) the number and class of securities subject to each outstanding purchase right and the purchase price per Share in effect thereunder. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the Purchase Plan or the outstanding purchase rights thereunder.

 

Offering Period and Purchase Rights

 

Shares are offered under the Purchase Plan through a series of overlapping offering periods, each with a maximum duration of 24 months. Such offering periods will begin on the first business day of June and on the first business day of December each year over the term of the Purchase Plan. Accordingly, two (2) separate offering periods will begin in each calendar year.

 

Each offering period will consist of a series of one or more successive purchase intervals. Purchase intervals will run from the first business day in June to the last business day in November each year and from the first business day in December each year to the last business day in May in the immediately succeeding year. Accordingly, Shares will be purchased on the last business day in May and November each year with the payroll deductions collected from the participants for the purchase interval ending with each such semiannual purchase date.

 

If the fair market value per share of common stock on any semiannual purchase date within a particular offering period is less than the fair market value per share of common stock on the start date of that offering period, then the participants in that offering period will automatically be transferred from that offering period after the semiannual purchase of Shares on their behalf and enrolled in the new offering period which begins on the next business day following such purchase date.

Eligibility and Participation

 

Any individual who is employed on a basis under which he or she is regularly expected to work for more than 20 hours per week for more than five months per calendar year in the employ of the Company or any participating parent or subsidiary corporation (including any corporation which subsequently becomes such at any time during the term of the Purchase Plan) is eligible to participate in the Purchase Plan.

 

An individual who is an eligible employee on the start date of any offering period may join that offering period at that time. However, no employee may participate in more than one offering period at a time.

 

As of June 26, 2009, approximately 7,910 employees, including all five of our executive officers, were eligible to participate in the Purchase Plan.

 

Purchase Price

 

The purchase price of the Shares purchased on behalf of each participant on each semiannual purchase date will be equal to 85% of the lower of (1) the fair market value per Share on the start date of the offering period in which the participant is enrolled or (2) the fair market value on the semiannual purchase date.

 

The fair market value per Share on any particular date under the Purchase Plan will be deemed to be equal to the closing selling price per share on such date reported on the NASDAQ Global Select Market. On June 26, 2009, the closing selling per share of the Company’s common stock on the NASDAQ Global Select Market was $19.40 per share.

 

Payroll Deductions and Stock Purchases

 

Each participant may authorize periodic payroll deductions in any multiple of 1% up to a maximum of 10% of his or her total cash earnings (generally base salary, bonuses, overtime pay and commissions) to be applied to the acquisition of Shares at semiannual intervals. Accordingly, on each semiannual purchase date (the last business day in May and November each year), the accumulated payroll deductions of each participant will automatically be applied to the purchase of whole Shares at the purchase price in effect for the participant for that purchase date.

 

Special Limitations

 

The Purchase Plan imposes certain limitations upon a participant’s rights to acquire common stock, including the following limitations:

 

 

The Plan Administrator will have the discretionary authority to increase, decrease, or implement the per participant and any total participant limitations prior to the start date of any new offering period under the Purchase Plan.

 

Withdrawal Rights and Termination of Employment

 

The participant may withdraw from the Purchase Plan at any time, and his or her accumulated payroll deductions may either be applied to the purchase of shares on the next semiannual purchase date or refunded.

 

Upon the participant’s cessation of employment or loss of eligible employee status, payroll deductions will automatically cease. Any payroll deductions which the participant may have made for the semiannual period in which such cessation of employment or loss of eligibility occurs will be immediately refunded.

Stockholder Rights

 

No participant will have any stockholder rights with respect to the Shares covered by his or her purchase rights until the Shares are actually purchased on the participant’s behalf. No adjustment will be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase.

 

Assignability

 

Purchase rights are not assignable or transferable by the participant and may be exercised only by the participant.

 

Change in Control

 

In the event a change in control occurs, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such change. The purchase price in effect for each participant will be equal to 85% of the lower of (1) the fair market value per Share on the start date of the offering period in which the participant is enrolled at the time the change in control occurs or (2) the fair market value per Share immediately prior to the effective date of such change in control.

 

A change in control will be deemed to occur if (1) the Company is acquired through a merger or consolidation in which more than 50% of the Company’s outstanding voting stock is transferred to a person or persons different from those who held stock immediately prior to such transaction; (2) the Company sells, transfers or disposes of all or substantially all of its assets; or (3) any person or related group of persons acquires ownership of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

 

Share Proration

 

Should the total number of Shares to be purchased pursuant to outstanding purchase rights on any particular date exceed either (1) the maximum number of Shares purchasable in total by all participants on any one purchase date (if applicable) or (2) the number of Shares then available for issuance under the Purchase Plan, then the Plan Administrator will make a pro-rata allocation of the available Shares on a uniform and nondiscriminatory basis. In such an event, the Plan Administrator will refund the accumulated payroll deductions of each participant, to the extent in excess of the purchase price payable for the Shares prorated to such individual.

 

Amendment and Termination

 

The Purchase Plan will terminate upon the earliest of (1) the last business day in May 2011, (2) the date on which all Shares available for issuance thereunder are sold pursuant to exercised purchase rights or (3) the date on which all purchase rights are exercised in connection with a change in control.

 

The Board may at any time alter, amend, suspend or discontinue the Purchase Plan. However, the Board may not, without stockholder approval, (1) increase the number of Shares issuable under the Purchase Plan, except for permissible adjustments in the event of certain changes in the Company’s capitalization, (2) alter the purchase price formula so as to reduce the purchase price, or (3) modify the requirements for eligibility to participate in the Purchase Plan.

 

Plan Benefits

 

The table below shows, as to the named executive officers (“NEOs”) and specified groups, the number of Shares purchased under the Purchase Plan during fiscal 2009, together with the value of those Shares as of the date of purchase.

 

Participation in the ESPP

 

Participation in the Purchase Plan is voluntary and dependent on each eligible employee’s election to participate and his or her determination as to the level of payroll deductions. Accordingly, future purchases under

the Purchase Plan are not determinable. Nonemployee directors are not eligible to participate in the Purchase Plan. The following table sets forth certain information regarding shares purchased under the Purchase Plan during the last fiscal year for each of the NEOs, for all current executive officers as a group and for all other employees who participated in the Purchase Plan as a group:

 

AMENDED PLAN BENEFITS
Employee Stock Purchase Plan

 

 

 

 

New Plan Benefits

 

No purchase rights have been granted, and no Shares have been issued, on the basis of the 6,700,000 Share increase that is the subject of this Proposal No. 4.

 

Federal Tax Consequences

 

The Purchase Plan is intended to be an employee stock purchase plan within the meaning of Section 423 of the Code. Under an employee stock purchase plan, which so qualifies, no taxable income will be recognized by a participant, and no deductions will be allowable to the Company, upon either the grant or the exercise of the purchase rights. Taxable income will not be recognized until there is a sale or other disposition of the Shares acquired under the Purchase Plan or in the event the participant should die while still owning the purchased Shares.

 

If the participant sells or otherwise disposes of the purchased Shares within two years after the start date of the offering period in which such Shares were acquired or within one year after the actual semiannual purchase date of those Shares, then the participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the fair market value of the Shares on the purchase date exceeded the purchase price paid for those Shares, and the Company will be entitled to an income tax deduction, for the taxable year in which such disposition occurs equal in amount to such excess. The participant will also recognize capital gain equal to the amount by which the amount realized upon the sale or disposition exceeds the sum of the aggregate purchase price paid for the Shares and the ordinary income recognized in connection with their acquisition.

 

If the participant sells or disposes of the purchased Shares more than two years after the start date of the offering period in which the Shares were acquired and more than one year after the actual semiannual purchase date of those Shares, then the participant will recognize ordinary income in the year of sale or disposition equal to the lesser of (1) the amount by which the fair market value of the Shares on the sale or disposition date exceeded the purchase price paid for those Shares or (2) 15% of the fair market value of the Shares on the start date of that offering

period. Any additional gain upon the disposition will be taxed as a long-term capital gain. The Company will not be entitled to an income tax deduction with respect to such disposition.

 

If the participant still owns the purchased Shares at the time of death, the lesser of (1) the amount by which the fair market value of the Shares on the date of death exceeds the purchase price or (2) 15% of the fair market value of the Shares on the start date of the offering period in which those Shares were acquired will constitute ordinary income in the year of death.

 

Summary

 

The Board believes that it is in the best interests of the Company to continue to provide employees with the opportunity to acquire an ownership interest in the Company through their participation in the Purchase Plan and thereby encourage them to remain in the Company’s employ and more closely align their interests with those of the stockholders.

 

Vote Required

 

The affirmative vote of a majority of the Votes Cast is required for approval of the amendment to the Purchase Plan described in this Proposal No. 4. Should such stockholder approval not be obtained, the 6,700,000 Share increase, which is the subject of this Proposal, will not be implemented.

 

The Board of Directors Unanimously Recommends That Stockholders
Vote FOR Proposal No. 4

 

PROPOSAL NO. 5:

 

AMENDMENT TO THE COMPANY’S EXECUTIVE COMPENSATION PLAN

 

Introduction

 

The Company is asking the stockholders to approve the amended and restated Executive Compensation Plan (Compensation Plan). On August 17, 2009, the Compensation Committee approved the amended and restated Compensation Plan and directed that the amended and restated Compensation Plan be submitted to stockholders at the Annual Meeting. If approved by a majority of Votes Cast by our stockholders, the amended and restated Compensation Plan will be effective for the Company’s fiscal year 2010. Our NEOs have an interest in this proposal.

 

The Compensation Plan was originally approved by the Board on July 13, 2007 and was approved by the stockholders at the 2007 Annual Meeting. The amended and restated Compensation Plan is intended to qualify under Section 162(m) of the Internal Revenue Code (“Section 162(m)”).

 

The amended and restated Compensation Plan has been revised to maximize the Company’s ability to incentivize and reward its employees during this uncertain economic environment. Prior to the amendment and restatement of the Compensation Plan, performance periods under the Compensation Plan were required to be at least a fiscal year and no longer than three fiscal years in length. Pursuant to the amended and restated Compensation Plan, the Compensation Committee will have the flexibility to set goals and targets for time periods as it determines in its sole discretion (which may include setting performance periods that are less than one fiscal year). This flexibility will allow the Compensation Committee to set performance goals and performance periods that more accurately reflect the rapidly evolving economic climate. Additionally, the amended and restated Compensation Plan limits the maximum award an individual may receive during any fiscal year.

 

The terms and provisions of the amended and restated Compensation Plan are summarized below. This summary, however, does not purport to be a complete description of the Compensation Plan. The Compensation Plan is set forth in its entirety and has been filed as Appendix C to this Proxy Statement with the SEC. The following summary is qualified in its entirety by reference to the complete text of the Compensation Plan. Any stockholder who wants to obtain a copy of the actual plan document may do so by written request to the Corporate Secretary at the Company’s principal offices in Sunnyvale, California.

Eligibility

 

Persons who are eligible to participate in the Compensation Plan are our key executives, including our Chief Executive Officer and President, Executive Chairman, Vice Chairman, Chief Financial Officer, all of our Executive Vice Presidents, and Senior Vice Presidents. The participants in the Compensation Plan are chosen solely at the discretion of the Compensation Committee. Because our executive officers are eligible to receive awards under the Compensation Plan, our executive officers have an interest in this proposal. No person is automatically entitled to participate in the Compensation Plan in any performance period. We may also pay discretionary bonuses, or other types of compensation, outside of the Compensation Plan.

 

Purpose

 

The purpose of the Compensation Plan is to provide a means and guidelines under which the Company can share its success with its key executives by providing such executives with awards based on the achievement of goals relating to the performance of the Company and its subsidiaries. If certain requirements are satisfied, incentive compensation payouts issued under the Compensation Plan may qualify as deductible “performance-based compensation” within the meaning of Section 162(m).

 

Administration

 

The Compensation Plan will be administered by the Compensation Committee, consisting of no fewer than two members of the Board. With respect to incentive compensation that is intended to qualify as “performance-based compensation” within the meaning of Section 162(m), each member of the Compensation Committee shall qualify as an “outside director” within the meaning of Section 162(m).

 

Determination of Awards

 

Under the Compensation Plan, participants will be eligible to receive awards based upon the attainment and certification of certain performance goals established by the Compensation Committee. The performance goals the Compensation Committee may choose from may include one or more of the following:

 

 

The performance criteria may differ for each participant and for each award and will be set forth in writing. The performance period during which the performance criteria must be attained will be determined by the Compensation Committee in its sole discretion. The Compensation Committee retains the discretion to reduce or eliminate any award that would otherwise be payable pursuant to the Compensation Plan.

 

Payment of Awards

 

All awards will be paid in cash as soon as is practicable following determination of the award.

Maximum Award

 

The amounts that will be paid pursuant to the Compensation Plan are not currently determinable. The maximum incentive compensation payment that any participant may receive under the Compensation Plan in any fiscal year is $5,000,000.

 

Amendment and Termination

 

The Board or Compensation Committee may amend or terminate the Compensation Plan, in whole or in part, at any time and for any reason. The amendment, suspension or termination of the Compensation Plan will not, without the consent of the participants, alter or impair any rights or obligations under any awards granted under the Compensation Plan.

 

Federal Income Tax Consequences

 

Under present federal income tax law, participants will recognize ordinary income equal to the amount of the award received in the year of receipt. That income will be subject to applicable income and employment tax withholding by the Company. If and to the extent that the Compensation Plan payments satisfy the requirements of Section 162(m) and otherwise satisfy the requirements for deductibility under federal income tax law, the Company will receive a deduction for the amount constituting ordinary income to the participant.

 

Awards to Be Granted to Certain Individuals and Groups.

 

Awards under the Compensation Plan are determined based on actual future performance, so future actual awards cannot now be determined. The following table sets forth certain information regarding bonuses paid under the Compensation Plan during the last fiscal year for each of the NEOs, for all current executive officers as a group and for all other employees who participated in the Compensation Plan for the 2009 fiscal year as a group:

 

AMENDED PLAN BENEFITS
Executive Compensation Plan

 

Summary

 

We believe strongly that the approval of the amended and restated Compensation Plan is essential to our continued success and will establish an important incentive for executives of the Company, help us to attract, retain and motivate people whose skills and performance are critical to our success and preserve the Company’s ability to incent and reward its executives consistently with the Company’s performance during an uncertain and rapidly changing economic environment. We strongly believe that the amended and restated Compensation Plan is essential for us to compete for executive talent in the very difficult labor markets in which we operate.

 

Vote Required

 

The affirmative vote by a majority of the Votes Cast is required to approve this proposal. The effect of an abstention is the same as that of a vote against the proposal. Unless you indicate otherwise, your proxy will vote “FOR” the proposal.

 

The Board of Directors Unanimously Recommends That Stockholders
Vote FOR Proposal No. 5.

 

PROPOSAL NO. 6:

 

RATIFICATION OF INDEPENDENT AUDITORS

 

The Company is asking the stockholders to ratify the selection of Deloitte & Touche LLP as the Company’s independent auditors for the fiscal year ending April 30, 2010.

 

In the event the stockholders fail to ratify the appointment, the Audit Committee of the Board of Directors will consider it as a direction to select other auditors for the subsequent year. Even if the selection is ratified, the Audit Committee at its discretion may direct the appointment of a different independent accounting firm at any time during the year if the Board determines that such a change would be in the best interest of the Company and its stockholders.

 

A representative of Deloitte & Touche LLP is expected to be present at the Annual Meeting, will have the opportunity to make a statement if he or she desires to do so, and will be available to respond to appropriate questions.

 

Vote Required

 

The affirmative vote by a majority of the Votes Cast is required to ratify the selection of Deloitte & Touche LLP. The effect of an abstention is the same as that of a vote against the proposal. Unless you indicate otherwise, your proxy will vote “FOR” the proposal.

 

The Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal No. 6

 

SECURITY OWNERSHIP OF CERTAIN

 

BENEFICIAL OWNERS AND MANAGEMENT

 

To the Company’s knowledge, the following table sets forth certain information regarding beneficial ownership of the Company’s common stock as of June 26, 2009 by (1) each person or entity who is known by the Company to own beneficially more than 5% of the Company’s common stock, (2) each of the Company’s directors and nominees for director, (3) each of the Company’s executive officers set forth in the Summary Compensation Table of the Compensation of Executive Officers section of this Proxy Statement, and (4) all of the Company’s current directors and executive officers as a group.

 

Except as indicated by footnote, the address of the beneficial owners is c/o NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089. Information related to holders of more than 5% of the Company’s common stock was obtained from filings with the SEC pursuant to Sections 13(d) or 13(g) of the Exchange Act.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in their ownership of common stock and other equity securities of the Company. Executive officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on the review of the copies of such reports furnished to the Company and written representations that no other reports were required, except as noted below, the Company believes that during the fiscal year ended April 24, 2009, its executive officers, directors and greater than 10% stockholders complied with all Section 16 filing requirements. However, Mr. Mendoza filed one Form 4 to report two transactions that took place prior to fiscal 2009 but had not been reported on a timely basis. In addition, Mr. Mendoza amended a Form 4 from a prior fiscal year to correct the number of securities beneficially owned. Mr. Salmon amended a Form 3 originally filed in December 2005 to correct the number of shares owned at the time he became a Section 16 reporting officer. In addition, Mr. Salmon filed one Form 4 to report one transaction from a prior fiscal year that had not been reported on a timely basis.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The Board has delegated to the Compensation Committee of the Board (“Compensation Committee”) sole authority and responsibility for establishing and overseeing salaries, incentive compensation programs, and other forms of compensation for our executive officers and general policies for remuneration of our other employees and for administering our equity incentive and benefits plans. As used herein, the term “executive” refers to an employee of the Company who holds a position at the Vice President level or above; the term “senior executive” refers to an executive who holds a position at the Executive Vice President level or above; and the term “executive officer” refers to an executive who is subject to Section 16(b) of the Exchange Act.

 

The principal components of compensation that we pay to our NEOs consist of the following:

 

1. Base salary and standard employee benefits (including our 401(k) plan, health and life insurance plans, and nonqualified deferred compensation program);

 

2. Cash incentive compensation under the terms of incentive compensation plans established for our executives, including our NEOs;

 

3. Equity compensation in the form of grants of stock options, restricted stock and restricted stock units; and

 

4. The Executive Retirement Medical Plan for qualifying executives (including our NEOs).

 

Our compensation programs are designed to recruit and retain quality senior executives and to motivate and reward our executives for managing and operating our business in a manner that maximizes stockholder value consistent with good ethical behavior. We use a combination of individual and corporate-wide performance goals and measure these goals on an annual and long-term basis in order to ensure that we achieve our corporate goals. This compensation discussion and analysis explains the material elements of our compensation for our NEOs and how our compensation program is designed and operated to help us achieve our corporate goals.

 

On May 13, 2009, the Board approved a revised Compensation Committee Charter (the “Charter”) which is available for review at http://investors.netapp.com/governance.cfm. The Charter is expected to be reviewed and assessed annually by the Compensation Committee with changes recommended to the Board for approval.

 

Principles and Objectives of Compensation

 

Our compensation program is designed to reward employee behaviors that benefit the Company and its stockholders on a day-to-day, periodic and long-term basis. These behaviors include excellence in performing one’s

duties, collegiality and teamwork in meeting individual- and corporate-wide goals and good ethical behavior in performing one’s duties. Our base salary compensation is designed to ensure excellence in the day-to-day management and operation of our business while our cash incentive compensation program rewards behaviors that support the Company’s short-term (typically annual) goals. Our equity award programs target longer term value that we believe should ultimately be expressed as a sustained material increase in our stock price. Our equity awards also represent a key tool for retaining our employees, including our NEOs. We do so through the granting of equity awards that “vest” over a fixed period of time subject to the continued provision of services by the individual to the Company. Our customary new hire equity award vests over a period of four years, with one-quarter of the total award vesting on the first anniversary of the employee’s hire date and the balance of the award vesting ratably each month thereafter for the next three years such that the entire award vests in full on the fourth anniversary of the hire date, subject to continued provision of service. Our ongoing/refresh equity award for high-performing employees vests over a period of four years, vesting ratably each month such that the entire award vests in full on the fourth anniversary of the grant date, subject to continued provision of service.

 

Our Executive Retirement Medical Plan provides medical coverage beyond the COBRA maximum benefit period to a defined group of retiring senior executives as a fully insured plan based on minimum age, service and level of responsibility (that is, Executive Vice President or above) and was adopted by the Company as a method to retain the defined group of executives.

 

Total compensation is higher for executives (including our NEOs) with greater responsibility and greater ability to influence the Company’s achievement of targeted results and corporate goals. As an executive’s position and responsibility increase, we believe that a greater portion of that executive’s total compensation should be performance-based pay that is contingent on the achievement of specific corporate goals. And as an executive’s performance-based pay increases with increasing levels of responsibility, we also believe that equity-based compensation should compose an increasingly higher portion of performance-based compensation and of total compensation. Therefore, our compensation program is structured such that a significant portion of our most senior executives’ (and all of our NEOs’) total compensation is tied to long-term appreciation of our stock price.

 

Administration of Our Compensation Program

 

The Compensation Committee meets periodically throughout the year to manage our compensation program. The Compensation Committee determines and approves the principal components of compensation for our NEOs (including the incentive targets for the cash incentive compensation program) on an annual basis, typically prior to the beginning of the applicable fiscal year. As part of this process, the Compensation Committee establishes targeted total compensation levels (that is, maximum achievable compensation) for each of our NEOs. In making its decisions regarding compensation, the Compensation Committee obtains the advice and counsel of outside advisors engaged by the Compensation Committee. Radford, an Aon Consulting company (hereinafter “Radford”), has been engaged as the Committee’s independent advisors on compensation matters for senior management (including the NEOs). Radford also provides consulting support for the compensation of the Board of Directors and all employees. Radford takes its direction from the Compensation Committee Chair and interacts with management (human resources and finance personnel) to ensure that the current pay and financial data is accurate. With respect to our NEOs (other than our Chief Executive Officer (“CEO”)), the Compensation Committee solicits the input of our CEO, who recommends to the Compensation Committee the salary, incentive compensation and equity-based compensation to be paid to our NEOs other than himself. We expect that the Compensation Committee will continue to solicit input from our CEO with respect to compensation decisions affecting the other NEOs and other members of our senior management team. With respect to compensation for our CEO, the Compensation Committee deliberates and makes decisions without the presence or participation of the CEO.

 

In addition, Radford periodically reviews our compensation programs, based on both benchmarking of a select group of “peer companies”, see our Compensation Peer Group defined below, as well as based on our own internal pay equity parameters and our overall corporate goals. For instance, in connection with its determination of compensation for the 2009 fiscal year, the Compensation Committee retained Radford to (1) review and assess the total direct compensation levels provided to our senior management team relative to an appropriate peer group specifically delineated below, (2) review and assess our current equity grant guidelines and practices relative to that peer group, and (3) develop future equity grant guidelines and practices for all employees taking into account current trends in

compensation. Based on the analysis by Radford, input from the senior management team and the Compensation Committee’s deliberations, the Compensation Committee approved our compensation plan for the 2009 fiscal year.

 

The Compensation Committee has designed our compensation program in order to recruit and retain quality executives in a competitive labor environment and to motivate those executives to perform the best job possible consistent with good ethical behavior and to do so over a sustained period of time, which we believe will ultimately be expressed in our stock price. The Company offers each of the elements of compensation outlined above to our NEOs because we believe that all four elements are necessary in order to meet the goals that we have set for our Company.

 

Factors in Determining Compensation

 

The primary factors that the Compensation Committee takes into consideration in establishing the principal components of compensation of our NEOs are discussed below. While these are typically the considerations upon which the Compensation Committee bases its compensation decisions for our NEOs, the Compensation Committee may, at its discretion, apply entirely different factors, such as different measures of financial performance, for future fiscal years.

 

Competitive Market Data

 

In February 2008, based on the review and recommendations presented by Radford, the Compensation Committee reviewed and approved the following Compensation Peer Group to be used for benchmarking and for setting executive and director compensation. To determine the appropriate peer group, the Compensation Committee considered companies with similar revenue, number of employees, market capitalization and annual growth rates. In addition to focusing on our direct product line competitors, we selected other most-admired companies that we compete with for talent in our various markets. The Compensation Committee will periodically review and update the peer group as appropriate. The Compensation Peer Group established for the 2008 and 2009 fiscal years was as follows:

 

 

 

 

Base Salary

 

In setting the base salary for each NEO, the Compensation Committee considers the executive’s qualifications and experience, scope of responsibilities, future potential contributions to the Company, the goals and objectives of the executive, and the executive’s past performance. In addition, the Compensation Committee reviews published compensation survey data for the Compensation Peer Group and reviews internal pay equity. The base salary for each NEO is designed to be competitive with salary levels for comparable positions in the Compensation Peer Group as well as to reflect the individual’s personal performance and internal alignment considerations. The relative weight given to each factor varies with each individual at the sole discretion of the Compensation Committee. For the 2009 fiscal year, we targeted the base salary of the Company’s NEOs to be within the 50th percentile range for the peer group. In addition, for the NEOs, we established base salaries at a level so that a significant portion (generally 50% or more) of the executive’s total compensation was performance-based (that is, cash incentive and/or equity awards), and, therefore, in connection with its determination of increases or decreases in total compensation for our NEOs, the Compensation Committee reviews the executive’s current total compensation

package in order to ensure that any change in annual base salary is properly balanced relative to those portions of his or her total compensation that consist of incentive compensation and equity awards. Our NEOs as a group fell within +/- 20% of the 50th percentile salary data for the Compensation Peer Group, which Radford advises is customarily considered the competitive range for executive compensation purposes.

 

While base salary levels (along with all other components of a NEOs compensation) are typically set at fixed and consistent points in our fiscal year cycle, under certain circumstances, the Compensation Committee will revise base salary levels when those levels are not consistent with the Company’s overall compensation policies or are not competitive enough to attract higher quality employees. The Compensation Committee did consider the impact of the changes in the global economy and the Company’s overall performance in fiscal 2009. As a result, no merit increases were approved for the NEOs for fiscal 2010, although, in August 2009 the Compensation Committee did approve salary adjustments for each of Mr. Georgens and Mr. Warmenhoven in connection with their appointments to Chief Executive Officer and Executive Chairman, respectively.

 

Incentive Compensation Plan

 

We have never paid any automatic or guaranteed cash incentives to our employees, including our NEOs. The Compensation Committee believes that a cash incentive compensation plan that is tied to operational performance metrics can better serve to motivate the NEOs and other employees to achieve annual performance goals because they focus more on immediate near-term measures of performance, rather than those reflected in the appreciation in value of equity awards, while still putting receipt of such compensation “at risk”. The Compensation Committee annually develops an incentive compensation plan under our Executive Compensation Plan with payment of bonuses, if any, shortly following the end of a particular fiscal year. Typically, at the time the Compensation Committee determines whether and to what extent to pay bonuses for the previous fiscal year, it creates a new, similarly structured, plan for the succeeding fiscal year. The Compensation Committee determines the specific performance targets for each of our NEOs and generally establishes target bonus at the 60th to 65th percentile of total target compensation offered by the Compensation Peer Group.

 

Under the incentive compensation plan established for the 2009 fiscal year which ended on April 24, 2009, our executives (including all of our NEOs) were eligible to earn cash bonuses, which are targeted at a specified percentage of actual annual base salary earnings, and funded based on the Company’s achievement of target operating profits. The Compensation Committee believes this is an appropriate measure because operating profits in the Company’s industry reflect optimal performance and stockholder value creation by simultaneously requiring revenue generation and expense management.

 

The amount of actual bonuses paid to the NEOs was determined based on the Company’s performance relative to target operating profit. The NEOs could earn more or less than their target bonus depending on whether the Company’s actual operating profits were at, below, or in excess of the target. As illustrated in the table below, for the 2009 fiscal year, the incentive compensation-to-operating profit payout ratio was not linear, but was leveraged with accelerators of 10-for-1 above 100% of the Company’s targeted operating profits goal (which was consistent with fiscal 2008), and decelerators of 2-for-1 below 100% of the Company’s target operating profit goal (which was 4-for-1 in fiscal 2008). The upside and downside is not linear because the Company has historically set aggressive operating profit targets for incentive compensation purposes such that performance above 100% is considered exceptional. For example, for each incremental percentage point of operating profit above 100% of the Company’s target for a fiscal year, each NEO would receive additional cash compensation equal to 10% of his actual incentive compensation target payout, up to a maximum of 200% of target. For each incremental percentage point of operating profit below 100% of the Company’s target for a fiscal year, each NEO’s actual incentive compensation target payout would be reduced by 2%. The Compensation Committee believes that paying a reduced bonus for achievement below target performance and an increased bonus for achievement in excess of target performance

aligns the executives’ actual compensation with the performance of the Company, incentivizing the executives to drive positive Company performance.

 

 

For the 2009 fiscal year, the Company actually achieved 74% of the fiscal 2009 operating profit target.

 

On November 11, 2008, following the economic decline and uncertainty, the Compensation Committee revised the process it would use to fund as the incentive compensation plan for executives other than NEOs for the 2009 fiscal year as follows:

 

 

Payment of bonuses to eligible employees would still only occur after the end of the fiscal year and not on a quarterly basis. All of the modifications to the incentive compensation plan for the 2009 fiscal year are intended to be for the 2009 fiscal year only. In accordance with sound corporate governance practices, the Compensation Committee expressly required that there would be no change to the funding methodology under the Executive Compensation Plan for the NEOs and any Executive Vice President (or other employee) who has been designated as a Section 16(b) officer at any time during the fiscal year

 

For the NEOs, the target bonuses for the 2009 fiscal year ranged from 110% to 130% of such individuals’ base salaries, these amounts represent the target incentive opportunities which when applied to our base salary rates deliver between 60^th to 65^th percentile target cash compensation levels for our Compensation Peer Group. As noted above, the Company achieved only 74% of target operating profit which resulted in actual bonuses paid to the NEOs being at approximately 47.9% of their target amounts, which was well below the 60^th to 65^th percentile of target cash compensation for our Compensation Peer Group.

 

Long-Term Stock-Based Incentive Compensation

 

The Compensation Committee has the authority to grant stock options, restricted stock and performance shares/units, which are effectively the same thing as restricted stock units (“RSUs”), to our NEOs under our Amended and Restated 1999 Stock Option Plan. These grants are designed to align the interests of each of our NEOs with those of the stockholders and provide each NEO with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each stock option grant allows the executive officer to acquire shares of the Company’s common stock at a fixed price per share (the market price on the grant date) over a specified period of time (up to seven years), thus providing a return to the NEO only if the market price of the shares

appreciates over the option term, and the NEO continues to be employed by the Company. The size of the option grant to each NEO is designed to create a meaningful opportunity for stock ownership and is based on a number of factors, which include the NEOs current position with the Company, external comparability with option grants made to executive officers of the Compensation Peer Group, internal comparability with option grants made to other executives within the Company, the number of vested and unvested options and RSUs held by the NEO, the NEOs current level of performance and the NEOs potential for future responsibility and promotion over the option term. The Compensation Committee, however, does not place any particular weight on an individual factor and does not adhere to any specific guidelines in making its determinations.

 

Since May 2003, we have occasionally granted RSUs in addition to stock options to our NEOs in unique situations when retention was of key strategic importance. As with the granting of stock options, and RSU grants allow us to align the interests of each NEO with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. RSUs to date have vested annually over four years and, because the RSU entails actual ownership of our common stock without the need to pay cash consideration to receive the shares, our RSU grants are proportionally smaller than our stock option grants, though the size of the RSU grant is still determined based on the same factors used to determine the size of stock option grants described in the immediately preceding paragraph. To date, we have not granted RSUs to our CEO. For other NEOs, executives and employees, RSUs have become a balanced part of the long term incentive mix.

 

This shift in philosophy is evidenced by our recent stock option for RSU exchange program approved by Company stockholders on April 21, 2009, the terms of which are described in detail in our special meeting proxy statement filed on March 23, 2009. In conformity with preferred corporate governance practices, our NEOs were explicitly excluded from this option exchange. The Compensation Committee plans to continue to evaluate the proper equity compensation mix for the CEO and all other NEOs each year and may change its practices as it deems appropriate in the future.

 

Pricing of and Accounting for Equity Awards

 

All grants of stock options have exercise prices equal to or exceeding the fair market value of the underlying shares of common stock on the grant date. All equity-based awards have been reflected in our consolidated financial statements, based on the applicable accounting guidance. Effective April 29, 2006, we adopted FAS 123R using the modified prospective method, which requires us to recognize stock-based compensation expense using the fair-value based method for all awards vesting on or after the date of adoption of FAS 123R. FAS 123R requires us to estimate and record an expense over the service period of the stock-based award. Accounting expenses have not played a significant role in the Compensation Committee’s determination on the amount of equity granted to NEOs.

 

Policies Regarding Granting of Equity Awards

 

Our revised Charter permits the Compensation Committee to create and delegate authority to an equity subcommittee. On March 10, 2009, the Compensation Committee established an equity subcommittee, which is comprised of one member of the Company’s Board of Directors and one member who is an executive officer of the Company pursuant to section 16(b) of the Securities Exchange Act. Effective upon the Board’s approval of the revised Charter, the Compensation Committee delegated to the equity subcommittee the authority to grant and amend equity-based awards to employees or other service providers which are Vice President level or below; provided, however that the Compensation Committee expressly retained, and the equity subcommittee has not been granted, the authority to grant or amend equity awards to Vice President’s which report directly to the CEO. The Compensation Committee will establish equity grant guidelines from time to time for the equity subcommittee’s consideration in approving such grants, and the Committee shall be informed on a regular basis of all grants made by the equity subcommittee which are outside of such guidelines.

 

Except in extraordinary circumstances as approved by the Compensation Committee, we grant stock options and RSUs to all of our employees (including our NEOs) on fixed dates. If the NEO is a new hire and is receiving an initial grant in connection with the commencement of employment, the grant becomes effective on the 15th (or the first business day following the 15th, in the event that the 15th falls on a weekend or holiday) of the month that

immediately follows the month in which the individual first commences employment with us. Regardless of the date of grant, vesting of the award commences from the first day of the person’s employment. Promotion and retention grants to NEOs become effective on the 15th or the first business day following the 15th, in the event that the 15th falls on a weekend or holiday) of the month that immediately follows the month in which the Compensation Committee approves the grant for such individual. Annual stock option and RSU grants to NEOs become effective on June 1st (or the first business day following June 1st, in the event that June 1st falls on a weekend or holiday). On November 11^th, the Compensation Committee approved a change for annual stock option and RSU grants made to all other employees so that they become effective on December 15th (or the first business day following December 15th, in the event that December 15th falls on a weekend or holiday) rather than January 15^th.

 

We do not have a policy or practice in place to grant equity awards that are timed to precede or follow the release or withholding of material nonpublic information.

 

Other Compensation for NEOs

 

Severance and Change of Control Arrangements

 

In considering total executive compensation for fiscal year 2009, the Compensation Committee recognized that we faced a potential risk of not being able to retain key senior executives in the event of an acquisition of the Company as a result of not having employment or severance agreements. In April 2008, the Compensation Committee began to discuss entering into change of control severance agreements with certain of our senior executives. The Compensation Committee worked with Radford, who provided various suggestions regarding the potential terms of a change of control severance agreement based on competitive market data from our Compensation Peer Group. In considering these potential terms, the Compensation Committee’s objectives were to: (1) assure we would have the continued dedication and objectivity of our senior executives, notwithstanding the possibility of a change of control of the Company, thereby aligning the interests of these key senior executives with those of the stockholders in connection with potentially advantageous offers to acquire the Company; and (2) create a total executive compensation plan that is competitive with our Compensation Peer Group.

 

In June 2008, the Compensation Committee approved the terms of a change of control severance agreement, and the Company entered into such agreement with certain of our senior executives, including each of the NEOs. In August 2009, the Compensation Committee approved the terms of and the Company entered into, Amended and Restated Change of Control Severance Agreements with each of Mr. Georgens and Mr. Warmenhoven. The terms of the individual Change of Control Severance Agreements are described in further detail in the section below titled “Potential Payments upon Termination or Change in Control.”

 

Perquisites

 

The Company’s NEOs are eligible to participate in the Company’s Executive Retirement Medical Plan, which provides medical coverage beyond the COBRA maximum benefit period to a defined group of retiring senior executives as a fully-insured plan based on minimum age, service and level of responsibility (that is, Executive Vice President or above), and was adopted by the Company as a method to retain the defined group of senior executives. Our NEOs are also entitled to a preventative care medical benefit not available to nonexecutives up to $2,500 per calendar year.

 

Other Benefits and Reimbursements

 

NEOs are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees. We offer up to $3,000 in a matching contribution under our 401(k) plan to each employee. The only retirement benefits that we offer our NEOs are those under the Executive Retirement Medical Plan.

 

The Board has adopted a travel policy whereby the Executive Chairman and Vice Chairman are permitted for business travel to fly private or charter aircraft within certain limitations. The Executive Chairman and Vice Chairman are two of the most frequently traveled senior executives of the Company and are often required to travel on extremely short notice and to areas that have limited access to commercial flights. Because the reimbursement is for business travel only and is integrally and directly related to the performance of the executives’ duties, the Company’s reimbursement is not compensation or a perquisite. Subject to an annual cap of $800,000, the Executive

Chairman is reimbursed for expenses incurred in the operation of his privately owned aircraft when used for Company business, provided such expenses do not exceed the rate charged for equivalent commercial charter travel. The Vice Chairman is reimbursed for the actual cost of chartering an aircraft for his qualified business travel as defined in the policy and is also subject to an annual cap of $500,000.

 

Tax Deductibility of Compensation

 

Section 162(m) of the Code generally disallows a tax deduction to publicly held companies for compensation paid to certain executive officers, to the extent that compensation exceeds $1 million per officer in any year. The Company generally seeks to maximize the deductibility for tax purposes of all elements of compensation. Our Amended and Restated 1995 Stock Incentive Plan and our Amended and Restated 1999 Stock Option Plan are structured so that any compensation recognized by an executive officer in connection with the exercise of his or her outstanding options under each such plan will qualify as performance-based compensation and will not be subject to the $1 million limitation. In addition, our Amended and Restated 1999 Stock Option Plan allows our Compensation Committee to structure equity awards other than stock options as performance based compensation under Section 162(m). At the 2007 Annual Meeting, stockholders approved the Executive Compensation Plan so that cash bonuses paid thereunder would be structured to allow for a deduction under Section 162(m). The Compensation Committee, however, periodically reviews applicable tax provisions, such as Section 162(m), and may revise compensation plans from time to time to comply with their rules and to maximize deductibility.

 

 

The information contained in the following Report of the Compensation Committee of the Board of Directors on Executive Compensation shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, 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 in such filing.

 

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION

 

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

 

Submitted by the Compensation Committee
of the Board of Directors:

 

Ed Kozel
Robert T. Wall, Chairman

 

COMPENSATION OF EXECUTIVE OFFICERS

 

Summary Compensation Table

 

The table below summarizes the compensation information for the NEOs for the fiscal years ended April 24, 2009, April 25, 2008 and April 27, 2007.

 

 

 

 

Grants of Plan-Based Awards

 

The table below summarizes information concerning all plan-based awards granted to the NEOs during fiscal 2009, which ended on April 24, 2009.

 

 

 

 

Outstanding Equity Awards at Fiscal Year End

 

The following table sets forth information regarding stock options and stock awards held by the NEOs as of April 24, 2009.