SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

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

MINDSPEED TECHNOLOGIES, INC.

Payment of Filing Fee (Check the appropriate box):

þ		Fee not required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

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

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

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

      

 

MINDSPEED TECHNOLOGIES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 10, 2010

 

To our Stockholders:

 

Our 2010 annual meeting of stockholders will be held on March 10, 2010, beginning at 2:00 p.m. Pacific Time, at our headquarters, located at 4000 MacArthur Boulevard, East Tower, Newport Beach, California 92660. At the meeting, the holders of our outstanding common stock will act on the following matters:

 

 

All holders of record of shares of our common stock (NASDAQ: MSPD) at the close of business on January 11, 2010, are entitled to vote at the meeting and any postponements or adjournments of the meeting. To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the meeting in person. We encourage you to vote via the Internet or by telephone. If you received a printed set of proxy materials, you also have the option of voting by completing, signing, dating and returning the proxy card that accompanied the printed materials. Submitting your vote via the Internet or by telephone or proxy card will not affect your right to vote in person if you decide to attend the annual meeting.

 

We are mailing to most of our stockholders a notice of Internet availability of proxy materials instead of a paper copy of this proxy statement and our 2009 annual report to stockholders. The notice of Internet availability of proxy materials contains instructions on how to access those documents via the Internet. The notice of Internet availability of proxy materials also contains instructions on how to request a paper copy of our proxy materials, including this proxy statement, our 2009 annual report to stockholders and a form of proxy card or voting instruction card, as applicable. All stockholders who do not receive a notice of Internet availability of proxy materials will receive a paper copy of the proxy materials by mail. We believe that this process minimizes the costs of printing and distributing our proxy materials and also provides other benefits.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be Held on March 10, 2010. The proxy statement and our 2009 annual report to stockholders are available at http://investors.mindspeed.com/proxy.

 

IF YOU PLAN TO ATTEND:

 

Registration will begin at 1:00 p.m. Each stockholder will need to bring a proxy card, voting instruction card or notice of Internet availability of proxy materials and valid picture identification, such as a driver’s license or passport, for admission to the meeting. Stockholders holding stock in brokerage accounts (“street name” holders) will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting and all mobile phones must be silenced during the meeting. We realize that many mobile phones have built-in digital cameras, and while these phones may be brought into the meeting, the camera function may not be used at any time.

 

By Order of the Board of Directors,

 

BRET W. JOHNSEN

Senior Vice President, Chief Financial Officer and Treasurer

 

January 29, 2010

Newport Beach, California

 

TABLE OF CONTENTS

 

MINDSPEED TECHNOLOGIES, INC.
4000 MacArthur Boulevard, East Tower
Newport Beach, California 92660

 

 

 

 

PROXY STATEMENT

 

 

 

 

This proxy statement contains information related to our annual meeting of stockholders to be held on Wednesday, March 10, 2010, beginning at 2:00 p.m. Pacific Time, at our headquarters, located at 4000 MacArthur Boulevard, East Tower, Newport Beach, California 92660, and at any postponements or adjournments of the meeting. Your proxy for the meeting is being solicited by the board of directors. The proxy materials, which include this proxy statement, the proxy card and the 2009 annual report on Form 10-K, are first being made available to stockholders beginning on or about January 29, 2010.

 

We have elected to provide access to our proxy materials to our stockholders via the Internet. Accordingly, a notice of Internet availability of proxy materials has been mailed to the majority of our stockholders, while other stockholders have instead received paper copies of the proxy materials accessible via the Internet. Stockholders that received the notice of Internet availability of proxy materials have the ability to access the proxy materials at www.proxyvote.com or request that a printed set of the proxy materials be sent to them by following the instructions set forth on the notice of Internet availability of proxy materials.

 

Please visit www.proxyvote.com for instructions on how to instruct us to send future proxy materials to you electronically by e-mail or in printed form by mail. You may also visit www.mindspeed.com to instruct us to send future proxy materials to you electronically by e-mail. If you choose to receive future proxy materials by e-mail, you will receive an e-mail next year with instructions containing a link to those materials or a link to a special website to access our proxy materials. Your election to receive proxy materials by e-mail or printed form by mail will remain in effect until you terminate it.

 

Choosing to receive future proxy materials by e-mail will allow us to provide you with the proxy materials you need in a timelier manner and will save us the cost of printing and mailing documents to you.

 

What is the purpose of the annual meeting?

 

At our annual meeting, stockholders will act upon the matters outlined in the meeting notice provided with this proxy statement, including the election of a director, ratification of the appointment of our independent registered public accounting firm and the approval of an amendment to our directors stock plan and an employee stock purchase plan. In addition, management will report on the performance of our company and respond to questions from stockholders.

 

Who can attend the meeting?

 

Subject to space availability, all stockholders as of the close of business on January 11, 2010, the record date, or their duly appointed proxies, may attend the meeting. Registration will begin at 1:00 p.m. If you plan to attend the meeting, please note that you will need to bring your proxy card, voting instruction card or notice of Internet availability of proxy materials and valid picture identification, such as a driver’s license or passport. Cameras, recording devices and other electronic devices will not be permitted at the meeting and all mobile phones must be silenced during the meeting. We realize that many mobile phones have built-in digital cameras, and while these phones may be brought into the meeting, the camera function may not be used at any time.

 

Please also note that if you hold your shares in “street name” (that is, through a broker or other nominee), you will need to bring a copy of a brokerage statement reflecting your stock ownership as of the record date.

Who is entitled to vote at the meeting?

 

Only stockholders of record at the close of business on the record date for the meeting are entitled to receive notice of and to participate in the annual meeting. If you were a stockholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the meeting, or any postponements or adjournments of the meeting. There were 29,067,315 shares of our common stock outstanding on the record date.

 

What are the voting rights of the holders of the company’s common stock?

 

Each share of our common stock outstanding on the record date will be entitled to one vote on each matter considered at the meeting.

 

What is a quorum?

 

A quorum is the minimum number of our shares of common stock that must be represented at a duly called meeting in person or by proxy in order to legally conduct business at the meeting. For the annual meeting, the presence, in person or by proxy, of the holders of at least 14,533,658 shares, which is a simple majority of the 29,067,315 shares outstanding as of the record date, will be considered a quorum allowing votes to be taken and counted for the matters before the stockholders.

 

If you are a registered stockholder, you must deliver your vote via the Internet or by telephone or mail or attend the annual meeting in person and vote in order to be counted in the determination of a quorum. If you are a “street name” stockholder, your broker will vote your shares pursuant to your instructions, and such shares will count in the determination of a quorum. If you do not vote via the Internet, by telephone or proxy card, or provide any instructions to your broker, your shares will still count for purposes of attaining a quorum and your broker may vote your shares in its discretion on proposal 2. If you are a member of a retirement savings plan or other similar plan, the trustee or administrator of the plan will vote according to your directions and the rules of the plan, which may result in your shares being counted in the determination of a quorum even if you do not provide voting directions.

 

How do I vote?

 

You may submit your vote via the Internet, by telephone or in person at the annual meeting. If you received printed proxy materials, you also have the option of submitting your proxy card by mail or attending the meeting and delivering the proxy card. The designated proxies will vote according to your instructions; however, if you are a registered stockholder and you return an executed proxy card without specific instructions on how to vote, the proxies will vote “FOR” the election of Mr. Stead in proposal 1; “FOR” the ratification of the company’s independent registered public accounting firm in proposal 2; “FOR” the approval of an amended and restated directors plan in proposal 3; and “FOR” the approval of an employee stock purchase plan in proposal 4.

 

If you are a “street name” stockholder and you do not return instructions on how to vote, your shares will not be voted on proposal 1, proposal 3 or proposal 4. The voting of shares held by “street name” stockholders is further discussed below under the caption “About the Meeting and Voting — What vote is required to approve each proposal? — Street Name Shares and Broker Non-Votes.” Additionally, in order to vote at the meeting, you will need to obtain a signed proxy from the broker or nominee that holds your shares, because the broker or nominee is the legal, registered owner of the shares. If you have the broker’s proxy, you may vote by ballot or you may complete and deliver another proxy card in person at the meeting.

 

If you are a member of a retirement or savings plan or other similar plan, you may submit your vote via the Internet or by telephone. The trustee or administrator of the plan will vote according to your directions and the rules of the plan.

 

Can I vote via the Internet or by telephone?

 

You may submit your vote via the Internet or by telephone by following the instructions contained in the notice of Internet availability of proxy materials. If you received a printed set of proxy materials, you may submit your vote via the Internet or by telephone by following the instructions contained on the proxy card that accompanied the printed materials.

If you are a registered stockholder or you hold your shares in “street name,” the deadline for submitting your vote by telephone or via the Internet is 11:59 p.m. Eastern Time on March 9, 2010. If you are a member of a retirement or savings plan or other similar plan, the deadline for submitting your voting directions by telephone or via the Internet is 11:59 p.m. Eastern Time on March 7, 2010.

 

Can I change or revoke my vote?

 

Subject to the deadlines set forth in the paragraph above, you may change your vote at any time before the proxy is exercised by re-submitting your vote via the Internet or by telephone.

 

If you are a registered stockholder, you may revoke your vote at any time before the proxy is exercised by filing with our secretary a written notice of revocation. At the meeting, you may revoke or change your vote by submitting a proxy to the inspector of elections or voting by ballot. Your attendance at the meeting will not by itself revoke your vote.

 

If your shares are held in “street name” or you are a member of a retirement or savings plan or other similar plan, please contact your broker, nominee, trustee or administrator to determine whether you will be able to revoke or change your vote.

 

What are the board’s recommendations?

 

The board recommends that you vote:

 

 

What vote is required to approve each proposal?

 

Election of Director

 

Directors are elected by a plurality of votes cast. This means that the director nominee receiving the most votes cast at the meeting will be elected to serve for the next three years. Only votes cast “for” are counted in determining whether a plurality has been cast in favor of a director. A properly executed proxy marked “withhold authority” with respect to the election of the director will not be voted with respect to the director. Abstentions and broker non-votes will have no effect on the vote on this proposal.

 

All Other Proposals

 

For each other proposal, the affirmative vote of the holders of a majority of the shares represented in person or by proxy and entitled to vote on each proposal will be required for approval. If you abstain with respect to a proposal, your shares will not be voted, although your shares will be counted for purposes of determining the total number of shares necessary for approval of such proposal. Accordingly, an abstention will have the effect of a negative vote.

 

Street Name Shares and Broker Non-Votes

 

If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some proposals. “Broker non-votes” are shares as to which a broker or nominee does not vote, or has indicated that it does not have discretionary authority to vote and has not received instructions on how to vote. If you do not give specific instructions, your broker or nominee may cast your vote in its discretion for proposal 2, the ratification of the appointment of our independent registered public accounting firm. “Broker non-votes” will be included in determining the number of shares entitled to vote and will have the same effect as a vote against proposal 2. If you do not give specific instructions on how to vote, your broker

or nominee is not permitted to cast your vote in its discretion for proposal 1, election of a director; proposal 3, the approval of an amended and restated directors stock plan; or proposal 4, the approval of an employee stock purchase plan. A “broker non-vote” is not counted for the purposes of determining a plurality and will have no effect on proposal 1. In addition, a “broker non-vote” is not counted for the purposes of determining the total number of shares necessary for approval of proposal 3 and proposal 4 and will have no effect on the approval of either of the proposals.

 

Why did I receive a notice of Internet availability of proxy materials instead of a full set of the proxy materials?

 

We are pleased to take advantage of the SEC rules that allow companies to furnish their proxy materials via the Internet. Accordingly, we sent to the majority of our stockholders a notice of Internet availability of proxy materials regarding Internet availability of the proxy materials for this year’s annual meeting of stockholders. Other stockholders were instead sent paper copies of the proxy materials accessible via the Internet. Instructions on how to access the proxy materials via the Internet or to request a paper copy can be found in the notice of Internet availability of proxy materials. In addition, stockholders may request to receive proxy materials in printed form by mail or electronically by e-mail on an ongoing basis by submitting a request to us at www.proxyvote.com. You may also visit www.mindspeed.com to instruct us to send future proxy materials to you electronically by e-mail. A stockholder’s election to receive proxy materials by mail or e-mail will remain in effect until the stockholder terminates it.

 

Why didn’t I receive a notice of Internet availability of proxy materials?

 

We are providing certain stockholders, including stockholders who have previously requested to receive paper copies of proxy materials, with paper copies of the proxy materials instead of, or in addition to, a notice of Internet availability of proxy materials. If you would like to assist us in reducing the cost of distributing our proxy materials in the future, you can consent to receiving future proxy materials and other stockholder communications electronically via e-mail or the Internet. To sign up for electronic delivery, please visit www.mindspeed.com to submit your request.

 

Can I vote my shares by filling out and returning the notice of Internet availability of proxy materials?

 

No. The notice of Internet availability of proxy materials does, however, provide instructions on how to vote your shares.

 

How many shares of the company’s common stock do the directors, executive officers and certain beneficial owners own?

 

To our knowledge, the following table sets forth information regarding the beneficial ownership of the 29,030,719 shares of our common stock outstanding on November 30, 2009, by each person who is known to us, based upon filings with the SEC or other information, to beneficially own more than 5% of our common stock, each of our directors, each executive officer named in the “Summary Compensation Table” below and all current directors and executive officers as a group. Except as otherwise indicated below and subject to applicable community property laws, each owner has sole voting and sole investment power with respect to the stock listed.

 

 

 

 

How is the board made up?

 

Our certificate of incorporation provides for a board consisting of three classes of directors with overlapping three-year terms. One class of directors is elected each year with a term extending to the third succeeding annual meeting after election. Our board currently consists of one Class I director, three Class II directors and two Class III directors.

 

How are vacancies filled?

 

Our certificate of incorporation provides that any newly created directorships resulting from an increase in the authorized number of directors or any vacancies on the board resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office. The bylaws permit any of our directors to resign at any time. Our guidelines on corporate governance provide that any director whose personal circumstances or job responsibilities change meaningfully should offer to not stand for reelection as a director.

 

Which directors are up for election?

 

The sole director in Class I, Mr. Stead, is up for election at the 2010 annual meeting to serve for a term expiring at the 2013 annual meeting.

 

What is his background?

 

Mr. Stead, 67, has been a director of our company since June 2003. He has been the executive chairman of the board of IHS, Inc. (software) since December 2000 and has been chief executive officer of IHS since September 2006. Prior to that, he was chairman of the board and chief executive officer of Ingram Micro Inc. (computer technology services) from August 1996 to May 2000. Mr. Stead is a director of Brightpoint, Inc. (cell phone service supplier) and Conexant. He is also chairman of the board of the Garrett Seminary on the Northwestern University campus.

 

Who are the remaining directors?

 

Class II Directors — continuing directors with terms expiring at the 2011 annual meeting

 

Mr. Hayashi, 53, has been a director of our company since August 2005. Mr. Hayashi has been the executive vice president, architecture, development and engineering, of Time Warner Cable, Inc. (cable television) since January 2008. He had previously served as the senior vice president, advanced engineering and technologies of Time Warner from May 2002 to January 2008, and as the vice president, advanced technologies, of Time Warner from July 1993 to May 2002.

 

Mr. Louie, 63, has been a director of our company since June 2003. Mr. Louie co-founded and has served as the managing director and a director of Mobile Radius, Inc. (mobile Internet data services) since March 2002. Mr. Louie served as the China President of the GSM Association (global trade association — wireless technology) from October 2003 to May 2005. He also has been the managing director of Dynasty Capital Services LLC (consulting) since January 2002. Mr. Louie served as president, Qualcomm Greater China (wireless communications) from May 2000 to October 2001 and as vice president, business development of Globalstar Communications Limited (satellite telecommunications) from January 1989 to May 2000. Since December 2007, Mr. Louie has been a member of the board of directors of Pacific Online (Internet hosting services), a publicly-traded company listed on the Hong Kong Stock Exchange.

 

Mr. Madden, 56, has been a director of our company since June 2003. He was the executive vice president and chief financial officer of Ingram Micro from July 2001 through April 2005. He served as senior vice president and chief financial officer of ArvinMeritor, Inc. (automotive components) from October 1997 to July 2001. He currently serves as a director of FreightCar America, Inc. (manufacturing and rebuilding — railroad freight cars), Champion Enterprises, Inc. (manufacturing — factory built houses) and Intcomex, Inc. (computer part distribution).

Class III Directors — continuing directors with terms expiring at the 2012 annual meeting

 

Mr. Decker, 59, has been a director of our company since January 2002 and non-executive chairman of the board since June 2003. Mr. Decker is the retired chairman and chief executive officer of Conexant Systems, Inc. (semiconductors — communications), having served as chief executive officer from January 1999 to February 2004 and again from November 2004 to July 2007, and as chairman from January 1999 to July 2008. Mr. Decker continues as a member of the board of directors of Conexant and is also a member of the boards of International Rectifier (semiconductors — analog), Newport Media, Inc. (semiconductors — broadcast media), BCD Semiconductor (semiconductors — analog) and Pacific Mutual Holding Company (life insurance products). He also serves as a director or member of several professional and civic organizations.

 

Mr. Halim, 49, has been a director of our company since January 2002 and our chief executive officer since June 2003. He was senior vice president and chief executive officer of the Internet infrastructure business of Conexant from February 2002 to June 2003 and senior vice president and general manager, network access division, of Conexant from January 1999 to February 2002. Mr. Halim currently serves as a trustee of the University of California, Irvine Foundation.

 

Who is the chairman of the board?

 

Mr. Decker has served as chairman of the board since June 2003.

 

How often did the board meet during fiscal year 2009?

 

The board met twelve times during fiscal year 2009. Each director is expected to attend each meeting of the board and of those committees on which he serves. All of our directors attended at least 75% of all applicable board and committee meetings during fiscal year 2009. We usually schedule meetings of the board on the same day as our annual meetings, and when this schedule is followed, it is the policy of the board that directors are expected to attend our annual meetings. All directors attended the annual meeting of stockholders in March 2009.

 

How does the board determine which directors are considered independent?

 

Each year prior to the annual meeting, the board reviews and determines the independence of its directors. During this review, the board considers transactions and relationships between each director or any member of his or her immediate family and our company and its subsidiaries and affiliates. The board measures these transactions and relationships against the independence requirements of the SEC and The NASDAQ Stock Market, LLC. As a result of this review, the board affirmatively determined that the following continuing directors, Messrs. Decker, Hayashi, Louie, Madden and Stead, are “independent” in accordance with the applicable rules of the SEC and NASDAQ. The board has also determined that Donald R. Gips, who resigned from the board in January 2009, was “independent” during the time that he served as a director.

 

What is the role of the primary board committees?

 

The board has standing audit, governance and board composition and compensation and management development committees. The table below provides membership information as of the end of fiscal year 2009 and meeting information for each of the committees during fiscal year 2009.

 

Donald R. Gips resigned from the board effective January 15, 2009 to serve as White House director of presidential personnel for the United States Presidential Administration. Prior to his resignation, Mr. Gips served as the chairman of the compensation and management development committee and as a member of the governance and board compensation committee.

 

Audit Committee

 

The audit committee, established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, assists the board in overseeing our accounting and financial reporting processes and audits of our financial statements. It is directly responsible for the appointment, compensation, retention and oversight of the work of the independent registered public accounting firms we engage. It reviews the independent registered public accounting firm’s audit of the financial statements and its report thereof; our system of internal control over financial reporting and management’s evaluation and the independent registered public accounting firm’s audit thereof; the independent registered public accounting firm’s annual management letter; various other accounting and auditing matters; and the independence of the auditing registered public accounting firm. The committee reviews and pre-approves all audit and non-audit services performed by our independent registered public accounting firm, other than as may be allowed by applicable law.

 

The audit committee also reviews and approves the appointment or change of our internal auditor. The committee reviews and approves any proposed related party transactions (unless such transactions are approved by another independent body of the board). It has established procedures for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting and auditing matters. The committee meets with management to review any issues related to matters within the scope of its duties. The committee has the power to conduct or authorize investigations into any matter within its scope of responsibilities and may engage independent legal, accounting and other advisers as it determines necessary.

 

The charter of the committee is available on our website at www.mindspeed.com. The board has determined that all of the members of the committee are “independent” in accordance with Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, the applicable rules of NASDAQ and our board membership criteria. All of the committee members also meet the audit committee composition requirements of NASDAQ. The board has determined that Mr. Madden, the chairman of the audit committee, is qualified as an audit committee financial expert within the meaning of SEC regulations and that he has accounting and related financial management expertise within the meaning of the applicable rules of NASDAQ. Mr. Madden’s experience is discussed above under the caption “Board of Directors — Election of Director.”

 

Governance and Board Composition Committee

 

The governance committee reviews with the board, on an annual basis or more frequently as needed, our guidelines on corporate governance and the board’s committee structure and membership. The committee annually establishes a framework for the evaluation of our chief executive officer. The committee recommends nominees for election at each annual meeting and nominees to fill any board vacancies. The committee recommended to the board Mr. Stead for re-election at the 2010 annual meeting. When needed, the committee leads the search for qualified director candidates by defining the experiential background and qualifications for individual director searches and may engage third-party search firms to source potential candidates and coordinate the logistics of each search. The committee also has the power to engage outside advisors and counsel to assist the committee.

 

The committee prepares, not less frequently than every three years, and submits to the board, for adoption by the board, a list of selection criteria to be used by the committee. The committee will consider director candidates

recommended by our stockholders pursuant to our procedures described below under the caption “Other Matters — Stockholder Proposals.” The selection criteria for director candidates include the following:

 

 

The committee’s charter is available on our website at www.mindpseed.com. The board has determined that all of the members of the committee are “independent” in accordance with applicable rules of NASDAQ and our board membership criteria.

 

Compensation and Management Development Committee

 

The compensation committee recommends to the board compensation and benefits for non-employee directors; reviews and approves, on an annual basis, the corporate goals and objectives with respect to compensation of our chief executive officer pursuant to the framework developed by the governance committee; determines salaries for all executive officers and reviews annually the salary plan for other executives in general management positions; reviews standard base pay, incentive compensation, deferred compensation and all equity-based plans and recommends changes in such plans as needed; reviews annually the performance of our chief executive officer and other senior executives; assists the board in developing and evaluating potential candidates for executive positions; oversees the development of executive succession plans; and reviews and discusses the “Compensation Discussion and Analysis” with management and gives its recommendation to the board on whether the “Compensation Discussion and Analysis” should be included in our proxy statement and annual report on Form 10-K.

 

The charter of the committee is available on our website at www.mindspeed.com. The board has determined that all of the members of the committee are “independent” in accordance with applicable rules of NASDAQ and our board membership criteria. The compensation committee has the authority to engage services of outside advisors, experts and others to assist the committee. Our human resources department supports the committee in its work and in some cases acts pursuant to delegated authority to fulfill various functions in administering our compensation programs. In addition, the committee reviews its charter at least annually, and recommends any proposed changes to the board for approval.

 

During the course of fiscal year 2009, management and the board engaged Semler Brossy Consulting Group, LLC to consult and assist in the determination of executive compensation. The engagement specifically called for an analysis of the competitiveness of our equity compensation practices for our non-executive employees, an analysis of the competitiveness of our cash, equity and total compensation practices for our executive officers and a review of the value of our executives’ equity holdings. The companies analyzed in this engagement were the companies listed as peer companies below under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Objectives of Compensation Programs and Compensation Program Design — Peer Group.” The engagement covered information on equity practices, such as equity burn rates, equity overhang, forms of equity awards and allocation of equity awards between officers and non-officers. Semler Brossy also analyzed trends, including changes in equity participation eligibility and the mix of cash and equity in total compensation.

 

Stockholders and other parties interested in communicating directly with any individual director, including the chairman, the board as a whole or the non-management directors as a group may do so by writing to Mindspeed Technologies, Inc., 4000 MacArthur Boulevard, East Tower, Newport Beach, California 92660, Attention: Secretary. Our secretary reviews all such correspondence and regularly forwards to the board a summary of all such correspondence and copies of all correspondence that, in the opinion of the secretary, deals with the functions of the board, the board committees or other such correspondence that the secretary otherwise determines requires their attention. Directors may at any time review a log of all correspondence we receive that is addressed to members of the board and may request copies of any such correspondence. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of our internal audit department and handled in accordance with procedures established by the audit committee with respect to such matters.

 

No member of the compensation committee during fiscal year 2009 was a current or former officer or employee of our company. There are no compensation committee interlocks between our company and other entities involving our executive officers and board members who serve as executive officers or board members of such other entities. No member of the committee had any relationship requiring disclosure below under the caption “Certain Relationships and Related Transactions,” except for Messrs. Decker and Stead, who serve as directors of Conexant.

 

The table below sets forth certain information concerning our executive officers as of November 30, 2009.

 

 

There are no family relationships among the individuals serving as our directors or executive officers. Set forth below are the name, office and position held with our company and principal occupations and employment during the past five years of each of our executive officers. Biographical information on Mr. Halim is discussed above under the caption “Board of Directors — Election of Director.”

 

Mr. Johnsen has been our senior vice president, chief financial officer and treasurer since July 2008. Prior to joining us, Mr. Johnsen served in a variety of finance and accounting positions with Broadcom Corporation (wired and wireless communication semiconductor and software products) from October 1999 through June 2008, including as vice president and corporate controller (principal accounting officer) from September 2007 through June 2008, senior director of finance, wireless connectivity group, from June 2007 through September 2007, senior director of finance and operations, worldwide manufacturing, from May 2005 through June 2007, director of finance, worldwide operations, from April 2003 through May 2005, as controller for various business groups within Broadcom from June 2000 through December 2003 and as corporate accounting manager from October 1999 through June 2000.

 

Mr. Bajwa has been our senior vice president and general manager, lightspeed connectivity solutions, since October 2007. Mr. Bajwa previously served as our vice president of marketing and applications engineering from October 2006 to October 2007, executive director of marketing from April 2006 to October 2006 and director of marketing from August 2003 to April 2006 for our optical communications IC product line. Prior to joining us, Mr. Bajwa was the director, navigation business, of Agilent Technologies, Inc. (electronic measurement devices and services) from November 2002 to August 2003.

 

Mr. Busch has been our senior vice president and general manager, high-performance analog, since October 2007. Mr. Busch previously served as our vice president of marketing and applications for our switching and signal conditioning product line from November 2006 to October 2007 and our executive director of business development from January 2006 to November 2006. Prior to joining us, Mr. Busch was a business development manager of Analog Devices, Inc. (signal processing solutions) from November 2003 to December 2005 and the vice president of marketing and president of the U.S. subsidiary of TeraCross Ltd. (semiconductor manufacturer) from November 2001 to November 2003. Mr. Busch currently serves as a director for First Western Group (real estate and agricultural lending).

Mr. Cao has been our senior vice president, operations, since March 2008. Prior to joining us, Mr. Cao was the vice president, operations, of HOYA Corporation USA, formerly Xponent Photonics, Inc. (optical network component manufacturer), from August 2006 to March 2008. Mr. Cao also served as the vice president, manufacturing and technology, from March 2006 to August 2006 and the director, assembly operations, from January 2001 to March 2006 of Vitesse Semiconductor Corporation (semiconductor communications design and development).

 

Mr. Cates has been our senior vice president and general manager, wide area networking, since May 2007. Prior to joining us, he was the vice president of North American sales and marketing of Metalink Ltd. (broadband communications) from October 2004 to May 2007. Mr. Cates also served as the vice president of marketing of Solarflare Communications, Inc. (vendor of Ethernet products) from June 2003 to September 2004 and the vice president of sales and marketing of Peregrine Semiconductor Corp. (semiconductor manufacturer and designer) from September 2001 to June 2003.

 

Mr. Hamilton has been our senior vice president, worldwide sales, since July 2006. Mr. Hamilton previously served as our vice president of sales for the Asia Pacific region from June 2003 to July 2006. He served as the vice president of sales for the Asia Pacific region of Conexant from September 2001 to June 2003.

 

Mr. Mankar has been our senior vice president, VLSI engineering, since August 2008. Prior to joining us, Mr. Mankar provided consulting services to Conexant from May 2008 to August 2008, and was the senior vice president, worldwide core engineering, and chief development officer of Conexant from December 2006 to May 2008. He also served as vice president, VLSI hardware systems broadband media processing, and vice president, worldwide core engineering, of Conexant from January 2005 to December 2006. He was vice president, VLSI hardware systems personal computing division, of Conexant from September 1999 to December 2004, and vice president, core engineering, of Conexant from January 2004 to December 2004.

 

Mr. Medrek has been our senior vice president and general manager, multiservice access, since June 2004. Mr. Medrek previously served as our senior vice president and general manager, broadband internetworking systems, from June 2003 to June 2004. Mr. Medrek served as the vice president and general manager, broadband internetworking systems, of Conexant from February 2001 to June 2003 and the vice president of marketing, broadband internetworking systems, of Conexant from March 2000 to February 2001.

 

Overview

 

The following provides a brief overview of the more detailed disclosure set forth in the Compensation Discussion and Analysis below:

 

 

Objectives of Compensation Programs and Compensation Program Design

 

The compensation committee establishes our executive compensation philosophy and oversees our executive compensation programs. Under the compensation committee’s supervision, in fiscal year 2009, we implemented compensation policies, plans and programs intended to achieve the following objectives:

 

 

We carry out these objectives by providing market competitive salaries, achieving an appropriate mix of cash and equity compensation, setting compensation based on individual and overall company performance and occasionally granting discretionary and retention bonuses.

 

Total Compensation Program Design

 

The compensation committee considers the total compensation, earned or potentially available, of the executive officers in establishing each component of compensation. In its review, the committee considers information regarding our general industry and direct peer group, national surveys of other U.S. semiconductor and high technology companies, reports of our third-party compensation consultants and performance judgments as to the past and expected future contributions of individual executive officers. The compensation committee also reviews tally sheets in an effort to promote internal pay equity.

Our total compensation package generally includes a base annual salary, short-term incentive awards and long-term incentive awards. We target the short-term incentives of the chief executive officer to equal 100% of his base annual salary. We target the short-term incentives of all other named executive officers to equal 55% of their respective base annual salaries. Mr. Halim’s higher incentive target is a result of his higher level of responsibility and the industry standard of providing the chief executive officer with higher incentive targets. We also occasionally grant cash discretionary bonuses to recognize achievements, as well as cash retention bonuses to maintain management continuity.

 

The fiscal year 2009 base salaries and target incentives for our named executive officers are set forth in the table below.

 

 

 

 

Role of Executive Officers and Compensation Consultants in Compensation Decisions

 

The compensation committee solicits compensation recommendations from our chief executive officer on our other executive officers, and then reviews and approves the total compensation for each of our executive officers. The compensation committee may request additional information from the chief executive officer and may also solicit the perspective and input of third-party compensation consultants. In fiscal year 2009, the compensation committee elected to continue its engagement with a third-party compensation consultant, Semler Brossy.

 

Semler Brossy was specifically engaged to consult on the competitiveness of our equity compensation practices, summaries of our equity plans and the level of overall compensation for our named executive officers. For fiscal year 2009, we provided Semler Brossy with a list of our peer companies and data from the 2009 Radford Executive Survey for U.S. Technology Companies and requested that it report on the practices of each identified peer company, as well as analyze the data from the survey. The report included information on equity practices, such as equity burn rates, equity overhang, forms of equity awards and allocation of equity awards between officers and non-officers. The report also included information on trends, including changes in equity participation eligibility and the mix of cash and equity in total compensation. Following the conclusion of fiscal year 2009, Semler Brossy began advising us regarding the amendment to our directors stock plan described below under the caption “Proposal 3 — Approval of Amended and Restated Directors Stock Plan.”

 

Additional information on the peer companies that Semler Brossy examined is discussed below under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Objectives of Compensation Programs and Compensation Program Design — Peer Group.”

 

Goal Setting and Performance Evaluation

 

Executive officer performance evaluations, including evaluations of our named executive officers, occur annually and are completed immediately following the conclusion of each fiscal year. To help achieve our strategic goals and annual objectives, we have developed an integrated performance management program, which has an overall purpose of strengthening results at the individual and organizational level. The program is designed to align individual performance with strategic business goals and annual objectives. It is intended to foster two-way communication to provide all employees, including executive officers, with the resources, information and support needed to be successful. The performance management program’s primary objectives are to ensure that individual contributions and results are directed toward achieving our business plan based on our strategic and tactical goals. It also links rewards to performance and recognizes outstanding performance with corresponding compensation

actions. The process begins with establishing overall company and individual performance goals for the chief executive officer and other executive officers at the beginning of the fiscal year. These goals are based on our annual operating plan, which is reviewed by the board.

 

The chief executive officer’s performance evaluation is coordinated by the chairman of the governance committee. The chief executive officer is evaluated on performance against the annual operating plan, which is summarized in an annual scorecard. The scorecard contains a percent achievement reached for each company metric, as well as an overall weighted average achievement percentage on all company performance goals. An annual 360 degree feedback assessment is also conducted for purposes of providing additional developmental feedback to the chief executive officer. The chairman of the governance committee reviews the corporate performance scorecard and the 360 feedback results with the other independent board members, obtains their feedback on the chief executive officer’s performance and completes the review. The governance committee then reports its findings to the compensation committee for use in its determination of appropriate compensation actions.

 

The board frequently discusses the performance of the executive officers with the chief executive officer. The chief executive officer incorporates this feedback into the evaluations of the other executive officers. The performance evaluations for our named executive officers are the same as those discussed below under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Elements of Compensation — Cash Incentive Awards.”

 

Peer Group

 

In setting the base annual salary, individual bonus target amounts and equity grant guidelines for executive officers, the compensation committee, with assistance from our third-party compensation consultant, reviews information relating to the executive compensation of a self-selected peer group of companies comprised of direct competitors, other local semiconductor companies and leading national semiconductor companies. In analyzing our peer group, the compensation committee distinguishes emerging peers from mature peers. We include our direct competitors and other local semiconductor companies in our emerging peer group because we compete with them for business, as well as talent. We include leading national semiconductor companies in our mature peer group because they have a large influence on industry compensation practices. This self-selected peer group has remained essentially the same for the past several years. The peer group companies for fiscal year 2009 include the following:

 

 

The compensation committee reviews the compensation levels of our emerging peers when considering the amount of executive officer base annual salary and total compensation. For fiscal year 2009, the compensation committee believes that the base annual salary and total compensation provided to each executive officer was within the range of total compensation paid to similarly situated executive officers at emerging peer companies. The compensation committee targets our executive officers’ base salaries and total compensation at the median of our emerging peers.

 

The compensation committee reviews the data of both our emerging and mature peers in designing our equity-compensation policies. It typically considers our emerging peers’ annual equity burn rates, equity overhang and form of equity awards. Additionally, it reviews our emerging peers’ policies regarding allocation of equity awards between executive officers and non-executive officers, percentage of employees receiving grants, vesting practices,

hiring grant practices and other trends. It typically considers data from our mature peers with respect to types of equity awards and employee eligibility for such awards.

 

For fiscal year 2009, the compensation committee also used the Radford survey database, which provides data specific to high technology and semiconductor industry compensation practices. The examination of the survey and peer group compensation practices allows us to accurately follow industry norms in an effort to ensure that our compensation policies are current and competitive.

 

Elements of Compensation

 

Executive compensation consists primarily of: (i) a base annual salary; (ii) short-term cash incentive-based compensation; and (iii) long-term incentive equity awards. This mix of payments allows us to provide compensation that directly addresses our compensation goals of retention, alignment of executive and stockholder interests and linking pay with performance. We also provide our executive officers with other benefits, including perquisites, change of control agreements and a retirement savings plan. The compensation committee also grants special cash bonuses to certain named executive officers to recognize particularly strong achievement or for specific retention purposes. Information on the total compensation awarded to each named executive officer during fiscal year 2009 is set forth in our “Summary Compensation Table” below.

 

Base Annual Salary

 

The base annual salaries we provide to our executive officers are intended as compensation for each executive officer’s ongoing contributions to the performance of the operational area(s) for which they are responsible. In keeping with our compensation philosophy to attract and retain individuals of high quality, executive officer base salaries have been targeted to be competitive with base salaries paid to executive officers of our emerging peers, as described above, based on data reviewed by the compensation committee. The compensation committee determines the market median by reviewing information contained in survey data, SEC filings and advice from our third-party compensation consultant. The base salaries for our executive officers also reflect input from our chief executive officer regarding individual performance, company strategy and retention factors.

 

The base annual salary levels of each of our executive officers are reviewed annually and adjusted from time to time to recognize individual performance, promotions, competitive compensation levels, retention requirements, internal pay equity and other qualitative factors. In addition to adjustments made for competitive and retention reasons, the compensation committee has periodically adjusted executive officer base salaries based on its assessment of each executive’s performance and history with us, as well as overall budgetary considerations for salary increases.

 

The base annual salaries in fiscal year 2009 for all named executive officers are set forth above under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Objectives of Compensation Programs and Compensation Program Design — Total Compensation Program Design.”

 

Cash Incentive Awards

 

Our annual cash incentive compensation plan for the executive officers, including our chief executive officer, is based on both the overall financial performance of our company and the performance of the executive officers with respect to their individual assigned goals. In any given fiscal year, that performance is measured against the specific performance criteria adopted by the compensation committee for use in that particular fiscal year. Performance criteria typically include financial metrics, such as revenue growth, operating profitability and attainment of strategic business development goals. Annual incentive awards may also be adjusted by the board in its discretion based on individual performance factors. For all executive officers, the annual incentive award value is generally targeted at the median of corresponding awards for our peer group.

 

Although we have established target incentive levels, the incentive-based compensation awards to our executive officers have generally not reached such levels during the past several fiscal years. Executive officers who have achieved 100% of their incentive-based compensation performance goals for a given fiscal year have been compensated below their respective target levels. While our incentive-based compensation awards have been

typically below the target levels, we retain these levels for competitive reasons and may award incentive-based compensation that reaches these levels in the future.

 

The compensation committee determined whether each named executive officer met his performance goals for fiscal year 2009. Management reported on the accomplishments of the officers, and the compensation committee carried out its responsibility of determining the extent to which those accomplishments met the pre-established goals. While the use of the performance goals is intended to establish a rigorous process for tracking and evaluating performance, the compensation committee’s assessment of performance against particular goals involves the application of qualitative, as well as quantitative measures. The compensation committee does not apply a mechanical formula in determining achievement of the goals, but takes into account the level of performance compared to the goal, as well as other considerations such as improvement or decline compared to prior years, positioning for future success and the need to motivate and retain the current management team.

 

The specific company and business unit revenue, operating profit, available cash, cash generation, design win, engineering execution and budget reduction targets are based on our company’s internal annual operating plan and are confidential. As an indication of the level of difficulty in achieving the overall performance objectives, the compensation committee determined that our named executive officers attained levels of achievement (including financial and non-financial goals) in the following ranges in each of the last three fiscal years:

 

 

 

The pre-established factors for fiscal year 2009 used to determine individual performance and the relative weight given to each factor for each named executive officer are set forth in the table below. The different factors and relative weights reflect differences in the job responsibilities of our named executive officers.

 

 

 

Mr. Halim. Based on the performance evaluation described above under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Objectives of Compensation Programs and Compensation Program and Design — Goal Setting and Performance Evaluation,” the compensation committee determined that Mr. Halim achieved 67% of his financial performance goals (fiscal year operating profit, available

cash and cash generation targets) for fiscal year 2009. We had a larger operating loss than planned, but we largely met our available cash targets each quarter and achieved our cash generation targets in all but one quarter.

 

Cash generation and operating profit are non-GAAP measures. Our calculation of operating profit excludes stock-based compensation expense, employer taxes on stock-based compensation, amortization of intangible assets, asset impairments, employee separation costs, the effects of special charges such as asset impairments and restructuring charges and employee option exchange costs. We calculate cash generation as the net increase or decrease in cash and cash equivalents. We use non-GAAP measures because these measures help us internally to evaluate our operating performance, while excluding items that are considered by management to be outside of our core operating results. The specific performance goals for fiscal year operating profit, available cash and cash generation are based on our internal annual operating plan and are confidential.

 

The compensation committee determined that Mr. Halim met 79% of his individual goals. We had a number of key design wins, particularly in the voice-over-Internet Protocol and high-performance analog markets. We achieved 72% of our engineering milestones on schedule in fiscal year 2009 for our key product programs. With respect to organizational development, a number of key promotions and hires were made in fiscal year 2009 and significant progress was made in improving forecast accuracy as measured by net inventory turns.

 

Based on the overall assessment of Mr. Halim’s performance against his goals, the compensation committee determined that no cash incentive payment was earned for fiscal year 2009.

 

Mr. Johnsen. The compensation committee determined that Mr. Johnsen earned 50% of his sole goal, company operating profit target. Based on the overall assessment of Mr. Johnsen’s performance against his goal, the compensation committee determined that no cash incentive payment was earned for fiscal year 2009.

 

Mr. Hamilton. The compensation committee determined that Mr. Hamilton earned the following percentages of his goals for fiscal year 2009: (i) 95.9% — achievement of a company fiscal year revenue target — (40% weighting of overall award); (ii) 94.6% — design win execution against the fiscal year plan — (40% weighting of overall award); and (iii) 102.4% — achievement of a budget reduction plan for the worldwide sales department — (20% weighting of overall award), resulting in a 96.7% overall achievement of the goals set forth for the fiscal year. Based on the overall assessment of Mr. Hamilton’s performance against his goals, the compensation committee awarded Mr. Hamilton a total cash incentive award of $132,935.

 

Mr. Medrek. The compensation committee determined that Mr. Medrek earned the following percentages of his goals for fiscal year 2009: (i) 50% — company operating profit target — (33% weighting of overall award); (ii) 86% — business unit fiscal year revenue targets — (33% weighting of overall award); and (iii) 98% — achievement of the budget plan for the multiservice access business unit — (33% weighting of overall award), resulting in a 78.0% overall achievement of the goals set forth for the fiscal year. Based on the overall assessment of Mr. Medrek’s performance against his goals, the compensation committee determined that no cash incentive payment was earned for fiscal year 2009.

 

Mr. Cates. The compensation committee determined that Mr. Cates earned the following percentages of his goals for fiscal year 2009: (i) 50% — company operating profit target — (33% weighting of overall award); (ii) 72% — business unit fiscal year revenue targets — (33% weighting of overall award); and (iii) 113% — achievement of the budget plan for the wide area networking business unit — (33% weighting of overall award), resulting in a 78.3% overall achievement of the goals set forth for the fiscal year. Based on the overall assessment of Mr. Cates’ performance against his goals, the compensation committee determined that no cash incentive payment was earned for fiscal year 2009.

 

Cash Bonus Plan for Fiscal Year 2010

 

In December 2009, the compensation committee approved a fiscal year 2010 cash bonus plan. Pursuant to the terms of the plan, our chief executive officer, the other executive officers (excluding Mr. Hamilton) and certain of our non-executive officers will be eligible to receive a cash bonus for fiscal year 2010. The amount of cash bonuses our chief executive officer and other executive officers may earn under the cash bonus plan for fiscal year 2010

described above, if any, is limited by the amount of cash allocated to the plan. The amount of cash that may be allocated, if any, to the plan to be available for awards will be calculated as follows:

 

 

Under the fiscal year 2010 cash bonus plan, the compensation committee will determine our chief executive officer’s cash bonus, if any, based upon the recommendations of the governance committee. The governance committee’s recommendation will be based on its assessment of our chief executive officer’s achievement of his fiscal year 2010 goals previously established by the governance committee. Our chief executive officer will make recommendations to the compensation committee for its approval of cash bonuses, if any, to be awarded to the other executive officers. The fiscal year 2010 cash bonus plan also provides for a cash pool that our chief executive officer is authorized to allocate in the form of cash bonuses, if any, among non-executive officers in amounts that our chief executive officer determines are appropriate based, in part, on executive officer recommendations.

 

Although Mr. Hamilton will not participate in the cash bonus plan for fiscal year 2010 described above, he is eligible for a cash bonus for fiscal year 2010 under our sales incentive plan. If Mr. Hamilton achieves 100% of his performance goals for fiscal year 2010, he is eligible to receive a cash bonus in an amount equal to 55% of his base salary for fiscal year 2010. Because sales executives in our industry typically receive cash incentive awards as part of their compensation packages, for competitive reasons, we excluded Mr. Hamilton from the cash bonus plan for fiscal year 2010 described above. The amount of the cash bonus Mr. Hamilton is eligible to receive under our sales cash incentive plan for fiscal year 2010 is not limited by the amount of cash allocated to the cash bonus plan for fiscal year 2010 described above.

 

Long-Term Incentive Equity Awards

 

Our long-term compensation consists of both stock option and restricted stock awards provided under our 2003 long-term incentives plan. In determining the timing and size of our awards, we follow a policy of attempting to provide compensation that is competitive with our peers. Additionally, we consider the number and status of past long-term awards when deciding to make a new grant.

 

We routinely grant eligible employees equity awards at the time of hire and also provide equity awards covering a large portion of our employees annually. The vesting periods vary with respect to each individual award, but stock option awards generally vest within a three or four year period and restricted stock awards generally vest within a range of one to four years. The one year restricted stock award vestings were typically granted as part of our short term-incentive compensation with specific performance goals. The exercise price of all stock options is set at the fair market value of the company’s stock on the grant date.

 

In April 2009, we granted stock options to our named executive officers, as well as to many of our other employees. The awards will vest as to 33.33% of the underlying award in April 2010 and 8.33% of the underlying award quarterly thereafter. In April 2009, we also granted shares of restricted stock to a limited number of executive officers, including our named executive officers. The awards will vest as to 25% of the underlying award in May 2010 and 6.25% of the underlying award quarterly thereafter. The number of stock options and shares of restricted stock awarded, as set forth in the “Grants of Plan Based Awards” table below, varied with respect to each individual due to differences in each individual’s compensation targets and role within the company. The “Outstanding Equity Awards at Fiscal Year-End” table below sets forth all long-term incentive awards granted in previous years.

 

Our long-term compensation awards of stock options and restricted stock are consistent with our goals for compensation, particularly in further aligning the interests of our executive officers with our stockholders. The awards provide compensation in addition to salary, cash incentives and bonuses, and assist us in recruiting and retaining executive officers. The awards are useful in retention because of their vesting requirements, which provide that upon termination of employment, only options currently vested may be exercised and unvested stock options and restricted stock are forfeited. Thus, long-term compensation awards give executive officers an incentive to remain with the company through each award’s entire vesting period.

Incentive Equity Awards for Fiscal Year 2010

 

In November 2009, we granted stock options to a large portion of our employees, including our named executive officers, and shares of restricted stock to substantially all of our employees. The stock option awards will vest as to 8.33% of the underlying award quarterly beginning in February 2010. The restricted stock awards will vest as to 25% of the underlying award quarterly beginning in February 2010. The number of stock options and shares of restricted stock awarded, as set forth in the table below, varied with respect to each individual due to differences in each individual’s compensation targets and role within the company.

 

 

Special Bonuses

 

Discretionary Cash Bonuses

 

From time to time, we grant discretionary cash bonuses, though they are not a significant part of our executive compensation. These awards are not tied to any specific performance measure and are made at the discretion of the compensation committee. Shortly after the end of fiscal year 2009, we granted a discretionary cash bonus of $75,000 to Mr. Johnsen to recognize his particularly strong achievements during the recently completed fiscal year, including his contributions to significant improvements in our balance sheet, the equity offering we completed in the fourth quarter of fiscal year 2009 and the improved management of our cash assets. Shortly after the end of fiscal year 2008, Messrs. Johnsen, Medrek and Cates also received discretionary cash bonuses of $50,000, $35,000 and $35,000, respectively for their performance during fiscal year 2008.

 

While discretionary cash bonuses will remain an option for us to recognize extraordinary achievement, we view them as an exception, and grant them selectively. We expect most, if not all, of our fiscal year 2010 cash incentive compensation to be paid under our cash bonus plan for fiscal year 2010 discussed above under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Elements of Compensation — Cash Bonus Plan for Fiscal Year 2010.”

 

Retention Bonuses

 

In addition to our standard components of compensation, we occasionally grant retention bonuses to our executive officers. We grant retention bonuses to certain individuals based on a determination that these individuals fill an essential role in our success or failure and the importance of retaining their services.

 

In December 2008, the compensation committee approved a special bonus of $600,000 to our chief executive officer, Mr. Halim. The special bonus was subject to a letter agreement and vested on a quarterly basis over a period of one year. The compensation committee determined the special bonus to be appropriate to ensure management continuity and recognize the importance of Mr. Halim’s role as our chief executive officer in continuing progress made in fiscal year 2008, particularly with respect to our revenue and our achievement of non-GAAP operating profit, into fiscal year 2009. The compensation committee also considered the high cost of leading a search for a replacement for Mr. Halim if he were to resign as our chief executive officer, both financially and with respect to the focus and morale of our employees.

 

Stock Option Exchange Program

 

On May 15, 2009, we implemented a stock option exchange program, pursuant to which eligible employees exchanged eligible stock options for new stock options with an exercise price of $1.70, the closing price of our common stock on NASDAQ on the exchange date. The exchange ratio was determined such that the fair value of the

new stock options, as determined under Accounting Standards Codification 718, Compensation — Stock Compensation, formerly FAS 123R, or ASC 718, received as part of the exchange was approximately equal to the fair value, as determined under ASC 718, of the exchanged stock options. The stock option exchange program was approved by our stockholders at the 2009 annual meeting of stockholders. Named executive officers for fiscal year 2008 and directors were not eligible to participate.

 

Prior to the implementation of the stock option exchange program, nearly all of the outstanding stock options were ineffective for retention and compensation purposes because they featured an exercise price significantly higher than the market price for our common stock. The stock option exchange program allowed us to provide our employees with equity compensation for which they could realize value and had the effect of reducing the number of shares of our common stock subject to outstanding equity awards.

 

One named executive officer for fiscal year 2009, Mr. Cates, was not a named executive officer in fiscal year 2008 and participated in the stock option exchange program. Pursuant to the terms of the program, Mr. Cates exchanged 25,000 stock options with an exercise price of $10.60 per share for 12,500 stock options with an exercise price of $1.70 per share. The new stock options vest as to 33% of the underlying award on the anniversary of the exchange date for three years.

 

Other Compensation Policies

 

Perquisites and Personal Benefits

 

We provide our executive officers, including our chief executive officer, with perquisites, valued at the actual cost to our company, and other personal benefits that we believe are reasonable, competitive and consistent with our peers and our overall executive compensation program. The perquisites and personal benefits that we regularly offer include retirement savings plan matching contributions, life insurance premiums, excess personal liability insurance premiums, an annual physical examination, airline club fees, club dues, health club memberships, financial planning and tax preparation services. We sometimes also offer certain benefits associated with the hiring of new executive officers, such as transportation, temporary housing and relocation costs.

 

In determining the appropriate level of perquisites and personal benefits, we periodically review the Ayco Executive Benefits & Perquisite survey, as well as information provided in SEC filings of our peer group. We believe that these benefits help us to hire and retain qualified executive officers and enable them to perform their job responsibilities with fewer distractions. For valuation of perquisites and other benefits provided during fiscal year 2009, see footnote 2 of our “Summary Compensation Table” below.

 

Timing of Grants of Equity Awards

 

We have generally considered grants of stock options and restricted stock to our executive officers on an annual basis, typically in our first or second fiscal quarter. We also make equity grants to new hires or in specific situations other than on an annual basis, as determined by the compensation committee. The grant date of equity awards is typically the date we obtain formal approval of the grant. We do not have, and do not intend to have, any program, plan or practice to time the grant of equity awards in coordination with the release of material non-public information. We also do not have, and do not intend to have, any program, plan or practice to time the release of material non-public information for the purpose of affecting the value of executive compensation. The exercise price for stock options we have granted equals the closing price of our common stock on the grant date.

 

Policy Regarding Deductibility of Compensation

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, enacted in 1993, generally disallows a tax deduction to public companies for compensation over $1 million paid to the chief executive officer and the three most highly compensated executive officers (not including the chief executive officer and the chief financial officer). However, certain compensation meeting a tax law definition of “performance-based” is generally exempt from this deduction limit. We do not currently have a policy regarding qualification of cash compensation, such as salary and bonuses, for deductibility under Section 162(m). We have included provisions in our 2003 long-term incentives plan designed to enable grants of stock options to executive officers affected by Section 162(m) to qualify

as “performance-based” compensation. Such grants cannot qualify until they are made by a committee consisting of “outside directors” under Section 162(m). The compensation committee believes that in certain circumstances factors other than tax deductibility take precedence when determining the forms and levels of executive compensation most appropriate and in the best interests of us and our stockholders. Given our changing industry and business, as well as the competitive market for outstanding executive officers, the compensation committee believes that it is important to retain the flexibility to design compensation programs consistent with its overall executive compensation philosophy even if some executive compensation is not fully deductible. Accordingly, the compensation committee may from time to time deem it appropriate to approve elements of compensation for certain executive officers that are not fully deductible.

 

The performance factors for equity compensation intended to meet the tax law definition of “performance-based” compensation were most recently approved in March 2009 and must be approved by stockholders at least every five years.

 

Change of Control Agreements

 

Each of our named executive officers has entered into our standard change of control agreement, which provides, under certain circumstances, for payments upon termination of employment in connection with a change of control of the company. Payments made under the agreement are subject to a “double trigger,” meaning that both a change of control and a termination are required. We believe that a change of control agreement is necessary to diminish the inevitable distraction of executive officers by virtue of the personal uncertainties and risks created by a pending or threatened change of control. The agreement intends to encourage the executive officer’s full attention and dedication and to provide a compensation and benefits arrangement satisfactory to the executive officer and competitive with other companies.

 

For the purposes of the change of control agreement, a change of control generally means:

 

 

An executive officer who terminates his own employment for good reason or whose employment is terminated by us for reasons other than for cause, disability or death (qualified terminations) in connection with a change of control is entitled to the following payouts and benefits:

 

 

 

We believe that providing for payment under the change of control agreements upon a double trigger of a change of control and a qualified termination achieves the balanced result of focusing the executive officer and protecting our company’s best interests. For more information regarding potential payments under the change of control agreements, see the “Potential Payments Upon Termination or Change-in-Control” table below.

 

Retirement Plans

 

Executive officers are eligible to participate in our retirement savings plan. Our retirement savings plan operates as a defined contribution tax-qualified plan and is open to all of our domestic salaried employees. A participant may elect to defer compensation within certain contribution limitations. We retain the discretion to contribute to each participant’s plan through profit sharing and matching of contributions. Our contributions are paid in the form of cash and are invested in our common stock fund. For fiscal year 2009, we matched participants’ contributions 100% of the first 4% of the participant’s covered compensation. The matching contributions paid to our named executive officers under our retirement savings plan during fiscal year 2009 are listed in footnote 2 of our “Summary Compensation Table” below.

 

We have previously also offered our deferred compensation plan to a select group of highly compensated employees and directors of our company. Our deferred compensation plan allowed these individuals to defer compensation subject to a minimum level of contribution without a maximum level of contribution. We matched the participant’s contribution under this plan in an amount equal to the match the participant would have received under our retirement savings plan but for his or her participation in our deferred compensation plan and certain limitations imposed by the tax code less the match actually credited to the participant under our retirement savings plan. In November 2008, acting pursuant to the terms of our deferred compensation plan, the compensation committee suspended future deferrals and in August 2009, the board terminated our deferred compensation plan. All balances in our deferred compensation plan will be distributed to the plan participants by September 2010. For more information about our deferred compensation plan and our named executive officers’ contributions, see our “Nonqualified Deferred Compensation” table below.

 

Overall Analysis

 

During the course of fiscal year 2009, we remained committed to the core executive compensation objectives of attracting and retaining quality executive officers, aligning the interests of our executive officers and our stockholders and paying for performance.

 

Performance Analysis

 

Fiscal year 2009 was a challenging business year, with our first two quarters heavily influenced by macroeconomic conditions, including the well-publicized problems in the financial services industry that created a broad-based credit squeeze and an associated pull back in capital investment. Our revenues declined significantly in the first half of fiscal year 2009, and we missed both our revenue and operating income plans for the year.

 

Progress was made in turning around our business, including improving our balance sheet, improving inventory management and realizing absolute growth in our multiservice access business during what was otherwise a year of revenue decline. We exited the fiscal year on solid footing, having significantly reduced our operating expenses from the fourth fiscal quarter of 2008 and achieving substantial second half fiscal year 2009 revenue growth over first half revenues.

Fiscal Year 2009 Compensation Decisions

 

We offered cash incentive-based compensation in fiscal year 2009 rather than equity incentive-based compensation, as we have in previous years. However, other than to Mr. Hamilton, no cash incentive-based compensation was paid for fiscal year 2009 performance to any of our named executive officers. Based, in part, on the conclusion that we did not achieve our annual operating plan goals, which have a significant influence on the performance goals of nearly all of our executive officers, the compensation committee determined that none of the other named executive officers had achieved a sufficient level of their individual performance goals under our cash-incentive plan to warrant payment.

 

To recognize individual achievement outside of the company’s performance as a whole, we granted a discretionary cash bonus to our chief financial officer. We also granted a retention bonus to our chief executive officer to ensure management continuity and to recognize his importance in our continued progress. These bonuses are discussed above under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Elements of Compensation — Special Bonuses.”

 

We continued to grant long-term compensation awards consisting of both stock options and restricted stock in fiscal year 2009. This mix of stock options and restricted stock is consistent with our compensation goals and programs, particularly the goals of further aligning the financial interests of our executive officers with those of our stockholders and attracting and retaining executive officers. We believe that the awards were useful in retention, particularly in a fiscal year when performance goal-based cash incentives were not paid. The vesting requirements of both stock options and restricted stock provide that upon termination of employment, only options currently vested may be exercised and unvested stock options and restricted stock are forfeited. Thus, long-term compensation awards provide executive officers with an incentive, during difficult business cycles, to remain with the company through each award’s entire vesting period.

 

The following table sets forth the compensation earned for services performed for our company during fiscal years 2009, 2008 and 2007 by:

 

 

 

 

 

     ­ ­

 

(A) Represents amounts we contributed pursuant to our retirement savings plan.

 

(B) Represents amounts we paid for excess personal liability insurance coverage.

 

 

 

For more information about perquisites, see the discussion above under the caption “Executive Officer and Director Compensation — Compensation Discussion and Analysis — Other Compensation Policies — Perquisites and Personal Benefits.”

 

 

The following table presents information on equity awards granted to our named executive officers during fiscal year 2009.

 

 

 

 

The following table summarizes the equity awards we have made to our named executive officers which were outstanding as of the end of fiscal year 2009.

 

 

 

 

Stock Option Award Vesting Schedule

 

The vesting schedule for stock option awards is set forth below.

 

 

Restricted Stock Award Vesting Schedule

 

The vesting schedule for restricted stock awards is set forth below.

 

 

The following table sets forth information regarding the vesting of restricted stock awards for each of our named executive officers during fiscal year 2009. There were no options exercised by our named executive officers during fiscal year 2009.

 

 

 

 

In November 2008, acting pursuant to the terms of our deferred compensation plan, the compensation committee suspended future deferrals to the plan. In August 2009, the compensation committee terminated our deferred compensation plan, and all balances in the plan will be distributed by September 2010. A summary of our deferred compensation plan, as it existed prior to its termination, is set forth below.

 

Our deferred compensation plan provided that a select group of highly compensated employees and directors could defer up to 100% of their respective base annual salaries, annual bonuses and director fees, subject to a minimum of $2,000 per source of deferral. A participant could have also elected to defer 100% of restricted stock grants and qualifying gains with respect to the exercise of eligible stock options. We previously provided a limited matching amount to the contributions of each participant.

 

The following table sets forth the aggregate earnings during fiscal year 2009 and the aggregate balances at the end of fiscal year 2009 under our deferred compensation plan for our named executive officers. No contributions were made under the plan by any of our named executive officers in fiscal year 2009.

 

 

 

 

Under the terms of our standard change of control agreement, deferred compensation plan and 2003 long-term incentives plan, our named executive officers may be entitled to certain payments upon termination of their employment. The following description of the agreement and plans is qualified by reference to the complete text of the agreement and plans, which have been filed with the SEC.

 

The following table sets forth estimated payments that would be made to each of our named executive officers upon termination of employment under various circumstances, including: (i) death; (ii) in connection with a change of control; (iii) other than for personal performance; and (iv) for any other reason. The information set forth in the table assumes:

 

 

The actual amounts to be paid can only be determined at the time of the executive’s termination of employment and may differ materially from the amounts set forth in the table below. The amounts set forth in the table below do not reflect the withholding of applicable state and federal taxes. Following the table is a description of the plans and agreements that affect potential payments upon death, termination or change of control.