SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

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o		Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-12

PHOENIX TECHNOLOGIES LTD.

(Name of Registrant as Specified In Its Charter)

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PHOENIX TECHNOLOGIES LTD.
915 Murphy Ranch Road
Milpitas, California 95035
(408) 570-1000

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 20, 2007

 

Notice is hereby given that the Annual Meeting of Stockholders of Phoenix Technologies Ltd. (the “Company” or “Phoenix”) will be held at the Company’s offices located at 915 Murphy Ranch Road, Milpitas, California, 95035, on December 20, 2007 at 8:00 AM, Pacific Standard Time, to consider and act upon the following matters:

 

 

Only stockholders of record at the close of business on November 9, 2007 will be entitled to notice of and to vote at the Annual Meeting or any adjournments thereof. The stock transfer books will not be closed between the record date and the date of the Annual Meeting. A list of stockholders entitled to vote at the Annual Meeting will be available for inspection at the Company’s offices for a period of ten days before the Annual Meeting and will also be available for inspection at the meeting.

 

All stockholders are cordially invited to attend the meeting. Whether or not you plan to attend, please sign and return the enclosed proxy card as promptly as possible in the envelope provided. You may revoke your proxy card at any time prior to the Annual Meeting. If you attend and vote at the Annual Meeting, your proxy card will be automatically revoked and only your vote at the Annual Meeting will be counted.

 

By Order of the Board of Directors

 

Timothy Chu

Vice President, General Counsel and Secretary

 

November [20], 2007

 

 

 

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

PROXY STATEMENT

 

PHOENIX TECHNOLOGIES LTD.
915 Murphy Ranch Road
Milpitas, California 95035

 

PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held December 20, 2007

 

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors (the “Board”) of Phoenix Technologies Ltd. (the “Company” or “Phoenix”) of proxies for use at the Annual Meeting of Stockholders of the Company to be held on December 20, 2007 (the “Meeting”) at the Company’s offices located at 915 Murphy Ranch Road, Milpitas, California, commencing at 8:00 AM, Pacific Standard Time, and at any adjournments thereof. All proxy cards are solicited for the purposes set forth herein and in the Notice of Annual Meeting of Stockholders that accompanies this Proxy Statement. The date of this Proxy Statement is November [20], 2007, the approximate date on which this Proxy Statement and the accompanying proxy card were first sent or given to stockholders.

 

We do not expect any matters not listed in the Proxy Statement to come before the Meeting. If any other matter is presented, your signed proxy card gives the individuals named as proxy holders the authority to vote your shares to the extent authorized by Rule 14a-4(c) under the Securities Exchange Act of 1934, as amended, which would include matters that the proxy holders did not know were to be presented at the Meeting by November 19, 2007.

 

General Information

 

Certain Financial Information.  The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 is enclosed with this Proxy Statement.

 

Voting Securities.  Only stockholders of record as of the close of business on November 9, 2007 (the “Record Date”) will be entitled to vote at the Meeting and any adjournments thereof. As of the Record Date, there were [          ] shares of the Common Stock of the Company issued and outstanding. Stockholders may vote in person or by proxy. Each holder of shares of Common Stock is entitled to one vote on the proposals presented in this Proxy Statement and one vote for each director to be elected for each share of Common Stock held. There is no cumulative voting in connection with the election of directors.

 

Quorum.  The required quorum for transacting business at the Meeting is a majority of the votes eligible to be cast by holders of shares of Common Stock issued and outstanding on the Record Date. Shares that are voted “FOR, AGAINST, ABSTAIN” or “WITHHOLD” on a matter are treated as being present at the Meeting for purposes of establishing a quorum.

 

Vote Required.  Under the Company’s bylaws and applicable law, the approval of Proposal 3 with respect to amendment of the Company’s Amended and Restated Certificate of Incorporation requires the affirmative vote of holders of a majority of the Company’s outstanding shares of Common Stock. All other proposals require the approval of holders of a majority of the shares present in person or represented by proxy at a meeting and entitled to vote.

 

Abstentions.  Under the Company’s bylaws and applicable Delaware law, abstentions will be counted for purposes of determining both (i) the presence or absence of a quorum for transacting business and (ii) the total number of shares present in person or represented by proxy and entitled to vote on a proposal. Accordingly, abstentions will have the same effect as a vote against the proposal.

 

Broker Non-Votes.  “Broker non-votes” (i.e., shares held by a broker or nominee which are represented at the meeting, but with respect to which the broker or nominee is not empowered to vote on a particular non-routine proposal) will be counted in determining whether a quorum is present. Proposals 3, 4, 5 and 6 are non-routine proposals with respect to which the broker or nominee is not empowered to vote. Thus, if stockholders do not give their broker or nominee specific instructions with respect to Proposals 3, 4, 5 and 6, their shares

will not be voted on those matters and will not be counted in determining the number of shares necessary for approval. With respect to all other proposals, the broker or nominee has the authority to vote such shares absent contrary voting instructions from the stockholder.

 

Solicitation of Proxies.  Proxy cards and voting instructions are being solicited on behalf of the Company’s Board of Directors. In addition to soliciting stockholders by mail, certain of the Company’s directors and officers may solicit proxies personally, by telephone, telegram, email, facsimile, webcasts or postings to the Company’s corporate website. None of these individuals will receive special compensation for their assistance in soliciting proxies, but may be reimbursed for reasonable out-of-pocket expenses incurred in connection with this solicitation. The Company will request brokers, custodians, nominees and other record holders to forward copies of the proxy and other soliciting material to persons for whom they hold shares of Common Stock of the Company and to request authority for the exercise of proxies; in such cases, the Company, upon request of the record holders, will reimburse such holders for their reasonable expenses.

 

Voting of Proxies.  All shares represented by a valid proxy card received prior to the Meeting will be voted, and where a stockholder specifies by means of the proxy a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specification so made. If no choice is indicated on the proxy card, the shares will be voted FOR all nominees, FOR all other proposals described herein, and as the proxy holders may determine in their discretion with respect to any other matters that properly come before the Meeting. A stockholder giving a proxy has the power to revoke his or her proxy at any time prior to the time it is voted by delivering to the Secretary of the Company a written instrument revoking the proxy or a duly executed proxy with a later date, or by attending the Meeting and voting in person.

 

If you plan to vote in person at the Meeting, please bring proof of identification. Even if you currently plan to attend the Meeting, we recommend that you submit your proxy card as described above so that your vote will be counted if you later decide not to attend the Meeting.

 

If your shares are held in a brokerage account or by another nominee, you are considered the beneficial owner of the shares, and these proxy materials, together with a voting instruction card, are being forwarded to you by your broker or other nominee. As a beneficial owner, you have the right to direct your broker, trustee or nominee how to vote and are also invited to attend the Meeting.

 

Since a beneficial owner is not the stockholder of record, if you wish to vote these shares in person at the Meeting you must obtain a “legal proxy” from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the Meeting. If you wish to attend the Meeting, but not vote at the Meeting, please bring a copy of a brokerage statement showing your share ownership as of November 9, 2007.

 

If your shares are registered under different names, or if they are in more than one account, you may receive more than one proxy card or voting instruction card. Please follow the instructions on each proxy card or voting instruction card to ensure that all of your shares are represented at the meeting. Please sign each proxy card exactly as your name or names appear on the proxy card. For joint accounts, each owner should sign the proxy card. When signing as executor, administrator, attorney, trustee or guardian, etc., please print your full title on the proxy card.

 

PROPOSAL NO. 1:

 

ELECTION OF DIRECTORS

 

The Company’s nominees for election at the Meeting are Dale Fuller, Douglas Barnett and Richard Noling (the “Nominees”). Mr. Fuller, Mr. Barnett and Mr. Noling are presently Class 3 Directors of the Company.

 

The Company expects each Nominee to be available to serve as a director. If, however, a Nominee is unable or declines to serve for any reason, proxies may be voted for such substitute nominee as the Board may designate. Proxies may not be voted for more than one substitute nominee.

The Company’s current Amended and Restated Certificate of Incorporation (the “Restated Certificate”) and Bylaws provide for a classified Board currently consisting of two Class 1 Directors (currently Woodson Hobbs and Michael Clair), one Class 2 Director (currently John Mutch) and three Class 3 Directors (currently Mr. Fuller, Mr. Barnett and Mr. Noling). The Class 1, 2 and 3 Directors serve staggered three-year terms. Under the current Restated Certificate, the Class 3 Directors to be elected at the Meeting will be elected to hold office until the 2011 Annual Meeting of Stockholders and until their successors have been elected and qualified.

 

In the event Proposal 3 is approved by the stockholders at the Meeting, the classification of the Board of Directors will be eliminated and each director, including the Class 3 Directors to be elected at the Meeting, will stand for election annually, beginning with the 2009 Annual Meeting of the Stockholders.

 

Nominees and Other Directors.  The name, age, principal occupations during the past five years and tenure as director are set forth below for each of the Nominees and for each director of the Company. The Nominees are currently serving as directors of the Company.

 

 

Mr. Fuller was appointed to the Board in November 2006 and was appointed Chairman in February 2007. Mr. Fuller also serves as Chairman of the Nominating and Corporate Governance Committee and is a member of the Compensation Committee. Mr. Fuller served as Interim President and CEO of McAfee, Inc. from October 2006 to March 2007. Prior to McAfee, Mr. Fuller served as Chief Executive Officer of Borland Software Corporation from 1999 until 2005. Before Borland, Mr. Fuller served as Chief Executive Officer of WhoWhere? Inc., an online global communications directory of people and business information, as General Manager, and Vice President of Apple Computer’s Powerbook division, and as Vice President and General Manager of NEC Corporation’s portable computer division. Mr. Fuller currently serves on the board of directors of Guidance Software, where he is a member of the audit and compensation committees and is the chair of the nominating and governance committee. Mr. Fuller attended the Stanford University Directors’ Forum in 2007.

 

Mr. Barnett was appointed to the Board in July 2007. He is also a member of the Audit Committee of the Board. Mr. Barnett is currently Managing Director and Chief Financial Officer of AlixPartners, an international corporate turnaround, performance improvement and financial advisory firm. From 2003 to 2007, he served as Senior Vice President, Finance and as Chief Financial Officer for UGS PLM Software, a global provider of product lifecycle management software and services. From 2002 to 2003, Mr. Barnett was the Chief Financial Officer of Colfax Corporation. Mr. Barnett received his B.S. in Accounting from the University of Illinois and an M.B.A. from Northwestern University Kellogg Graduate School. Mr. Barnett is a Certified Public Accountant.

 

Mr. Noling was appointed to the Board in September 2005. He is also the Chairman of the Audit Committee and a member of the Compensation and Nominating and Corporate Governance Committees. Mr. Noling is currently Interim Chief Financial Officer at SpeechPhone LLC, a provider of hosted speech services. From 2003 to September 2005, Mr. Noling served as the Chief Executive Officer of ThinGap Corporation, a designer, developer and manufacturer of high-efficiency electric motors. Mr. Noling served as Chief Financial Officer of Insignia Solutions Inc., a software company, from 1996 to 1997, and then as President and Chief Executive Officer from 1997 to 2003. From 1994 to 1995, Mr. Noling was Chief Financial Officer of DocuMagix, Inc., a personal paper management software developer, and from 1991 to 1994, he was Sr. Vice President and Chief Financial Officer of Gupta Corporation, a developer of relational databases and development

tools. Mr. Noling received his B.A. in Aerospace and Mechanical Engineering Science from the University of California, San Diego, an M.A. from Fuller Theological Seminary and an M.S. in Administration from the University of California, Irvine. Mr. Noling attended the Stanford University Directors’ Forum in 2007.

 

Mr. Hobbs joined the Company as President and Chief Executive Officer and as a member of the Board of Directors of the Company in September 2006. Prior to joining the Company, Mr. Hobbs served as President, Chief Executive Officer and a member of the board of directors of Intellisync Corporation, a provider of platform-independent wireless messaging and mobile software, from 2002 until its sale to Nokia in 2006. Between 1995 and 2002, Mr. Hobbs was a consulting executive for the venture capital community and a strategic systems consultant to large corporations. During this timeframe, he held the position of Interim Chief Executive Officer for various periods at the following companies: FaceTime Communications, a provider of instant messaging network-independent business solutions; Tradenable, Inc., an online escrow service company; BigBook, Inc., a provider in the online yellow pages industry; and I/PRO Corporation, a provider of quantitative measurement of Web site usage. From 1993 to 1994, Mr. Hobbs served as Chief Executive Officer of Tesseract Corporation, a human resources outsourcing and software company. Mr. Hobbs spent the early part of his career with Charles Schwab Corporation, a securities brokerage and financial service company, as its Chief Information Officer; with Service Bureau, a division of IBM, as a developer; and with Online Focus, an online credit union system, as the Director of Operations.

 

Mr. Clair was appointed to the Board in August 2007. He is a technology investor and consultant to Silicon Valley companies. From 1996 until its sale to Nokia in 2006, Mr. Clair was Chairman of the Board of Intellisync Corporation. He has held senior and executive management positions at Tymshare Inc., ROLM Corporation and SynOptics Communications, Inc., which he co-founded. He currently serves on the boards of a number of privately-held technology companies, including Cranite Systems, Corfino and NDS Surgical Imaging, LLC. Mr. Clair holds a B.S. in Business and Finance and an MBA from the State University of New York at Buffalo.

 

Mr. Mutch was appointed to the Board in February 2007. He is also a member of the Audit Committee. He is the founder and managing partner of MV Advisors LLC, a strategic advisory and investment firm. In March 2003, Mr. Mutch was appointed by the U.S. Bankruptcy Court to the board of directors of Peregrine Systems, a global enterprise software provider, where he served as President and CEO beginning in August, 2003, and led the company through its acquisition by Hewlett-Packard in December 2005. Mr. Mutch joined HNC Software in 1997 as Senior Vice President of Strategy and Marketing and was promoted to President in September 1999 and CEO in December 1999. He remained CEO until the sale of HNC Software to Fair Isaac in August 2002. From December 1986 to June 1994, Mr. Mutch held a variety of executive sales and marketing positions with Microsoft Corporation, including director of organization marketing. Mr. Mutch is currently a director at Edgar Online and Executive Chairman of Aspyra Inc. He holds a B.S. from Cornell University and an M.B.A. from the University of Chicago.

 

Board Independence

 

Upon consideration of the criteria and requirements regarding director independence set forth in NASDAQ Rules 4200 and 4350, the Board has determined that each member of the Board, other than Mr. Hobbs, meets the standards of independence established by the NASDAQ. Mr. Hobbs is not independent because he is employed by the Company.

 

Meetings and Committees of the Board

 

During the fiscal year ended September 30, 2007 (the “Last Fiscal Year”), the Board held a total of 6 regularly scheduled meetings, 6 special meetings, and took additional actions by written consent. During the Last Fiscal Year, each Board member attended at least 75% of the aggregate number of meetings of the Board and meetings of the committees of the Board on which he served during the Last Fiscal Year.

 

The Board has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.

Audit Committee

 

The members of the Audit Committee are Messrs. Noling, Barnett and Mutch. Mr. Noling serves as the Chairman of the Audit Committee. Dale L. Fuller and Anthony P. Morris, who resigned from the Board on July 13, 2007, were members of the Audit Committee during a portion of the Last Fiscal Year. On March 15, 2007, the Board unanimously approved the appointment of Mr. Mutch to replace Mr. Fuller and on July 3, 2007, the Board unanimously approved the appointment of Mr. Barnett to replace Mr. Morris as members of the Audit Committee.

 

Each member of the Audit Committee is “independent” as such term is defined in the NASDAQ Rules and Rule 10A-3 of the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended. Mr. Noling serves as the Chairman of the Audit Committee. The Board has determined that each of Messrs. Noling, Barnett and Mutch qualifies as an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K promulgated by the SEC. During the Last Fiscal Year, the Audit Committee met seven (7) times, and took additional actions by written consent.

 

The responsibilities of the Audit Committee include:

 

 

For a complete listing of the Audit Committee’s responsibilities please refer to the Audit Committee Charter attached hereto as Exhibit A and posted on the Company’s website at http://www.phoenix.com/en/About+Phoenix/Investors/Corporate+Governance /default.htm.

 

Compensation Committee

 

The members of the Compensation Committee are Messrs. Fuller and Noling. Taher Elgamal, who elected not to stand for re-election at the 2007 annual meeting of stockholders, Mr. Morris and Anthony Sun, who resigned from the Board on February 26, 2007, were members of the Compensation Committee during a portion of the Last Fiscal Year. On March 15, 2007, the Board unanimously approved the appointment of Messrs. Fuller and Noling to replace Dr. Elgamal and Mr. Sun as members of the Compensation Committee. On July 16, 2007, the Board unanimously approved the appointment of Robert Majteles to replace Mr. Morris as a member and Chairman of the Compensation Committee. Mr. Majteles resigned from the Board on October 24, 2007. Each member of the Compensation Committee is “independent” as such term is defined in the NASDAQ Rules. During the Last Fiscal Year, the Compensation Committee met seven (7) times, and took additional actions by written consent.

The responsibilities of the Compensation Committee include:

 

 

For a complete listing of the Compensation Committee’s responsibilities, please refer to the current Compensation Committee Charter posted on the Company’s website at: http://www.phoenix.com/en/About+Phoenix/Investors/Corporate+Governance/default.htm.

 

Nominating and Corporate Governance Committee

 

The members of the Nominating and Corporate Governance Committee are Messrs. Fuller and Noling. Mr. Fuller serves as Chairman of the Nominating and Corporate Governance Committee. David Dury, who elected not to stand for re-election at the 2007 annual meeting of stockholders, and Dr. Elgamal were members of the Nominating and Corporate Governance Committee during a portion of the Last Fiscal Year. On March 15, 2007, the Board unanimously approved the appointment of Messrs. Fuller and Majteles to replace Mr. Dury and Dr. Elgamal as members of the Nominating and Corporate Governance Committee. Mr. Majteles resigned from the Board on October 24, 2007. Each member of the Nominating and Corporate Governance Committee is “independent” as such term is defined in the NASDAQ Rules.

 

The Nominating and Corporate Governance Committee operates pursuant to a charter posted on the Company’s website at http://www.phoenix.com/en/About+ Phoenix/Investors/Corporate+Governance. During the Last Fiscal Year, the Nominating and Corporate Governance Committee met five (5) times.

 

The purpose of the Nominating and Corporate Governance Committee is to establish general qualification guidelines applicable to nominees for election to the Board and to ensure that the Board is appropriately constituted to meet its fiduciary obligations to the Company and its stockholders. The Nominating and Corporate Governance Committee identifies individuals qualified to become Board members, including nominees suggested by stockholders, and recommends nominees for appointment or election to the Board. The Nominating and Corporate Governance Committee does not use specific minimum requirements, but considers several factors to determine whether a director candidate is qualified. These factors include, but are not limited to: (i) general understanding of technology, marketing, finance and other disciplines relevant to the success of a publicly traded company in today’s business environment; (ii) understanding of the Company’s business and

technology; (iii) educational and professional background; (iv) personal accomplishments; and (v) geographic location, gender, age, and ethnic diversity. To date, the Company has not paid any fees to any third party to identify or evaluate or assist in identifying or evaluating potential nominees.

 

Additionally, the Nominating and Corporate Governance Committee is responsible for the creation and monitoring of the corporate governance practices of the Company. Specifically, the Nominating and Corporate Governance Committee’s responsibilities include:

 

 

The Nominating and Corporate Governance Committee seeks to have on the Board at least one financial expert as defined in Item 401(h) of Regulation S-K promulgated by the SEC and believes that the majority of the Board must be composed of independent directors as defined in NASDAQ Rule 4200.

 

The Nominating and Corporate Governance Committee will consider candidates for director from any source, including director candidates recommended by stockholders. No formal procedures exist for the handling of director candidates recommended by stockholders; however, all candidates recommended by stockholders will be evaluated by the Nominating and Corporate Governance Committee in the same way and by using the same criteria and general guidelines used for all other candidates. Stockholders may submit director recommendations in writing to the Corporate Secretary at the Company’s offices located at 915 Murphy Ranch Road, Milpitas, California 95035, providing the candidate’s name and qualifications for service as a Board member, a document signed by the candidate indicating the candidate’s willingness to serve, if elected, and evidence of the stockholder’s ownership of Company stock.

 

The Nominating and Corporate Governance Committee did not receive, prior to September 27, 2007, any recommendations for director candidates from any non-management stockholder or group of stockholders that beneficially owns more than 5% of the Company’s voting stock. Each Nominee included on the proxy card is an executive officer and/or director standing for re-election.

 

Stockholder Communications with Directors

 

The Board welcomes communications from the Company’s stockholders. Any stockholder may communicate with either the Board as a whole, or with any individual director by sending a written communication c/o the Company’s Corporate Secretary at the Company’s offices located at 915 Murphy Ranch Road, Milpitas, California 95035. All communications sent to the Company’s Corporate Secretary will be forwarded to the Board, as a whole, or to the individual director to whom such communication was addressed, without review by management.

 

Compensation of Directors

 

Members of the Board who are not employees of the Company (“Outside Directors”) are entitled to receive an annual retainer of $20,000, payable quarterly in arrears, a fee of $1,500 for each meeting of the Board they attend in person and a fee of $1,000 for each telephonic meeting of the Board that they attend. In addition, members of each Board committee, other than the Audit Committee, are entitled to receive a fee of $1,000 for each committee meeting they attend in person and a fee of $500 for each telephonic committee

meeting that they attend. Members of the Audit Committee are entitled to receive a fee of $1,500 for each Audit Committee meeting they attend in person and a fee of $1,000 for each telephonic Audit Committee meeting they attend. Additionally, the Chairman of each committee, other than the Audit Committee, is entitled to receive an annual retainer of $3,000. The Audit Committee Chairman is entitled to receive an annual retainer of $7,500. The Chairman of the Board is entitled to receive an annual retainer of $7,500. Outside Directors who reside outside of the local area are also entitled to receive reimbursement of travel expenses.

 

In addition, during the Last Fiscal Year, the Board approved the following additional compensation to certain directors: (a) each of Messrs. Sun and Morris received a special service award of $50,000, upon his resignation from the Board of Directors, in recognition of his many years of service to the Company; (b) each of Messrs. Dury and Morris received $15,000 in meeting fees for serving on the Board’s ad hoc Strategic Alternatives Committee; (c) Mr. Morris received $7,500 for serving as the Lead Independent Director of the Board (a role which is currently not filled since the Chairman of the Board, Mr. Fuller, is independent); (d) Messrs. Elgamal and Morris received $3,000 and $1,500, respectively, for serving on the Board’s ad hoc Product Readiness Oversight Committee; and (e) Mr. Dury received $7,000 for serving as the Board’s liason to the Company’s Operating Committee.

 

Outside Directors currently receive options under the 1999 Stock Plan and the 1999 Director Option Plan. Under the 1999 Director Option Plan, Outside Directors receive an initial grant of 40,000 shares upon their initial appointment to the Board and subsequent annual grants of 15,000 shares. Board member options vest and become exercisable for 100% of the shares on the date of grant and have a term of ten years. During the Last Fiscal Year, the Company made initial stock option grants for 40,000 shares to each of Messrs. Fuller, Majteles, Clair, Mutch and Barnett, annual grants of 15,000 shares to each of Messrs. Noling, Elgamal, Dury, Morris and Sun, in each case having an exercise price equal to the fair market value of the Company’s Common Stock on the date of grant.

 

Required Vote

 

If a quorum is present, directors will be elected by the affirmative vote of a majority of the votes cast with respect to each director to be elected at the Meeting. The Company’s bylaws previously provided that directors would be elected upon the affirmative vote of the holders of a plurality of the shares of Common Stock present or represented at a meeting at which a quorum was present. The bylaws were amended on September 19, 2007 to change the required vote to that set forth in the first sentence of this paragraph. The Nominating and Corporate Governance Committee has established procedures under which any director who is not elected will offer to tender his or her resignation to the Board. The Nominating and Corporate Governance Committee will make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. The Board will act on the Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results.

 

The Board of Directors Unanimously Recommends a Vote FOR
the Election of Messrs. Fuller, Barnett and Noling

 

PROPOSAL NO. 2

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board has selected Ernst & Young LLP to continue to serve as the Company’s independent registered public accounting firm for the fiscal year ending September 30, 2008. The Company is asking stockholders to ratify this appointment. If ratification by the stockholders of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm is not obtained, the Audit Committee will reconsider this appointment. Even if the appointment is ratified, the Audit Committee, in its discretion, may appoint a different independent registered public accounting firm at any time

during the year if the Audit Committee determines that such a change would be in the best interests of the Company and its stockholders.

 

Representatives of Ernst & Young LLP are expected to be present at the Meeting. They will have the opportunity to make a statement if they desire to do so and are also expected to be available to respond to appropriate questions from stockholders.

 

Required Vote

 

If a quorum is present, the affirmative vote of the holders of a majority of the shares of Common Stock present or represented at the Meeting and entitled to vote on the matter is required for approval of Proposal No. 2.

 

The Board of Directors Unanimously Recommends a Vote FOR Ratification of the Appointment of Ernst & Young LLP as the Company’s Independent Registered Public Accounting Firm for the Fiscal Year
Ending September 30, 2008

 

PROPOSAL NO. 3

APPROVAL OF AMENDMENTS TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO ELIMINATE THE CLASSIFICATION OF THE COMPANY’S BOARD OF DIRECTORS AND TO REMOVE ALL REFERENCES TO SERIES A JUNIOR PARTICIPATING PREFERRED STOCK.

 

We are asking our stockholders to approve an amendment to the Company’s Restated Certificate to eliminate the classification of the Board of Directors and thereby ensure that each director will stand for election annually and to remove all references to Series A Junior Participating Preferred Stock.

 

Board Classification

 

Article Eleventh of the Restated Certificate currently provides that the Board will be divided into three classes, Class 1, Class 2 and Class 3, with no one class having more than one director more than any other class, unless otherwise provided for from time to time by resolution adopted by a majority of the entire Board of Directors. The Restated Certificate further provides that each director will be elected for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected.

 

If this proposal is approved by the stockholders, the Restated Certificate will be amended to eliminate the classification of the Board, such that all directors will stand for election annually. The Board believes that elimination of the classification of the Board is in the best interest of the Company and its stockholders in that it will allow stockholders to review and express their views on the performance of all directors each year. This proposal is not being presented in response to any stockholder demand.

 

The Board has determined that the declassification of the Board should become effective commencing with the annual meeting of stockholders of the Company in fiscal year 2009. Accordingly, if this proposal is approved by the stockholders, the terms of all directors will end at the annual meeting of stockholders of the Company in fiscal year 2009, and all directors elected at that annual meeting will have one-year terms.

 

Our Bylaws currently provide that each director be elected by the majority of votes cast with respect to such director in uncontested elections (the number of shares voted “for” a director nominee must exceed the number of votes cast “against” that nominee). In a contested election (a situation in which the number of nominees exceeds the number of directors to be elected), the standard for election of directors would be a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors. Whether an election is contested or not is determined as of a date that is 14 days in advance of when we file our definitive proxy statement with the U.S. Securities and Exchange Commission (SEC). If a nominee who is serving as a director is not elected at the annual meeting, Delaware law provides that the director would continue to serve on the Board as a “holdover director.” However, the Nominating and

Corporate Governance Committee has established procedures under which any director who fails to be elected by a majority vote will offer to tender his or her resignation to the Board. In that situation, the Nominating and Corporate Governance Committee would make a recommendation to the Board about whether to accept or reject the resignation, or whether to take other action. The Board will act on the Nominating and Corporate Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. If a nominee who was not already serving as a director fails to receive a majority of votes cast at the annual meeting, Delaware law provides that the nominee does not serve on the Board as a “holdover director.”

 

Series A Junior Participating Preferred Stock

 

Article Fourth of the Restated Certificate currently authorizes the Company to issue both Common Stock and Preferred Stock. The Restated Certificate further provides that the Preferred Stock may be issued in one or more series, the first of which will be designated “Series A Junior Participating Preferred Stock” (the “Series A Preferred”). The rights, preferences and privileges of the Series A Preferred are set forth in Article Fourth of the Restated Certificate.

 

If this proposal is approved by the stockholders, the Restated Certificate will be amended to eliminate any reference to the Series A Preferred class of Preferred Stock. The Company previously filed a Certificate of Elimination on November 29, 1999 to cancel the Series A Preferred and no shares of Series A Preferred Stock of the Company have ever been issued. The Board therefore believes that, in order to simplify the Restated Certificate and remove extraneous provisions, it is in the best interest of the Company to eliminate any reference to the Series A Preferred from the Restated Certificate.

 

If Proposal 3 is approved by the stockholders, Article Fourth and Article Eleventh of the Restated Certificate will be amended as set forth in Exhibit B hereto.

 

Required Vote

 

The affirmative vote of a majority of the shares of common stock of the Company outstanding as of the Record Date will be required to approve the above described amendment to our Restated Certificate.

 

The Board Of Directors Unanimously Recommends a Vote FOR the Proposal to Amend our Amended and Restated Certificate of Incorporation to Eliminate the Classification of the Company’s Board of Directors and to Remove All References to Series A Junior Participating Preferred Stock.

 

PROPOSAL NO. 4

APPROVAL OF THE COMPANY’S 2007 EQUITY INCENTIVE PLAN

 

Summary

 

On October 5, 2007, the Board approved the 2007 Equity Incentive Plan (the “2007 Plan”). The Board adopted the 2007 Plan because both its current stockholder-approved equity plans, the 1999 Stock Plan (the “1999 Plan”) and the 1999 Director Option Plan (the “1999 Director Plan”), have a limited number of shares remaining for issuance, and the Board believes Phoenix should continue to have a stockholder-approved equity compensation plan in order to make equity compensation awards to attract and retain employees, officers, directors and other service providers.

 

The number of shares reserved for issuance under the 2007 Plan is equal to 3,500,000 shares plus (i) 489,895 shares that as of October 5, 2007 are available for issuance under the 1999 Plan and (ii) 3,461,784 shares that as of October 5, 2007 are subject to outstanding options granted under the 1999 Plan (including the 1,250,000 performance vesting options described in Proposal No. 6 below) or have been issued under the 1999 Plan but are subject to repurchase by the Company; provided that in the case of (ii), such shares only become available for issuance under the 2007 Plan if and to the extent such outstanding options are cancelled, expire or are forfeited or such shares are repurchased by the Company. The 3,500,000 additional shares of common stock that will be reserved for issuance under the 2007 Plan represents approximately [     ]% of the Company’s outstanding shares as of November 9, 2007.

At the Annual Meeting, you are being asked to approve the adoption of the 2007 Plan and the reservation of shares for issuance under the 2007 Plan as described in this Proposal 4. If the stockholders approve the 2007 Plan, this approval is intended to satisfy the stockholder approval requirements under Code Section 162(m), so as to permit Phoenix to deduct under U.S. federal income tax law certain amounts paid under the 2007 Plan to executive officers that might otherwise not be deductible, and to permit Phoenix to grant “incentive stock options” eligible for special tax treatment under Code Section 422.

 

If the 2007 Plan is approved by the stockholders, the 2007 Plan will become effective upon stockholder approval, and Phoenix will cease granting new awards under the 1999 Plan and the 1999 Director Plan as of the date of the Annual Meeting. If the 2007 Plan is not approved by the stockholders, the 1999 Plan and the 1999 Director Plan will continue in operation pursuant to their terms. The Company plans to register the shares under the 2007 Plan pursuant to a registration statement on Form S-8 as soon as practicable after stockholder approval. The material terms of the 2007 Plan include the following:

 

 

 

Summary of the 2007 Equity Incentive Plan

 

General

 

The purpose of the 2007 Plan is to encourage ownership in Phoenix by employees, consultants and directors whose long-term employment or other service relationship with Phoenix is considered essential to the our continued progress and thereby, encourage recipients to act in the stockholder’s interest and share in Phoenix’s success. Stock options and stock awards, including stock appreciation rights and similar types of awards, may be granted under the 2007 Plan. Options granted under the 2007 Plan may be either “incentive stock options” as defined in Section 422 of the Code, or nonstatutory stock options.

 

A copy of the 2007 Plan is attached to the electronic version of this proxy statement filed with the SEC as Exhibit C. The description of the 2007 Plan included in this Proposal 4 may not contain all of the information about the 2007 Plan that is important to you and we recommend that you read the full text of Exhibit C in connection with your review of this Proposal. Because it is not a complete description of all of the terms of the 2007 Plan, the summary is qualified by reference to the complete text of the 2007 Plan.

 

Administration

 

The Board, the Compensation Committee of the Board or a committee of officers or directors appointed by the Board (collectively, the “Administrator”) administers the 2007 Plan. To make grants to certain of our officers and key employees, the members of the committee approving such grant must qualify as “non-employee directors” under Rule 16b-3 of the Securities Exchange Act of 1934, and as “outside directors” under Section 162(m) of the Code.

 

The Board may delegate any part of its authority and powers under the 2007 Plan to one or more of our directors and/or officers, but only the Board, the Compensation Committee or another committee appointed by the Board which consists of two or more non-employee directors can make awards to participants who are our executive officers. References to the Administrator in this proposal include the Board, any committee of the Board and any directors or officers to whom the Committee properly delegates authority.

 

Eligibility

 

Awards may be granted under the 2007 Plan to employees, consultants and directors of Phoenix and any of its affiliates. Incentive stock options may be granted only to employees of Phoenix or its subsidiaries. As of November 9, 2007, there are approximately [          ] employees and consultants and five (5) non-employee directors eligible to receive awards under the 2007 Plan. The Administrator, in its discretion, selects the employees, directors and consultants to whom awards may be granted, the time or times at which such awards are granted, and the terms of such awards.

 

Code Section 162(m) Matters

 

Section 162(m) of the Internal Revenue Code generally prevents public companies from deducting compensation paid in excess of $1 million to certain of their executive officers during any single year. Under current law, this restriction applies to compensation paid to our Chief Executive Officer and our other three most highly compensated officers. Certain “performance-based compensation” is specifically exempted from this deduction limit if it otherwise meets the requirements of Section 162(m). In order that we may grant

awards of stock options, stock appreciation rights or restricted stock and/or other types of equity awards under the 2007 Plan after the date of our Annual Meeting and have those awards and/or payments qualify as exempt performance-based compensation for purposes of Section 162(m), the 2007 Plan must be approved by our stockholders in a manner that complies with Section 162(m). We are submitting the 2007 Plan relating to Section 162(m) for stockholder approval to satisfy this requirement.

 

Stock options and stock appreciation rights (“SARs”) that are structured such that the recipient’s compensation is based solely on the appreciation of the value of the underlying shares from the date of grant until the date of exercise may qualify as performance-based compensation if, among other requirements, the plan under which the awards are granted is stockholder-approved and contains a limit on the number of shares that may be granted under options or SARs to any one individual during a specified period. In addition, as with options and SARs, stock awards must be granted pursuant to a stockholder-approved plan that contains limits on the number of shares subject to stock awards that may be granted to any one individual under the Plan during a specified period. Accordingly, the 2007 Plan provides that no awardee may be granted stock awards covering more than 175,000 shares in any fiscal year, except in connection with commencement of service, during which fiscal year the participant may be granted an additional 125,000 shares, and subject to adjustment in the event of a stock split or the occurrence of certain other corporate transactions, as described below.

 

Additional requirements apply to certain other forms of compensation, such as stock awards, in order for them to qualify as performance-based compensation, including a requirement that payment under the awards be contingent upon the achievement of certain performance goals that are established in a manner specified under Section 162(m). As a result, the 2007 Plan permits us to issue certain awards that incorporate performance objectives and provides that these performance objectives, which we call “qualifying performance criteria,” may be based upon any one or a combination of the following performance metrics:

 

 

Each of these performance objectives may be with respect to Phoenix and/or an affiliate or individual business unit. Under Section 162(m), each performance condition must be (1) established either at the time an award is granted or no later than the earlier of 90 days after the beginning of the period of service to which it relates or before the elapse of 25% of the period of service to which it relates, (2) uncertain of achievement at the time it is established and (3) determinable as to achievement by a third party with knowledge of relevant

facts. Despite the provisions above, certain awards under the 2007 Plan (such as time-vested restricted stock or restricted stock units) will not qualify for the performance-based exemption from the $1 million deduction limit.

 

The committee may adjust any evaluation of performance criteria to exclude any of the following events that occurs during a performance period: (A) asset write-downs; (B) litigation or claim judgments or settlements; (C) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results; (D) accruals for reorganization and restructuring programs; and (E) any gains or losses classified as extraordinary or as discontinued operations in our financial statements.

 

Certain other requirements apply in order for awards to qualify as performance-based compensation, including that such awards must be granted by a Compensation Committee of the Board whose members satisfy certain independence requirements imposed by the Code.

 

Approval by our stockholders of the 2007 Plan will constitute stockholder approval of the 2007 Plan (as further described below) for Section 162(m) purposes, including approval of:

 

 

If our stockholders do not approve the 2007 Plan under this Proposal, we may decide to grant stock-based awards outside of this plan to the extent we are otherwise legally permitted to do so, notwithstanding the fact that such awards may not be deductible for purposes of Section 162(m). Assuming that our stockholders do approve the 2007 Plan, in order to assure our continued ability to deduct awards made under the 2007 Plan in the future, we will be required under Section 162(m) to seek stockholder approval of certain terms of the 2007 Plan again in 2012. The Plan also allows our Board or Compensation Committee to grant Plan awards that do not comply with the Section 162(m) requirements at any time.

 

Terms and Conditions of Options

 

Each option is evidenced by a stock option agreement between Phoenix and the optionee and is subject to the following additional terms and conditions.

 

Exercise Price.  The Administrator determines the exercise price of the options at the time the options are granted. The exercise price of an incentive stock option or a nonstatutory stock option may not be less than 100% of the fair market value of the common stock on the date the option is granted; provided that the exercise price of an incentive stock option granted to an employee who holds more than 10% of the voting stock of Phoenix may not be less than 110% of the fair market value of the common stock on the date the option is granted. However, Phoenix may grant options with exercise prices equal to less than the fair market value of our common stock on the date of grant in connection with an acquisition by Phoenix of another company. The fair market value of our common stock is the closing price for the shares as quoted on the NASDAQ Global Market as of the applicable date. As of November 9, 2007, the closing price of our common stock was $[     ] per share. No option may be repriced to reduce the exercise price of such option without stockholder approval (except in connection with a change of capitalization as described in “Adjustments upon Changes in Capitalization, Dissolution or Change in Control” below).

 

Exercise of Options; Form of Consideration.  The Administrator determines when options vest and become exercisable and in its discretion may accelerate the vesting of any outstanding option. Phoenix’s standard vesting schedule applicable to options initially granted to employees has been quarterly vesting over four years with 25% of the shares vesting one year after the grant date and subject to continued employment with Phoenix as of the applicable vesting date. Follow-on option grants to employees typically vest quarterly from the date of grant over four years. The means of payment for shares issued upon exercise of an options are specified in each option agreement. The 2007 Plan permits payment to be made by cash, check, wire transfer, other shares of common stock of Phoenix (with some restrictions), broker-assisted sales, a reduction

in the amount of any Phoenix liability owed to the awardee (including any liability attributable to the awardee’s participation in any Phoenix-sponsored deferred compensation program or arrangement), any other form of consideration permitted by applicable law (which may include a “net exercise” program) and the Administrator, or any combination thereof.

 

Term of Option.  The term of an option may be no more than ten years from the date of grant (or not longer than ten and one-half years in the case of options granted to employees in certain jurisdictions outside the United States); provided that the term of an incentive stock option granted to an employee who holds more than 10% of the voting stock of Phoenix may be no more than five years from the date of grant. No option may be exercised after the expiration of its term.

 

Termination of Employment.  If an optionee’s employment or service to the Company terminates for any reason other than death or disability or unless otherwise provided for by the Administrator or in the option agreement, then options held by the optionee under the 2007 Plan generally will be exercisable to the extent they are vested on the termination date for a period of three months (or six months for directors and executive officers) (or such period set by the Administrator) after the termination but not after the expiration date.

 

Generally, if any optionee’s employment or service terminates as a result of optionee’s death, all outstanding options that were vested and exercisable as of the date of the optionee’s death may be exercised for twelve months following the optionee’s death but in no event after the expiration date. Generally, if an optionee’s employment or service terminates as a result of the optionee’s disability, then all options to the extent they are vested and exercisable on the termination date may be exercised for twelve months following the termination date but in no event after the expiration date. The Administrator has the authority to extend the period of time for which an award is to remain exercisable following an awardee’s termination (taking into account limitations and consequences under the Code) but not beyond the expiration of the term of the award.

 

Terms and Conditions of Stock Awards

 

Stock awards may be shares, stock units, stock appreciation rights or other similar stock awards (including awards that do not require the awardee to pay any amount in connection with receiving the shares or that have an exercise or purchase price that is less than the grant date fair market value of our stock). Stock appreciation rights are rights to receive cash and/or shares of our common stock based on the amount by which the exercise date fair market value of a specific number of shares exceeds the exercise price established by the Administrator. The total number of shares to which a stock appreciation right applies (rather than the net number issued upon settlement) will be deducted against the number of shares of common stock reserved for issuance under the 2007 Plan upon settlement of the stock appreciation right.

 

Each stock award agreement will contain provisions regarding (i) the number of shares subject to the stock award, (ii) the purchase price of the shares, if any, and the means of payment for the shares, (iii) such terms and conditions on the grant, issuance, vesting and forfeiture of the shares, as applicable, as may be determined from time to time by the Administrator, (iv) restrictions on the transferability of the stock award or the shares, and (v) such further terms and conditions, in each case not inconsistent with the 2007 Plan, as may be determined from time to time by the Administrator.

 

Terms and Conditions of Grants to Non-Employee Directors

 

Under the 2007 Plan, the Board may at its discretion grant stock options and stock awards to non-employee directors of the Company. The Board may determine the terms and conditions of such award, including the number of shares subject to such award, the vesting schedule and any vesting acceleration, the terms of exercisability, acceptable forms of consideration and the term of such award. Such awards are subject to such other terms and conditions as set forth in “Terms and Conditions of Options” and “Terms and Conditions of Stock Awards” above.

 

The 2007 Plan also incorporates substantially the same terms from our 1999 Director Plan with respect to automatic option grants to our non-employee directors. Under the 2007 Plan, each person who becomes a non-employee director is automatically granted an option (the “First Option”) to purchase 40,000 shares of our

common stock (as adjusted for stock splits, stock dividends, reclassifications and like transactions) on the date on which such person first becomes a non-employee director, whether through election by the stockholders of Phoenix or appointment by the Board to fill a vacancy. Each non-employee director is automatically granted an option (a “Subsequent Option,” and together with a First Option, the “Automatic Option Grants”) to purchase 15,000 shares of our common stock (as adjusted for stock splits, stock dividends, reclassifications and like transactions) promptly following the anniversary date on which such director became a non-employee director. The exercise price of all Automatic Option Grants is equal to 100% of the fair market value of our common stock on the date such option is granted (closing price for the shares as quoted on the NASDAQ Global Market as of the grant date). Automatic Option Grants are fully vested and exercisable on the date of grant and have a term of ten years, unless terminated earlier under the terms of the 2007 Plan (e.g., upon the optionee’s termination of Board membership). Upon termination of Board membership, the optionee generally has six months to exercise the option. The Automatic Option Grants are otherwise subject to the general terms and conditions that apply to options granted under the 2007 Plan.

 

In the event that an Automatic Option Grant would cause the number of shares subject to outstanding options plus the number of shares previously purchased upon exercise of options to exceed the number of shares available for issuance under the 2007 Plan, then such grant and any further grants will be deferred until such time, if any, as additional shares become available for grant under the 2007 Plan through action of the stockholders to increase the number of shares which may be issued under the 2007 Plan or through cancellation or expiration of options previously granted under the 2007 Plan.

 

The Board may amend the terms of the 2007 Plan without stockholder approval to change the number of shares granted subject to Automatic Option Grants, vary the vesting conditions or terminate the program in its entirety. The Board intends to review its director compensation policies over the next year and may in connection with such review make significant amendments to such program.

 

Nontransferability

 

Generally, awards granted under the 2007 Plan are not transferable other than by will or the laws of descent and distribution or to a designated beneficiary upon the awardee’s death. The Administrator may in its discretion make an award transferable to an awardee’s family member or any other person or entity as it deems appropriate.

 

Deferral of Award Benefits

 

The Administrator may permit awardees whom it selects to defer compensation payable pursuant to the terms of an award or defer compensation arising outside the terms of the 2007 Plan pursuant to a program that provides for deferred payment in satisfaction of other compensation amounts through the issuance of one or more awards under the 2007 Plan. Any such deferral arrangement will be in writing and will comply with Section 409A of the Code and the regulations thereunder.

 

Adjustments upon Changes in Capitalization, Dissolution or Change in Control

 

In the event of any stock split, reverse stock split, stock dividend, combination or reclassification of our common stock or any other change to the capital structure of Phoenix (effected without receipt of consideration by Phoenix), the Administrator will make proportionate adjustments to (1) the number of shares of common stock covered by each outstanding award, (2) the number of shares of common stock which have been authorized for issuance under the 2007 Plan but as to which no awards have yet been granted or which have been returned to the 2007 Plan upon cancellation, forfeiture or expiration of an award or repurchase of shares (including any shares unissued, subject to outstanding options or repurchased under the 1999 Plan), (3) the price per share of common stock covered by each such outstanding award under the 2007 Plan, (4) the 162(m) Limit under the 2007 Plan and (5) the number of shares subject to options granted to directors under Automatic Option Grants.

 

In the event of a liquidation or dissolution, any options or stock awards will terminate immediately prior to the consummation of such proposed transaction to the extent such options or stock awards have not been

previously exercised or the shares subject thereto issued to the awardee, unless otherwise determined by the Administrator.

 

In the event of a change in control of Phoenix, the Board the Compensation Committee or another committee appointed by the Board may (i) provide for the assumption or substitution of or adjustment (including to the number and types of shares and exercise or purchase price applicable) to each outstanding award, (ii) accelerate the vesting of options and terminate any restrictions on stock awards, and/or (iii) provide for termination of awards as a result of the change in control on such terms as it deems appropriate, including providing for the cancellation of awards for a cash or other payment to the participant.

 

The Administrator has the authority to accelerate vesting of outstanding awards under the 2007 Plan at any time in its sole discretion.

 

Amendment and Termination of the Plan

 

The Administrator may amend, alter or discontinue the 2007 Plan or any award agreement at any time. However, Phoenix will obtain stockholder approval for any amendment to the 2007 Plan if stockholder approval is necessary or desirable to comply with any applicable law or NASDAQ Global Market listing requirements. In addition, Phoenix will obtain stockholder approval of any of the following: (i) an increase to the maximum number of shares for which awards may be granted under the 2007 Plan other than an increase in connection with a change in Phoenix’s capitalization as described in “Adjustments upon Capitalization, Dissolution or Change in Control” above; (ii) a reduction in the minimum exercise prices at which options may be granted; (iii) any amendment of outstanding options or stock appreciation rights that affects a repricing of such awards by reducing the exercise price of outstanding options or cancelling an outstanding option held by an awardee and re-granting to the awardee a new option with a lower exercise price, other than in connection with a change in Phoenix’s capitalization as described in “Adjustments upon Capitalization, Dissolution or Change in Control” above; or (iv) a change of the class of persons eligible to receive awards under the 2007 Plan. Generally, no amendment of the 2007 Plan will impair the rights of an outstanding award without the consent of the awardee. The Administrator may amend an outstanding award in order to conform it to the Administrator’s intent that the award not be subject to Section 409A of the Code.

 

New Plan Benefits

 

Because benefits under the 2007 Plan will depend on the Administrator’s actions and the fair market value of Phoenix’s common stock at various future dates, it is not possible to determine the benefits that will be received by employees, directors and consultants if the 2007 Plan is approved by the stockholders. No awards have been granted or promised to be granted under the 2007 Plan to any individual as of the date of this Proxy Statement.

 

Federal Income Tax Consequences

 

The following is a brief summary of the general federal income tax consequences to U.S. taxpayers and Phoenix of awards granted under the 2007 Plan. This summary does not purport to be complete and does not discuss the tax consequences of a participant’s death, the tax consequences of an award that is subject to but does not satisfy the deferred compensation rules of Section 409A of the Code, or the tax laws of any locality, state or foreign country in which the participant may reside. Tax consequences for any particular individual may be different.

 

Options

 

The grant of an incentive stock option has no federal income tax effect on the optionee. Upon exercise the optionee does not recognize income for “regular” tax purposes. However, the excess of the fair market value of the stock subject to an option over the exercise price of such option (the “option spread”) is includible in the optionee’s “alternative minimum tax income” for purposes of the alternative minimum tax. If the optionee does not dispose of the stock acquired upon exercise of an incentive stock option until more than two

years after the option grant date and more than one year after exercise of the option, any gain (or loss) upon sale of the shares will be a long-term capital gain (or loss). If the shares are sold or otherwise disposed of before these periods have expired (a “disqualifying disposition”), the option spread at the time of exercise of the option (but not more than the amount of the gain on the sale or other disposition) is ordinary income in the year of such sale or other disposition. If gain on the disqualifying disposition exceeds the amount treated as ordinary income, the excess is taxable as capital gain (which will be long-term capital gain if the shares have been held more than one year after the date of exercise of the option). Phoenix is not entitled to a federal income tax deduction in connection with incentive stock options, except to the extent that the optionee has taxable ordinary income on a disqualifying disposition (unless limited by Section 162(m)).

 

The grant of a nonstatutory option having an exercise price equal to the grant date fair market value of our common stock had no federal income tax effect on the optionee. Upon the exercise of a nonstatutory option, the optionee has taxable ordinary income (and unless limited by Section 162(m) Phoenix is entitled to a corresponding deduction) equal to the option spread on the date of exercise. Upon the disposition of stock acquired upon exercise of a nonstatutory stock option, the optionee recognizes either long-term or short-term capital gain or loss, depending on how long such stock was held, on any difference between the sale price and the exercise price, to the extent not recognized as taxable income on the date of exercise. Phoenix may allow nonstatutory stock options to be transferred subject to conditions and restrictions imposed by the Administrator; special tax rules may apply on such transfer.

 

In the case of both incentive stock options and nonstatutory stock options, special federal income tax rules apply if Phoenix common stock is used to pay all or part of the option price, and different rules than those described above will apply if unvested shares are purchased on exercise of the option.

 

Stock Awards

 

Stock awards will generally be taxed in the same manner as nonstatutory stock options. However, shares issued under a restricted stock award are subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code to the extent the shares will be forfeited in the event that the participant ceases to provide services to Phoenix and are nontransferable. If a stock award is subject to a substantial risk of forfeiture, the participant will not recognize ordinary income at the time the award shares are issued. Instead, the participant will recognize ordinary income on the dates when the stock is no longer subject to a substantial risk of forfeiture, or when the stock becomes transferable, if earlier. The participant’s ordinary income is measured as the difference between the amount paid for the stock, if any, and the fair market value of the stock on the date the stock is no longer subject to forfeiture. The participant may accelerate his or her recognition of ordinary income, if any, and begin his or her capital gains holding period by timely filing (i.e., within thirty days of the share issuance date) an election pursuant to Section 83(b) of the Code. In such event, the ordinary income recognized, if any, is measured as the difference between the amount paid for the stock, if any, and the fair market value of the stock on the date of such issuance, and the capital gain holding period commences on such date. The ordinary income recognized by an employee will be subject to tax withholding by Phoenix. Unless limited by Section 162(m), Phoenix is entitled to a deduction in the same amount as and at the time the employee recognizes ordinary income.

 

Section 409A

 

The American Jobs Creations Act of 2004 added Section 409A to the Code, generally effective January 1, 2005. Section 409A covers most programs that defer the receipt of compensation to a succeeding year. It provides rules for elections to defer, if any, and for timing of payouts. There are significant penalties placed on the individual participant for failure to comply with Section 409A. However, it does not impact Phoenix’s ability to deduct deferred compensation.

 

Section 409A does not apply to incentive stock options or nonstatutory stock options that have an exercise price at least equal to the grant date fair market value and no features defer the recognition of income beyond the exercise date. Restricted stock is also exempt from Section 409A provided there is no deferral of income beyond the vesting date. Section 409A also does not cover stock appreciation rights if the exercise price is not

less than the fair market value of the underlying stock on the date of grant, the rights are settled in such stock and no features defer the recognition of income beyond the exercise date.

 

Accounting Treatment

 

Phoenix will recognize compensation expense in connection with awards granted under the 2007 Plan as required under the applicable accounting standards, including under Statement of Financial Accounting Standards No. 123(R). Phoenix currently amortizes compensation expense associated with equity awards over an award’s requisite service period and established fair value of equity in accordance with applicable accounting standards.

 

Vote Required and Board of Directors’ Recommendation

 

Approval of the 2007 Plan requires the affirmative vote of the holders of at least a majority of the shares of our common stock that are voting on this Proposal 4 in person or by proxy and entitled to vote at the Annual Meeting. In the event the stockholders fail to approve the 2007 Plan, the 1999 Plan and the 1999 Director Plan will continue in operation pursuant to its terms. Even if the 2007 Plan is approved, the Board may, pursuant to the terms of the 2007 Plan and subject to the rules of the NASDAQ Stock Market, make any other changes to the 2007 Plan that it feels would be in our and our stockholders’ best interests.

 

Because each of our executive officers and our directors is eligible to participate in the 2007 Plan, the approval of the 2007 Plan impacts each of our executive officers and directors and thus each of our executive officers and directors has a personal interest in this proposal and its approval by our stockholders.

 

The Board of Directors Unanimously Recommends a Vote FOR
Approval of the 2007 Equity Incentive Plan

 

PROPOSAL NO. 5

 

APPROVAL OF AMENDMENT OF THE 2001 EMPLOYEE STOCK PURCHASE PLAN

 

At the Annual Meeting, our stockholders will be asked to approve the amendment of the 2001 Employee Stock Purchase Plan (the “ESPP”) to (i) increase the number of shares issuable under the ESPP by an additional 500,000 shares, to an aggregate of 1,750,000 shares, and (ii) amend the term of the ESPP to be ten (10) years from the amendment and restatement of the ESPP by the Board. The ESPP was adopted by the Board in November 2001 and became effective in February 2002 after approval by the stockholders at the 2001 Annual Meeting. As of November 9, 2007, the number of shares available for future issuance under the ESPP was [          ] (representing approximately [     ]% of Phoenix’s outstanding common stock as of November 9, 2007).

 

In September 2007, the Board approved amendments to the ESPP, subject to stockholder approval, to increase the number of shares issuable under the ESPP by an additional 500,000 shares and extend the term of the ESPP to 10 years from the date the Board of Directors amended and restated the ESPP (or until September, 2017). These amendments were deemed necessary by our Board because we have a limited number of shares remaining for issuance under the ESPP. The ESPP enables us to provide additional incentives to recruit and retain our employees. Without this increase we estimate that we will not have enough shares to satisfy anticipated purchases in the offering period beginning in December 2007. In addition, without an amendment to the term, our ESPP would terminate in November 2011.

 

If the stockholders approve the amendments to the ESPP, this approval is intended to satisfy the stockholder approval requirements under Section 423 of the Internal Revenue Code, as amended (the “Code”), so as to permit participants in the ESPP to be eligible for special tax treatment under Code Section 423. If the proposed amendments are not approved by the stockholders, the ESPP will terminate pursuant to its terms, and Phoenix will not have a stockholder-approved equity stock purchase plan qualified under Code Section 423 under which it may grant employees the opportunity to acquire an ownership interest in Phoenix at a discount.

Summary of the 2001 Employee Stock Purchase Plan

 

General

 

The purpose of the ESPP is to offer eligible employees the opportunity to acquire a stock ownership interest in Phoenix through the purchase of our common stock at a discount by means of periodic after-tax payroll deductions. The ESPP is intended to qualify under Code Section 423.

 

A copy of the ESPP, as amended and restated by the Board as of September 19, 2007, is attached to the electronic version of this proxy statement filed with the SEC as Exhibit D . The description of the ESPP included in this Proposal 5 may not contain all of the information about the ESPP that is important to you and we recommend that you read the full text of Exhibit D in connection with your review of this Proposal. Because it is not a complete description of all of the terms of the ESPP, the summary is qualified by reference to the complete text of the ESPP.

 

Administration

 

The ESPP is administered by the Board of Directors or a committee appointed by the Board (the “ESPP Administrator”). At the present time, the ESPP is administered by the Compensation Committee. All questions of interpretation or application of the ESPP are determined by the ESPP Administrator.

 

Offering Periods

 

Offering Periods will be of periods not to exceed the maximum period permitted by Section 423 of the Code. In addition, Offering Periods will be concurrent and commence each June 1 and December 1 of each calendar year or at such other time or times as may be determined by the Administrator. The first business day of an Offering Period is referred to as the “Offering Date.” Until determined otherwise by the Administrator, each Offering Period will be for 12-month durations and will consist of two (2) six-month purchase periods (individually, a “Purchase Period”) during which payroll deductions of participating employees are accumulated under the ESPP. Prior to the amendment of the ESPP in September 2007, the offering periods under the ESPP were 24 months and included four purchase periods of 6 months each. The last date of each applicable Purchase Period is referred to as the “Purchase Date.” The ESPP also provides that if on the first Purchase Date during an Offering Period the fair market value of the Common Stock is lower than the fair market value of the Common Stock on the applicable Offering Date, then, following the purchase of shares, the Offering Period would terminate and participants in the terminated Offering Period would be enrolled automatically in a new Offering Period that would start on the first business day immediately following the Purchase Date.

 

Eligibility and Participation

 

Employees (including officers and employee directors) who are employed for at least 20 hours per week and more than five months in any calendar year and who are employed by us as of an Offering Date are eligible to participate in the related Offering Period under the ESPP, subject to certain limitations imposed by Section 423(b) of the Code and the ESPP. For example, no employee will be granted an option under the ESPP if immediately after the grant such employee would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total voting power or value of all classes of stock of Phoenix or its subsidiaries. In addition, the ESPP provides that, at the discretion of the Board of Directors, certain of our executive officers may be excluded from participating in an Offering Period. All of our executive officers are currently excluded from participating in the ESPP. An eligible employee may participate in more than one Offering Period at a time. As of November 9, 2007, approximately [          ] employees (excluding officers and employee directors) were eligible to participate in the ESPP.

 

Eligible employees become participants in the ESPP by submitting an enrollment form authorizing payroll deductions prior to the applicable Offering Date, unless a later time for filing the enrollment form has been set by the ESPP Administrator. Once a participant enrolls in an Offering Period under the ESPP, such participant will automatically be enrolled in subsequent Offering Periods unless the participant withdraws from the then-current Offering Period. Payroll deductions will commence on the first payroll following the Offering Date

and will continue until the participant withdraws from the Offering Period to which the enrollment form is applicable or any subsequent Offering Period in which the participant is participating.

 

Grant and Exercise of Option

 

At the beginning of an Offering Period, each participant is granted an option to purchase up to that number of shares in each Purchase Period determined by dividing such participant’s payroll deductions accumulated during the Purchase Period and retained in the participant’s account as of the end of the Purchase Period by the lower of (i) 85% of the fair market value of a share of our common stock on the applicable Offering Date or (ii) 85% of the fair market value of a share of our common stock on the applicable Purchase Date; provided that in no event will a participant be permitted (A) to purchase stock under the ESPP at a rate which, when aggregated with such participant’s rights to purchase stock under all other employee stock purchase plans of Phoenix and its subsidiaries, exceeds $25,000 in fair market value of such stock (determined as of the Offering Date) for each calendar year in which such option is outstanding at any time or (B) to purchase more than 2,000 shares of our common stock on any Purchase Date. In addition, we may make a pro rata reduction in the number of shares subject to options if the total number of shares which would otherwise be purchased on a Purchase Date by all employees participating in the ESPP exceeds the number of remaining available shares in the ESPP. The fair market value of a share of Common Stock on a given date will be either the closing price of the Common Stock on the NASDAQ Global Market on the applicable date or the average closing price of the Common Stock over the number of consecutive trading days preceding such date as determined by the Board of Directors.

 

Unless an employee withdraws his or her participation in the ESPP by giving written notice to Phoenix of his or her election to withdraw all accumulated payroll deductions prior to the end of a Purchase Period, the employee’s option for the purchase of shares will be exercised automatically at the end of the Purchase Period, and the maximum number of full shares subject to option which are purchasable with the accumulated payroll deductions in his or her account will be purchased at the applicable purchase price determined as provided below.

 

During his or her lifetime, a participant’s option to purchase shares under the ESPP is exercisable only by him or her. However, a participant may file a written designation of a beneficiary who is (i) to receive any shares and cash, if any, from the participant’s account under the ESPP in the event of such participant’s death subsequent to the end of a Purchase Period but prior to delivery to him or her of such shares and cash, and (ii) to receive any cash from the participant’s account under the ESPP in the event of such participant’s death prior to a Purchase Date.

 

Payroll Deductions

 

The purchase price of the shares to be acquired under the ESPP is accumulated by after-tax payroll deductions during each Purchase Period. The deductions may not be more than 20% (designated in increments of not less than 1%) of a participant’s compensation during a Purchase Period (or may be based on a specific dollar amount not less than $5 per pay period and not more than 20% of a participant’s compensation), provided that in each case the deductions for a participant in a Purchase Period will not exceed $12,500. A participant may terminate his or her participation in the ESPP, may increase or decrease his or her rate of payroll deductions one time each during a Purchase Period, and may reduce his or her rate of payroll deductions to 0% once during a Purchase Period, which will not be deemed a withdrawal from the Offering Period or the ESPP. Payroll deductions for a participant will commence on the first payroll following the Offering Date and will continue until his or her withdrawal from an Offering Period or his or her participation terminates as provided in the ESPP.

 

Termination of Employment

 

Termination of a participant’s employment for any reason, including retirement or death, or the failure of the participant to remain in the continuous employ of Phoenix for at least 20 hours per week and more than five (5) months in any calendar year during the applicable Offering Period, cancels his or her option and his or

her participation in the ESPP immediately. In such event, the payroll deductions credited to the participant’s account will be returned (without interest) to him or her or, in the case of death, to the person or persons entitled thereto as provided in the ESPP.

 

Adjustments Upon Changes in Capitalization

 

Subject to any required action by our stockholders, in the event any change is made in Phoenix’s capitalization during an Offering Period, such as a stock split, stock dividend, combination or reclassification, that results in an increase or decrease in the number of shares of our common stock outstanding without receipt of consideration by Phoenix, appropriate adjustment will be made in the number of shares of our common stock authorized for issuance under the ESPP, in the purchase price, in the 2,000 share maximum purchase limit on any Purchase Date and in the number of shares subject to options under the ESPP.

 

In the event of a proposed dissolution or liquidation of Phoenix, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board of Directors. In the event of a proposed sale of all or substantially all of the assets of Phoenix, or the merger of Phoenix with or into another corporation, each option under the ESPP will be assumed or an equivalent substitute option will be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board of Directors elects in lieu of such assumption to shorten the Offering Period then in progress and allow each participant the right to exercise his or her option with respect to all of the optioned shares for a period of at least twenty days from the date of notice by the Board to each such participant.

 

Amendment and Termination of the ESPP

 

The Board of Directors may at any time amend or terminate the ESPP without the approval of the stockholders, except that such termination cannot affect options previously granted nor may an amendment make any change in an option granted prior thereto which adversely affects the rights of any participant. No amendment may be made to the ESPP without approval of our stockholders if such amendment would increase the number of shares reserved under the ESPP or change the class of employees eligible to participate in the ESPP, or if such amendment is required to comply with Rule 16b-3 of the Exchange Act.

 

The ESPP will expire 10 years from the date the Board of Directors has amended and restated the ESPP, unless sooner terminated by the Board of Directors, provided that any options then outstanding under the ESPP will remain outstanding until they expire by their terms.

 

New Plan Benefits

 

As of the date hereof, no shares have been issued on the basis of the share increase for which shareholder approval is sought under this proposal. Accordingly, future benefits or amounts received are not determinable. All executive officers are, at the discretion of the Board of Directors, currently excluded from participating in the ESPP.

 

Federal Income Tax Consequences

 

The following is a brief summary of the general federal income tax consequences to U.S. taxpayers and Phoenix of shares purchased under the ESPP. This summary does not purport to be complete and does not discuss the tax consequences of a participant’s death or the income tax laws of any state or foreign country in which the participant may reside. Tax consequences for any particular individual may be different.

 

The ESPP and the options granted under the ESPP are intended to qualify for favorable federal income tax treatment associated with rights granted under an “employee stock purchase plan” that qualifies under provisions of Section 423 of the Code.

 

A participant will be taxed on amounts withheld for the purchase of shares of Common Stock as if such amounts were actually received. Other than this, no income will be taxable to a participant until disposition of the acquired shares, and the method of taxation will depend upon the holding period of the acquired shares.

If the stock is disposed of more than two (2) years after the beginning of the Offering Period and more than one (1) year after the stock is transferred to the participant, then the lesser of (i) the excess of the fair market value of the stock at the time of such disposition over the purchase price or (ii) 15% of the fair market value of the stock as of the Offering Date will be treated as ordinary income. Any further gain or any loss will be taxed as a long-term capital gain or loss. Such capital gains currently are generally subject to lower tax rates than ordinary income.

 

If the stock is sold or disposed of before the expiration of either of the holding periods described above (a disqualifying disposition), then the excess of the fair market value of the stock on the Purchase Date over the purchase price will be treated as ordinary income at the time of such disposition. The balance of any gain will be treated as capital gain. Even if the stock is disposed of for less than its fair market value on the Purchase Date, the same amount of ordinary income is attributed to the participant, and a capital loss is recognized equal to the difference between the sales price and the fair market value of the stock on such Purchase Date. Any capital gain or loss will be short-term or long-term, depending on how long the stock has been held.

 

There are no federal income tax consequences to Phoenix by reason of the grant or exercise of options under the ESPP. Phoenix is entitled to a deduction to the extent amounts are taxed as ordinary income to a participant as a result of a disqualifying disposition.

 

Accounting Treatment

 

Based on Statement of Financial Accounting Standards No. 123(R), Phoenix recognizes compensation expense in connection with the ESPP. So long as Phoenix continues issuing shares under the ESPP with a purchase price at a discount to the fair market value of its stock, Phoenix will recognize compensation expense which will be determined by the level of participation in the ESPP. However, in certain cases where the purchase price is greater than 95% of the fair market value of the common stock, there would be no compensation expense under Statement of Financial Standards No. 123(R).

 

Required Vote and Board of Directors’ Recommendation

 

Approval of the amendments to the ESPP requires the affirmative vote of the holders of at least a majority of the shares of our common stock that are voting on this Proposal 5 in person or by proxy and entitled to vote at the Annual Meeting. In the event the stockholders fail to approve the amendments to the ESPP, the ESPP will continue in operation pursuant to its terms with the existing number of authorized shares and term.

 

Because each of our executive officers may be eligible to participate in the ESPP (subject to exclusion at the discretion of our Board), the approval of the amendments to the ESPP impacts each of our executive officers and thus each of our executive officers has a personal interest in this proposal and its approval by our stockholders.

 

The Board of Directors Unanimously Recommends a Vote FOR

Approval of Amendment of the 2001 Employee Stock Purchase Plan

 

PROPOSAL NO. 6

 

APPROVAL OF MATERIAL TERMS OF PERFORMANCE VESTING OPTION GRANTS TO CERTAIN EXECUTIVE OFFICERS AND RELATED AMENDMENTS TO THE COMPANY’S 1999 PLAN

 

Summary

 

On October 5, 2007, the Compensation Committee of the Board approved stock option grants which vest upon the achievement of certain Company performance goals to certain of its executive officers governed by the terms of the 1999 Plan (the “Performance Options”). A discussion of the Committee’s reasons for granting

the Performance Options is discussed in our Compensation Disclosure and Analysis section above under the heading “Equity Compensation.”

 

At the Annual Meeting, you are being asked to approve the grants and material terms of the Performance Options, and related amendments to the 1999 Plan as described below, in order to satisfy the stockholder approval requirements under Code Section 162(m), so as to permit Phoenix to deduct under U.S. federal income tax law certain compensation amounts that may be paid under the Performance Options which might otherwise not be deductible. As discussed in more detail above in Proposal 4 under the heading “Code Section 162(m) Matters,” Section 162(m) of the Internal Revenue Code generally prevents public companies from deducting compensation paid in excess of $1 million to certain of their executive officers during any single year. Under current law, this restriction applies to compensation paid to our Chief Executive Officer and our other three most highly compensated officers. Certain “performance-based compensation” is specifically exempted from this deduction limit if it otherwise meets the requirements of Section 162(m). Although Phoenix may generally grant performance-based options under the 1999 Plan that qualify for the exemption from the deduction limit under Section 162(m), certain restrictions under the 1999 Plan prevented us from doing so under the current stockholder-approved terms of that plan. Specifically, the 1999 Plan provides that grants are limited to a maximum of 125,000 shares to any individual during a fiscal year. Because Phoenix does not intend to grant additional options or other awards under the 1999 Plan if the 2007 Plan is approved by stockholders, we seek stockholder approval to increase the annual limit on the number of shares that may be granted to any individual under the 1999 Plan to 556,250 shares only for the limited purpose of these Performance Option grants. Stockholder approval of an amendment to the 1999 Plan to accommodate the Performance Option grants is also required under applicable NASDAQ rules.

 

In order to ensure that we approach our compensation process in an integrated fashion, and so as to involve our stockholders in that process, our Compensation Committee has chosen to make approval of the Performance Options contingent upon our also receiving stockholder approval of the 2007 Plan, as discussed in Proposal 4 above. Accordingly, if our stockholders do not approve the 2007 Plan under Proposal No. 4, we will treat this Proposal No. 6 as having also been rejected by our stockholders and the Performance Options will terminate in their entirety if not otherwise approved by our stockholders by October 5, 2008. In the event that both Proposal No. 4 and 6 are not approved by our stockholders, the 1999 Plan will continue to be available to us from which to grant options and other awards and executive officers will be eligible to receive options grants in the future under the current terms of that plan (including the 125,000 share annual option limitation described above). Any such additional option grants made to executive officers under the 1999 Plan under these circumstances will qualify as “performance-based compensation” to the extent the terms and circumstances surrounding such grants satisfy the requirements of Section 162(m). Similarly, if the 2007 Plan is approved by our stockholders, but the grant and material terms of the Performance Options are not approved, the Performance Options will terminate in their entirety if not otherwise approved by our stockholders by October 5, 2008, and our executives will be eligible to receive future equity grants from the 2007 Plan. Any such future equity award grants made to executive officers under the 2007 Plan will qualify as “performance-based compensation” to the extent the terms and circumstances surrounding such grants satisfy the requirements of Section 162(m).

 

Material Terms of Performance Options

 

The exercise price of each Performance Option is $8.52, which was the closing sale price of our common stock on October 5, 2007 as quoted on the NASDAQ Global Market. Although the terms of the Performance Options require continued service through the period that each portion of the award vests, these options vest upon achievement of certain stock price-related milestones rather than on a time-based vesting schedule.

 

Under the terms of each Performance Option, in the event the closing sale price of our common stock, as quoted on the NASDAQ Global Market, equals or exceeds one or more stock price thresholds for at least sixty (60) consecutive trading days (the “minimum trading period”), then twenty-five percent (25%) of the shares underlying such award will vest and become exercisable as a result of such stock price achievement as of the close of market on the 60th trading day, provided the executive remains an employee as of such date. The

applicable stock price thresholds for which vesting may occur upon satisfaction of the minimum trading period requirement are as follows: $15.00, $20.00, $25.00 and $30.00 per share. In addition, if an executive’s Performance Option vests and becomes exercisable in whole or in part, the executive is required to hold the shares obtained from the exercise for a minimum of six (6) months before selling such shares; provided, that, the executive is permitted to immediately sell shares in connection with a cashless exercise without regard to the six month holding period to cover any tax obligations arising from the exercise.

 

In the event of a change of control of the Company, as defined in each executive’s Severance and Change of Control Agreement, if the price per share to be paid to our stockholders in connection with such transaction equals or exceeds one or more stock price thresholds for which the executive has not already received a vesting benefit attributable to satisfaction of the minimum trading period requirement described above, then twenty-five percent (25%) of the shares underlying a Performance Option will immediately vest and become exercisable with respect to each applicable stock price threshold that is less than or equal to the transaction price per share. Any portion of the options as to which the applicable stock price threshold has not been achieved, either prior to or as a result of the change of control, will terminate upon the closing of the transaction. The Performance Options are not eligible for vesting acceleration benefits that apply to the optionees’ other Company equity compensation awards under the terms of our change of control agreements and our 1999 Plan.

 

The Performance Options have a ten-year term, subject to their earlier termination upon certain events including the optionee’s termination of employment. Other than as described above, they are subject to the standard terms of our 1999 Plan and the standard form officer stock option agreement under such plan. As such, they are not transferable and are subject to proportionate adjustment as to the number of shares subject to the option and the applicable exercise price (as well as the stock price thresholds described above) in the event the Company undertakes a stock split, stock dividend and certain other corporate transactions affecting our capital stock. The optionees may pay the exercise price for the Performance Options using cash, shares of the Company’s common stock valued at fair market value on the exercise date, a cashless exercise, a reduction in the amount of any Company liability to the optionee, or any combination of the foregoing. In the event of a change of control of the Company, the Performance Options will be subject to the treatment generally applicable to other options outstanding under the 1999 Plan in that they may be assumed by an acquiror (solely with respect to shares that are already vested) or terminated in connection with the transaction.

 

In the event that any portion of the Performance Options terminate or expire for any reason without their having been exercised, the shares of Common Stock subject to the terminated options will become available for issuance under either the 1999 or, if it is approved by our stockholders, the 2007 Plan.

 

The following executive officers were awarded Performance Options in the amounts listed below:

 

Vote Required and Board of Directors’ Recommendation

 

Approval of the Performance Options requires the affirmative vote of the holders, each in person or by proxy and entitled to vote at the Annual Meeting, of at least (a) a majority of the shares of our common stock that are voting on this Proposal 6, and (b) a majority of the shares of our common stock that are voting on Proposal 4 above regarding the approval of our 2007 Equity Incentive Plan.

 

Because the Performance Options impacts each of the executive officers listed above, such executive officers has a personal interest in this proposal and its approval by our stockholders.

 

The Board of Directors Unanimously Recommends a Vote FOR
Approval of the Performance Options

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information as of November 1, 2007, with respect to the Common Stock owned beneficially by (i) any person who is known to the Company to be the beneficial owner of more than 5% of its Common Stock, (ii) each director and Nominee of the Company, (iii) the Chief Executive Officer, the Chief Financial Officer and each executive officer included in the Summary Compensation Table on page 45 (collectively, the “Named Executive Officers”) and (v) all current directors and executive officers of the Company as a group. Except as otherwise indicated in the table, the address of each person listed in the table is c/o Phoenix Technologies Ltd., 915 Murphy Ranch Road, Milpitas, California 95035. Except as otherwise indicated in the footnotes to the table, to the Company’s knowledge, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable.

 

 

 

REPORT OF THE COMPENSATION COMMITTEE

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The following discussion and analysis relates to:

 

 

Executive Compensation Overview

 

Our executive compensation program is designed to:

 

 

Our executive officers’ compensation currently has four primary components — base salary, incentive bonus awards, equity awards and other benefits. We establish our executive compensation at the levels we believe will enable us to hire and retain outstanding executives in a competitive environment and to reward them for their contribution to the Company’s overall business success. In addition, we provide our executive officers most but not all of the benefits that are available generally to all salaried employees of the Company in the U.S.

 

Our Compensation Committee

 

The Compensation Committee of the Board of Directors (the “Committee”) reviews and approves the total compensation arrangements for our CEO and the other named executive officers.

 

The Committee conducts an annual evaluation and analysis of our executive compensation programs and practices to ensure that such programs are structured appropriately to achieve our compensation objectives. The Committee establishes the base salaries of the executive officers for the following fiscal year, reviews and approves any incentive bonus plans that apply to the executive officers, and considers and approves any grants of equity incentive compensation to the executive officers. The Committee also meets as required during the fiscal year to perform the same functions in connection with establishing compensation arrangements for any newly hired or promoted executive officer.

 

The Committee will from time to time engage an external compensation consulting firm to advise it and the Board on executive and equity compensation matters, as it did in connection with its annual review of executive compensation in fiscal years 2006 and 2007. (See “External Compensation Consultant”.) Management assists the Committee in screening and selecting the consulting firm. The selected consulting firm reports to the Committee.

 

Background of Compensation Philosophy

 

Phoenix has been undergoing a significant turnaround following a period of rapidly declining revenue and significant losses, which resulted in an almost total senior management change in the fall of 2006. Our compensation philosophy for fiscal year 2007 and for the next four years takes into account the unique circumstances of the Company and has been specifically designed to attract, retain and reward our new management team. The Committee has taken into consideration both the near-term difficulty of restoring

health to the Company’s core business and the historic difficulty, as described below, of successfully moving beyond the constraints of the small global market for the Company’s basic product line, in order to meet the long-term stockholder value creation goals of the Company.

 

Phoenix created its business category, Core Systems Software (originally referred to as Basic Input-Output Systems or “BIOS”), approximately 25 years ago and still leads that category globally. However, since the total market for all independent core systems software vendors in the PC marketplace is currently estimated to be less than $200 million in sales revenues, other products are required in order to create meaningful increases in shareholder value. During the period from 1999 to 2006, a series of failed strategic initiatives to diversify the Company’s product offerings reduced Phoenix’s quarterly revenues by approximately 65% and led to losses in the three months ended June 30, 2006 of over $18.5 million on revenues of only $10.5 million.

 

In the fourth quarter of fiscal 2006, with quarterly revenue falling an additional $2.0 million, the Board recruited Woodson Hobbs who offered to bring to the Company a new core management team. Mr. Hobbs, along with members of this new team, had accomplished a substantial and successful turnaround at Intellisync Corporation, another publicly-held technology company. Mr. Hobbs was appointed President and Chief Executive Officer of the Company in September 2006, and was joined by Richard Arnold (currently Chief Operating Officer and Chief Financial Officer) later that month and Gaurav Banga (currently Senior Vice President, Engineering and Chief Technology Officer) the following month.

 

At the time of his appointment and with the help of his team, Mr. Hobbs outlined an aggressive five-year plan to restore health to the Company’s business and build a multi-product future. In fiscal 2007, the Company exceeded its revenue growth target, substantially decreased its operating expenses and commenced development of new products that the new management team believes can be sold through existing sales channels.

 

Compensation Philosophy and Policies

 

The Committee, in consultation with Messrs. Hobbs and Arnold, has established the following principles that guide the design of the Company’s compensation programs:

 

 

In setting the compensation for each executive officer, the Committee considers:

 

 

Our process for setting our CEO’s compensation does not differ materially from the process we use to establish the compensation of any other executive officer or non-officer employee, except that the comparison companies we use for establishing compensation levels for non-officer employees include several substantially larger local technology companies (such as Google, eBay or Intel) with whom we compete for mid-level management and for technical personnel, while the comparison companies we use for establishing CEO and other executive compensation are generally limited to software companies we consider similar to Phoenix in size and complexity.

 

The Committee and management believe that strong financial performance by Phoenix on a sustained basis is an effective means of enhancing long-term value creation for our stockholders. Thus, the Committee builds into the compensation structure for each executive officer certain incentives to achieve corporate goals. With respect to each of the primary components of total compensation specifically, this means:

 

 

The Committee does not specifically evaluate the internal pay relationship among the executives and other employees when setting executive cash compensation, or the multiples by which a named executive officer’s cash compensation is greater than that of non-executive employees.

 

External Compensation Consultant

 

As described above, the Committee will retain an external compensation consulting firm from time to time to assist in the review and analysis of current market data for both cash and equity compensation, as well as market data for certain terms and provisions in executive employment-related agreements. In considering the initial and ongoing engagement of a consultant, the Committee considers multiple factors, including:

 

i) whether the consultant is capable of providing opinions and analyses of the Company’s compensation programs independent of management;

ii) whether the consultant is able to support the administrative process necessary to complete the annual compensation policy review, including whether the Compensation Committee would have adequate opportunity to consider all appropriate issues before decisions are required; and

 

iii) whether the consultant can make clear recommendations with respect to:

 

 

In December 2005, the Committee retained the services of Compensia Inc. as its external consultant to assist it in establishing the compensation levels for the Company’s then-current executive officers. In the fourth quarter of fiscal 2006, the Committee retained the services of Compensia Inc. to assist it in the establishment of compensation and other terms of employment for the Company’s new senior management team (Messrs. Hobbs, Arnold and Banga). The compensation programs applicable to each of the named executive officers for fiscal year 2007 were established during these processes.

 

Changes in the membership of the Company’s Board of Directors during fiscal year 2007 included the departure of all former members of the Committee and the appointment to the Committee of new members of the Board. In August 2007, the newly constituted Compensation Committee delegated to management the selection of an external compensation consultant and accepted management’s recommendation to retain the services of Watson Wyatt Worldwide, Inc. to assist it in its review of executive compensation programs for fiscal year 2008 and beyond. In the future, the Committee intends to rely less on management and be more directly involved in selecting the external compensation consultant. The Committee will re-assess each year the independence of the consultant with the intention of continuing any current engagement or entering into a new engagement with a compensation consultant depending upon the Committee’s assessment of the consultant’s ability to provide independent compensation information and advice.

 

Role of CEO and Other Named Executive Officers in Establishing Compensation

 

Our CEO plays a significant role in the compensation-setting process. The key aspects of Mr. Hobbs’ role are:

 

 

The Committee considers, but is not bound to and does not always accept, the CEO’s recommendations with respect to executive compensation. The Committee also typically seeks input from its external compensation consultant and other outside members of the Board of Directors prior to making any final determinations.

 

Mr. Hobbs participates in certain Committee meetings, at the Committee’s request, to provide background information concerning the Company’s strategic objectives, his evaluation of the performance of the other executive officers, and compensation recommendations for the other executive officers. Besides the CEO, the Committee on occasion meets with certain other executives, including our Chief Operating Officer and Chief Financial Officer, Mr. Arnold, to obtain recommendations with respect to Company compensation programs, practices and packages for executives, other employees and directors. Messrs. Hobbs and Arnold may also meet with the Committee’s external consultant during these processes.

While the Committee may discuss Mr. Hobbs’ or Mr. Arnold’s compensation packages with them, it meets in executive session without them present to determine their compensation. The other named executive officers do not play a role in their own compensation determination, other than participating in an annual evaluation process with our CEO.

 

Peer Group Benchmarking

 

The Committee, in consultation with its external compensation consultant, periodically reviews the Company’s peer group and benchmarking methodology to ensure that the current business environment and expectations are factored into how the Company’s compensation programs are established. As part of each compensation review process, the Committee identifies a group of similar sized technology companies with which the Committee believes is appropriate to compare Phoenix in determining the compensation for executive talent.

 

The Committee’s compensation consultant provides the Committee with available data on executive compensation levels and practices as reported in established surveys of executive compensation, as well as the publicly reported data for specific, comparable companies in our peer group. In addition, the compensation consultant provides data with respect to compensation levels and practices applicable to executives holding comparable positions in the broader high-technology market.

 

Fiscal 2006

 

During its review of executive compensation in December 2005, which established compensation for one of our current named executive officers, David Gibbs (Senior Vice President and General Manager, Worldwide Field Operations), the Compensation Committee (working with its compensation consultant Compensia) identified a peer group consisting of 16 companies nationwide that included software and other revenue peers with revenue ranges of between $56 million and $243 million. Those companies were:

 

 

Fiscal 2007

 

In establishing the compensation and employment terms for Messrs. Hobbs, Arnold and Banga for fiscal year 2007, the Committee (working with Compensia) utilized data from the 16 companies above, but also identified an additional group of 14 companies nationwide that included software and other similar companies with revenue ranges of between $17 million and $87 million who had recently hired a new CEO. Those companies were:

 

 

In addition, the Committee identified a list of 12 larger software companies in order to consider various provisions of employment contracts for CEOs specifically applicable in the event of a change of control of the

Company. These companies were not identified as peers of Phoenix, but as representative of current practices in executive contractual terms. Those companies were:

 

 

Fiscal 2008

 

During its review of executive compensation in August and September of 2007, which established compensation for our most senior named executive officers for fiscal year 2008 and beyond, the newly-constituted Compensation Committee (working with Watson Wyatt Worldwide), conducted a review of the current business of Phoenix and established new criteria for the selection of peer companies which it felt more closely matched the current scale and complexity of the Company. Utilizing these new criteria, the Committee identified a new peer group consisting of 21 companies nationwide that included software and other revenue peers with revenue ranges of between $45 million and $104 million. Those companies were:

 

 

These changes in our peer group selection criteria resulted in the replacement of all of the peer companies from the group used in setting the compensation for continuing executives in fiscal year 2007, a significant reduction in the average revenue of the peer group and the expansion of the peer group from 16 to 21 companies. Market data with respect to this peer group has been used to set our executive compensation programs for fiscal year 2008.

 

Relative Positioning

 

Prior to the arrival of the new core management team and the subsequent changes to the composition of the Board of Directors, the Committee believed in creating a pay-for-performance culture at the Company while setting total compensation levels at approximately the 60^th percentile level when compared to similar companies.

 

During August and September of 2006, while recruiting the current management team, the Committee concluded that it was in the best interest of the Company’s stockholders to increase the level of total compensation for the most senior executives above the previously determined percentile level in order to attract a management team capable of addressing the Company’s considerable challenges. While the newly-constituted Committee also believes strongly in creating a pay-for-performance culture at the Company, it interprets this to include providing market awards when the Company meets market levels of performance while paying above market when it is necessary to attract or retain leadership capable of addressing the Company’s needs or when the Company’s performance exceeds that of comparable companies.

The Committee does not have an established formula for the mix of salary, incentive bonuses and equity compensation, although the intent is that when the Company is achieving aggressive business objectives and exceeding the performance of comparable companies, the total compensation will reflect an allocation of the economic rewards to management and will therefore fall at the higher end of the range of total compensation for executives at comparable companies. Also, while we do not believe that it is appropriate to establish compensation levels primarily based on benchmarking, we believe that information regarding pay practices at other companies is useful because we recognize that our compensation practices must be competitive in the marketplace and because we consider this marketplace information along with many other factors in attempting to ensure the reasonableness of our compensation decisions.

 

The compensation strategy we have used for fiscal year 2007 as well as for fiscal year 2008 and beyond is to attract and retain an exceptional executive team by setting their base pay and total cash compensation near the highest levels (i.e. between the 80th and 100th percentile) among our peer group. In making the determination that this strategy is appropriate to apply for fiscal year 2008 and beyond, the Committee has taken into account the performance of our new management team during fiscal year 2007, the significant growth and other performance improvements we expect them to deliver during fiscal year 2008 and the aggressive goals we have established with them for longer term shareholder value creation.

 

Cash-Based Compensation

 

Salaries

 

In establishing the initial base salaries for the executive officers, the Committee considers comparative data from our peer group of companies, as well as each individual executive’s performance, qualifications, experience and level of responsibility. Base salaries for the executives are reviewed annually by the Committee and may be adjusted in accordance with certain criteria, including such factors as individual performance, the functions performed by the executive, the scope of the executive’s on-going responsibilities, general changes in industry compensation for comparable positions, and our financial performance generally. The weight given to each factor by the Committee may vary for each individual. Messrs. Hobbs and Arnold participate in setting salaries and criteria as described above.

 

Review of Salaries for Fiscal Year 2007

 

The base salaries of each of the members of the new management team recruited in September and October 2006 were established by the Committee during the recruiting process described above. The base salary for Mr. Gibbs, who is the only executive officer from the former management team who is still with the Company, was established during the Committee’s regular review of executive officer compensation in December 2005, based on recommendations from the Committee’s external consultant (which at that time was Compensia) and the former CEO of the Company.

The table below shows the base salary applicable in fiscal year 2006 for Mr. Gibbs, the starting base salaries for each of the named executive officers for fiscal year 2007, and the changes in base salary that occurred during fiscal year 2007:

 

 

 

 

Review of Salaries for Fiscal Year 2008

 

Mr. Hobbs made no recommendation to the Committee in respect of his own base salary for fiscal year 2008. In reviewing Mr. Hobbs’ salary for fiscal year 2008, the Committee assessed the competitiveness of the Company’s current CEO cash compensation relative to that of chief executive officers in the Company’s selected peer group of companies, and noted that Mr. Hobbs’ salary for fiscal year 2007 was in the high end of the range (i.e., above the 90th percentile). In keeping with our goal of targeting base pay at or near the top end of this range in order to retain talented leaders, and taking into account Mr. Hobbs’ performance during fiscal year 2007, the Committee determined that it was appropriate to continue Mr. Hobbs’ base salary at its current level for fiscal year 2008.

 

Mr. Hobbs made recommendations to the Committee in respect of the base salaries for fiscal year 2008 for each of the other named executive officers. In reviewing the salaries of the other named executive officers, the Committee performed a similar review as to that described above and accepted each of Mr. Hobbs’ recommendations as follows:

 

 

The Committee chose not to review the base salary of Mr. Chu, who had only recently joined the Company.

 

Incentive Bonus Awards

 

Our executive officers are eligible to participate in an incentive bonus award program. The Committee believes that incentive bonus awards serve to motivate our executive officers to meet performance goals set by the Board and the Committee and to fairly reward them for doing so. The Committee establishes the goals for the incentive bonus award program based on the annual operating plan approved each year by the Board of Directors, to ensure alignment of business goals and priorities.

 

In establishing the initial incentive bonus award targets for the executive officers, the Committee considers comparative data from our peer group of companies, as well as each individual executive’s performance, qualifications, experience and level of responsibility. Incentive bonus award targets for the executives are reviewed annually by the Committee and may be adjusted in accordance with certain criteria, including such factors as individual performance, the functions performed by the executive, the scope of the executive’s on-going responsibilities, general changes in industry compensation for comparable positions, and our financial performance generally. The weight given to each factor by the Committee may vary for each individual. Messrs. Hobbs and Arnold participate in setting bonus targets and criteria as described above.

 

Criteria for Fiscal Year 2007

 

In September 2006, the Committee approved management’s proposal that payment of incentive bonus awards in fiscal year 2007 to the CEO, the other executive officers and all other eligible employees would be based on the Company’s performance against its Board-approved fiscal year 2007 revenue objective.

 

During the Committee’s evaluation of alternatives for incentive bonus criteria for fiscal year 2007, it determined that the Company’s ability to create long-term value for shareholders would be principally determined by whether the new management team was able to rapidly restore the Company’s revenues to a level sufficient to enable the Company to continue operating as a global leader in its industry. For this reason, the Committee and management believed that the use of GAAP revenue as the single criteria for incentive bonus awards for fiscal year 2007 for all named executive officers and other eligible employees was in the best interests of shareholders.

 

Accordingly, the Committee determined that actual incentive bonus awards payable for fiscal year 2007, if any, would vary depending on the extent to which the Company’s final audited GAAP revenue for fiscal year 2007 met, exceeded or fell short of the Company’s revenue objective for the fiscal year as reflected in the Company’s Board-approved annual operating plan. In addition, the Committee retained discretion to modify the incentive bonus awards that would be payable to executive officers or to adjust the revenue target in the event it subsequently determined it was reasonable to do so.

 

The Committee deemed the fiscal year 2007 revenue objective to be a realistic, though relatively difficult, target to achieve, with more risk for underperformance than opportunities for achievement or overachievement in light of the numerous challenges facing the new management team. (See “Underpinnings of Compensation Philosophy.”) The Committee determined that achievement of the revenue objective would require exceptional execution of the turnaround plan formulated by the new management team.

 

Bonus Targets for Fiscal Year 2007

 

The target incentive award percentages for each of the members of the new management team recruited in September and October 2006 were established by the Committee during the recruiting process described above. For the executive officers continuing from fiscal year 2006, the Committee left unchanged the target percentages that had been in effect in fiscal 2006. Under the terms of Mr. Hobbs’ offer letter, which was approved by the Committee and the Board in September 2006, the Company guaranteed Mr. Hobbs a

minimum incentive bonus for fiscal year 2007 of 50% of his target bonus for the year. In accordance with the terms of the offer letter, Mr. Hobbs was paid half of his target bonus for fiscal 2007, or $157,500 (the “Prepayment”), upon the commencement of his employment with the Company in September 2006 and it was agreed that any bonus earned by Mr. Hobbs during fiscal year 2007 would be net of the Prepayment.

 

Under the terms of the fiscal 2007 bonus plan, no bonus is payable if the Company achieves less than 80% of the revenue target for the year and, in the event performance exceeded the established revenue objective, the maximum incentive bonus payment that each executive officer could earn for the year would be 200% of his target bonus. The following table shows the target and maximum fiscal year 2007 incentive bonus awards that the Committee established for each named executive officer who is still with the Company:

 

 

 

 

In April 2007, as a result of unusual market circumstances, the Company determined that it could no longer rely on customer forecasts of future use of the Company’s products and that it was therefore no longer appropriate to include customer forecasts of future period consumption in current period revenue. This determination resulted in a Board-approved recalculation of the Company’s target revenue for fiscal year 2007 to that which would have applied had this change in accounting methodology been anticipated during the original planning process, but without changing any other assumption in the previously-approved fiscal 2007 annual operating plan. Since the fiscal 2007 bonus plan was based on the fiscal year 2007 revenue target, the Committee considered and approved a management proposal to apply the adjusted revenue target to the bonus plan.

 

Bonus Payouts for Fiscal Year 2007

 

Following the conclusion of each of the first three quarters of fiscal year 2007, the Committee reviewed the Company’s year-to-date performance relative to its interim revenue targets as reflected in the approved annual operating plan and also reviewed management’s updated full year revenue expectations relative to the full year revenue target. Since at each such measurement point during fiscal year 2007 the Company was exceeding the interim revenue targets, the Committee approved interim payments to the named executive officers against their fiscal year 2007 target incentive bonuses. Each of these quarterly payments was set at only 80% of the target quarterly bonus for each executive, despite the Company having exceeded its interim revenue targets at each such measurement point. As a result of the Prepayment described above, Mr. Hobbs received no such interim payments after either the first or second fiscal quarter, and received a reduced payment after the end of the third fiscal quarter.

 

Following the end of fiscal year 2007, the Committee reviewed the Company’s full fiscal year performance against the revenue target for the year and determined that the Company had overachieved its annual target (adjusted as described above). Consequently, the Committee approved bonus payouts to the named executive officers who are still with the Company equal to 128% of each such executive’s bonus target for the year (net of the interim payouts and the Prepayment already made as described above), in accordance with the terms of the fiscal year 2007 bonus plan.

 

The bonus payouts earned by each of the named executive officers during fiscal year 2007 under our incentive bonus award program are set forth below in the Summary Compensation Table.

Criteria for Fiscal Year 2008

 

In September 2007, management proposed and the Committee evaluated and approved new criteria for the payment of incentive bonus awards for fiscal year 2008 to our executive officers (including our CEO) and other eligible employees, which are to be based on the Company’s performance against its financial objectives for fiscal year 2008.

 

During the Committee’s evaluation of alternatives for incentive bonus criteria for fiscal year 2008, it noted that the Company’s Board-approved annual operating plan for fiscal year 2008 included a substantial growth in target revenues over the full-year revenue anticipated for fiscal year 2007. The Committee also noted that some of management’s accomplishments during fiscal year 2007, including the entry into sizeable volume purchase agreements (“VPA”) with certain of our customers, and the amount by which quarterly revenue had already grown during fiscal year 2007, were likely to reduce the risk of substantial underperformance against the fiscal year 2008 revenue goal. However the Committee also determined that the long-term value to shareholders would continue to be heavily impacted by the Company’s progress towards its aggressive long-term revenue objectives, and therefore concluded that it remained appropriate for the incentive bonus award criteria to be principally based on the achievement of fiscal year 2008 revenue targets.

 

Accordingly, the Committee determined that a significant portion of the actual incentive bonus awards payable for fiscal year 2008, if any, would vary depending on the extent to which the Company’s final audited GAAP revenue for fiscal year 2008 met, exceeded or fell short of the established corporate revenue objective for fiscal year 2008 as reflected in the fiscal 2008 annual operating plan approved by the Board.

 

Additionally, the Committee noted that management had recently announced its intention to launch certain new products and other engineering initiatives which had the potential to generate substantial value for the Company over the long-term but which also had the potential to give rise to cost overruns and related reductions in targeted operating earnings over the short-term. As a result, the Committee determined the other incentive bonus award criteria should be based on operating earnings. After discussions with management, the Committee determined that it was appropriate to base a portion of the incentive bonus program on a non-GAAP measure of earnings, calculated before stock-based compensation expense, restructuring charges, interest, taxes and other costs.

 

Accordingly, the Committee determined that a second portion of the actual incentive bonus awards payable for fiscal year 2008, if any, would vary depending on the extent to which the Company’s final non-GAAP earnings as described above for fiscal year 2008 met, exceeded or fell short of the established corporate objective for such non-GAAP earnings for fiscal year 2008 as reflected in the fiscal 2008 annual operating plan approved by the Board. The Committee retained discretion to modify the incentive bonus awards that would be payable to executive officers or to adjust the revenue or earnings targets in the event it subsequently determined it was reasonable to do so.

 

Bonus Targets for Fiscal Year 2008

 

In setting the individual target bonuses for each executive officer for fiscal year 2008, the Committee considered a number of factors including:

 

(i) the target bonuses which had applied for fiscal year 2007;

 

(ii) the performance of each executive during fiscal year 2007

 

(iii) the Committee’s expectations for the performance of each executive during fiscal year 2008;

 

(iv) the impact an executive’s performance is likely to have on the Company’s success at reaching its revenue and earnings targets;

 

(v) inputs provided by the Committee’s compensation consultant in respect of incentive programs at the selected peer group of companies; and

 

(vi) the other elements of each executive’s overall compensation plan.

Following an analysis of all these factors and discussions with its consultant and with management, the Committee left unchanged for fiscal year 2008 the target incentive bonus award percentages for each named executive officer that had applied during fiscal year 2007, with the exception of Mr. Banga’s target percentage. The Committee accepted Mr. Hobbs’ recommendation that, in light of Mr. Banga’s responsibilities increasing significantly since his original target was set and the likelihood that his performance during fiscal year 2008 would have a greater overall impact on the Company’s achievement of its longer term objectives, Mr. Banga’s target bonus percentage be increased from 50% to 75% of base salary. The Committee rejected a similar recommendation from Mr. Hobbs with respect to Mr. Arnold’s incentive bonus target.

 

Additionally, the Committee rejected Mr. Hobb’s recommendation that the maximum potential incentive bonus award for overachievement of targets to remain unchanged at 200% of the target bonus for each executive. Following a review of data provided by the Committee’s compensation consultant, consideration of all other elements of executive compensation and discussions with the consultant, the Committee decided to (i) reduce the maximum for the revenue-based portion of the incentive bonus award for each executive from 200% to 150% and (ii) allow the maximum for the earnings-based portion of the incentive bonus award to be 200%.

 

The following table shows the target and maximum incentive bonus awards that the Committee established for each named executive officer for fiscal year 2008, as well as a comparison to the maximum bonus each could have earned during fiscal year 2007:

 

 

Equity-Based Compensation

 

As stated above, we believe that there should be an allocation of the value created in the business among the stockholders, the directors and executives and the employees of the Company. In connection with this philosophy, our compensation program is designed to include the provision of equity interests to our executives so as to closely align a substantial proportion of the total compensation of our executives with the total returns provided to the Company’s stockholders over the long term.

 

Under plans approved by our stockholders, our executive officers are eligible to receive equity awards either through grants of options to purchase stock in the Company or through grants of restricted stock or other equity interests in the Company. The Company believes that equity awards serve to motivate our executives to meet performance goals set by the Board and the Compensation Committee and to fairly reward them for doing so. The Committee also believes that by providing for time-based vesting of equity interests, our equity programs serve not only to help us to retain talented executives but also to motivate executives to take a longer term perspective when making decisions that effect shareholder value.

 

In establishing equity awards for executive officers, the Committee considers the comparative data from our peer companies described above as well as each individual executive’s performance, qualifications, experience and level of responsibility. Equity awards for executives are generally initially determined by the Committee and granted on the date of hire of senior executives, are reviewed annually by the Committee and may be adjusted from time to time by the Committee and the Board in accordance with certain criteria, including such factors as individual performance, the functions performed by the executive, the scope of the executive’s on-going responsibilities, general changes in industry equity compensation practices for comparable positions, and our financial performance generally. The weight given to each factor by the Committee may vary for each individual. Management participates in the design of equity programs as described above

Equity Granting Guidelines

 

The CEO has the delegated authority by the Board to approve non-executive officer new-hire grants for amounts up to 20,000 shares. All other non-officer equity grants must be approved by both the CEO and a designated member of the Committee. Grants to existing and new executive officers must be approved by the Committee.

 

In keeping with corporate governance best practices, the Committee has recently established Equity Granting Guidelines regarding the procedural aspects of granting and processing equity awards. These guidelines in large part document practices that have already been established by the Company. Under the guidelines, all equity grants are made on the 10th day of each month (or the first trading day after that date if the 10th in any particular month is not a trading day), which is in accordance with the past practice of the Company of generally approving equity awards on a consistent date from month to month. The Committee reserves the right to approve awards to existing and new-hire executive officers on days other than the 10th of the month. Equity awards are not deliberately timed to precede or follow the release of material nonpublic information in a manner that could be expected to benefit the recipient of the award.

 

In addition, in accordance with past practice, the guidelines provide that the exercise price for stock option awards must be the fair market value on the date of grant, which is the closing price of the Company’s stock as reported on the NASDAQ Global Market on the date of grant.

 

Stock Options

 

Options to purchase Company stock may be granted to executive officers by the Committee either under the Company’s 1999 Stock Plan or other similar plans approved by our stockholders from time to time or, on exceptional occasions, under a plan established by the Board at the time of recruitment of a new senior executive for which we are not required to obtain stockholder approval. Initial option grants typically are subject to time-based vesting provisions, with 25% of the grant vesting on the first anniversary of the grant date and monthly or quarterly vesting after that date so that full vesting occurs on the fourth anniversary of the grant date. Follow-on option grants are also typically subject to time-based vesting provisions, with monthly or quarterly vesting from the date of grant so that full vesting occurs on the fourth anniversary of the grant date.

 

At the beginning of fiscal year 2007, Mr. Gibbs and other named executive officers continuing from fiscal 2006 held various stock options granted at different times and at different exercise prices over the course of their prior service with the Company. The size of each of these grants was determined by the Committee at the time of each such grant in accordance with the compensation practices followed by the Company at that time. With respect to the new management team, Messrs. Hobbs and Arnold were each granted stock options, for 900,000 shares and 600,000 shares, respectively, at the time of their recruitment in September 2006 under new stand-alone option plans approved by the Board and for which stockholder approval was not required. Mr. Banga was granted a stock option to purchase 275,000 shares at the time of his recruitment in October 2006 under the 1999 Stock Plan. At the time of each such grant, the Committee was provided with advice and comparative information by Compensia, the Committee’s compensation consultant at the time. The Committee considered a number of other factors in determining these equity awards, including the background and experience of the proposed new executives and the considerable risk each proposed executive was taking by joining the Company during a time when it was the subject of an unsolicited takeover offer from a shareholder and was suffering rapidly declining revenues and substantial operating deficits.

 

Mr. Chu was granted a stock option to purchase 100,000 shares under the 1999 Stock Plan at the time of his recruitment in April 2007. Due to the relatively small size of Mr. Chu’s grant compared to those made to the other named executive officers, the Committee did not feel it was necessary to seek advice from an external consultant prior to approving this grant.

 

Our Equity Model

 

In March 2007, in connection with management’s annual review of compensation for all Company employees other than executive officers, the Company undertook a thorough review of the equity-based compensation for all

employees. This review was conducted by the management team without significant involvement by the Committee; however, all equity grants made to employees as a result of the review were authorized by the Committee. During this review, the new management team determined that, prior to its arrival, the Company apparently had no consistent and integrated set of policies governing the issuance of equity awards to employees. This inconsistency, over the course of many years, resulted in a situation where there was no apparent direct linkage between the equity interests of individual employees and the contribution each individual was able to make to long-term value creation for shareholders.

 

Consequently, the new management team developed a comprehensive model for equity participation based on the philosophies and objective described below, to be applied across the entire workforce (excepting only employees in the People’s Republic of China where equity ownership is not a component of compensation), in order to provide all eligible employees with an appropriate equity stake in the Company.

 

Central Philosophy of Our Equity Model

 

The guiding philosophy for the design of the equity ownership model is that all employees have an opportunity to create value for shareholders and should have an incentive reward for doing so, consisting of a stake in the equity of the Company. Since we believe that the greatest potential for impact on shareholder value creation is held by the most senior levels of management, and that each lower level of employment has lower potential to contribute value, we believe that equity interests should be structured accordingly.

 

We also believe that equity value contribution generally occurs over time and that it is therefore in the interests of the Company and its shareholders to retain employees for multiple years of service and that time-based vesting of stock options is one of the best ways of achieving this result. As options vest, we believe that those specific options constitute a compensation for services rendered during the vesting period, and therefore no longer constitute either a component of compensation for future services or an incentive for further retention.

 

Factors of Our Equity Model

 

In developing our model for value sharing through equity, the new management team considered many factors including:

 

 

 

Stock Option Grants during Fiscal Year 2007

 

In connection with the annual review of equity-based compensation described above, and after taking into account all existing options held by each employee and applying the desired outcomes described above, management recommended, and the Compensation Committee authorized, stock option grants to every eligible employee of the Company. No named executive officer was eligible for compensation adjustment or for any additional equity grants during this review of non-executive employees.

Proposed Fiscal Year 2008 Performance-based Option Grants

 

Pursuant to the above goals and philosophies, on October 5, 2007, the Committee approved certain performance-based stock option grants to Messrs. Hobbs, Arnold, Banga and Gibbs. These options are subject to stockholder approval and are further described in Proposal No. 6 of this Proxy Statement. (See “Proposal No. 6 — Approval of Certain Performance-Based Options under the 1999 Plan”)

 

In reviewing the performance-based grant proposal from management, the Committee, with the assistance of its compensation consultant, Watson Wyatt Worldwide, considered:

 

(i) the central philosophy and overall objectives of the Company’s equity model;

 

(ii) the long-term objectives of the Company as developed by management;

 

 

 

(v) the consistency of the proposal with the Company’s overall executive compensation program;

 

(vi) the tax and accounting implications of performance-based options; and

 

(vii) alternative methods of implementing the Company’s overall executive compensation program.

 

Based on the Company’s current business and growth plans, the Committee intends for these performance-based grants to replace entirely any additional option awards that might have been provided to the executive officers over the next four years to “refresh” existing options or restricted shares which vest over this time period. However, the Committee will re-examine the need for additional equity awards to the executive officers if there are any material changes to the Company during this period (e.g., early achievement of current goals, a significant change in the size or scope of the current business as a result of acquisitions, etc.).

 

Restricted Stock

 

Restricted stock grants may be made to executives with the approval of the Committee either under the 1999 Stock Plan or other similar plans approved by our stockholders from time to time or, on exceptional occasions, under a plan established by the Board at the time of recruitment of a new senior executive for which we are not required to obtain stockholder approval. Restricted stock grants require no payment by the executive to the Company and are typically granted subject to time-based vesting provisions, with 50% of the grant vesting on the second anniversary of the date of grant and quarterly or semi-annual vesting after that date so that full vesting occurs on the fourth anniversary of the date of grant.

 

At the beginning of fiscal year 2007, Mr. Gibbs held shares of restricted stock which had been granted at different times over the course of his prior service with the Company. The size of each of these grants was determined by the Committee at the time of each such grant in accordance with the compensation practices followed by the Company at that time. In January 2007, the Committee approved a grant of 50,000 shares of restricted stock to Mr. Gibbs to balance his equity holdings with the other senior executive officers and provide additional retention incentive.

 

Mr. Hobbs was granted 100,000 shares of restricted stock at the time of his recruitment in September 2006 under the 1999 Stock Plan, and Mr. Banga was granted 25,000 shares of restricted stock at the time of his recruitment in October 2006 under the 1999 Stock Plan. At the time of each such grant, the Committee was provided with advice and comparative information by the Committee’s compensation consultant at the time, Compensia. The Committee considered a number of other factors in determining these equity awards including the background and experience of the proposed new executives and the considerable risk each proposed executive was taking by joining the firm during a time when it was the subject of an unsolicited takeover offer from a shareholder and was suffering rapidly declining revenues and substantial operating deficits.

Other Elements of Compensation

 

The named executive officers are eligible to participate in all of the Company’s employee benefit plans, such as medical, dental, vision, group life, disability and accidental death and dismemberment insurance plans; and the Company’s 401(k) plan, in each case on the same basis as other employees. The executive officers do not, however, participate in the Company’s Employee Stock Purchase Plan (ESPP), the terms of which give the Board the option to exclude executive officers from participation. The Company offers matching contributions to all participants in the 401(k) plan up to an annual amount of $3,000.

 

Severance and Change of Control Agreements

 

We provide separation benefits in order to remain competitive in attracting and retaining talented executives. (See “Employment Contracts and Termination of Employment and Change of Control Arrangements”.) In determining the amounts and types of severance benefits, the Committee looked at the severance benefits provided by the Company’s peer group, as the group was defined by the Committee at the time of the hiring of the named executive officer. The Committee has approved severance benefits and terms that Compensia, its external compensation consultant at the time, advised were standard within the Company’s peer group. The Committee also considered what it thought would be reasonable in light of the executive’s position and level of responsibilities. See “Potential Payments Upon Termination” for a description of termination payments and benefits.

 

During fiscal 2007, no amendments or modifications to any Severance and Change of Control Agreement with any named executive officer were made, following the Committee’s review and rejection of a management proposal to modify the agreements for Messrs. Hobbs and Arnold to allow for “single-trigger” vesting acceleration (i.e., acceleration of unvested options and restricted stock upon the occurrence of a change of control) and to add Internal Revenue Code Section 280G tax gross-up provisions.

 

Impact of Section 162(m) of the Internal Revenue Code

 

In general, it is the Committee’s policy to qualify the Company’s executives’ compensation for deductibility under applicable tax laws to the greatest extent possible. Section 162(m) of the Internal Revenue Code disallows a tax deduction for any publicly held company or its subsidiaries for named executive officer compensation exceeding $1 million in any taxable year, unless the compensation is considered “performance-based” under the Code (i.e., compensation paid under a plan administered by a committee of outside directors, based on achieving objective performance goals, the material terms of which have been approved by stockholders). In fiscal year 2007, the total non-performance based compensation earned by each of our executive officers was less than $1 million. Most of the outstanding options and stock awards granted to our named executive officers do not qualify as “performance based” because they have time-based vesting conditions and/or have been awarded pursuant to non-stockholder approved inducement plans. The performance-based option grants described in Proposal 6 are being presented to the Company’s stockholders for approval in order to qualify such options as “performance-based.” While the Committee will strive to qualify the Company’s executives’ compensation for deductibility under applicable tax laws, the Committee believes that it is important to preserve the ability to structure compensation programs to meet a variety of corporate objectives even if the compensation is not deductible. Due to the Company’s focus on performance-based compensation plans, the Committee expects that the vast majority of compensation paid to the executive officers as a group will be tax deductible.

 

Equity Ownership Guidelines

 

The Company currently does not have a policy requiring its executive officers to own a minimum number of shares of Company stock. However, one of the terms of the performance-based option grants described in Proposal 6 requires executives who exercise any vested performance-based options to hold the shares (net of shares sold at the time of exercise to cover the exercise price and any tax withholding obligations) for a minimum of 6 months.

 

The Compensation Committee, comprised of independent directors, reviewed and discussed the above Compensation Discussion and Analysis with the Company’s management. Based on that review and

discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

MEMBERS OF THE COMPENSATION COMMITTEE

 

Dale Fuller

Richard Noling

 

EXECUTIVE COMPENSATION

 

The following Table set forth information concerning compensation earned for services rendered to the Company by the Chief Executive Officer (the “CEO”), the two persons who served as the Chief Financial Officer (the “CFO”) during the Last Fiscal Year, the Company’s next three most highly compensated executive officers for the Last Fiscal Year and two additional executive officers of the Company who would have been included, but for the fact that such individuals were no longer serving as executive officers of the Company as of the end of the Last Fiscal Year (together, the “Named Executive Officers”).

 

Summary Compensation Table

 

 

 

 

Grants of Plan-Based Awards

 

The following table sets forth information regarding grants of stock and option awards made to our Named Executive Officers during fiscal 2007:

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information regarding outstanding equity awards held by our Named Executive Officers as of September 30, 2007:

 

 

 

 

Option Exercises and Stock Vested

 

The following table sets forth information regarding options exercised and shares of common stock acquired upon vesting by our Named Executive Officers during fiscal 2007:

 

 

Equity Compensation Plan Information

 

The following table gives information about the Company’s Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of September 30, 2007.

 

 

 

 

1997 Non-Statutory Stock Option Plan

 

The Company’s 1997 Non-Statutory Stock Option Plan (the “1997 Plan”) has not been approved by the stockholders. The Board adopted the 1997 Plan to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to employees and consultants of the Company and to promote the success of the Company’s business. Officers and directors of the Company are not eligible to receive option grants under the 1997 Plan. The 1997 Plan had a term of ten years which ended on July 17, 2007, 2007 (the “Expiration Date”). As of the Expiration Date, options can no longer be granted under the 1997 Plan.

 

The Board has reserved 1,317,576 shares of Common Stock for issuance under the 1997 Plan. As of November 9, 2007, [          ] shares of Common Stock had been issued upon exercise of options granted under the 1997 Plan, options to purchase [          ] shares were outstanding. As a result of the 1997 Plan’s expiration, no shares remain available for future grant. Options granted under the 1997 Plan are non-statutory stock options that are not intended to qualify as “incentive stock options” as defined in Section 422 of the

Internal Revenue Code of 1986, as amended. The 1997 Plan is administered by the Board or a committee appointed by the Board (as applicable, the “Administrator”). The Administrator determines the exercise price of options at the time the options are granted, when options become exercisable, and the acceptable form of consideration for exercising an option. Options granted under the 1997 Plan are generally not transferable other than by will or the laws of descent and distribution, and may be exercised during the optionee’s lifetime only by the optionee.

 

Senior Management Nonqualified Stock Option Plan

 

The Board adopted the Company’s Senior Management Nonqualified Stock Option Plan (the “1987 Plan”) in 1987. The 1987 Plan has not been approved by the Company’s stockholders. The term of the 1987 Plan was ten years; therefore, no additional options may be granted under the 1987 Plan. Officers (and directors that also served as officers) were eligible to receive options grants under the 1987 Plan. As of November 9, 2007, options to purchase [          ] shares of Common Stock were outstanding under the 1987 Plan.

 

Non-Plan Stock Option Agreements

 

Pursuant to a stock option agreement between Woodson Hobbs and the Company, dated September 6, 2006, Mr. Hobbs was granted a non-qualified stock option on September 6, 2006, to purchase 900,000 shares of Common Stock with an exercise price of $5.05 per share, the closing price of the Common Stock on September 6, 2006. Subject to certain vesting acceleration provisions, the option will vest at a rate of 1/4 on the first anniversary of the grant date and 1/48 each month after that date, conditioned upon Mr. Hobbs’ continued employment with the Company. The term of the option is ten years from the date of grant unless sooner terminated. Mr. Hobbs may elect to exercise this option with respect to unvested shares and enter into a Restricted Stock Purchase Agreement providing the Company with a repurchase right for the unvested shares. This repurchase right would lapse at the same rate as the options would have otherwise vested.

 

Pursuant to a stock option agreement between Richard Arnold and the Company, Mr. Arnold was granted a non-qualified stock option on September 27, 2006, to purchase 600,000 shares of Common Stock with an exercise price of $4.45 per share, the closing price of the Common Stock on that date. Subject to certain vesting acceleration provisions, the option vested at a rate of 1/4 on September 27, 2007 and is vesting 1/48 each month after that date, conditioned upon Mr. Arnold’s continued employment with the Company. The term of the option is ten years from the date of grant unless sooner terminated. Mr. Arnold may elect to exercise this option with respect to unvested shares and enter into a Restricted Stock Purchase Agreement providing the Company with a repurchase right for the unvested shares. This repurchase right would lapse at the same rate as the options would have otherwise vested.

 

Employment Contracts and Termination of Employment and
Change of Control Arrangements
Employment Arrangements

 

The Company entered into an Offer Letter agreement with Mr. Hobbs on September 6, 2006. This agreement provides that Mr. Hobbs will serve as President and Chief Executive Officer of the Company at an annual salary of $420,000. He is also eligible for an annual bonus targeted at 75% of his base salary. The Company agreed to pay him 50% of his fiscal year 2007 bonus, in the amount of $157,500, in September 2006.

 

The Company also granted Mr. Hobbs a non-qualified stock option to purchase 900,000 shares of Common Stock at an exercise price of $5.05, which was the closing price of the Common Stock on September 6, 2006. Subject to certain vesting acceleration provisions contained in Mr. Hobbs’ Severance and Change of Control Agreement (as described below), 1/4 of the options vested on September 6, 2007, and 1/48 of the options vest each month after that date, conditioned on Mr. Hobbs’ continued employment with the Company. Mr. Hobbs may elect to exercise this option with respect to unvested shares and enter into a Restricted Stock Purchase Agreement providing the Company with a repurchase right for the unvested shares. This repurchase right would lapse at the same rate as the options would have otherwise vested.

The Company also granted Mr. Hobbs 100,000 shares of restricted stock in connection with the commencement of his employment. Subject to certain vesting acceleration provisions contained in Mr. Hobbs’ Severance and Change of Control Agreement (as described below), the restricted stock vests, the shares become nonforfeitable, and the Company’s right to repurchase the stock lapses with respect to 50% of the shares on September 6, 2008, and as to 12.5% of the shares every six months after that date, conditioned on Mr. Hobbs’ continued employment with the Company.

 

Pursuant to the terms of Mr. Hobbs’ Severance and Change of Control Agreement dated September 6, 2006, if Mr. Hobbs’ employment is terminated by the Company (for any reason other than Cause (as defined in his agreement), death or disability) or if Mr. Hobbs terminates his employment for Good Reason (as defined in his agreement), the Company will continue to pay him his base salary and benefits for an initial severance period of six months following such termination. Mr. Hobbs will continue to receive severance and benefits beyond the six-month period if his tenure with the Company on the date of termination equals or exceeds four months’ time. In such event, Mr. Hobbs will receive severance and benefits for a number of months equal to two times the number of whole months he has been employed by the Company prior to termination; provided, however, that the maximum term of these severance payments is limited to twelve months and the maximum amount of severance pay is limited to one times his annual base salary rate in effect on the date of termination. In the case of such a termination, the vested portion of Mr. Hobbs’ stock option as of the termination date remains exercisable until the earlier of the option’s expiration or six months. If Mr. Hobbs’ employment with the Company is so terminated, he is entitled to a bonus equivalent to the number of whole months he has been employed by the Company during the fiscal year in which the termination occurs, divided by twelve, and multiplied by his bonus, if any, for the previous fiscal year.

 

If the Company terminates Mr. Hobbs (other than for Cause, death, disability) or if Mr. Hobbs terminates his employment for Good Reason, during a period beginning on the date of the signing of a definitive agreement for a Change of Control (as defined in his agreement) and ending twelve months following a Change of Control, all of the following provisions apply: (i) All restricted stock and other equity awards (other than stock options) vest; (ii) all of the stock options granted to him on his commencement of employment become exercisable; (iii) any more favorable vesting provisions in an equity award agreement will govern; (iv) if on the date of termination the sum of all severance payments, any unearned portion of Mr. Hobbs’ prepaid bonus of $157,500, and the “acceleration value” (as defined in the agreement) of all restricted stock and stock options is less than $500,000, the Company will pay Mr. Hobbs the difference.

 

Pursuant to the terms of the Severance and Change of Control Agreement, Mr. Hobbs is subject to a covenant not to compete until the end of any severance period and a covenant not to solicit employees of the Company for a period of twelve months after termination of employment.

 

Additional Severance and Change of Control Agreements

 

The Company and Richard Arnold, currently the Company’s Chief Operating Officer and Chief Financial Officer, entered into a Severance and Change of Control Agreement on September 26, 2006. If the Company terminates Mr. Arnold other than for Cause (as defined in his agreement), disability, or death, he continues to receive compensation and benefits for six months. The vested portion of Mr. Arnold’s stock options as of the termination date remains exercisable until the earlier of the options’ expiration or six months. He is entitled to receive a bonus equivalent to the number of whole months he was employed by the Company during the fiscal year in which the termination occurs, divided by twelve, and multiplied by his bonus, if any, for the previous fiscal year.

 

If the Company terminates Mr. Arnold (other than for Cause, death, disability) or if Mr. Arnold terminates his employment for Good Reason (as defined in his agreement), within two months prior to or twelve months following a Change of Control (as defined in his agreement), all of his unvested stock options and restricted stock will vest and become exercisable. This agreement has a term of three years and will extend through the one-year anniversary of any Change of Control.

 

The Company and Dr. Gaurav Banga, currently the Company’s Senior Vice President, Engineering and Chief Technology Officer, entered into a Severance and Change of Control Agreement on October 9, 2006. If

the Company terminates Dr. Banga other than for Cause (as defined in his agreement), disability, or death, he will continue to receive compensation and benefits for six months. The vested portion of Dr. Banga’s stock options as of the termination date will remain exercisable until the earlier of the options’ expiration or six months. In addition, if such a termination occurs within two months prior to or twelve months following a Change of Control (as defined in the agreement), 50% of any unvested stock options and restricted stock will vest and become exercisable. This agreement has a term of three years and will extend through the one-year anniversary of any Change of Control.

 

The Company and Timothy Chu, the Company’s recently appointed Vice President, General Counsel and Secretary, entered into a Severance and Change of Control Agreement on April 27, 2007. If the Company terminates Mr. Chu other than for Cause (as defined in the agreement), disability, or death, he continues to receive compensation and benefits for six months. The vested portion of Mr. Chu’s stock options as of the termination date remain exercisable until the earlier of the options’ expiration or six months. In addition, if such a termination occurs within two months prior to or twelve months following a Change of Control (as defined in the agreement), 50% of any unvested stock options and restricted stock vest and become exercisable. This agreement has a term of three years and will extend through the one-year anniversary of any Change of Control.

 

The Company and David Gibbs entered into a Severance and Change of Control Agreement on January 11, 2006. The Board approved the amendment and restatement of this agreement on July 25, 2006. As so amended, if the Company terminates Mr. Gibbs other than for Cause (as defined in the agreement), disability, or death, or if Mr. Gibbs terminates his employment for Good Reason (as defined in the agreement), he continues to receive compensation for twelve months and benefits for six months. If Mr. Gibbs is not re-employed during this twelve month period, he receives compensation until he is re-employed for up to an additional six months. The vested portion of Mr. Gibbs’s stock options as of the termination date remain exercisable until the earlier of the options’ expiration or six months.

 

If such a termination occurs within two months prior to or twelve months following a Change of Control (as defined in the agreement), 50% of any unvested stock options and restricted stock vest and become exercisable as of the date of termination. In addition, 100% of any unvested stock options and restricted stock will vest and become exercisable. Any vesting provisions in an equity award agreement that are more favorable with respect to a Change of Control than those set forth here will govern. This agreement has a term of three years and will extend through the one-year anniversary of any Change of Control.

 

Pursuant to the Severance and Change of Control Agreement between the Company and David Eichler, dated August 24, 2006, Mr. Eichler received $115,000 in connection with his resignation from the Company.

 

Pursuant to the Severance and Change of Control Agreement between the Company and Scott Taylor, dated August 24, 2006, Mr. Taylor received $126,782 in connection with his resignation from the Company.

 

Pursuant to the Severance and Change of Control Agreement between the Company and Ira Scharfglass, dated August 24, 2006, Mr. Scharfglass received $131,977 in connection with his resignation from the Company.

 

Each of the agreements discussed above also contains a covenant not to compete and a covenant not to solicit employees of the Company. For each of the executives (other than Mr. Hobbs, whose covenants are discussed in the applicable section above) the covenant not to compete and covenant not to solicit employees of the Company applies until twelve months after he ceases to be employed by the Company.

 

If any payments to a named executive officer pursuant to any of the agreements described above are considered “excess parachute payments” as defined in Section 280G of the Internal Revenue Code, the payments will be reduced to avoid such a characterization.

 

Potential Payments Upon Termination

 

The tables below reflect the potential payments and benefits to which the Named Executive Officers employed with the Company as of the fiscal year ended September 30, 2007 would be entitled under the

individual Severance and Change of Control Agreements between each Named Executive Officer and the Company. The amounts shown in the tables below assume that each termination was effective as of September 28, 2007 and that all eligibility requirements under the applicable agreements were met. The tables do not reflect amounts required by law and the Company’s policies to be paid upon a termination, such as earned but unpaid salary, accrued but unused vacation and any expense reimbursements.

 

Termination for any reason other than Cause, Death or Disability (without Change of Control)

 

 

 

 

Termination for any Reason other than Cause, Death or Disability in connection with a Change of Control.

 

For this category of “double-trigger” termination, payments and benefits to the named executive officer would be triggered by the named executive officer being terminated for any reason (other than Cause, death or Disability) within two months prior to or within twelve months following a Change of Control.