UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A INFORMATION

 

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

EXCHANGE ACT OF 1934 (Amendment No.          )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

PROGRESS SOFTWARE CORPORATION

(Name of Registrant as Specified in Its Charter)

 

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

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

PROGRESS SOFTWARE CORPORATION
14 Oak Park
Bedford, Massachusetts 01730

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Progress Software Corporation will be held on April 27, 2010, commencing at 10:00 a.m., local time, at our principal executive offices located at 14 Oak Park, Bedford, Massachusetts 01730, for the following purposes:

 

 

Proposal 1 relates solely to the election of six directors nominated by our Board of Directors and does not include any other matters relating to the election of directors, including, without limitation, the election of directors nominated by any shareholder.

 

Our Board of Directors has fixed the close of business on February 26, 2010 as the record date for determination of the shareholders entitled to receive notice of and to vote at the annual meeting and any adjournment or postponement of that meeting.

 

By Order of the Board of Directors,

 

James D. Freedman
Secretary

 

March 26, 2010

 

YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE. A POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.

 

PROGRESS SOFTWARE CORPORATION

14 Oak Park

Bedford, Massachusetts 01730

 

 

 

 

PROXY STATEMENT

 

 

 

 

This proxy statement is being furnished in connection with the solicitation by the Board of Directors of Progress Software Corporation of proxies for use at the 2010 Annual Meeting of Shareholders to be held on April 27, 2010, at 10:00 a.m., local time, at our principal executive offices located at 14 Oak Park, Bedford, Massachusetts 01730. We anticipate that this proxy statement and the accompanying form of proxy will first be mailed to shareholders on or about March 26, 2010.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual
Meeting of Shareholders to Be Held on April 27, 2010:

 

This proxy statement and our 2009 Annual Report to shareholders are available at: http://materials.proxyvote.com/743312

 

At the annual meeting, shareholders will be asked to consider and vote upon the following proposals:

 

 

You may obtain directions to the location of the annual meeting by visiting our website at www.progress.com.

 

ABOUT THE MEETING AND VOTING

 

What is the purpose of the annual meeting?

 

At our annual meeting, shareholders will act upon the matters outlined in the meeting notice provided with this proxy statement, including the election of directors, an amendment to our principal stock option plan, an amendment to our employee stock purchase plan and ratification of the appointment of our independent registered public accounting firm.

 

Who can attend the meeting?

 

All shareholders as of the close of business on February 26, 2010, the record date, or their duly appointed proxies, may attend the meeting. If you plan to attend the meeting, please note that you will need to bring your proxy card or voting instruction card and valid picture identification, such as a driver’s license or passport. Cameras, recording devices and other electronic devices will not be permitted at the meeting and all mobile phones must be silenced during the meeting.

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

 

Who is entitled to vote at the meeting?

 

Only shareholders of record at the close of business on the record date for the meeting are entitled to receive notice of and to participate in the annual meeting. If you were a shareholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the meeting, or any postponements or adjournments of the meeting. There were 41,236,576 shares of our common stock outstanding on the record date.

 

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

 

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

 

What is the difference between holding shares as a shareholder of record and a beneficial owner?

 

If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered the shareholder of record with respect to those shares, and these proxy materials are being sent directly to you by us. As the shareholder of record, you have the right to grant your voting proxy directly to us by completing, signing, dating and returning a proxy card, or to vote in person at the annual meeting.

 

Many of our shareholders hold their shares through a broker, bank or other nominee rather than directly in their own name. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares. We have sent these proxy materials to your broker or bank. As the beneficial owner, you have the right to direct your broker, bank or nominee on how to vote and are also invited to attend the annual meeting. However, since you are not the shareholder of record, you may not vote these shares in person at the annual meeting unless you request and obtain a proxy from your broker, bank or nominee. Your broker, bank or nominee will provide a voting instruction card for you to use in directing the broker, bank or nominee regarding how to vote your shares.

 

What is a quorum?

 

A quorum is the minimum number of our shares of common stock that must be represented at a duly called meeting in person or by proxy in order to legally conduct business at the meeting. For the annual meeting, the presence, in person or by proxy, of the holders of at least 20,618,289 shares, which is a simple majority of the 41,236,576 shares outstanding as of the record date, will be considered a quorum allowing votes to be taken and counted for the matters before the shareholders.

 

If you are a shareholder of record, you must deliver your vote by mail or attend the annual meeting in person and vote in order to be counted in the determination of a quorum.

 

If you are a beneficial owner, your broker will vote your shares pursuant to your instructions, and those shares will count in the determination of a quorum. If you do not vote via proxy card or provide any instructions to your broker, your shares will still count for purposes of attaining a quorum and your broker may vote your shares in its discretion on proposal 4.

 

How do I vote?

 

If you are a shareholder of record, you have the option of submitting your proxy card by mail or attending the meeting and delivering the proxy card. The designated proxy will vote according to your instructions. You may also attend the meeting and personally vote by ballot.

If you are a beneficial owner of shares, in order to vote at the meeting, you will need to obtain a signed proxy from the broker or nominee that holds your shares. If you have the broker’s proxy, you may vote by ballot or you may complete and deliver another proxy card in person at the meeting.

 

Can I change or revoke my vote?

 

You may revoke your vote at any time before the proxy is exercised by filing with our secretary a written notice of revocation or by signing and duly delivering a proxy bearing a later date. At the meeting, you may revoke or change your vote by submitting a proxy to the inspector of elections or voting by ballot. Your attendance at the meeting will not by itself revoke your vote.

 

What are the recommendations of our Board of Directors?

 

Our Board of Directors recommends that you vote:

 

 

What vote is required to approve each proposal?

 

Election of Directors

 

Directors are elected by a plurality of votes cast. This means that the six directors receiving the most votes cast at the meeting will be elected to serve for the next year. Only votes cast “for” are counted in determining whether a plurality has been cast in favor of a director. A properly executed proxy marked “withhold authority” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated. Broker non-votes, while included for purposes of attaining a quorum, will have no effect on the vote on this proposal.

 

All Other Proposals

 

For each other proposal, the proposal will be approved if the votes cast favoring the action exceed the votes cast opposing the action. Abstention and broker non-votes will have no effect on the vote on the approval of that proposal.

 

Street Name Shares and Broker Non-Votes

 

If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some proposals. “Broker non-votes” are shares as to which a broker or nominee does not vote, or has indicated that it does not have discretionary authority to vote. For this meeting, if you do not give specific instructions, your broker or nominee may cast your vote in its discretion for proposal 4, the ratification of the appointment of our independent registered public accounting firm. “Broker non-votes”, while included for purposes of attaining a quorum, will have no effect on the vote. If you do not give specific instructions, your broker or nominee is not permitted to cast your vote in its discretion for proposal 1, the election of directors, proposal 2, the approval of an amendment to the 2008 Stock Option and Incentive Plan, or proposal 3, the approval of an amendment to our employee stock purchase plan, and such “broker non-vote” will not be counted in

determining the total number of shares necessary for approval of those proposals and will therefore have no effect on those proposals.

 

What is “householding” of proxy materials?

 

In some cases, shareholders holding their shares in a brokerage or bank account who share the same surname and address and have not given contrary instructions received only one copy of the proxy materials. This practice is designed to reduce duplicate mailings and save printing and postage costs. If you would like to have a separate copy of our annual report and/or proxy statement mailed to you or to receive separate copies of future mailings, please submit your request to the address or phone number that appears on your proxy card. We will deliver such additional copies promptly upon receipt of such request.

 

In other cases, shareholders receiving multiple copies at the same address may wish to receive only one. If you now receive more than one copy, and would like to receive only one copy, please submit your request to the address or phone number that appears on your proxy card.

 

Who will count the votes and where can I find the voting results?

 

American Stock Transfer & Trust Company will tabulate the voting results. We will announce the voting results at the annual meeting and will publish the results by filing a current report on Form 8-K within four business days of the annual meeting.

 

PROPOSAL 1: ELECTION OF DIRECTOR NOMINEES

 

The number of directors on our Board of Directors is fixed from time to time by our shareholders and may be enlarged or reduced by vote of a majority of our Board of Directors. Currently our Board of Directors is comprised of six members. Our Board of Directors has nominated for election as directors Barry N. Bycoff, Ram Gupta, Charles F. Kane, David A. Krall, Michael L. Mark and Richard D. Reidy, each of whom is currently a director of our company.

 

Each director elected at the annual meeting will hold office until the next annual meeting of shareholders or special meeting in lieu of such annual meeting and until his successor has been duly elected and qualified, or until his earlier death, resignation or removal. There are no family relationships among any of our executive officers or directors.

 

Each of the director nominees named in this proxy statement has agreed to serve as a director if elected, and we have no reason to believe that any nominee will be unable to serve. In the event that before the annual meeting one or more nominees should become unwilling or unable to serve, the persons named in the enclosed proxy will vote the shares represented by any proxy received by our Board of Directors for such other person or persons as may thereafter be nominated for director by the Nominating and Corporate Governance Committee and our Board of Directors.

 

If a quorum is present at the annual meeting, a plurality of the votes properly cast will be required to elect a nominee to the office of director.

 

Our Board of Directors recommends that you vote FOR the election of the following six individuals as directors: Barry N. Bycoff, Ram Gupta, Charles F. Kane, David A. Krall, Michael L. Mark and Richard D. Reidy.

 

DIRECTORS

 

The following table sets forth the director nominees, their ages, and the positions currently held by each person with our company.

 

 

 

 

 

 

Mr. Bycoff became our Executive Chairman in March 2009 and has been a director since March 2007. From May 2005 to July 2007, Mr. Bycoff was a venture partner of Pequot Ventures, the venture capital arm of Pequot Capital Management, Inc., and from July 1996 to November 2004, Mr. Bycoff was Chairman and CEO of Netegrity, Inc.

 

Mr. Gupta has been a director since May 2008.  From August 2000 to October 2004, Mr. Gupta was Executive Vice President, Peoplesoft Inc., and from November 2005 to May 2007, Mr. Gupta was President and Chief Executive Officer of CAST Iron Systems, Inc. Mr. Gupta is currently a private investor. Mr. Gupta also is a director of S1 Corp.

 

Mr. Kane has been a director since November 2006.  Mr. Kane is currently President and Chief Operating Officer of One Laptop Per Child. From May 2006 to October 2006, Mr. Kane was Chief Financial Officer of RSA Security Inc., and from July 2002 to May 2006, was Chief Financial Officer of Aspen Technology, Inc. Mr. Kane also is a director of Netezza Corporation.

 

Mr. Krall has been a director since February 2008.  Mr. Krall is currently President and Chief Operating Officer of Roku, Inc., which he joined in February 2010. Prior to that time, Mr. Krall was President and Chief Executive Officer and a member of the Board of Directors of QSecure, Inc. From 2000 to 2007, Mr. Krall was President, Chief Executive Officer and a member of the Board of Directors of Avid Technology, Inc.

 

Mr. Mark was appointed Lead Independent Director in March 2009 and has been a director since July 1987. From December 2006 until March 2009, Mr. Mark was Chairman of the Board. Mr. Mark is a private investor.

 

Mr. Reidy became our President and Chief Executive Officer in March 2009. Prior to that time, Mr. Reidy was our Chief Operating Officer, a position he had held since September 2008. From December 2007 until September 2008, Mr. Reidy was Executive Vice President, and from 2004 until December 2007, was President, DataDirect Technologies Division. Mr. Reidy joined us in 1985 and has been a director since May 2009.

 

THE BOARD OF DIRECTORS AND ITS COMMITTEES

 

Board of Directors

 

Our Board of Directors met eight times during the fiscal year ended November 30, 2009. Each of the directors attended at least 75% of the aggregate of the total number of meetings of our Board of Directors and the total number of meetings of all committees of our Board of Directors on which he served during fiscal year 2009. Our Board of Directors has standing Audit, Compensation, and Nominating and Corporate Governance Committees.

 

Audit Committee

 

The Audit Committee of our Board of Directors during fiscal year 2009 consisted of Messrs. Gupta (from March 2009), Kane and Mark, with Mr. Kane serving as Chairman. In connection with his appointment as Executive Chairman in March 2009, Mr. Bycoff resigned as a member of the Audit Committee in order to ensure that the independence requirements of the Securities and Exchange Commission, or SEC, and The NASDAQ Stock Market LLC, or NASDAQ, continue to be met.

 

Our Board of Directors has determined that each member of the Audit Committee meets the independence requirements promulgated by NASDAQ and the SEC, including Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended. In addition, our Board of Directors has determined that each member of the Audit Committee is financially literate and that Mr. Kane qualifies as an “audit committee financial expert” under the rules of the SEC. The Audit Committee met eight times during fiscal year 2009.

 

The Audit Committee operates under a written charter adopted by our Board of Directors, a copy of which can be found on our website at www.progress.com under the Corporate Governance page. As described more fully in its charter, the Audit Committee oversees our accounting and financial reporting processes, internal controls and audit functions.

 

For fiscal year 2009, among other functions, the Audit Committee:

 

 

Compensation Committee

 

The Compensation Committee of our Board of Directors during fiscal year 2009 consisted of Messrs. Krall, Gupta and Mark (from March 2009), with Mr. Krall serving as Chairman (from May 2009). Roger Heinen, who did not stand for re-election at the 2009 annual meeting of shareholders, served as Chairman of the Compensation Committee until May 2009.

Our Board of Directors has determined that each member of the Compensation Committee meets the independence requirements promulgated by NASDAQ. The Compensation Committee met ten times during fiscal year 2009. The Compensation Committee operates under a written charter adopted by our Board of Directors, a copy of which can be found on our website at www.progress.com under the Corporate Governance page.

 

In accordance with its charter, the Compensation Committee:

 

 

Our Chief Executive Officer, our other executives, and our human resources department support the Compensation Committee in its duties and may be delegated authority to fulfill certain administrative duties regarding our compensation programs. In addition, our Chief Executive Officer makes recommendations to the Compensation Committee on an annual basis regarding salary increases, potential bonuses, and equity awards for each of our other executive officers.

 

The Compensation Committee has sole authority under its charter to retain, approve fees for, determine the scope of the assignment of, and terminate advisors and consultants as it deems necessary to assist in the fulfillment of its responsibilities. In fiscal year 2009, the Compensation Committee retained Radford Surveys + Consulting, or Radford, to assist it in evaluating the compensation of our officers and directors. Please read the “COMPENSATION DISCUSSION AND ANALYSIS” included in this proxy statement for additional information on the role of Radford in the executive compensation process.

 

At the beginning of each fiscal year, the Compensation Committee begins the process of reviewing executive officer and board compensation for the coming fiscal year. The Compensation Committee members are provided reports from the external compensation consultant comparing our executive compensation and equity granting practices relative to the market and to a peer group. Reports are also provided on board of director compensation relative to the market and a peer group.

 

During the first quarter of each fiscal year, the Compensation Committee reviews recommendations from management on the current fiscal year short-term incentive programs relative to anticipated corporate performance. In March, the Compensation Committee reviews and approves changes to executive officers’ total target cash compensation, which includes base salary and target incentive compensation.

 

Prior to the annual meeting of shareholders for each fiscal year, the Compensation Committee also reviews and makes recommendations to the full Board of Directors regarding any changes to Board compensation.

 

At the end of the fiscal year, the Compensation Committee reviews preliminary results of the short term incentive programs, 401(k) match and 401(k) cash bonus in excess of federal limits. Final review and approval of these programs and costs are completed early in the following fiscal year prior to any payments.

 

In accordance with our Stock Option Grant Policy, the Compensation Committee meets four times a year to review and approve stock option grant and other equity award requests.

Communication with Compensation Committee members is accomplished through committee meetings, teleconference calls or email. Members of management and/or the external compensation consultants participate in these various communication methods and attend meetings or conference calls at the invitation of the Compensation Committee.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee of our Board of Directors during fiscal year 2009 consisted of Messrs. Gupta, Kane (from March 2009) and Krall (from March 2009), with Mr. Gupta serving as Chairman (from March 2009). In connection with his appointment as Executive Chairman in March 2009, Mr. Bycoff resigned as Chairman of the Nominating and Corporate Governance Committee in order to ensure that the independence requirements of NASDAQ continue to be met. Mr. Heinen, who did not stand for re-election at the 2009 annual meeting of shareholders, served on the Nominating and Corporate Governance Committee until May 2009.

 

The Board of Directors has determined that each member of the Nominating and Corporate Governance Committee meets the independence requirements promulgated by NASDAQ. The Nominating and Corporate Governance Committee met once during fiscal year 2009. The Nominating and Corporate Governance Committee operates under a written charter adopted by our Board of Directors, a copy of which can be found on our website at www.progress.com under the Corporate Governance page.

 

In accordance with its charter, the Nominating and Corporate Governance Committee:

 

 

Our Board of Directors, led by the Nominating and Corporate Governance Committee, develops and reviews succession plans for our senior management, including the Chief Executive Officer.

 

A copy of our Corporate Governance Guidelines can be found on our website at www.progress.com under the Corporate Governance page.

 

Director Compensation

 

For fiscal year 2009, the non-employee directors of our company were paid an annual retainer of $225,000. In addition, prior to the appointment of Mr. Bycoff as Executive Chairman, the Chairman of the Board received a pro-rated fee of $25,000 for serving in that capacity. With respect to service on the committees of our Board of Directors, the following fees were paid:

 

 

Employee directors of our company receive no compensation for serving as a director, except that all directors, including employee directors, are eligible to be reimbursed for expenses incurred in attending board or committee meetings. No additional fee is paid to the Lead Independent Director in connection with his serving in that capacity.

 

The annual retainer is paid one third in cash and two-thirds in equity (with 50% in the form of fully vested shares of common stock and 50% in the form of fully vested stock options). The number of option shares is determined by dividing the compensation amount by the grant date Black Scholes value. The number of shares of common stock is determined by dividing the compensation amount by the grant date closing price of our common stock as reported by NASDAQ. The fees paid with respect to service on the committees of our Board of Directors are paid in cash.

 

The fiscal year 2009 compensation was paid to our non-employee directors in two installments, coincident with the May and October dates upon which we made our broad-based employee equity grants.

 

In April 2009, we adopted revised stock retention guidelines for our non-employee directors. These guidelines provide for all non-employee directors to hold at least 10,000 shares of our common stock and/or deferred stock units. Directors have five years to attain this ownership threshold.

 

DIRECTOR COMPENSATION TABLE — FISCAL YEAR 2009

 

The following table sets forth a summary of the compensation earned by or paid to our non-employee directors in fiscal year 2009.

 

 

 

 

 

 

 

Each director had the following unexercised stock options outstanding at November 30, 2009:

 

 

 

CORPORATE GOVERNANCE

 

Independence of Members of our Board of Directors

 

Our Board of Directors has determined that each of our non-employee directors (Messrs. Gupta, Kane, Krall and Mark) is independent within the meaning of the director independence standards of NASDAQ and the applicable rules of the SEC. In making this determination, our Board solicited information from each of the directors regarding whether that director, or any member of his immediate family, had a direct or indirect material interest in any transactions involving our company, was involved in a debt relationship with our company or received personal benefits outside the scope of the director’s normal compensation. Our Board of Directors considered the responses of the directors, and independently considered the commercial agreements, acquisitions and other material transactions entered into by us during fiscal year 2009, and determined that none of our non-employee directors had a material interest in those transactions.

 

Executive Chairman

 

In March 2009, Mr. Bycoff was appointed to the newly-created position of Executive Chairman for a one- year term expiring at the annual meeting of shareholders to be held in 2010. In January 2010, we entered into an agreement with Mr. Bycoff pursuant to which the term was extended until the annual meeting of shareholders in 2011. As Executive Chairman, Mr. Bycoff provides advice to the Chief Executive Officer with a principal focus on strategic matters and consults in the annual performance evaluation of the Chief Executive Officer. Mr. Bycoff also works with the Lead Independent Director and the Chief Executive Officer to prepare Board of Directors meeting agendas, chairs meetings of the Board of Directors and reports on the overall progress of our company.

 

Lead Independent Director

 

In March 2009, Mr. Mark was appointed to the newly-created position of Lead Independent Director of our Board of Directors. Previously, Mr. Mark was Chairman of the Board. In the role of Lead Independent Director, Mr. Mark presides over meetings of the independent members of our Board of Directors. Mr. Mark also works with the Executive Chairman and the Chief Executive Officer to prepare Board of Directors meeting agendas.

 

Executive Sessions of Independent Directors

 

Executive sessions of the independent directors are held following regularly scheduled meetings of our Board of Directors. Executive sessions do not include the employee directors of our company, and the Lead Independent Director is responsible for chairing the executive sessions.

 

Policies Governing Director Nominations

 

Our Board of Directors delegates the search for, and recommendation of, director nominees to the Nominating and Corporate Governance Committee. When considering a potential candidate for membership on our Board of Directors, the Nominating and Corporate Governance Committee will consider any criteria it deems appropriate, including, among other things, the experience and qualifications of any particular candidate as well as such candidate’s past or anticipated contributions to our Board of Directors and its committees. At a minimum, each nominee is expected to have the highest personal and professional integrity and demonstrated exceptional ability and judgment, and to be effective, with the other directors, in collectively serving the long-term interests of our shareholders. In addition, the Nominating and Corporate Governance Committee has established the following minimum requirements:

 

 

 

The Board of Directors retains the right to modify these minimum qualifications from time to time, and exceptional candidates who do not meet all of these criteria may still be considered.

 

In addition to any other standards the Nominating and Corporate Governance Committee may deem appropriate from time to time for the overall structure and composition of our Board of Directors, the Nominating and Corporate Governance Committee may consider the following factors when recommending that our Board of Directors select persons for nomination:

 

 

The Nominating and Corporate Governance Committee may also consider other criteria that it deems appropriate from time to time for the overall composition and structure of our Board of Directors. The Nominating and Corporate Governance Committee does not assign specific weights to particular criteria and no criterion is necessarily applicable to all prospective nominees.

 

In the case of incumbent directors, the Nominating and Corporate Governance Committee reviews each such director’s overall past service to us, including the number of meetings attended, level of participation, quality of performance, and whether the director continues to meet applicable independence standards. In the case of a new director candidate, the Nominating and Corporate Governance Committee determines whether the candidate meets the applicable independence standards, and the level of the candidate’s financial expertise. The candidate will also be interviewed by the Nominating and Corporate Governance Committee.

 

Generally, the Nominating and Corporate Governance Committee identifies candidates for director nominees in consultation with management and the other directors through the use of search firms or other advisors, through recommendations submitted by shareholders or through such other methods as the Nominating and Corporate Governance Committee deems to be helpful to identify candidates. Once a candidate has been identified, the Nominating and Corporate Governance Committee confirms that the candidate meets all of the minimum qualifications for a director nominee established by the Committee. The Nominating and Corporate Governance Committee then meets to discuss and evaluate the qualities and skills of each candidate, both on an individual basis and taking into account the overall composition and needs of our Board of Directors. The same procedures apply to all candidates for director nomination, including candidates submitted by shareholders. Based on the results of the evaluation process, the Nominating and Corporate Governance Committee recommends candidates for our Board of Directors’ approval as director nominees for election to our Board of Directors. The Nominating and Corporate Governance Committee also recommends candidates to our Board of Directors for appointment to its committees.

 

The Nominating and Corporate Governance Committee will consider director nominee candidates who are recommended by shareholders of our company. Recommendations sent by shareholders must provide the following information:

 

 

 

The submission must be accompanied by a written consent of the individual to be named in our proxy statement as standing for election if nominated by our Board of Directors and to serve if elected by the shareholders. Shareholder recommendations of candidates for election as directors at an annual meeting of shareholders must be given at least 120 days prior to the date on which our proxy statement was released to shareholders in connection with our previous year’s annual meeting.

 

Shareholders may recommend director candidates for consideration by the Nominating and Corporate Governance Committee by sending a written communication to the Committee at our offices located at 14 Oak Park, Bedford, Massachusetts 01730, c/o Corporate Secretary.

 

Policy Governing Shareholder Communications with our Board of Directors

 

Our Board of Directors welcomes communications from shareholders. Any shareholder may communicate either with our Board of Directors as a whole, or with any individual director, by sending a written communication addressed to the Board of Directors or to such director at our offices located at 14 Oak Park, Bedford, Massachusetts 01730, or by submitting an email communication to board@progress.com. All communications sent to our Board of Directors will be forwarded to the Board of Directors, as a whole, or to the individual director to whom such communication was addressed.

 

Policy Governing Director Attendance at Annual Meetings of Shareholders

 

We do not require members of our Board of Directors to attend the annual meeting of shareholders. Messrs. Reidy, Bycoff and Mark attended the annual meeting of shareholders held in 2009.

 

Codes of Conduct

 

Our Board of Directors has adopted a Finance Code of Professional Ethics that applies to the Chief Executive Officer, Chief Financial Officer, Corporate Controller and other employees of our finance organization and a Code of Conduct that applies to all of our officers, directors and employees. Copies of the Code of Conduct and the Finance Code of Professional Ethics can be found on our website at www.progress.com under the Corporate Governance page.

 

Stock Option Grant Policy

 

Our Board of Directors has adopted a Stock Option Grant Policy providing for stock options and other equity awards to be made on fixed grant dates during the year. A copy of the Stock Option Grant Policy can be found on our website at www.progress.com under the Corporate Governance page.

 

For more corporate governance information, you are invited to access the Corporate Governance section of our website at www.progress.com

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview

 

The 2009 fiscal year was challenging for many companies, including Progress Software, due to the global crisis in credit and financial markets. In response to the global economic crisis, we took significant actions during the year intended to enable us to emerge in a stronger competitive position. For fiscal year 2009, we believe our compensation programs delivered payouts commensurate with a generally weak economic environment but also reflective of the actions we took to emerge from the downturn. Among other actions we took, the Compensation Committee froze base salaries and target incentive amounts at existing levels for executive officers and altered the mix of long-term equity compensation.

 

Our philosophy is to reward executives based upon corporate performance, as well as to provide long-term incentives for the achievement of future financial and strategic goals. We emphasize pay-for-performance compensation programs, which we believe advance both the short and long-term interests of our shareholders. We use a combination of total target cash compensation, composed of base salary and an annual cash incentive compensation program, a long-term equity incentive compensation program, and a broad-based benefits program to create a competitive compensation package for our executive management team.

 

We describe below our compensation philosophy, policies and practices with respect to our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers, who are collectively referred to as our named executive officers.

 

Appointment and Compensation of New Chief Executive Officer

 

In March 2009, Mr. Reidy, who had been our Chief Operating Officer, became our Chief Executive Officer and Joseph W. Alsop resigned as Chief Executive Officer. In connection with Mr. Reidy’s promotion to Chief Executive Officer, we entered into an employment letter with Mr. Reidy setting forth the terms of his compensation. As set forth in this employment letter, Mr. Reidy’s equity compensation was increased so that his fiscal year 2009 equity award consisted of 175,000 stock options and 75,000 restricted stock units.

 

The Compensation Committee also determined that Mr. Reidy’s base salary should be increased to $450,000 and his target incentive percentage should be increased to 100% of his base salary to reflect the then current market levels for Chief Executive Officers of similar software companies based on data provided by Radford. However, consistent with the freeze in base salaries and target incentive amounts in place company-wide, the Compensation Committee and Mr. Reidy agreed to defer these changes until the freeze was lifted, which occurred on December 1, 2009.

 

Separation Agreement with Former Chief Executive Officer

 

As noted above, Mr. Alsop resigned as our Chief Executive Officer in March 2009. In connection with Mr. Alsop’s resignation as our CEO and his subsequent termination of employment with us, we entered into a Separation Agreement with Mr. Alsop on June 30, 2009. Pursuant to the Separation Agreement, Mr. Alsop’s employment with us terminated on June 30, 2009. Mr. Alsop was paid his accrued salary and accrued but unused vacation through such date.

 

Mr. Alsop’s Separation Agreement also provided for two modifications to Mr. Alsop’s existing stock options. First, the Separation Agreement provided for the acceleration of vesting of Mr. Alsop’s unvested stock options, which represented the right to purchase 254,464 shares of our common stock. Second, the Separation Agreement extended the timeframe during which Mr. Alsop may exercise all of his stock options following the termination of his employment. Under the terms of the Separation Agreement, Mr. Alsop will be entitled to exercise all of his outstanding stock options, representing options to purchase a total of 1,746,500 shares of our common stock, until

the earlier of (a) the original expiration date for each such option or (b) March 31, 2014. Mr. Alsop’s rights to exercise his stock options will otherwise be governed by the terms of the applicable stock option plan and award agreement.

 

The Separation Agreement does not provide for any cash severance payments to be made, nor any other employee-related benefits to be paid, to Mr. Alsop in connection with his departure from our company.

 

The Separation Agreement also includes non-competition, non-solicitation, non-disparagement and related covenants. The non-competition and non-solicitation covenants will be in effect through the earlier of (a) June 30, 2014 or (b) one year following the exercise, forfeiture or termination of all of Mr. Alsop’s stock options. The non-competition covenant relates to certain businesses and ventures with similar product areas and activities as our company.

 

Mr. Alsop’s Separation Agreement was the result of arms length negotiations with Mr. Alsop and was approved by our Board of Directors and Compensation Committee in consultation with Radford. Radford advised that the aggregate compensation set forth in Mr. Alsop’s Separation Agreement was at the high end of the competitive range for CEO severance arrangements outside of the context of a change in control but still within market parameters, particularly taking into account Mr. Alsop’s long tenure with our company and founder status.

 

Executive Chairman Compensation

 

In March 2009, Mr. Bycoff was appointed to the newly-created position of Executive Chairman for a one-year term expiring at the 2010 annual meeting of shareholders. The terms of Mr. Bycoff’s compensation as Executive Chairman are set forth in an employment letter agreement he entered into with us on May 12, 2009, which is described below.

 

As Executive Chairman, Mr. Bycoff is entitled to a base salary of $250,000 and he is eligible to participate as a part-time employee in our employee benefits plans. Mr. Bycoff is not entitled to any cash incentive compensation. As provided in the employment letter agreement, on May 12, 2009, Mr. Bycoff was issued 40,000 restricted stock units. These restricted stock units vest in two equal installments, with the first installment having vested on November 12, 2009 and the second installment vesting on May 12, 2010, subject to Mr. Bycoff’s continued service as Executive Chairman.

 

On January 15, 2010, we entered into an amendment to Mr. Bycoff’s employment letter pursuant to which the term of Mr. Bycoff’s service as Executive Chairman was extended until our annual meeting of shareholders to be held in 2011. Mr. Bycoff’s compensation during the extended term will remain unchanged except that on January 12, 2010, we issued Mr. Bycoff 25,789 additional restricted stock units. These restricted stock units will vest in two equal installments, with the first installment vesting on the six month anniversary of the date of the 2010 annual meeting of shareholders and the second installment vesting six months thereafter, subject to his continued service with our company. The number of restricted stock units was determined by dividing $760,000 (which was the approximate value of the initial equity award issued to Mr. Bycoff in May 2009) by $29.47, which was the closing price of our stock on the date of issuance.

 

The compensation set forth in Mr. Bycoff’s employment letter agreement and described above was the result of arms length negotiations with Mr. Bycoff and was determined based on Mr. Bycoff’s responsibilities as Executive Chairman and market data provided by Radford. Radford advised the Compensation Committee that there was limited data available against which to benchmark Mr. Bycoff’s aggregate compensation as comparably sized software companies infrequently appointed an executive chairman and in those instances in which an executive chairman was appointed, the individual was frequently the former chief executive officer/founder transitioning to retirement.

 

Radford determined that Mr. Bycoff’s aggregate compensation approximated the 75th percentile of the aggregate compensation paid to the executive chairman at the limited number of comparably sized companies with an individual in that position. For companies outside of our market, Radford advised that an executive chairman at

those companies typically receives compensation in the range of 30-50% of the aggregate compensation paid to the chief executive officer, with Mr. Bycoff’s aggregate compensation approximating the upper end of this range as compared to Mr. Alsop’s aggregate compensation as chief executive officer. Radford also noted that the executive chairman typically does not receive total compensation in excess of the total cash compensation paid to the chief executive officer, which was approximately the case in comparison to Mr. Alsop. Lastly, Radford compared Mr. Bycoff’s aggregate compensation to the potential cost to our company of hiring a senior level business consultant to provide similar services as set forth in Mr. Bycoff’s employment letter agreement.

 

Based on the data it obtained, Radford advised that the aggregate cash and equity compensation set forth in Mr. Bycoff’s employment letter agreement was at the high end of the competitive range for similar positions but still within market parameters. Mr. Bycoff’s employment letter agreement was approved by our Board of Directors and Compensation Committee after consultation with Radford.

 

The foregoing compensation is in lieu of any other compensation to which Mr. Bycoff would otherwise be entitled as a member of the Board of Directors during his term as Executive Chairman. Mr. Bycoff’s compensation was determined separately from the Compensation Committee’s determination of executive compensation components and the specific fiscal year 2009 compensation decisions with respect to the other named executive officers discussed below.

 

Administration and Objectives of our Executive Compensation Program

 

Our Compensation Committee is responsible for establishing and administering our policies governing the compensation for our executive officers, including salaries, cash incentives and equity incentive compensation. Our Compensation Committee consists of three independent members of our Board of Directors, all with extensive experience in the software industry.

 

Our Compensation Committee has designed our overall executive compensation program to achieve the following objectives:

 

 

We use a mix of short-term compensation (base salaries and cash incentive bonuses) and long-term compensation (equity incentive compensation) to provide a total compensation structure that is designed to achieve these objectives. In determining whether to adjust the compensation of any one of our named executive officers, the Compensation Committee takes into account market compensation levels for each role, the contributions and performance of each named executive officer, and any changes in the responsibilities and roles of each named executive officer. The Compensation Committee also takes into account the recommendations of our Chief Executive Officer.

 

Our Chief Executive Officer makes recommendations to the Compensation Committee with respect to compensation for other executive officers, including the terms of these executives’ annual cash incentives and long-term equity incentives. Our Chief Executive Officer considers factors such as tenure, individual performance, responsibilities and experience levels of the executives, as well as the compensation of the executives relative to one another, when making recommendations regarding appropriate total compensation of our executives. Certain executives assist the Chief Executive Officer in structuring his proposals regarding the design of the annual cash incentives and long-term equity incentives; however, executives do not play any role in setting their own compensation.

Our Chief Executive Officer typically discusses his recommendations with the Chairman of the Compensation Committee or has management present them at Compensation Committee meetings. The compensation and benefits group within our Human Resources Department and our Legal Department support the Compensation Committee in the performance of its responsibilities. During fiscal year 2009, our Chief Financial Officer, Vice President of Human Resources, Senior Vice President, General Counsel & Secretary and other representatives of the human resources, finance and legal departments regularly attended the Compensation Committee meetings to provide perspectives on the competitive landscape, the needs of the business and information about our financial performance. The Compensation Committee periodically meets in executive session without management to deliberate on executive compensation matters. The Compensation Committee considers, but is not bound to and does not always accept, the Chief Executive Officer’s recommendations regarding executive compensation. The Compensation Committee reviews all recommendations in light of our compensation philosophy and generally seeks input from Radford prior to making any final decisions.

 

For the past several years, our Compensation Committee has engaged Radford as its outside compensation consultant to advise the Compensation Committee on all matters related to executive compensation. Representatives of Radford attend Compensation Committee meetings and provide advice to the Compensation Committee upon its request. For example, Radford provides data to the Compensation Committee on trends and issues in executive compensation, assists in determining the appropriate peer group against which to compare executive compensation, compares our executive compensation levels against our peer group and comments on the competitiveness and reasonableness of our executive compensation program. Typically, management works with Radford on matters for the Compensation Committee where that work is requested by the Compensation Committee. In addition, Radford may provide services to management where those services do not interfere with the exercise of Radford’s independent judgment.

 

To assist the Compensation Committee in making decisions on total direct compensation for executives and company-wide equity grants, the Compensation Committee utilizes peer and industry group data and analysis provided by Radford. Radford provided the following studies: “Executive Compensation Review” and “Aggregate Equity Usage”. The reports prepared by Radford utilized the survey data from the Radford High Tech Executive Total Direct Compensation survey and peer group data to benchmark the various elements of executive pay, and utilized the peer group data and general market data for the Aggregate Equity Usage report for details of equity practices, in particular stock option burn rates.

 

The Compensation Committee does not explicitly consider the comparative performance of the peer group companies when making executive compensation decisions. However, to the extent that the compensation of the executives of these peer group companies is impacted by the performance of their respective companies, the compensation data utilized to benchmark our executives will also be impacted.

 

For 2009, the peer group list was comprised of 20 other companies in the software industry with revenue and market capitalization comparable to us. The peer group list is reviewed on an annual basis to ensure the companies remain a valid comparison and to account for any corporate structure changes in the peer groups, such as an acquisition by another company. In November 2008, at the time Radford compiled data for the peer group, the companies in the peer group ranged in size on a revenue basis from approximately $0.3 billion to $1.4 billion with a median of $0.6 billion as compared to our revenue of $0.5 billion, and on a market capitalization basis from approximately $0.1 billion to $8.9 billion with a median of $0.9 billion as compared to our market capitalization of $0.7 billion.

 

2009 Peer Group List

 

 

 

We also use survey data for additional perspective on executive compensation. We participate in the Radford Executive survey to benchmark our executives, including the named executive officers, to the marketplace. The materials from Radford include a comprehensive report providing details on the benchmark positions used for each executive as well as analysis on base salary, short term incentives, total actual cash, total target cash compensation, actual total direct compensation and target total direct compensation. The survey data was comprised of compensation information from companies in the high technology industry with revenue ranging from $0.4 billion to $0.8 billion. There were 62 companies that fit within this criterion.

 

Executive Compensation Components

 

Our executive compensation program is primarily composed of three elements:

 

 

Our Compensation Committee has not adopted a formal policy for allocating between these various forms of compensation. However, we generally strive to provide our named executive officers with a balance of short-term and long-term incentives. In addition, we provide our executives with benefits that are generally available to our employees, including medical, dental, group life and disability insurance and our 401(k) plan. We also have entered into an Employee Retention and Motivation Agreement with each of our named executive officers, which provides for payments and benefits upon a change of control of our company and/or certain involuntary terminations of employment thereafter.

Within the context of the overall objectives of our compensation programs, the Compensation Committee determined the specific amounts of compensation, including base salary, incentive cash compensation and equity compensation, to be paid to each of our executives for our fiscal year ended November 30, 2009 based on a number of factors, including:

 

 

Our philosophy in designing our executive compensation plan is to target base salary at or below the 50^th percentile, total target cash compensation around the median level of actual cash compensation and equity awards between the 50^th and 75^th percentile as compared to the compensation studies prepared by the outside compensation firms. In fiscal year 2009, our named executive officers ranged from 76% to 125% of the 50^th percentile for total target cash compensation and were on average at the 75^th percentile for equity awards in comparison to the survey data. These total cash compensation levels are only achieved if we perform against our goals. The Compensation Committee uses between the 50^th and 75^th percentile for equity awards in order to reward executive officers for superior performance and align the interests of the executive officers with the interests of shareholders by having a significant portion of their compensation based on increases in shareholder value.

 

We discuss each of the primary elements of our executive compensation program in detail below. While we have identified particular compensation objectives that each element of executive compensation serves, our compensation programs are meant to complement each other and collectively serve all of our executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that, as a part of our overall executive compensation, each element to a greater or lesser extent serves each of our objectives.

 

Analysis of Risk Associated with Our Executive Compensation Plans

 

In setting compensation, our Compensation Committee also considers the risks to our shareholders and to achievement of our goals that may be inherent in the compensation program. Although a significant portion of our executives’ compensation is performance-based and “at-risk,” we believe our executive compensation plans are appropriately structured so as not to encourage our executives to take excessive or unreasonable risks.

 

We considered the following elements of our executive compensation plans and policies when evaluating whether such plans and policies are structured to encourage our executives to take unreasonable risks:

 

 

Analysis of Compensation Decisions for 2009

 

Base Salary  Our Compensation Committee annually reviews total target cash compensation ranges, including base salary, for each of our executive officers in April. We have historically established base salaries for each of our executives based on a number of factors, including:

 

 

In September 2008, due to widespread economic uncertainty in the United States and to reduce our expenses, management froze employee salaries for 2009 at 2008 levels and postponed annual salary increases which would normally take effect in early 2009 until business conditions improve. Certain employees outside of the United States may have received raises consistent with the terms of their employment and certain other employees may have received promotional raises in fiscal year 2009 in recognition of increased responsibilities, but none of our named executive officers received such an increase in fiscal year 2009.

 

For fiscal year 2009, the base salaries of the named executive officers were as follows:

 

 

In March 2009, at the time of Mr. Reidy’s promotion to Chief Executive Officer, the Compensation Committee determined that Mr. Reidy’s base salary should be increased to $450,000 to reflect the then current market levels for Chief Executive Officers of similar software companies. However, consistent with the freeze in base salaries and target incentive amounts in place company-wide, the Compensation Committee and Mr. Reidy agreed to defer the increase to his base salary until the base salary freeze was lifted. Effective December 1, 2009, with the lifting of the freeze, the Compensation Committee increased Mr. Reidy’s base salary to $450,000.

 

Annual Cash Incentive Program  It is our philosophy to base a significant portion of an executive officer’s total compensation opportunity on performance incentives. Our named executive officers participate in our Corporate Executive Bonus Plan, which is intended to provide an incentive for superior work and to motivate eligible executive officers toward overall business results, to tie their goals and interests to those of the company and its shareholders, and to enable the company to attract and retain highly qualified executives. This bonus plan is administered by our Compensation Committee.

 

We calculate and pay bonuses under the Corporate Bonus Plan as follows:

 

 

Individual Target Incentive Percentages.  The Compensation Committee establishes individual target incentive percentages as part of its annual review of each executive’s compensation. The Compensation Committee established the following target incentives, as a percentage of base salary, for the named executive officers in 2009, which were the same as their target incentive percentages for 2008.

 

Mr. Alsop — 93%

 

Mr. Reidy — 82%

 

Mr. Robertson — 78%

Mr. Ireland — 78%

 

Mr. Stamen — 72%

 

The Compensation Committee set these target incentive percentages to ensure that a substantial portion of each executive’s cash compensation is linked directly to business performance and to provide the executives with a performance-based opportunity to achieve total cash compensation at approximately the 50th percentile of the peer group. The Compensation Committee maintained the target incentive percentages for the named executive officers at the same levels as in the prior year because their total target cash compensation were within the ranges of total actual cash compensation at the 50th percentile in the peer group. In maintaining the target incentive percentages at 2008 levels, the Compensation Committee also considered various other criteria such as individual performance; levels of responsibilities; individual competencies, skills and contributions; functions performed; internal compensation equity issues; and our general financial performance. The weight given each factor by the Compensation Committee varied with each individual.

 

As described above, in March 2009, at the time of Mr. Reidy’s promotion to Chief Executive Officer, the Compensation Committee determined that Mr. Reidy’s target incentive percentage should be increased to 100% of his base salary to reflect market levels for Chief Executive Officers of similar software companies. However, the Compensation Committee and Mr. Reidy agreed to defer the increase to his target incentive percentage until the freeze in base salaries and target incentive amounts was lifted, which occurred in December 2009.

 

Corporate Attainment Percentage.  Executive officers may receive a bonus payment under the bonus plan based upon the attainment of performance targets which are established by the Compensation Committee. These performance goals are based on our growth strategy as reflected in our annual operating budget. In March 2009, our Compensation Committee formally approved corporate goals under the bonus plan for our named executive officers.

 

As in prior years, these corporate goals were based on non-GAAP total revenue and non-GAAP operating income for the current fiscal year. The Compensation Committee also added a third performance goal tied to the growth of revenue from our Enterprise Infrastructure and Data Infrastructure product lines. The Compensation Committee included this third performance goal as an incentive for us to achieve further growth in our newer product lines. Our Board of Directors discussed and reviewed operating plans with management during board presentations in September and December. The Compensation Committee reviewed and discussed performance goals and incentive bonus plan designs with management during committee meetings in January, February and March.

 

For fiscal year 2009, one-third of a named executive officer’s bonus was contingent upon the attainment of the performance goal related to our non-GAAP total revenue, one-third was contingent upon the attainment of the performance goal related to our non-GAAP operating income and one-third was contingent upon the attainment of the performance goal related to revenue in those product lines listed above. The Compensation Committee communicated the bonus criteria to the named executive officers after those criteria were established. The Compensation Committee may in its discretion adjust bonuses payable under the bonus plan based on the achievement of individual performance goals, although no such adjustments occurred in fiscal year 2009.

 

The Compensation Committee established a minimum level of non-GAAP total revenue, a minimum level of non-GAAP operating income and a minimum level of selected product line revenue for fiscal year 2009, which minimum level must be achieved for an executive officer to receive any portion of his target bonus amount allocated to that performance goal. Once the minimum threshold has been achieved, the attainment percentage for each performance goal for an executive officer’s bonus is a linear calculation of:

 

actual amount — threshold amount
target amount — threshold amount

 

For 2009, the maximum attainment percentage was set at 200%.

For fiscal year 2009, the following table details the determination of the corporate attainment percentage:

 

 

Non-GAAP total revenue differs from revenue determined under generally accepted accounting principles (GAAP) by excluding purchase accounting adjustments related to deferred revenue. Non-GAAP operating income differs from operating income determined under GAAP by excluding amortization of acquired intangibles, stock-based compensation, purchase accounting adjustments related to deferred revenue, restructuring and acquisition-related expenses and professional services fees associated with the investigation and shareholder derivative lawsuits related to our historical stock option grant practices. We use non-GAAP measures to make operational and investment decisions because we believe the costs and expenses that we exclude from GAAP revenue and GAAP operating income are not tied to our core results. For these reasons, we also use non-GAAP revenue and non-GAAP operating income as performance goals.

 

These target incentive bonus amounts represented over 40% of the named executive’s total target cash compensation. Thus, these targets represented a significant percentage of our named executive officers’ total target cash compensation and varied depending on the position of the named executive officer, with our Chief Executive Officer having the greatest percentage of his compensation tied to the company’s targets since he has the most influence over the success of our company.

 

Based on the achievement of the performance goals described above, the named executive officers, other than Mr. Alsop, were paid the bonus amounts set forth below in the Summary Compensation Table. As his employment with our company terminated in June 2009, Mr. Alsop did not receive any incentive cash compensation for fiscal year 2009.

 

Equity Compensation  We also use equity compensation to attract, retain, motivate and reward our named executive officers. Historically, we have used stock options as our primary equity compensation tool. Stock option grants are intended to correlate executive compensation with our long-term success as measured by our stock price. Stock options are tied to our future success because options granted have an exercise price equal to the closing market value at the date of grant and will only provide value to the extent that the price of our stock increases above the exercise price.

 

Stock option awards provide our named executive officers with the right to purchase shares of our common stock at a fixed exercise price, typically for a period of either ten years, if awarded prior to 2005, or seven years, if awarded since 2005, subject to continued employment with our company. Stock options generally vest in monthly increments over a five-year period versus a software industry norm of four years. We believe that meaningful vesting periods encourage recipients to remain with the Company over the long-term and, because the value of the awards is based on our stock price, stock options encourage recipients to focus on achievement of longer-term goals, such as strategic growth, business innovation and shareholder return. In general, employees whose employment terminates (other than for death or disability) before the award fully vests forfeit the unvested portions of these awards. While we believe that our longer vesting periods serve our employee retention goals, they tend to increase the number of stock options outstanding at any given time compared to companies that grant stock options with shorter vesting schedules.

In March 2009, our Compensation Committee changed the target mix of equity awards for our named executive officers and other employees for fiscal year 2009 to 60% stock options and 40% restricted stock units. We have assigned each restricted stock unit a value that is the equivalent of 2.5 stock options. Restricted stock units convert to shares of our common stock upon vesting. Vesting typically occurs in six equal installments over three years beginning six months after issuance.

 

The Compensation Committee made this change in order to retain stock options that vest over five years as a way to reward long-term value creation and to add restricted stock units that vest in three years in order to recognize sustained contribution to the organization. In addition, in a volatile stock market, restricted stock units continue to provide value when stock options may not, which the Compensation Committee felt would be useful in retaining talented executives in unpredictable economic times.

 

The Compensation Committee’s decisions regarding the amount and type of equity incentive compensation, the allocation of equity and relative weighting of these awards within total executive compensation have been based on the Compensation Committee’s understanding and individual experiences of market practices of similarly-situated companies. Equity-based incentive awards are intended to be the longer-term components of our overall executive compensation program. While annual incentive cash compensation is designed to encourage shorter-term performance (generally performance over a one-year period), equity-based awards are designed to encourage performance by our executive officers over several years.

 

The Compensation Committee utilizes the grant data from the peer group and the survey data provided by Radford to assist it in determining the size of the overall equity pool for our company as well as the individual grants to the named executive officers.

 

In May 2009, the Compensation Committee determined the equity awards for fiscal year 2009 for the named executive officers. During the past few years, our current practice has been to make annual grants of stock options to our employees, including our named executive officers, in two equal installments during the fiscal year. As a result, on May 12, 2009 and October 15, 2009, the Compensation Committee granted stock options to our named executive officers and other eligible employees. Restricted stock units were issued in one installment on May 12, 2009.

 

In connection with Mr. Reidy’s promotion to Chief Executive Officer, the Compensation Committee determined that Mr. Reidy’s equity compensation should be increased so that his fiscal year 2009 equity award would consist of 175,000 stock options and 75,000 restricted stock units. The Compensation Committee based its decision with respect to this increased grant upon data provided by Radford.

 

For fiscal year 2009, the Compensation Committee authorized grants of stock options and restricted stock units to the named executive officers as follows:

 

 

The table above does not include any equity awards issued to Mr. Bycoff as director compensation prior to his appointment as Executive Chairman. See the section of this proxy statement entitled, “THE BOARD OF DIRECTORS AND ITS COMMITTEES — Director Compensation” for Mr. Bycoff’s director compensation prior to his appointment as Executive Chairman.

Mr. Alsop did not receive any equity compensation related to fiscal year 2009 prior to his termination of employment.

 

Severance and Change in Control Benefits

 

We have entered into a severance agreement with Mr. Reidy providing him with certain payments and benefits upon an “involuntary termination” of Mr. Reidy’s employment with our company in those circumstances in which Mr. Reidy’s Employee Retention and Motivation Agreement is not otherwise applicable. Mr. Reidy’s severance agreement is described below. See “EXECUTIVE COMPENSATION — Severance and Change in Control Agreements.”

 

We have also entered into an Employee Retention and Motivation Agreement with each of the named executive officers, including Mr. Reidy. Each agreement provides for certain payments and benefits upon a change of control of our company and/or certain involuntary terminations of employment thereafter. Our Board of Directors determined that it is in the best interests of our company and its shareholders to assure that we will have the continued dedication and objectivity of our key employees, despite the possibility, threat or occurrence of a change of control of the company. These agreements are described below. See “EXECUTIVE COMPENSATION — Severance and Change in Control Agreements.”

 

401(k) Plan

 

We currently provide a matching contribution under our 401(k) plan. All employees who participated in our 401(k) plan, including named executive officers, received a discretionary matching contribution for fiscal year 2009 representing 4.9% of such employee’s calendar year compensation, including base salary, commissions and bonus, depending upon the employee’s length of service with the company and the employee’s contribution level. This matching contribution was approved by the Compensation Committee. In addition, due to limitations imposed on 401(k) matching to higher-paid individuals under federal tax law, a portion of the contributions that otherwise would have been received by certain employees, including the named executive officers, were instead paid directly to them in cash.

 

Other Benefits

 

We believe that establishing competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. The named executive officers are eligible to participate in all of our health and insurance plans, in each case on the same basis as other employees. In addition, our stock purchase plan is available to all employees other than employees, if any, who hold 5% or more of our common stock.

 

Tax and Accounting Implications

 

Deductibility of Executive Compensation.  Section 162(m) of the Internal Revenue Code places a limit of $1 million on the amount of compensation that public companies may deduct in any one year with respect to certain of their named executive officers. Certain performance-based compensation approved by shareholders is not subject to this deduction limit. The Compensation Committee’s strategy in this regard is to be cost and tax effective. Therefore, the Compensation Committee intends to preserve corporate tax deductions, while maintaining the flexibility in the future to approve arrangements that it deems to be in our best interests and the best interests of our shareholders, even if such arrangements do not always qualify for full tax deductibility.

 

Accounting for Stock-Based Compensation.  Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using either the current market price or the Black-Scholes option valuation model.

 

COMPENSATION COMMITTEE REPORT

 

This report is submitted by the Compensation Committee of our Board of Directors. The Compensation Committee has reviewed the Compensation Discussion and Analysis included in this proxy statement and discussed it with management. Based on that review and discussions, the Compensation Committee has recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

No portion of this Compensation Committee Report shall be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, through any general statement incorporating by reference in its entirety the proxy statement in which this report appears, except to the extent that the company specifically incorporates this report or a portion of it by reference. In addition, this report shall not be deemed filed under either the Securities Act or the Exchange Act.

 

Respectfully submitted by the Compensation Committee,

 

David A. Krall, Chairman
Ram Gupta
Michael L. Mark

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

The members of the Compensation Committee of our Board of Directors during fiscal year 2009 were Messrs. Krall, Gupta and Mark (from March 2009). Roger Heinen, a former director of our company, served as Chairman of the Compensation Committee until the 2009 annual meeting of shareholders held in May 2009. None of these directors is or has ever been an officer or employee of our company or of any of its subsidiaries, or had any relationship with us requiring disclosure in this proxy statement. There are no compensation committee interlocks amongst any of our directors.

 

EXECUTIVE COMPENSATION

 

Summary of Executive Compensation

 

The following table sets forth certain information with respect to compensation for the fiscal years ended November 30, 2009, 2008 and 2007, earned by Mr. Reidy, who became our Chief Executive Officer in March 2009 and who was our Chief Operating Officer prior to that time, Mr. Alsop, who was our Chief Executive Officer until March 2009, our Chief Financial Officer, Mr. Bycoff, who became our Executive Chairman in March 2009 and our two other most highly compensated executive officers, referred to collectively as our named executive officers, as determined in accordance with applicable SEC rules.

 

As reflected in the Summary Compensation Table below, we pay our named executive officers a mix of cash and equity compensation.

 

Cash Compensation.  We pay our named executive officers a base salary and, except for Mr. Bycoff, a cash bonus under a non-equity incentive plan.

 

Equity Compensation.  We make annual equity awards to the named executive officers consisting of stock options and restricted stock units (RSUs). During fiscal year 2009, option grants were made in two equal installments during the fiscal year, in May and October. These options had an exercise price equal to the closing price of our stock on the date of grant and vest in monthly increments over five years. The amounts shown in the “Option Awards” column reflect the compensation expense recorded in 2009, 2008 and 2007.

In 2009, we issued RSUs to the named executive officers in one installment in May 2009. These RSUs convert to shares of our common stock upon vesting. These RSUs vest in six equal installments over three years beginning six months after issuance. The amounts shown in the “Stock Awards” column reflect the compensation expense recorded in 2009 with respect to the RSUs.

 

Other Forms of Compensation.  We do not provide our named executive officers with pensions or the ability to defer compensation. Amounts shown in the “All Other Compensation” column reflect the matching cash contribution under our 401(k) Plan and certain other items described in the footnotes below.

 

Summary Compensation Table — Fiscal Years 2007, 2008 and 2009

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

For 2009, the named executive officers received stock option grants and awards of RSUs pursuant to our 2008 Stock Option and Incentive Plan. Consistent with our Stock Option Grant Policy, option grants were made in two equal installments during the fiscal year, in May and October. These options have an exercise price equal to the closing price of our stock on the date of grant and vest in monthly increments over five years. RSUs convert to shares of our common stock upon vesting. These RSUs vest in six equal installments over three years beginning six months after issuance.

The following table sets forth certain information with respect to grants of plan-based awards for the fiscal year ended November 30, 2009 to the named executive officers. Mr. Alsop did not receive grants of plan-based awards for the fiscal year ended November 30, 2009 prior to his termination of employment.

 

GRANTS OF PLAN-BASED AWARDS TABLE — FISCAL YEAR 2009

 

 

 

 

The terms of the stock options and restricted stock units granted in calendar year 2009 to our named executive officers were consistent with the vesting schedules and expiration dates of the options and restricted stock units granted to employees during the year. Stock options to acquire a total of 1,455,000 shares of our common stock and 364,000 restricted stock units were granted to our employees and non-employee directors in fiscal year 2009.

 

Outstanding Equity Awards

 

The following tables set forth certain information with respect to the outstanding equity awards at November 30, 2009 for each of the named executive officers:

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END