Cypress Semiconductor DEF 14A 2007
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
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Cypress Semiconductor Corporation
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March 28, 2007
You are cordially invited to attend the Cypress Semiconductor Corporation Annual Meeting of Stockholders to be held on Thursday, May 3, 2007, at 10:00 a.m. Pacific Daylight Time, at our offices located at 198 Champion Court, San Jose, California 95134. Details regarding the meeting and the business to be conducted are more fully described in the accompanying Notice of Annual Meeting of Stockholders and Proxy Statement.
We hope you will be able to attend the Annual Meeting to listen to our report on the status of our business, our performance during 2006 and our near-term plans, and to ask any questions you may have.
Your vote is very important. Whether or not you plan to attend the Annual Meeting, please vote as soon as possible. You may vote in person at the Annual Meeting, by sending in your written proxy, by telephone, or by using the Internet. Your vote by written proxy, by telephone or over the Internet will ensure your representation at the Annual Meeting if you cannot attend in person. Please review the instructions on the enclosed proxy card regarding each of these voting options.
If you would rather receive our annual report and proxy statement electronically, you may sign up for our e-delivery program at www.cypress.com/edeliveryconsent.
Thank you for your ongoing support and continued interest in Cypress Semiconductor Corporation.
2007 ANNUAL MEETING OF STOCKHOLDERS
CYPRESS SEMICONDUCTOR CORPORATION
TO ALL CYPRESS STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Cypress Semiconductor Corporation, a Delaware corporation, will be held on:
The foregoing items of business are more fully described in the proxy statement accompanying this notice. All stockholders are cordially invited to attend the Annual Meeting in person. Only stockholders of record at the close of business on March 9, 2007, are entitled to receive notice of, and to vote at, the Annual Meeting or any adjournment or postponement thereof. Any stockholder attending the Annual Meeting and entitled to vote may do so in person even if such stockholder returned a proxy or voted by telephone or over the Internet.
IMPORTANT: WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY ALSO VOTE BY TELEPHONE OR VIA THE INTERNET BY FOLLOWING THE DIRECTIONS ON THE ENCLOSED PROXY CARD. ANY ONE OF THESE METHODS WILL ENSURE REPRESENTATION OF YOUR SHARES AT THE ANNUAL MEETING. NO POSTAGE NEED BE AFFIXED TO THE PROXY CARD ENVELOPE IF MAILED IN THE UNITED STATES.
CYPRESS SEMICONDUCTOR CORPORATION
The Board of Directors of Cypress Semiconductor Corporation (Cypress or the Company) is furnishing this proxy statement to you in connection with our solicitation of proxies to be used at our annual meeting of stockholders (Annual Meeting) to be held Thursday, May 3, 2007, at 10:00 a.m. Pacific Daylight Time, or at any adjournment(s) or postponement(s) thereof. The Annual Meeting has been called for the purposes set forth in this proxy statement and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at the Companys principal executive offices located at 198 Champion Court, San Jose, California 95134. The telephone number at that address is (408) 943-2600.
The date of this proxy statement is March 28, 2007, and it was first mailed on or about March 30, 2007, to all stockholders entitled to vote at the Annual Meeting.
The following is important information regarding the Annual Meeting and this proxy statement:
BOARD STRUCTURE AND COMPENSATION
We have long believed that good corporate governance is important to ensure that Cypress is managed for the long-term benefit of its stockholders. During the past year, we have continued to review our corporate governance policies and practices to ensure they comply with the requirements or suggestions of various authorities in corporate governance and the best practices of other public companies. We have also continued to review the rules of the Securities and Exchange Commission (SEC) and the listing standards of the New York Stock Exchange (NYSE) to ensure that our corporate governance policies and practices are compliant in particular with the new SEC disclosure rules. To this end, we have reviewed our Corporate Governance Guidelines to ensure consistency with the new SEC disclosure rules. Our revised Corporate Governance Guidelines are available at http://media.corporate-ir.net/media_files/nys/cy/governance/ guidelines2.pdf. You may also request a copy in print by writing to:
Our Code of Business Conduct and Ethics is available on our website at http://media.corporate-ir.net/media_files/nys/cy/governance/conduct.pdf. Our Code of Business Conduct and Ethics covers topics such as financial reporting, conflict of interest, insider trading, compliance with laws, rules and regulations, and other Company policies. You may also request a copy in print by writing to:
On May 30, 2006, we submitted our 303A Annual CEO Certification to the NYSE.
In order to make a determination of independence of a director as required by our Corporate Governance Guidelines and rules of the NYSE and SEC, the Board of Directors (the Board) determines whether a director or a director nominee has a material relationship with Cypress (either directly or indirectly as a partner, stockholder or officer of an organization that has a relationship with Cypress). Each director or director nominee completed a questionnaire, with questions tailored to the rules of the NYSE, as well as the SEC requirements for independence. On the basis of the questionnaires completed and returned by each director, the Board determined that each of Messrs. Albrecht, Benhamou, Carney, Long, McCranie, and van de Ven is independent as determined under our Corporate Governance Guidelines and the rules of the NYSE and SEC. The Board determined that Mr. T.J. Rodgers, our President and Chief Executive Officer, has a material relationship with Cypress by virtue of his employment and position at Cypress, and therefore, is not independent. Apart from Mr. Rodgers, no other director has a relationship with Cypress other than through his membership on the Board and its committees.
The Nominating and Corporate Governance Committee regularly assesses the appropriate size of the Board and whether any vacancies are expected due to retirement or otherwise. The Nominating and Corporate Governance Committee uses a variety of methods for identifying and evaluating nominees for directorships, including requests to Board members and others for recommendations.
Stockholders may recommend, with timely notice, individuals for the Nominating and Corporate Governance Committee to consider as potential director candidates by submitting their names and background to the Nominating and Corporate Governance Committee, c/o Corporate Secretary, Cypress Semiconductor Corporation, 198 Champion Court, San Jose, California 95134. The Nominating and Corporate Governance Committee will consider a recommendation only if appropriate biographical information and background material are provided on a timely basis (see How and when may I submit proposals for consideration at next years annual meeting of stockholders or to nominate individuals to serve as directors for Cypress?).
The qualifications of recommended director candidates will be reviewed by the Nominating and Corporate Governance Committee in accordance with the criteria set forth in our Corporate Governance Guidelines and SEC and NYSE rules. These criteria include the candidates skills, attributes, integrity, experience, commitment, diligence, conflicts of interest and the ability to act in the interest of all stockholders. The Nominating and Corporate Governance Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Cypress believes that the backgrounds and qualifications of our directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow our Board to fulfill its responsibilities.
The process followed by the Nominating and Corporate Governance Committee to identify and evaluate nominees includes meeting from time to time to evaluate biographical information and background material relating to potential candidates and if appropriate, conducting interviews of selected candidates by members of the Nominating and Corporate Governance Committee and the Board.
Assuming that appropriate biographical and background material are provided for candidates recommended by stockholders, the Nominating and Corporate Governance Committee will evaluate nominees by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by Board members.
The Board makes the final determination whether or not a stockholder-recommended candidate will be included as a director nominee for election in accordance with the criteria set forth in our Corporate Governance Guidelines. If the Board decides to nominate a stockholder-recommended candidate and recommends his or her election as a director by the stockholders, the name of the nominee will be included in Cypresss proxy statement and proxy card for the stockholders meeting at which his or her election is recommended.
The Board will give appropriate attention to written communications on valid issues that are submitted by stockholders and other interested parties, and will respond if and as appropriate. Absent unusual circumstances or as contemplated by committee charters, the Chairman of the Nominating and Corporate Governance Committee, with the assistance of the Corporate Secretary, will (1) be primarily responsible for monitoring communications from stockholders and other interested parties, and (2) provide copies or summaries of such communications to the other directors as the Chairman considers appropriate.
Communications will be forwarded to all directors if they relate to substantive matters and include suggestions or comments that the Chairman of the Nominating and Corporate Governance Committee considers to be important for the directors to know. In general, communications relating to corporate governance and long-term corporate strategy are more likely to be forwarded to our full Board of Directors.
Stockholders and other interested parties who wish to send communications on any topic to the Board may do so by sending an email to CYBOD@cypress.com or by addressing such communication to the Chairman of the Board of Directors, c/o Corporate Secretary, Cypress Semiconductor Corporation, 198 Champion Court, San Jose, California, 95134.
Eric A. Benhamou serves as Chairman of our Board of Directors. The Board held a total of eight (8) meetings during our 2006 fiscal year, which ended on December 31, 2006. Every director attended at least 75% of the number of Board meetings that they were required to attend, and at least 75% of the meetings of the committees of the Board on which the director served. Our non-management (who are all independent) directors met four (4) times in executive sessions during regularly scheduled Board meetings in the 2006 fiscal year. Mr. Benhamou presided over all executive sessions of our directors, as defined under the rules of the NYSE.
Interested parties are able to make their concerns known to the non-management independent directors by electronic mail to CYBOD@cypress.com, or in writing addressed to the Chairman of the Board of Directors, c/o Corporate Secretary, Cypress Semiconductor Corporation, 198 Champion Court, San Jose, California 95134.
The Board of Directors has an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee, and an Operations Committee. The membership and functions of each committee in 2006 is described in the table below:
The Audit Committee
The Audit Committee of our Board of Directors assists the Board in fulfilling its responsibilities with respect to its oversight of:
The Audit Committee operates under a written charter adopted by our Board of Directors, and was established in accordance with Exchange Act Section 3(a)(58)(A). The charter of the Audit Committee is available on our web site at http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=CY&script=2210&item_id=489. The Board of Directors has determined that all the members of the Audit Committee are independent as independence is defined in NYSE Rule 303A.02.
The Audit Committee consists of Messrs. Albrecht, Benhamou, Carney, and McCranie, and met eight (8) times in fiscal year 2006. The Board of Directors determined that each member of the Audit Committee is financially literate and has accounting and/or related financial management expertise required under the rules of the NYSE.
Our Audit Committee charter limits to three (3) the number of audit committees on which a Cypress Audit Committee member may serve without the review and approval of our Board of Directors. Mr. Albrecht currently serves on the audit committees of four public companies, including Cypress and SunPower Corporation, a Cypress subsidiary. Our Board of Directors has discussed with Mr. Albrecht his Audit Committee membership and evaluated the existing demands on his time. Based on these discussions, our Board concluded that such simultaneous service does not impair Mr. Albrecht's ability to continue to effectively serve on our Audit Committee. Our Board designated Mr. Albrecht as the audit committee financial expert in accordance with the NYSE requirement. The responsibilities of our Audit Committee and its activities during fiscal year 2006 are described in the Report of the Audit Committee contained in this proxy statement.
In discharging its duties, the Audit Committee:
The Compensation Committee consists of Messrs. Benhamou, Carney, and Long. The Board has determined that the members of the committee are independent as defined under the rules of the NYSE. The Compensation Committee assists the Board with discharging its duties with respect to the formulation, implementation, review and modification of the compensation of our directors, officers and senior executives, and the preparation of the annual report on executive compensation for inclusion in our proxy statement.
The Committee, through delegation by the Board of Directors, has overall responsibility for the following:
In discharging its duties, the Committee has retained the services of various compensation consultants in order to have independent, expert perspectives on matters related to executive compensation, Company and executive performance, equity plans and other issues. The Committee has the sole authority to determine the scope of services for these consultants and may terminate the consultants services at any time. The fees of these consultants are paid by the Company.
No officer of the Company was present during discussions or deliberations regarding that officers own compensation. Additionally, the Committee met in executive session with its independent consultant to discuss various matters and formulate certain final decisions, including those regarding the performance and compensation of the Chief Executive Officer.
The Compensation Committee held five (5) meetings during our 2006 fiscal year. The responsibilities of our Compensation Committee and its activities during fiscal year 2006 are also described in the Report of the Compensation Committee contained in this Proxy Statement. The charter for our Compensation Committee is posted on our web site at http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=CY&script=2210&item_id=490.
The Nominating and Corporate Governance Committee consists of Messrs. Long and van de Ven. The Board has determined that the members of the Committee are independent as defined under the rules of the NYSE. The purpose of the Nominating and Corporate Governance Committee is to:
The Nominating and Corporate Governance Committee is authorized to retain advisers and consultants and to compensate them for their services. The Nominating and Corporate Governance Committee did not retain any such advisers or consultants during fiscal year 2006.
The Nominating and Corporate Governance Committee held two (2) meetings during fiscal year 2006. The charter for our Nominating and Corporate Governance Committee is posted on our web site at http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=CY&script=2210&item_id=491.
The Operations Committee consists of Messrs. McCranie and van de Ven. The purpose of the Operations Committee is to:
To discharge their responsibilities, members of the Operations Committee attend various quarterly operations reviews and provide advice and counsel to the Companys management. As part of their committee responsibilities, Mr. van de Ven also serves on our Manufacturing Advisory Board (MAB) and Mr. McCranie serves on the Sales & Marketing Board (S&MB). The charter for our Operations Committee is posted on our web site at http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=CY&script=2210&item_id=6028.
We pay an annual retainer fee of $45,000 to each non-management member of our Board. We also pay an additional $2,500 to the chairman of our Audit Committee quarterly, and a quarterly payment of $1,250 to other members of the Audit Committee. Each of the chairmen of the Compensation Committee and the Nominating and Corporate Governance Committee is paid an additional $1,875 quarterly. No additional payment is made to other members of the Compensation Committee or the Nominating and Corporate Governance Committee. The members of our Operations Committee are paid $2,500 for each business operations or each advisory board meeting they attend. In addition to the compensation described above, we pay the travel and other meeting-related expenses of each of our non-management directors.
In addition to the cash remuneration set forth above, the 1994 Stock Plan, as amended, provides for the automatic grant of non-statutory options to our non-management directors. Upon their initial appointment to the Board, each non-management director is granted an option to purchase 80,000 shares of common stock. Incumbent non-management directors who have served since the last annual stockholders meeting and are re-elected at the Companys next annual meeting automatically receive an additional option to purchase 20,000 shares of common stock as detailed in our 1994 Stock Plan. Vesting and pricing is effective as of the date of the Annual Meeting. If the re-elected incumbent director has not served on the Board since the last annual stockholders meeting, then the additional 20,000 option grant is pro-rated based on the number of months from the date of his initial grant to the date of his re-election. Commencing in fiscal year 2007, we will be considering awarding to our directors restricted stock units instead of stock options.
As long as a director maintains continuous status as a director, option grants vest on a monthly basis over a period of five (5) years from the date of grant. The exercise price of options granted under the 1994 Stock Plan is the fair market value of our common stock on the date of grant, which is the date of the annual meeting for returning directors. No other compensation is made to members of our Board, except as set forth under Certain Relationships and Related Transactions.
A board of seven (7) directors is to be elected at the 2007 Annual Meeting. The proxies cannot be voted for greater than the number of nominees named. All directors are elected annually and serve a one-year term until the next annual meeting where they or their successors are elected. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the seven (7) nominees named below, each of whom is presently serving as one of our directors. If any nominee is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee designated by the present Board of Directors to fill the vacancy. If additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them in accordance with cumulative voting to elect as many of the nominees listed below as possible. In such event, the proxy holders will determine the specific nominees for whom such votes will be cumulated. We do not expect any nominee will be unable or will decline to serve as a director. There are no arrangements or understandings between any nominee and any other person pursuant to which he was selected as a director or a nominee.
Nominees for Election to Our Board of Directors
Except as set forth below, each of the nominees has been engaged in his principal occupation described above during the past five (5) years. There are no family relationships among our directors and executive officers.
T.J. Rodgers is a co-founder of Cypress and has been the Companys president and chief executive officer and a member of our board of directors since 1982. Mr. Rodgers also serves as a director of Bloom Energy (formerly Ion America), Silicon Light Machines, and SunPower Corporation. Mr. Rodgers is also a member of the board of trustees at Dartmouth College.
W. Steve Albrecht is the Associate Dean and Andersen Alumni Professor of Accounting at the Marriott School of Management at Brigham Young University (BYU). Mr. Albrecht, a certified public accountant, certified internal auditor, and certified fraud examiner, joined BYU in 1977 after teaching at Stanford University and the University of Illinois. Prior to BYU, he worked as an accountant for Deloitte & Touche. Mr. Albrecht is the past president of the American Accounting Association and the Association of Certified Fraud Examiners. He currently serves on the board of directors of Red Hat, SkyWest Airlines, and SunPower Corporation. He is currently a trustee of the Financial Accounting Foundation that provides oversight to the FASB (Financial Accounting Standards Board) and GASB (Governmental Accounting Standards Board).
Eric A. Benhamou is the chairman of our board of directors, as well as the chairman of the board of directors of 3Com Corporation and Palm, Inc. He served as chief executive officer of Palm, Inc. from October 2001 until October 2003, and as chief executive officer of 3Com from 1990 until the end of 2000. Mr. Benhamou co-founded Bridge Communications, an early networking pioneer, and was vice president of engineering until its merger with 3Com in 1987. He is also a member of the board of directors of RealNetworks, Inc. and Silicon Valley Bank. He serves on the executive committee of TechNet and the Computer Science and Technology Board (CSTB). He is the chief executive officer of Benhamou Global Ventures, an investment firm he established.
Lloyd Carney is the chairman of the board of directors and chief executive officer of Carney Global Ventures, an early round global venture fund. Prior to founding Carney Global Ventures, he was the general manager of IBMs NetCool Division. Prior to his employment at IBM, he was the chairman and chief executive officer of Micromuse, before it was acquired by IBM in 2006. Prior to Micromuse, Mr. Carney was the chief operations officer and executive vice president at Juniper Networks where he oversaw the engineering, product management and manufacturing divisions. Prior to joining Juniper Networks, Mr. Carney was the president of the Core IP Division, the Wireless Internet Division and the Enterprise Data Division at Nortel Networks.
James R. Long has been an independent business consultant since 1999. He retired in 1999 as executive vice president of Nortel Networks Corporation and president of Nortel Enterprise Solutions. Between 1991 and 1999, Mr. Long was the president of various business units at Nortel Networks, including Asia Pacific, Nortel World Trade, and the Enterprise Solutions group. Prior to joining Nortel, Mr. Long held a variety of senior executive positions with IBM Corporation and Rolm Company, an IBM and Siemens joint venture. He currently serves on the board of directors of 3Com Corporation and the Polynesian Cultural Center. Mr. Long currently serves on Cypresss Sales & Marketing Advisory Board.
J. Daniel McCranie currently serves as chairman of the board of ON Semiconductor and Virage Logic. He is also a member of the board of directors of Actel Corporation. Mr. McCranie served as Cypress's executive vice president of sales and marketing from 1993-2001. Prior to his initial tenure with Cypress, Mr. McCranie was the chairman of the board, president and chief executive officer of SEEQ Technology, and held positions of increasing responsibility in management, engineering, and sales and marketing at Harris Corporation, Advanced Micro Devices, American Microsystems and Philips Corporation.
Evert van de Ven has more than 30 years of experience in the semiconductor industry, including engineering and advisory positions at Philips Semiconductor, Matsushita Electronics Corporation and Applied Materials. Mr. van de Ven retired as executive vice president and chief technology officer of Novellus Systems in 1995. Mr. van de Ven previously served on the board of directors at Matrix Integrated Systems. Mr. van de Ven has been a member of the Technology Advisory Board at Cypress since 1995, and was a member of the Companys Manufacturing Advisory Board from 1999 to 2005.
The seven (7) nominees receiving the highest number of affirmative votes of the shares present or represented and entitled to vote shall be elected as directors to serve until our next annual meeting, where they or their successors will be elected. Votes withheld from this proposal are counted for purposes of determining the presence or absence of a quorum for the transaction of business, but have no further legal effect under Delaware law.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION TO THE BOARD OF EACH OF THE NOMINEES PROPOSED ABOVE.
The Board of Directors, upon recommendation of the Audit Committee, has reappointed the firm of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 30, 2007, subject to ratification by our stockholders.
PricewaterhouseCoopers LLP has served as our independent registered public accounting firm since 1982. A representative of PricewaterhouseCoopers LLP is expected to be present at the Annual Meeting and will have an opportunity to make a statement if he or she desires to do so, and will be available to respond to questions.
Stockholder ratification of the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm is not required by our bylaws or other applicable legal requirements. However, the Board is submitting the selection of PricewaterhouseCoopers LLP to the stockholders for ratification as a matter of good corporate practice.
If the stockholders fail to ratify the selection of our independent registered public accounting firm, the Audit Committee and the Board will reconsider whether or not to retain that firm. Even if the selection is ratified, the Board, at its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in Cypresss and its stockholders best interests.
Breakdown of Fees for 2006
Breakdown of Fees for 2005
Audit Fees: Includes fees associated with the annual audit of financial statements and internal control over financial reporting in compliance with regulatory requirements under the Sarbanes-Oxley Act, review of our quarterly reports on Form 10-Q, annual report on Form 10-K and periodic reports on Form 8-K, consents issued in connection with our Form S-8 filings, assistance and review with other documents we filed with the SEC, and statutory audits required internationally. In addition, audit fees for 2005 included services rendered in connection with SunPower Corporations initial public offering in November 2005, and a secondary public offering in June 2006.
Audit-Related Fees: Audit-related services principally include employee benefit plan audits, internal control consulting, and accounting consultations not associated with the audit.
Tax Fees: Includes fees for tax compliance (tax return preparation assistance and expatriate tax services), general tax planning, tax-related services on acquisition, and international tax consulting.
All Other Fees: Cypress was not billed any other fees by PricewaterhouseCoopers LLP.
The affirmative vote of the holders of a majority of the shares represented and entitled to vote at the meeting will be required to ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 30, 2007.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
The Audit Committee of Cypresss Board of Directors serves as the representative of the Board of Directors with respect to its oversight of:
The Audit Committee also reviews the performance of Cypresss independent registered public accounting firm, PricewaterhouseCoopers LLP, in the annual audit of financial statements and internal control over financial reporting and in assignments unrelated to the audit, and reviews the independent public accountants fees.
The Audit Committee provides the Board such information and materials as it may deem necessary to make the Board aware of financial matters requiring the attention of the Board. The Audit Committee reviews the Companys financial disclosures, and meets privately, outside the presence of our management, with our independent registered public accounting firm and our internal auditors to discuss our internal accounting control policies and procedures. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements in our Annual Report on Form 10-K for our fiscal year ended December 31, 2006, with management including a discussion of the quality and substance of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. In addition, the Audit Committee reviewed the results of managements assessment of the effectiveness of Cypresss internal control over financial reporting as of December 31, 2006. The Audit Committee reports on these meetings to our Board of Directors.
The charter of the Audit Committee is available at our website at:
Cypresss management has primary responsibility for preparing Cypresss financial statements and for its financial reporting process. In addition, management is responsible for establishing and maintaining adequate internal control over financial reporting. Cypresss independent registered public accounting firm is responsible for expressing an opinion on the conformity of Cypresss financial statements to generally accepted accounting principles and on managements assessment of the effectiveness of Cypresss internal control over financial reporting.
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by the independent registered public accounting firm. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. With the exception of certain de-minimus amounts, unless the specific service has been previously pre-approved with respect to that fiscal year, the Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform such services for Cypress.
Based on the review and discussion referred to in items (1) through (4) above, the Audit Committee recommended to Cypresss Board of Directors and the Board approved, that the Companys audited financial statements be included in Cypresss Annual Report on Form 10-K for the fiscal year ended December 31, 2006, for filing with the SEC. The Audit Committee also recommended the reappointment of PricewaterhouseCoopers LLP as Cypresss independent registered public accounting firm for fiscal year 2007.
Each member of the Audit Committee is independent as defined under the listing standards of the NYSE.
AMENDMENT OF THE 1994 STOCK PLAN
Our 1994 Stock Plan (the Plan) currently allows us to grant stock options and restricted stock (including restricted stock units) to employees, officers and directors. As of March 1, 2007, the Plan had approximately 16.1 million stock options and 1 million shares of restricted stock or restricted stock units available for grant.
Summary of the Proposal
General. Our Board of Directors approved the amendment and restatement of the Plan (as amended and restated, the Amended Plan) on March 26, 2007, subject to approval by the stockholders at the Annual Meeting. The amendments approved by the Board have no effect on the term of the Plan. Our executive officers and directors have an interest in this Proposal. The Amended Plan includes the following features:
Replacement of 2,000,000 Share Limitation on Full-Value Awards with a Fungible Share Provision. Many technology companies and other employers, including us, have begun using full-value awards such as restricted stock and restricted stock units to a greater extent in order to retain and attract valuable employees. Because such awards are typically issued in lesser numbers than stock options, they can result in less overall dilution from equity compensation awards than stock options. In some cases, issuing lower numbers of full-value awards can also decrease the amount of equity compensation expense companies recognize for financial accounting purposes. In order for us to have greater flexibility to use full-value awards, and to allow us to remain competitive in structuring our equity compensation packages, we are asking our stockholders to approve replacing the fixed 2,000,000 limit on full-value awards with a fungible share provision, under which each full-value award issued under the Amended Plan will result in a reduction of 1.88 shares from the Amended Plan share reserve.
Addition of Stock Appreciation Rights. Stock appreciation rights are stock option type awards that are exercised by withholding the number of shares with a fair market value on the date of exercise equal to the aggregate exercise price. Under the Amended Plan, stock appreciation rights may be settled in stock or in cash, although if this proposal is approved, we expect to primarily issue stock appreciation rights that may only be settled in stock. Because shares are retained to satisfy the exercise price instead of being sold on the open market, as is typically the case with stock options, stock appreciation rights can be less dilutive than stock options. From a plan share reserve perspective, however, the Amended Plan provides that the shares used to satisfy the exercise price and minimum tax withholding obligations on the exercise of a stock appreciation right will not be available for re-issuance.
Critical Element of our Compensation Policy. We believe that our employees are our most valuable asset. The approval of the Amended Plan and the resulting ability to continue with our broad-based equity compensation program:
Shares Reserved Under the Amended Plan
As of March 1, 2007, 17,048,291 shares of common stock were available for issuance under the current 1994 Stock Plan. Options to purchase approximately 26.6 million shares of common stock were outstanding, with a weighted exercise price of $15.57 per share. We have issued 1,011,533 shares subject to restricted stock units, leaving us with 988,467 shares available for issuance as restricted stock or restricted stock unit awards under the 2,000,000 share limit. Shares under the Amended Plan may be authorized but unissued, or reacquired shares.
The affirmative vote of the holders of a majority of the common stock present or represented at the meeting is required to approve the adoption of the Amended Plan.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR THE AMENDMENT OF THE 1994 STOCK PLAN.
SUMMARY OF THE AMENDED PLAN
The following is a summary of the principal features of the Amended Plan and its operation. However, the summary is qualified in its entirety by reference to the Amended Plan, as set forth in Appendix A.
Background and Purpose of the Amended Plan
The Amended Plan is intended to (i) attract, (ii) retain, and (iii) increase incentives through share ownership on the part of, eligible employees, consultants, and non-employee directors who provide significant services to us. We believe that, over the years, our stock plans have made a significant contribution to the success of our business by increasing our ability to attract and retain highly competent individuals on whose judgment, initiative, leadership and continued efforts our growth and profitability depend.
Types of Awards Granted Under the Amended Plan
The Amended Plan also provides for the grant of automatic, nondiscretionary stock options and restricted stock units to our non-employee directors. Collectively, the discretionary awards and the automatic options are referred to as Awards.
Administration of the Amended Plan
A committee of at least two non-employee members of our Board (the Committee) administers the Amended Plan. To make grants to certain of our officers and key employees, the members of the Committee 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 Internal Revenue Code (so that we can receive a federal tax deduction for certain compensation paid under the Amended Plan).
Subject to the terms of the Amended Plan, the Committee has the sole discretion to select the employees, consultants, and non-employee directors who will receive discretionary Awards, determine the terms and conditions of such discretionary Awards (for example, the exercise price and vesting schedule), and interpret the provisions of the Amended Plan and outstanding Awards. The Committee also has the authority to amend outstanding Awards, including the authority to accelerate vesting or to extend an options post-termination exercise period (but not beyond the original option term). Subject to applicable law, the Committee may delegate any part of its authority and powers under the Amended Plan to one or more of our directors and/or officers.
The Committee may not permit the repricing, including by way of exchange, of any Award without receiving prior stockholder approval.
Share Counting Provisions
Any restricted stock award or restricted stock unit award granted under the Amended Plan will result in 1.88 shares being removed from the Amended Plan share reserve. Shares withheld to satisfy minimum withholding obligations or to satisfy the exercise price of a stock appreciation right shall not become available for re-issuance under the Amended Plan.
Awards that Expire or are Forfeited
If an Award expires or is cancelled without having been fully exercised or vested, the unvested or cancelled shares will be returned to the available pool of shares reserved for issuance under the Amended Plan. To the extent that the Amended Plan share reserve was reduced by 1.88 shares upon the grant of an award, the Amended Plan share reserve shall be increased by 1.88 shares upon the expiration or cancellation of such award.
Eligibility to Receive Awards
The Committee selects (or Cypress management selects for approval by the Committee) the employees, consultants, and non-employee directors to be granted discretionary Awards, provided that only employees may receive incentive stock options. The actual number of individuals who will receive discretionary Awards cannot be determined in advance because the Committee has the discretion to select the participants.
Our non-employee directors are eligible to receive automatic options grants for each year they serve on the Board.
As of March 1, 2007, 6,028 employees (including 19 executive officers), 14 outside advisors, and 9 non-employee directors were eligible to participate in the Plan.
Stock Options and Stock Appreciation Rights
A stock option or stock appreciation right is the right to acquire shares at a fixed exercise price for a fixed period of time (stock appreciation rights may be settled in cash, if so provided in the award agreement). Under the Amended Plan, the Committee may grant stock appreciation rights and nonstatutory stock options and/or incentive stock options (which entitle employees, but not Cypress, to more favorable tax treatment).
Share Limits. The Committee will determine the number of shares covered by each option and stock appreciation right, but during any fiscal year of Cypress, no participant may be granted options or stock appreciation rights covering, in the aggregate, more than 1,000,000 shares.
Exercise Price. The exercise price of the shares subject to each option and stock appreciation right is set by the Committee, but cannot be less than 100% of the fair market value (on the date of grant) of the shares covered by the option or stock appreciation right, except in the case of an incentive stock option to an employee who holds greater than 10% of the voting power of all classes of stock of the Company or its subsidiaries. In this case, the exercise price must be no less than 110% of the fair market value per share on the date of grant.
Incentive Stock Options. The aggregate fair market value of the shares (determined on the grant date) covered by incentive stock options which first become exercisable by any participant during any calendar year may not exceed $100,000. Any shares in excess of this limit will be treated as a nonstatutory stock option. If the employee holds more than one incentive stock option, the incentive stock options are considered in the order in which they were granted.
Term and Vesting. An option or stock appreciation right granted under the Amended Plan generally cannot be exercised until it becomes vested. The Committee establishes the vesting schedule of each option or stock appreciation right at the time of grant. Options granted to new hires typically cliff vest as to 20% of the covered shares after one (1) year of service and vest monthly thereafter so as to be 100% vested after completing five (5) years of service. Options granted to existing employees typically vest monthly over five (5) years. Options and stock appreciation rights granted under the Amended Plan expire at the times established by the Committee, but not later than eight (8) years after the grant date (such term is limited to five (5) years in the case of an incentive stock option granted to a participant who owns stock possessing more than 10% of the total combined voting power of all classes of stock of Cypress or any parent or subsidiary).
Exercise of the Option or Stock Appreciation Right. An option or stock appreciation right granted under the Amended Plan is exercised by giving written or electronic notice to the brokerage company retained by Cypress, specifying the number of shares to be purchased and, for stock options, tendering full payment of the exercise price to Cypress. The Committee may permit payment through the tender of shares that are already owned by the participant, or by any other means that the Committee determines to be consistent with the purpose of the Amended Plan. Stock appreciation rights are exercised by Cypress withholding shares with a fair market value equal to the aggregate exercise price. The participant must pay any taxes that Cypress is required to withhold at the time of exercise.
Termination of Participant. In the event a participants continuous status as an employee, director, or consultant terminates for any reason other than upon the participants death or disability, all of the vested options and stock appreciation rights held by the participant under the Amended Plan will be exercisable (to the extent the option or stock appreciation right was exercisable on the date of termination, unless otherwise determined by the Committee) within such period of time as is specified in the applicable option or stock appreciation right agreement. In the absence of a specified period of time in the agreement, the vested portion of the option or stock appreciation right will remain exercisable for a period of 30 days following the date of such termination. In the event a participants continuous status as an employee, director, or consultant terminates as a result of the participants disability, all of the options and stock appreciation rights held by the participant under the Amended Plan will be exercisable (to the extent the option or stock appreciation right was exercisable on the date of termination, unless otherwise determined by the Committee) for a period of six (6) months following the date of such disability or such longer period of time not exceeding 12 months, as specified in the applicable option or stock appreciation right agreement. In the event a participants continuous status as an employee, director, or consultant terminates as a result of the participants death, all of the vested options and stock appreciation rights held by the participant under the Amended Plan will be exercisable (to the extent the option or stock appreciation right would have become exercisable had the participant continued living and remained in continuous status as an employee, director, or consultant for an additional 12 months) for a period of six (6) months following the date of such death. In addition, if the participants death occurs within 30 days after his or her termination of continuous status as an employee, director, or consultant, the option or stock appreciation right may be exercised within six (6) months following the date of such death (to the extent the option or stock appreciation right was exercisable on the date of termination, unless otherwise determined by the Committee). However, in no event may the period of exercisability extend beyond the expiration date of the option or stock appreciation right.
Restricted Stock/Restricted Stock Units
Awards of restricted stock are shares that vest in accordance with the terms and conditions established by the Committee. The Committee will determine the terms and conditions of restricted stock granted under the Amended Plan, including the number of shares of restricted stock granted to any employee, consultant, or non-employee director and whether the award will be in the form of restricted stock or restricted stock units; provided that during any fiscal year of Cypress, no participant may be granted more than 800,000 shares in the aggregate of restricted stock or restricted stock units.
In determining whether an award of restricted stock or restricted stock units should be made, and/or the vesting schedule for any such Award, the Committee may impose whatever conditions to vesting as it determines to be appropriate. For example, the Committee may determine to grant an Award of restricted stock only if the participant satisfies performance goals established by the Committee. The Committee is considering implementing significant performance based restricted stock for executive officers and other senior management in 2007.
Automatic Options Granted to Non-Employee Directors
Under the Amended Plan, our non-employee directors receive annual, automatic option grants. No person has any discretion to select which non-employee directors will be granted automatic options or to determine the number of shares to be covered by the automatic option grants.
Administration and Grants of Options. Automatic option grants are not subject to any discretionary administration and are made pursuant to a non-discretionary formula, as follows:
Terms and Conditions of the Options. Each automatic option is evidenced by a director option agreement between Cypress and the non-employee director, and is subject to the following terms and conditions:
Payment of the Exercise Price. Payment for shares issued upon exercise of an option may, depending on the terms of the option agreement, consist of cash, check, certain other shares, cashless exercise, or any combination of these methods of payment.
Termination of Directorship. In the event an optionees status as a director terminates for any reason, all of the vested options held by the optionee under the Amended Plan will be exercisable (to the extent the option was exercisable on the date of termination, or in the case of death, to the extent the option would have become exercisable had the optionee continued living and remained in continuous status as a director for another 12 months) for a period of one year following the date of such termination. In addition, if the optionee dies within 30 days after his or her termination of continuous status as a director, the vested options may be exercised within one year following the date of such death (to the extent the option was exercisable on the date of termination). However, in no event may the period of exercisability extend beyond the expiration date of the options.
Transfers or Leave of Absence
Unless otherwise determined by the Committee, and subject to applicable laws, the vesting of options granted under the Amended Plan ceases during any unpaid leave of absence. Moreover, unless otherwise determined by the Committee, any employee who transfers his or her employment to a subsidiary and receives an equity incentive covering such subsidiarys equity securities in connection with such transfer, ceases vesting in his or her options granted under the Amended Plan, until such time (if at all), the employee transfers from the employ of the subsidiary or another subsidiary back to the employ of Cypress.
Changes in Capitalization
If we experience a stock split, reverse stock split, stock dividend, combination or reclassification of our shares, or any other increase or decrease in the number of issued shares effected without our receipt of consideration (except for certain conversions of convertible securities) appropriate adjustments will be made, subject to any required action by our stockholders, to the number of shares available for issuance under the Amended Plan, the number of shares issuable as restricted stock awards under the Amended Plan, the number of shares covered by each outstanding Award, the price per share covered by each outstanding Award, and the per-person limits on Awards, as appropriate to reflect the stock dividend or other change.
Merger or Asset Sale
In the event of our merger with or into another corporation or the sale of substantially all of our assets, the successor corporation (or its parent or subsidiary) will assume or substitute each outstanding Award. With respect to discretionary Awards, the Committee may, in its sole discretion, fully accelerate such Awards in lieu of assumption or substitution. In such event, the Committee will notify all participants that their options and stock appreciation rights under the Amended Plan will be fully exercisable for a period of 30 days from the date of such notice and the option or stock appreciation right will terminate upon the expiration of such period.
With respect to automatic option grants, in the event the successor corporation does not agree to assume or substitute for such options, each outstanding automatic option will become fully vested and exercisable, including as to shares that would not otherwise be exercisable, unless the Board, in its discretion, determines otherwise.
The Committee, in its discretion, may make performance goals applicable to a participant with respect to an Award. At the Committees discretion, one or more performance goals may apply including the following: annual revenue, cash position, earnings per share, individual objectives, net income, operating cash flow, operating income, return on assets, return on equity, return on sales, and total stockholder return. For awards that are not intended to qualify as performance-based compensation under 162(m), the Committee may choose other performance goals.
Awards to be Granted to Certain Individuals and Groups
The number of discretionary Awards that an employee, consultant, or non-employee director may receive under the Amended Plan is at the discretion of the Committee and therefore cannot be determined in advance. The following table sets forth (a) the aggregate number of shares subject to automatic option grants under the Plan during the last fiscal year, and (b) the average per share exercise price of such automatic options.
Limited Transferability of Awards
Awards granted under the Amended Plan generally may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the applicable laws of descent and distribution. During the participants lifetime, only the participant may exercise the Award. If the Committee makes an Award under the Amended Plan transferable, such Award will contain such additional terms and conditions as the Committee deems appropriate; provided, however, that in no event may an award be transferred in exchange for consideration.
U.S. Federal Tax Aspects
The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and Cypress of awards granted under the Amended Plan. Tax consequences for any particular individual may be different.
Nonstatutory Stock Options and Stock Appreciation Rights. No taxable income is reportable when a nonstatutory stock option or stock appreciation right is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the shares purchased over the exercise price of the option. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss. Any cash received upon exercise of a stock appreciation right will constitute ordinary income.
Incentive Stock Options. No taxable income is reportable when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case taxation is similar to nonstatutory stock options). If the participant exercises the option and then later sells or otherwise disposes of the shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two- or one-year holding periods described above, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise price of the option.
Restricted Stock/Restricted Stock Units. A participant will not have taxable income upon grant unless he or she elects to be taxed at that time (except no such election is available for restricted stock units). Instead, he or she will recognize ordinary income at the time of vesting equal to the fair market value (on the vesting date) of the shares received minus any amount paid for the shares.
Tax Effect for Cypress. Cypress generally will be entitled to a tax deduction in connection with an Award under the Amended Plan in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to certain of our executive officers. Under Section 162(m) of the Internal Revenue Code, the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, Cypress can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include stockholder approval of the Amended Plan, setting limits on the number of Awards that any individual may receive, and for awards other than certain stock options, establishing performance criteria that must be met before the award actually will vest or be paid. The Amended Plan has been designed to permit the Committee to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting Cypress to receive a federal income tax deduction in connection with such awards.
Amendment and Termination of the Plan
The Board generally may amend, alter, suspend, or terminate the Amended Plan at any time, except that certain amendments may require stockholder approval or the consent of participants in the Amended Plan. Adding shares to the Amended Plan requires stockholder approval, except in the case of adjustments due to a stock split or similar change in capitalization effected without the receipt of consideration by us.
We believe strongly that the approval of the Amended Plan is essential to our continued success. Awards such as those provided under the Amended Plan constitute an important incentive for our key employees and other service providers and help us to attract, retain and motivate people whose skills and performance are critical to our success. Our employees are our most valuable asset. We strongly believe that the Amended Plan is essential for us to compete for talent in the difficult labor markets in which we operate.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information for 2006 with respect to our compensation plans (including individual compensation arrangements) under which equity securities of Cypress are authorized for issuance, are aggregated in the table below as follows:
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial ownership of our common stock as of the Record Date (except as described below) by:
The following table sets forth certain information regarding beneficial ownership of shares of the common stock of our significant active subsidiaries as of the Record Date by:
COMPENSATION DISCUSSION AND ANALYSIS
Our Compensation Discussion and Analysis addresses the following topics:
In this Compensation Discussion and Analysis section, the terms we, our, and us refer to management, the Company and sometimes, as applicable, the Compensation Committee of the Companys Board of Directors.
We believe that our achievements result from the coordinated efforts of all employees working toward common objectives that are aimed at the continued improvement of the Companys performance and stockholder value. This philosophy is reflected in how our executive compensation program is structured and implemented.
Specifically, our executive compensation program is designed with the following objectives:
As with all employees, we provide our executive officers with a base salary, equity incentives, short- and long-term cash awards that are tied to performance against corporate and individual goals, and other benefits, such as health and insurance plans. In addition, our executives may participate in our deferred compensation plans.
To achieve the objectives set forth above, we consider the following principles when making our compensation decisions:
We Begin our Focus on Strategic Objectives and then Reward Results
Our compensation analysis begins with an examination of Cypresss business plan and strategic objectives. Our Chief Executive Officer and Board of Directors meet annually to set our business plans and strategic objectives, and at least quarterly to review our results and progress against such objectives. It is our intent that our compensation program attract and retain leaders who will meet objective measures of success, and reward such individuals for achieving Cypresss intended results. Formulas that measure such achievement are built into certain components of our compensation program such that our executive officers earn less when our corporate goals are not met, and may earn more when the goals are exceeded. For example, fiscal year 2006 was a strong year for financial, strategic, operational and stockholder performance by the Company. Consequently, bonuses were earned under our Companys bonus program in each quarter of fiscal year 2006. See below under Cash Incentive Pay under Components of Executive Compensation.
Below are some of the key highlights for the year that were taken into consideration, based on actual results to date and projected results for 2006, when we evaluated the compensation for our chief executive officer and other executive officers during 2006:
We Promote a Pay-for-Performance Culture
We believe strongly that an individuals compensation should be directly linked to the performance of the Company and the individual. This belief has guided certain compensation-related decisions:
We Believe Our Compensation Decisions Should Be Consistent with the Interests of Stockholders
The elements of our compensation program are intended to drive management to a balance of short-term achievements to drive profitability with long-term successes that will ensure a strong future for the Company. We believe that stock option and restricted stock unit grants create a sense of ownership and long-term incentive that align the interests of management with our stockholders.
We Believe Compensation Should be Reasonable, Responsible and Competitive
It is essential that Cypresss overall compensation levels be competitive enough to attract talented leaders and motivate those leaders to achieve superior results. At the same time, we believe that compensation at all levels should be set at responsible levels and be consistent with Cypresss focus on controlling costs and rewarding performance.
We Use Equity Compensation for Recruitment and Retention
We believe that stock ownership is a key element for attracting and retaining executives. We also believe that equity based compensation opportunities should be based on position, salary level and competitive practice, and should reflect each executives individual contribution and potential, as well as retention objectives.
In October 2005, the Compensation Committee engaged AON Consulting to provide an analysis of pay levels and pay mix for our executive officers for 2006. AON evaluated data from our semiconductor peers on a national level. AONs benchmarking analysis encompassed each component of our compensation program, including cash, equity, and incentive-based compensation of our executives. AON compared the compensation of our executives for alignment with (a) our Companys compensation philosophy, and (b) similar positions within our industry. Consistent with its charter provisions, our Compensation Committee has retained AON Consulting in the past to provide general advice on other compensation matters. AONs analysis was based on data obtained from publicly available data of our peer group companies.
AONs analysis confirmed that Cypresss executive compensation levels were generally aligned with the Companys compensation philosophy. Except for the compensation of our chief executive officer, the table below is a summary of how our compensation packages ranked in the benchmarking analysis:
Targeted Overall Compensation
Together with the performance objectives, we establish targeted total compensation levels (i.e., maximum achievable compensation) for each of the senior executive officers. In making this determination, we are guided by the compensation philosophy described above. We also consider historical compensation levels, competitive pay practices at the companies in the study groups, and the relative compensation levels among the companies senior executive officers. We may also consider industry conditions, retention needs, corporate performance versus a peer group of companies and the overall effectiveness of our compensation program in achieving desired performance levels.
As discussed above, the Compensation Committee retained the services of AON Consulting to provide information regarding compensation programs for executive officers of peer group companies and to provide advice on other executive compensation matters. We were able to use the information and advice provided by AON to help establish our targeted overall compensation, or the aggregate level of compensation we will pay if performance goals are fully met. The AON analysis included compensation information for 22 peer group companies. The peer group included a broad range of companies in the high technology industry with whom Cypress competes for executive talent. For fiscal year 2006, the Compensation Committee considered major high technology competitors for executive talent as well as companies similar in size and scope to Cypress, as measured by market capitalization, net income, revenue and total stockholder return. The peer group consisted of the following companies:
Publicly available information on the above-mentioned peer group companies does not typically include information regarding target cash compensation, so AONs review relied on compensation surveys prepared by Radford Surveys and Consulting to benchmark total cash compensation. Data was gathered for base salary levels, bonus targets and all forms of equity awards, including stock options, performance shares, restricted stock, and long term cash-based awards. Data on deferred compensation benefits, or other generally available benefits, such as 401(k) plans or health care coverage was not included in the AON analysis.
Once we determined our targeted overall compensation, our Chief Executive Officer recommended to the Compensation Committee, and the Compensation Committee approved, each executive officers 2006 total annual cash compensation, including base salary and bonuses. In doing so, the Compensation Committee considered a number of factors, including the information in the AON analysis and other publicly available information. For example, the Committee compared the proposed base pay and target cash compensation against publicly available information and the survey data. Cypresss goal is to target base pay and total cash compensation for its executive officers at or around the 50th percentile, as ranked among its peer group. Positioning base pay at the 50th percentile of peer companies aids Cypress in controlling fixed costs and puts a higher portion of targeted cash compensation at risk. However, in determining base salary, the Committee also considers factors such as job performance, skill set, prior experience, the executives time in his or her position and/or with Cypress, internal consistency regarding pay levels for similar positions or skill levels within the Company, external pressures to attract and retain talent, and market conditions.
AONs analysis showed that Mr. Rodgers cash and equity compensation were below the 50th percentile of other chief executive officers in our peer group companies. However, our Compensation Committee decided to conduct a more thorough and focused survey with respect to our Chief Executive Officers compensation with a view to addressing any inequities during his annual performance review in June 2006.
The Compensation Committee, therefore, requested AON to conduct the survey specifically focused on Mr. Rodgers annual remuneration. Our Compensation Committee wanted this research to be based on real-time data of a revised, more current set of peer group companies. AONs report was produced in March 2006, and confirmed that our Chief Executive Officers compensation was below our ideal target of 50th percentile of market.
Our Compensation Committee engaged Pearl Meyer & Partners, another nationally recognized consulting firm, to provide an independent evaluation and review of the survey data from AON. Pearl Meyers report showed that Mr. Rodgers cash and equity compensations were below market.
Based on year to date accomplishments of strategic goals, financial performance, share price appreciation, estimates of future financial and strategic goal accomplishments, and input from AON and Pearl Meyer, commencing July 2006, our Compensation Committee:
The Compensation Committee or Cypress management considers whether to provide employees with additional compensation in the form of discretionary cash bonuses or equity awards as circumstances may warrant. These circumstances include, but are not limited to, the need to retain key employees or to recognize outstanding performance. No such awards were made in fiscal 2006, except to our Chief Executive Officer. Mr. Rodgers was instrumental in all aspects of developing and guiding SunPower Corporation to its initial public offering. The initial public offering (IPO) for SunPower was recognized by all as a tremendous success, creating value for all stockholders including Cypress Semiconductor Corporation, which owned 70% of SunPower shares on a fully diluted basis, as of December 31, 2006, corresponding to a market value of $1.93 billion.
To provide the Compensation Committee some guidance with respect to compensating Mr. Rodgers for the successful SunPower IPO, we also asked Pearl Meyer to review recent precedents for special one-time awards due to special transactions or events. For the successful IPO of SunPower, Pearl Meyer recommended that Mr. Rodgers be granted restricted stock units with service-based vesting. As a result of his outstanding contribution and the value that was created by SunPower, the Compensation Committee awarded Mr. Rodgers a one-time award of 100,000 restricted stock units, which vest annually over two years.
Components of Executive Compensation
There are four (4) elements that comprise Cypresss executive compensation program: (i) base salary; (ii) cash incentive opportunities, or bonuses; (iii) long-term incentives, such as equity awards; and (iv) deferred compensation and other generally available benefit programs. Cypress has selected these elements because each is considered useful and/or necessary to meet one or more of the principal objectives of our compensation program. For instance, base salary and bonuses opportunities are set with the goal of attracting quality employees and adequately compensating and rewarding them for their performance, while our equity programs are geared toward motivating and rewarding long-term goal achievement and retaining key talent. Cypress believes that these elements of compensation, when combined, are effective in achieving the objectives of our compensation program and the Company overall.
The following chart shows the allocation of various compensation elements as a percentage of total compensation for our Named Executive Officers in 2006. The equity compensation amounts are based on grant date fair market value and do not represent actual cash compensation earned or received.
Base pay is a critical element of executive compensation because it provides executives with a guaranteed level of monthly income. In determining base salaries, we consider the executives qualifications, experience, scope of responsibilities and potential, the goals and objectives established for the executive, the executives past performance, competitive salary practices at peer companies, internal pay equity and the tax deductibility of base salary. We strive to set competitive base salaries, which we believe to be at or around the 50th percentile for our industry. For our executive officers, base salaries are set so that a significant portion (generally 40% or more) of the total cash compensation that such executives can earn is performance-based pay.
The salary ranges for our executive officers reflect levels that the Compensation Committee concluded are appropriate based upon the judgment and level of responsibility expected for each position. In some circumstances it is necessary to provide compensation at above-market levels. These circumstances include an effort to retain a key individual, recognition of a role that is larger in scope or accountability than standard market positions, or an effort to reward individual performance. We review base salaries annually, adjusting them as needed to realign with market levels after taking into account individual responsibilities, performance and experience.
Guided by the Companys compensation philosophy and objectives and the survey results provided by the Compensation Committees consultants, our Chief Executive Officer made recommendations to the Compensation Committee with respect to the total compensation of the Companys executive officers other than himself. In setting compensation levels for a particular executive, the Committee takes into consideration the proposed compensation package as a whole and each element individually, and the executives past and expected future contributions to our business. Consistent with our philosophy, we increased the salaries of our executive officers by between 2.5% to 10%.
Our Chief Executive Officer does not participate in the setting of his salary. Our Compensation Committee approves the salary of our Chief Executive Officer and reviews his performance and compensation package with the independent members of the Board of Directors in an executive session.
Cash Incentive Pay
We establish a link between Cypresss performance, individual performance and the individuals level of compensation through our variable cash bonus plans. For example, our primary variable cash bonus plans, the Performance Profit Sharing Plan (PPSP), and the Key Employee Bonus Plan (KEBP) provide variable compensation based on the individuals performance and an objective measure of Cypresss profitability. Cypresss philosophy is to bias compensation toward this kind of variable compensation as well as equity awards. This means that when the executive officer and the Company perform well, as principally indicated by profitability in the case of the Company, executive officers will be well compensated. In fact, strong performers may exceed the industry median for compensation. When our performance is below our business plan, however, variable compensation will be limited or non-existent and equity compensation will not attain the same value, meaning that the executive officers overall compensation package may be below industry median levels.
The bonus targets for our Named Executive Officers for 2006 were as follows:
Performance Profit Sharing Plan
All Cypress employees, including our executive officers, are eligible to participate in Cypresss Performance Profit Sharing Plan (PPSP), a quarterly cash formula-driven bonus program that pays out based on a combination of the Companys performance and each employees achievement of individual, quarterly goals. Prior to the start of each fiscal quarter, employees define short-term, operational, strategic and/or financial goals or critical success factors (CSFs), that are measurable and able to be completed within the applicable fiscal quarter. CSFs are not guaranteed and generally reflect actions required to achieve Company objectives. These actions require significant participation by the employee. Each employee determines their CSF score by scoring their achievements against such goals on a scale of 0 to 100. For purposes of the PPSP, the Companys performance is measured by fully diluted adjusted GAAP earnings per share (EPS). Specifically, the actual EPS for a given fiscal quarter is compared to the applicable quarters planned EPS as approved by management and the Board at the beginning of the fiscal year. For each participant, including executive officers, the amount paid under the PPSP is based on the following formula:
The intent of this formula is to ensure that bonuses under the PPSP are only paid during profitable periods and to those who meet their defined objectives. PPSP bonuses were earned in each quarter of fiscal 2006.
Key Employee Bonus Plan
Our Key Employee Bonus Plan (KEBP) is a formula-driven, bonus plan for eligible senior employees, including executive officers. During 2006, approximately three hundred and thirty-six (336) employees participated in the KEBP. The objective of the KEBP is to provide incentives to eligible participants based on the Company's quarterly fully diluted adjusted GAAP earnings per share (EPS) performance, our Chief Executive Officers CSF performance and the participants individual CSF score, which range from 0 to 100.
Each KEBP participant is placed at an incentive level, which determines the percentage of that individuals base salary they are eligible to earn over the course of the year. The incentive levels are 150%, 80%, 50%, 30% and 20% of the eligible participants base salary. Our Chief Executive Officer is the only participant at the 150% incentive level. All of our Named Executive Officers are at the 80% incentive level. In respect to our executives, it means that their overall cash compensation depends heavily on their actual bonus earned under the KEBP program.
The Compensation Committee and the Board of Directors participate in the setting, scoring and approval of our Chief Executive Officers CSFs on a quarterly basis. Similarly, our Chief Executive Officer participates in the setting, scoring and approval of the CSFs of all other executive officers. CSFs are set for each fiscal quarter and for the year. CSFs are measurable goals for which minimum, or zero point, and maximum achievement levels are defined. They can be based on the time of completion of a goal or a defined deliverable. For example, an individual may set a CSF of $10 million in new product sales to a strategic customer with a zero point of $9 million. If the Company achieves $8.9 million in sales, zero points would be credited to that CSF, $9.5 million in sales would receive a 50% score and $10 million in sales would achieve a 100% score. CSFs are scored at the end of each quarter, except for annual CSFs, which are scored at the end of the fiscal year.
The performance of the executive vice president that each KEBP participant reports to also has an impact on the individuals potential payout. That is, the participants earned payout can be adjusted downward if his or her vice presidents CSF performance is less than 80%. For example, if a KEBP participants executive vice president scores a 64%, then regardless of the individuals CSF achievement, the potential payout will be zero. If the KEBP participants executive vice president scores from 6580%, then he or she will be eligible to 50% of what he or she would otherwise be entitled to, and if such executive vice president scores above 80%, then that persons direct reports will be eligible for 100% of their available KEBP payout.
The KEBP formula is driven very heavily by the Companys fully diluted adjusted GAAP EPS performance. As with our PPSP, the KEBP only pays out when the Company is profitable, which is determined by comparing the actual EPS for a given period against the planned EPS for that same period. Therefore, if the Company performs well, there is a greater likelihood that the participant will earn money under the KEBP program. Conversely, if the Company does not perform well, the participant is not likely to earn a bonus, even if such participant has a high CSF score, thereby making a large portion of our executive officers compensation at risk. Our KEBP program clearly demonstrates our philosophy of pay for performance, especially against the Companys plan for the applicable period.
The principles above are set out in the KEBP formula below, which reflects how each bonus is determined:
To be eligible for a KEBP payment, the participant must still be employed by the Company on the payment date. A participant who terminates employment prior to the payment date will forfeit the bonus, including all future payments. Quarterly payouts under KEBP are made in the quarter following the measuring period, and the payout for the annual target is made in the first quarter of the fiscal year following the measuring period.
Payment of bonus amounts under our KEBP and the PPSP, and therefore total cash compensation, depends on the achievement of specified performance goals, or CSFs. Achievement of these CSFs would result in total cash compensation for fiscal 2006 to end up slightly above the targeted 50th percentile of the Cypress peer group, which our Compensation Committee and the Company believe is an appropriate range to enable Cypress to attract and retain key personnel and motivate our executives to meet Cypresss business goals. As a result, the bonuses are targeted at a level that if achieved, and when combined with base salary, will result in total cash compensation to the executive in approximately the 50th percentile of Cypresss peer companies. For fiscal 2006, Mr. Rodgers made recommendations to the Compensation Committee with respect to target bonus amounts, expressed as a percentage of base salary, for each of the Named Executive Officers other than himself. Except for Mr. Rodgers, whose bonus target remained at 150% base salary, each of our Named Executive Officers bonus target was set at 80% of annual base salary. In 2006, these recommended target bonus amounts were consistent with our intention to target total cash compensation at the 50th percentile level and were approved by the Compensation Committee as proposed. None of the Named Executive Officers achieved 100% of their cash bonus target in 2006.
The following table shows the 2006 KEBP and PPSP bonuses earned by our Named Executive Officers:
The amount earned under the KEBP annual target in 2006 was paid to participants in the first quarter of 2007. Until fiscal year 2005, the amounts earned under KEBP annual target were paid in the first quarter of the second fiscal year following the quarter in which the bonus was earned. Therefore, in the first quarter of fiscal year 2007, the amounts earned under the 2005 KEBP annual target were paid to participants who were still employed by our Company at the time of payment. In 2006, the Compensation Committee revised the plan such that payments for KEBP annual target are paid in the quarter following the measuring period.
The following table shows the 2005 KEBP bonuses paid to our Named Executive Officers in 2007:
Equity Based Compensation
Award of Stock Options and Restricted Stock Units
Under our 1994 Stock Plan, we have the ability to provide our executive officers with long-term incentive awards through grants of stock options, restricted stock units and restricted stock awards.
Stock options only provide value when the underlying share price increases; stock options directly align executives with stockholder interests. Stock options provide our executive officers with the opportunity to purchase and maintain an equity interest in Cypress and to share in stock value appreciation. The Companys executive stock options typically have a five-year vesting period, in order to encourage a long-term perspective and to encourage our executives to remain at Cypress. All options to executive officers to date have been granted at the fair market value of Cypresss common stock on the date of the grant. We believe that stock options are inherently a form of at-risk compensation, as the optionee does not receive any benefit unless Cypresss stock price rises after the date that the option is granted, thus providing direct incentive for future performance.
In 2006, we amended our equity award programs to proactively decrease stockholder dilution. Standard stock option award guidelines for new hires, equity, promotions and annual focal awards were generally reduced by 25%. In addition, we also introduced full value awards in the form of restricted stock units (RSUs) for some selected new hires, equity and promotion awards as well as a component of the annual focal awards. RSUs were awarded based on a conversion ratio of 1 RSU for each 3 options. For example, assume a mid-level engineer was eligible to receive 1,500 stock options in 2005 as part of the annual focal award process. During 2006 the option table was reduced by 25% so the standard award would now be 1,125 stock options. As mentioned above, during 2006 the focal award for this level was given in RSUs at a conversion ratio of 3 to 1 so the actual grant for 2006 was 375 RSUs. This is a net decrease in stockholder dilution of 75%.
During our company-wide focal review completed in October 2006 for all employees and executive officers, other than our Chief Executive Officer, we introduced RSUs as follows: all employees below director level received 100% of their equity awards in RSUs; director level received 50% of their awards in stock options and 50% in RSUs; all vice presidents and above were eligible to receive a combination of stock options and RSUs with the amount of RSUs not being more than 50% of the total award. In 2006, all executive officers received 50% of their awards in stock options and 50% in RSUs.
In approving these equity awards, we considered our compensation philosophy, the financial cost of the awards, impacts on stockholder dilution, the position and level of responsibility of each officer, our belief that stock options should be a significant part of the total mix of executive compensation, the number of options currently held by each officer and the level of options granted to them in prior years.
Cypresss Policies With Respect to Equity Compensation Awards
Equity Grants, Timing and Pricing
Equity awards may be granted by either the Compensation Committee of the Board of Directors or their delegate, the Chief Executive Officer. At Cypress, our Chief Executive Officer recommends to the Compensation Committee equity compensation amounts to be awarded to our executive officers and the Compensation Committee makes the final approval. The Compensation Committee, however, makes all equity awards to the Chief Executive Officer without his participation.
As long-term compensation, under our 1994 Stock Plan, we currently award restricted stock units or stock options to our employees at the time of hire, including executive officers. For all approval requests from our Chief Executive Officer to the Compensation Committee, the Compensation Committee makes the grants in its meetings, and the Chief Executive Officer does not have discretion to determine grant dates.
Factors used to determine stock-based compensation include market practice, projected business needs, the projected impact of stockholder dilution, and the compensation expense we will incur under the new equity compensation accounting rules. During fiscal year 2006, we granted long-term incentive awards to Cypresss executive officers based on the executive compensation review and individual and corporate performance, as determined by the Compensation Committee.
Effective January 2, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective application transition method. Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest over the requisite service period of the awards.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period.
We have no program, plan or practice to coordinate equity grants with the release of material information. The Committee does not accelerate or delay equity grants in response to material information, nor do we delay the release of information due to plans for making equity grants.
In fiscal year 1995, we adopted a deferred compensation plan (Plan II), a legacy plan, which provides certain key employees, including our executive officers, with the option to defer the receipt of compensation in order to accumulate funds for retirement. Plan II is voluntary and is non-tax qualified. In 2005, we froze Plan II and established a new 2005 Deferred Compensation Plan (Plan I) which is more insurance-based, and intended to comply with new tax laws applying to such. Under Plan I, certain compensation may be deferred until termination or other specified dates participants may choose. Deferred amounts may be credited with earnings based on investment choices made available by the 401(k) Investment Plan Committee or the Deferred Compensation Plan Committee for this purpose. Certain participants beneficiaries are also eligible to receive a pre-retirement death benefit. All employees who are eligible to participate in the Key Employee Bonus Plan may participate in Plan I. Participants can defer up to 75% of their annual base salary and up to 100% of their cash bonuses or commissions they will earn in the following year.
We do not match the contributions made by the employees or guarantee returns on their investments. As of December 31, 2006, deferred compensation plan obligations were $17.2 million under Plan I and $9.5 million under Plan II.
Other Compensation Matters
None of our executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. We do not offer such qualified or non-qualified defined benefit plans to our executives because we believe that such defined benefit plans are atypical for similar companies in both our industry and geographic region. We also currently do not provide any 401(k) matching contributions to any employees including executive officers. Our Compensation Committee, which is comprised solely of outside directors as defined for purposes of Section 162(m) of the Internal Revenue Code, may elect to adopt qualified or non-qualified defined benefit plans in the future if the Compensation Committee determines that doing so is in our best interests.
Executive Officer Severance Arrangements
We do not have any severance pay arrangements with any of our executive officers that would be triggered in the event of the termination of his or her employment for reasons of termination without cause, mutual agreement, or termination under a change in control or otherwise.
None of our executive officers are entitled to any special payment of benefits upon a change in control of Cypress. Discretionary equity awards for all employees under the 1994 Stock Plan or the 1999 Nonstatutory Stock Option Plan may, at the discretion of our Board of Directors or an authorized committee thereof, be accelerated upon a change in control.
Stock Ownership Guidelines
We currently do not have stock ownership guidelines. We do recognize their importance and are considering establishing guidelines for our Company.
The philosophy of the Company is to provide no material perquisites to executive officers. Executive officers receive no benefits that other companies may provide such as car, airplane, country club and financial planning benefits. Executive officers are eligible to participate in the Employee Stock Purchase Plan and receive similar health, dental, and insurance benefits, which are available to other employees.
Section 162(m) Treatment Regarding Performance-Based Equity Awards
Our management and Compensation Committee have considered the implications of Section 162(m) of the Internal Revenue Code of 1986. This section precludes a public corporation from taking a tax deduction for individual compensation in excess of $1 million for its chief executive officer or any of its four other highest-paid officers. This section also provides for certain exemptions to this limitation, specifically compensation that is performance-based within the meaning of Section 162(m). Only our Chief Executive Officer was paid compensation in excess of $1 million in fiscal year 2006.
We currently intend to continue to structure the performance-based portion of the compensation of our executive officers in a manner that complies with Section 162(m). Our Compensation Committee intends to preserve the deductibility of compensation payable to our executives, although deductibility will be only one among a number of factors considered in determining appropriate levels or modes of compensation.
We have reviewed and discussed the foregoing Compensation Discussion and Analysis (which is incorporated by reference in this report) with management. Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in Cypresss Annual Report on Form 10-K for the year ended December 31, 2006.
Fiscal Year Ended December 31, 2006
Summary Compensation Table
The following table sets forth information regarding compensation earned during fiscal year 2006 by our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers, who we refer to collectively as our Named Executive Officers.
Our executive officers do not have employment contracts. They are not guaranteed salary increases or cash bonus amounts. We provide no pension benefits and do not match 401(k) contributions. We do not guarantee a return or provide above-market returns on compensation that has been deferred. We have not repriced any stock options in 2006, and we do not grant reload options. Executive officers receive no benefits or perquisites that are not available to other employees. We believe our compensation program holds our executive officers accountable for the financial and competitive performance of Cypress, and for their individual contribution toward that performance.
The following table shows all plan-based awards granted to the Named Executive Officers during fiscal year 2006, which ended December 31, 2006. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the Outstanding Equity Awards at Fiscal Year-End table on the following page.
GRANTS OF PLAN-BASED AWARDS
Fiscal Year Ended December 31, 2006
OUTSTANDING EQUITY AWARDS
Fiscal Year End December 31, 2006
OPTION EXERCISES AND STOCK VESTING
Fiscal Year Ended December 31, 2006
NON-QUALIFIED DEFERRED COMPENSATION
Fiscal Year Ended December 31, 2006
No member of the Compensation Committee was or is one of our officers or employees.
Certain Relationships and Related Transactions
Apart from service on our Board, there are no additional relationships between our directors and our Company, nor are there any related party transactions between our directors and our Company.
In 2001, prior to the Sarbanes-Oxley Act of 2002, we offered our employees loans under the stockholder-approved 2001 Employee Stock Purchase Assistance Plan. Christopher A. Seams, our Executive Vice President of Sales, Marketing, and Operations, made a one-time purchase of 54,500 shares of our common stock under this plan in 2001. As of February 28, 2007, Mr. Seams was indebted to us in the principal amount of $1,154,095, plus accrued interest outstanding in the amount of $283,085. The principal amount of the loan did not exceed this amount in the fiscal year 2006. We charge interest to Mr. Seams currently at a rate of 4.88% per annum, adjusted quarterly in accordance with the IRS permitted rates.
In 2001, prior to the Sarbanes-Oxley Act of 2002 and before Mr. Seams became a 16(b) officer, the Company gave a loan to Mr. Seams in the amount of $16,000 to purchase shares of common stock in Cypresss Silicon Magnetic Systems (SMS). The principal amount of the loan did not exceed $16,000 in the fiscal year F2006.
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file an initial report of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC and the National Association of Securities Dealers. Such officers, directors and 10% stockholders are also required by the SEC rules to furnish us with copies of all Section 16(a) forms that they file.
Based solely on our review of the copies of such forms received by us, we believe that during the fiscal year ended December 31, 2006, with the exception of a late Form 4 filing for shares gifted by Mr. Albrecht, all Section 16(a) filing requirements applicable to our officers, directors and 10% stockholders were satisfied.
We know of no other matters to be submitted at the Annual Meeting. If any other matters properly come before the Annual Meeting, it is the intention of the persons named in the enclosed proxy to vote the shares they represent as the Board of Directors may recommend.
It is important that your stock be represented at the Annual Meeting, regardless of the number of shares you hold. You are, therefore, urged to execute and return the accompanying proxy in the envelope provided or to vote by telephone or over the Internet at your earliest convenience.
CYPRESS SEMICONDUCTOR CORPORATION
(As amended and restated on May 3, 2007)