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Photon Dynamics DEF 14A 2006 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Photon Dynamics, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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PHOTON
DYNAMICS, INC.
5970 Optical Court San Jose, California 95138
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of
Shareholders of Photon Dynamics, Inc., a California
corporation. The meeting will be held on Wednesday,
January 24, 2007 at 9:00 AM local time at the offices
of Photon Dynamics at 5970 Optical Court, San Jose,
California for the following purposes:
1. To elect directors to serve for the ensuing year and
until their successors are elected.
2. To approve an amendment to the 2005 Equity Incentive
Plan and applicable predecessor plans to permit a one-time stock
option exchange program.
3. To approve an amendment to the 2005 Equity Incentive
Plan to increase the number of shares available for issuance
under that plan by 800,000 shares of common stock.
4. To approve the 2006 Non-Employee Directors’ Stock
Incentive Plan.
5. To ratify the selection by the Audit Committee of the
Board of Directors of Ernst & Young LLP as Photon
Dynamics’ independent registered public accounting firm for
the fiscal year ending September 30, 2007.
6. To conduct any other business properly brought before
the meeting.
These items of business are more fully described in the Proxy
Statement accompanying this Notice.
The record date for the Annual Meeting is December 8, 2006.
Only shareholders of record at the close of business on that
date may vote at the meeting or any adjournment thereof.
Sincerely,
Carl C. Straub Jr.
General Counsel & Secretary
San Jose, California
December 20, 2006
You are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, please
complete, date, sign and return the enclosed proxy, or vote over
the telephone or the Internet as instructed in these materials,
as promptly as possible in order to ensure your representation
at the meeting. A return envelope (which is postage prepaid if
mailed in the United States) is enclosed for your convenience.
Even if you have voted by proxy, you may still vote in person if
you attend the meeting. Please note, however, that if your
shares are held of record by a broker, bank or other nominee and
you wish to vote at the meeting, you must obtain a proxy issued
in your name from that record holder.
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PHOTON
DYNAMICS, INC.
5970 Optical Court San Jose, California 95138
PROXY
STATEMENT
FOR THE 2007 ANNUAL MEETING OF SHAREHOLDERS
JANUARY 24,
2007
QUESTIONS
AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING
We sent you this proxy statement and the enclosed proxy card
because the Board of Directors of Photon Dynamics, Inc. is
soliciting your proxy to vote at Photon Dynamics’ 2007
Annual Meeting of Shareholders. You are invited to attend the
Annual Meeting, and we request that you vote on the proposals
described in this proxy statement. You do not need to attend the
meeting to vote your shares, however. Instead, you may simply
complete, sign and return the enclosed proxy card, or follow the
instructions below to submit your proxy over the telephone or on
the Internet.
Photon Dynamics intends to mail this proxy statement and the
accompanying proxy card on or about December 20, 2006 to
all shareholders of record entitled to vote at the Annual
Meeting.
Only shareholders of record at the close of business on
December 8, 2006, will be entitled to vote at the Annual
Meeting. On this record date, there were 16,590,372 shares
of Common Stock outstanding and entitled to vote.
If on December 8, 2006, your shares were registered
directly in your name with Photon Dynamics’ transfer agent,
Computershare Limited, then you are a shareholder of record. As
a shareholder of record, you may vote in person at the meeting
or vote by proxy. Whether or not you plan to attend the meeting,
we urge you to fill out and return the enclosed proxy card, or
vote by proxy over the telephone or on the Internet as
instructed below, to ensure your vote is counted.
If on December 8, 2006 your shares were held not in your
name, but rather, in an account at a brokerage firm, bank,
dealer, or other similar organization, then you are the
beneficial owner of shares held in “street name” and
these proxy materials are being forwarded to you by that
organization. The organization holding your account is
considered to be the shareholder of record for purposes of
voting at the Annual Meeting. As a beneficial owner, you have
the right to direct your broker or other agent on how to vote
the shares in your account. You are also invited to attend the
Annual Meeting. Since you are not the shareholder of record,
however, you may not vote your shares in person at the meeting
unless you request and obtain a valid proxy from your broker or
other agent.
There are five matters scheduled for a vote:
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You may either vote “For” all the nominees to the
Board of Directors or you may indicate that your vote is
“Withheld” for any nominee you specify. For the other
matters to be voted on, you may vote “For” or
“Against” or abstain from voting. The procedures for
voting are fairly simple:
If you are a shareholder of record, you may vote in person at
the Annual Meeting, vote by proxy using the enclosed proxy card,
vote by proxy over the telephone, or vote by proxy on the
Internet. If you vote by proxy, your shares will be voted as you
specify on the proxy card or over the telephone or on the
Internet. Whether or not you plan to attend the meeting, we urge
you to vote by proxy to ensure your vote is counted. You may
still attend the Annual Meeting and vote in person if you have
already voted by proxy.
If you are a beneficial owner of shares registered in the name
of your broker, bank, or other agent, you should have received a
proxy card and voting instructions with these proxy materials
from that organization rather than from Photon Dynamics. Simply
complete and mail the proxy card to ensure that your vote is
counted. Alternatively, you may vote over the telephone or on
the Internet as instructed by your broker or bank. To vote in
person at the Annual Meeting, you must obtain a valid proxy from
your broker, bank, or other agent. Follow the instructions from
your broker or bank included with these proxy materials, or
contact your broker or bank to request a proxy form.
We provide Internet proxy voting to allow you to vote your
shares online, with procedures designed to ensure the
authenticity and correctness of your proxy vote instructions.
However, please be aware that you must bear any costs associated
with your Internet access, such as usage charges from Internet
access providers and telephone companies.
On each matter to be voted upon, you have one vote for each
share of Common Stock you own as of December 8, 2006. For
the election of directors, however, cumulative voting is
permitted. You may cumulate votes (cast more than one vote per
share) for a candidate only if the candidate is nominated before
the voting and at least one shareholder gives notice at the
meeting, before the voting, that he or she intends to cumulate
votes. If cumulative voting applies to the election of directors
at the Annual Meeting, you will have seven (7) votes for
each share of Common Stock you own. You may cast all of your
votes for one candidate or you may distribute your votes among
different candidates as you choose. If you do not specify how to
distribute your votes, your proxyholders (the individuals named
on your proxy card) will cumulate votes using their discretion.
If you return a signed and dated proxy card without marking any
voting selections, your shares will be voted “For” the
election of all seven nominees for director, “For” the
approval of an amendment to the 2005 Equity
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Incentive Plan and any applicable predecessor plans to permit a
one-time stock option exchange program, “For” the
approval of an amendment to the 2005 Equity Incentive Plan to
increase the number of shares available for issuance under that
plan by 800,000 shares of common stock, “For” the
approval of the 2006 Non-Employee Directors’ Stock
Incentive Plan and “For” the ratification of
Ernst & Young LLP as Photon Dynamics’ independent
registered public accounting firm for the fiscal year ending
September 30, 2007. If any other matter is properly
presented at the meeting, your proxy (one of the individuals
named on your proxy card) will vote your shares using his or her
best judgment.
We will pay for the entire cost of soliciting proxies. We are
paying Altman Group Inc. their customary fee of $6,500, plus
out-of-pocket expenses, to solicit proxies. In addition to these
mailed proxy materials, our directors and employees may also
solicit proxies in person, by telephone, or by other means of
communication. Directors and employees will not be paid any
additional compensation for soliciting proxies. We may also
reimburse brokerage firms, banks and other agents for the cost
of forwarding proxy materials to beneficial owners.
If you receive more than one proxy card, your shares are
registered in more than one name or are registered in different
accounts. Please complete, sign and return each proxy
card to ensure that all of your shares are voted.
Yes. You may revoke your proxy at any time before the final vote
at the meeting. If you are the record holder of your shares, you
may revoke your proxy in any one of three ways:
If your shares are held by your broker or bank as a nominee or
agent, you should follow the instructions provided by your
broker or bank.
To be considered for inclusion in next year’s proxy
materials, your proposal must be submitted in writing by
August 22, 2007, to Photon Dynamics’ Secretary at 5970
Optical Court, San Jose, California 95138. However, if
Photon Dynamics’ 2008 Annual Meeting of Shareholders is not
held between December 25, 2007 and February 23, 2008,
then the deadline will be a reasonable time prior to the time we
begin to print and mail our proxy materials.
If you wish to submit a proposal or nominate a director at our
2008 Annual Meeting of Shareholders, but you are not requesting
that your proposal or nomination be included in next year’s
proxy materials, then you must provide specified information to
us between September 26, 2007 and October 26, 2007.
However, if our 2008 Annual Meeting of Shareholders is not
held between December 25, 2007 and February 23, 2008,
then the deadline will be the later of (a) the
90th day prior to the 2008 Annual Meeting of Shareholders
and (b) the
10th day
following the day on which we publicly announce the date of such
meeting. If you wish to submit such a proposal or nominate a
director at our 2008 Annual Meeting of Shareholders, please
review our bylaws, which contain a description of the
information required to be submitted as well as additional
requirements about advance notice of shareholder proposals and
director nominations.
If you wish to bring a matter before the shareholders at next
year’s Annual Meeting and you do not notify Photon Dynamics
before November 5, 2007, Photon Dynamics’ management
will have discretionary authority to vote all shares for which
it has proxies in opposition to the matter. However, if our 2008
Annual Meeting of
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Shareholders is not held between December 25, 2007 and
February 23, 2008, then the deadline will be a reasonable
time prior to the time we mail our proxy materials.
Votes will be counted by the inspector of election appointed for
the meeting, who will separately count “For” and
“Withheld” and, with respect to
Proposal No. 2, Proposal No. 3,
Proposal No. 4 and Proposal No. 5,
“Against” votes, abstentions and broker non-votes. A
“broker non-vote” occurs when a nominee holding shares
for a beneficial owner does not vote on a particular proposal
because the nominee does not have discretionary voting power
with respect to that proposal and has not received instructions
with respect to that proposal from the beneficial owner (despite
voting on at least one other proposal for which it does have
discretionary authority or for which it has received
instructions). Abstentions and broker non-votes will not be
counted towards the vote total for any proposal.
If your shares are held by your broker as your nominee (that is,
in “street name”), you will need to obtain a proxy
form from the institution that holds your shares and follow the
instructions included on that form regarding how to instruct
your broker to vote your shares. If you do not give instructions
to your broker, your broker can vote your shares with respect to
“discretionary” items, but not with respect to
“non-discretionary” items. Discretionary items are
proposals considered routine under applicable rules. On
non-discretionary items for which you do not give your broker
instructions, the shares will be treated as broker non-votes.
A quorum of shareholders is necessary to hold a valid meeting. A
quorum will be present if at least a majority of the outstanding
shares are represented by votes at the meeting in person or by
proxy. On the December 8, 2006 record date, there were
16,590,372 shares outstanding and entitled to vote.
Your shares will be counted towards the quorum only if you
submit a valid proxy (or one is submitted on your behalf by your
broker, bank or other nominee) or if you vote in person at the
meeting. Abstentions and broker non-votes will be counted
towards the quorum requirement. If there is no quorum, the
Chairman of the meeting or a majority of the votes present at
the meeting may adjourn the meeting to another date.
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Preliminary voting results will be announced at the Annual
Meeting. Final voting results will be published in Photon
Dynamics’ quarterly report on
Form 10-Q
for the second quarter of 2007.
PROPOSAL 1
ELECTION
OF DIRECTORS
There are seven nominees for the seven director positions
presently authorized by Photon Dynamics’ Board of Directors
and Photon Dynamics’ Bylaws. The names of the persons who
are nominees for director and their positions and offices with
Photon Dynamics are set forth in the table below. Each of the
nominees listed below, with the exception of Mr. Rogas, are
currently elected directors of Photon Dynamics. In May 2006,
Mr. Rogas was appointed to the Board of Directors upon the
recommendation of the Nominating and Corporate Governance
Committee. It is Photon Dynamics’ policy to encourage its
directors to attend the Annual Meeting and all directors may
attend the Annual Meeting telephonically. All of Photon
Dynamics’ directors, except Mr. Brathwaite, who had a
pre-existing business commitment, attended the 2006 Annual
Meeting of Shareholders. Mr. Rogas was not a director as of
the date of the 2006 Annual Meeting.
Shares represented by executed proxies will be voted, if
authority to do so is not withheld, for the election of the
seven nominees named below, subject to discretionary power to
cumulate votes. If any nominee becomes unavailable for election
as a result of an unexpected occurrence, your shares will be
voted for the election of a substitute nominee proposed by
Photon Dynamics’ management. Proxies may not be voted for
more than seven directors. Each director to be elected will hold
office until the next annual meeting of shareholders and until
his or her successor is elected, or until the director’s
death, resignation or removal. Each person nominated for
election has agreed to serve if elected and our management has
no reason to believe that any nominee will be unable to serve.
The candidates receiving the highest number of affirmative votes
by the shares entitled to be voted will be elected.
The following is a brief biography of each nominee for director,
including their respective ages as of September 30, 2006.
MALCOLM J. THOMPSON has been a member of our Board of
Directors since 1992, served as the Executive Chairman of our
Board of Directors from October 2003 until September 2005 and is
now Chairman of the Board. He is the President of MJT Associates
and Consulting Company, specializing in high technology and
business consulting. From April 2003 to December 2005,
Dr. Thompson served as the interim chief executive officer
of Vitex Systems, Inc., a developer of technology for use in the
manufacture of next-generation flat panel displays. From 1998
through November 2001, he was president and chief executive
officer of Novalux, Inc., a provider of laser modules for
optical networks. From 1996 to 1998, he was president and chief
executive officer of dpiX, Inc., a digital image capture and
display products company, and from 1981 to 1996, he was the
Chief Technologist for Xerox PARC. Since December 2005, he has
been on the board of Cambridge Display Technology. He also has
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served as chairman of the board of the United States Display
Consortium, an industry-government consortium of over 135 member
companies. Dr. Thompson received a B.S. and a Ph.D. in
Applied Physics from the University of Brighton, Sussex in the
United Kingdom.
JEFFREY A. HAWTHORNE has been our President and Chief
Executive Officer since October 2003, and has been a member of
our Board of Directors since December 2003. From July 2003 to
October 2003, Mr. Hawthorne was our Chief Operating
Officer. From November 2001 to July 2003, Mr. Hawthorne was
our Vice President and President, Image Processing Systems
Division. Mr. Hawthorne joined us in 1991 and has held a
series of other management positions including Vice President,
Development from September 1994 to November 2001.
Mr. Hawthorne received a B.S. degree in Engineering Physics
from the University of Colorado and an M.S. degree in Optical
Engineering from the University of Rochester.
NICHOLAS E. BRATHWAITE has been a member of our Board of
Directors since April 2002. Mr. Brathwaite currently serves
as chief technology officer of Flextronics International Ltd., a
provider of engineering, advanced electronics manufacturing and
logistical services, and has held various engineering management
positions with Flextronics since 1995. From 1989 to 1995,
Mr. Brathwaite held various management positions at nChip,
a multi-chip module company. As a founding member of nChip,
Mr. Brathwaite was responsible for all manufacturing and
operational activities including wafer fabrication, wafer test
and module assembly. Before joining nChip, Mr. Brathwaite
spent six years with Intel Corporation in various engineering
management positions in technology development and
manufacturing. He has a B.S. in Applied Chemistry, an M.S. in
Polymer Engineering, a BSc (Hons) from McMaster University
Canada and an MSc from the University of Waterloo, Canada.
Mr. Brathwaite has several patents and has authored more
than 50 national and international publications. He is also a
member of the board of directors of Power Integrations, Inc., a
supplier of high-voltage analog integrated circuits for use in
AC to DC power conversion and inSilica, a fabless semiconductor
company.
MICHAEL J. KIM became a member of our Board of Directors
in 1991. Since July 2001, he has been consulting for high-tech
companies in Silicon Valley. From September 1999 through June
2001, he was the vice president of business development at
Philips Components, a display company. From 1993 to February
1999, he was senior vice president of LG Electronics, Inc., a
manufacturer of consumer electronics products and flat panel
displays, and served as the head of the San Jose Technology
Center of LG Electronics. From 1988 to 1992, Mr. Kim was
vice president at Goldstar Technology, Inc., a subsidiary of LG
Electronics. Mr. Kim received a B.S. degree in Electrical
Engineering from the University of Illinois, Chicago and an M.S.
degree in Electrical Engineering from the University of
Santa Clara.
TERRY H. CARLITZ has been a member of our Board of
Directors since December 2004. Since June 2002, Ms. Carlitz
has served as an independent business advisor. From 1999 to May
2002, Ms. Carlitz served as a director and as chief
financial officer of Saba Software, Inc., a provider of human
capital management applications. From 1998 to 1999,
Ms. Carlitz served as senior vice president of operations
and chief financial officer of SPL WorldGroup B.V., a provider
of customer relationship management solutions for the energy
industry. From 1995 to 1998, Ms. Carlitz served as chief
financial officer of Infinity Financial Technology, a provider
of derivatives trading and risk management solutions until its
merger with SunGard Data Systems. From 1987 to 1995,
Ms. Carlitz held various senior financial management
positions at Apple Computer, Inc. Since February 2003,
Ms. Carlitz has served on the board of directors of
Hyperion Solutions Corporation, a provider of business
performance management solutions, and Advent Software, Inc., a
provider of enterprise investment management software.
Ms. Carlitz also serves on the International Board of
Advisors at the San Jose State University College of
Business and the Management Board of Stanford University’s
Graduate School of Business. Ms. Carlitz received a B.S.
from San Jose State University and an M.B.A. from Stanford
University’s Graduate School of Business.
CURTIS S. WOZNIAK has been a member of our Board of
Directors since December 2004. Since October 2003,
Mr. Wozniak has been a private investor and a consultant.
From 1996 to October 2003, Mr. Wozniak served as chief
executive officer of Electroglas, Inc., a provider of automatic
wafer probing technologies. From 1994 to 1996, Mr. Wozniak
served as president and chief operating officer of Xilinx, Inc.,
a semiconductor manufacturer. From 1984 to 1994,
Mr. Wozniak held various management positions with Sun
Microsystems, Inc. Mr. Wozniak serves on the board of
directors of a privately held company and on the board of
trustees of Kettering University. Mr. Wozniak
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received a B.S.M.E. from Kettering University and an M.B.A. from
Stanford University’s Graduate School of Business.
EDWARD ROGAS JR. was appointed to the Board of
Directors on May 25, 2006 upon the recommendation of the
Nominating and Corporate Governance Committee. Mr. Rogas
came to the attention of the Board following a search led by the
Nominating and Corporate Governance Committee. Mr. Rogas
served as a Senior Vice President at Teradyne, Inc., an
automated test equipment (ATE) manufacturer, from 2000 through
2005. From 1976 to 2000, Mr. Rogas held various management
positions in the semiconductor ATE portion of Teradyne’s
business, including Vice President from 1984 to 2000. Prior to
that, from 1973 to 1976, he served as Vice President at American
Research and Development. Mr. Rogas serves as a member of
the board of directors of Vitesse Semiconductor Corporation. He
holds an M.B.A. (with distinction) from Harvard Business School
and a B.S. from the United States Naval Academy.
THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
As required under the Nasdaq Stock Market (“Nasdaq”)
listing standards, a majority of the members of a listed
company’s board of directors must qualify as
“independent,” as affirmatively determined by the
board of directors. Photon Dynamics’ Board of Directors
consults with Photon Dynamics’ counsel to ensure that the
Board’s determinations are consistent with all relevant
securities and other laws and regulations regarding the
definition of “independent,” including those set forth
in pertinent listing standards of the Nasdaq, as in effect from
time to time.
Consistent with these considerations, after review of all
relevant transactions or relationships between each director, or
any of his or her family members, and Photon Dynamics, its
senior management and its independent registered public
accounting firm, the Board has affirmatively determined that all
of Photon Dynamics’ directors are independent directors
within the meaning of the applicable Nasdaq listing standards,
except for Mr. Hawthorne, the Chief Executive Officer and
President of Photon Dynamics, and Dr. Thompson, the
Chairman of the Board of Directors of Photon Dynamics. As
required under applicable Nasdaq listing standards, Photon
Dynamics’ independent directors meet in regularly scheduled
executive sessions at which only independent directors are
present.
Information
Regarding the Board of Directors and its Committees
The Board of Directors has three committees: an Audit Committee,
a Compensation and Employee Ownership Committee (the
“Compensation Committee”) and a Nominating and
Corporate Governance Committee. The following table indicates
the current membership of each of the Board committees and
meeting information for fiscal 2006 for each of the Board
committees:
Below is a description of each committee of the Board of
Directors. Each of the committees has authority to engage legal
counsel or other experts or consultants, as it deems appropriate
to carry out its responsibilities. The
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Board of Directors has determined that each member of each
committee meets the applicable rules and regulations regarding
“independence” and that each member is free of any
relationship that would interfere with his or her individual
exercise of independent judgment with regard to Photon Dynamics.
Audit Committee. The Audit Committee of the
Board of Directors oversees Photon Dynamics’ financial
reporting process on behalf of the Board. For this purpose, the
Audit Committee performs several functions. Among other things,
the Audit Committee:
From October 1, 2005 to March 7, 2006, the Audit
Committee was composed of three non-employee directors: Terry
Carlitz, (Chair), Curtis Wozniak, and Floyd Kvamme. Upon
Mr. Kvamme’s retirement, Michael Kim was appointed to
the Committee until May 25, 2006 when Edward Rogas Jr.
joined the Committee. The Audit Committee met 13 times during
the fiscal year. The Board has adopted a written Audit Committee
Charter and revised the Charter on January 23, 2006. The
Board of Directors annually reviews the Nasdaq listing standards
definition of independence for Audit Committee members and has
determined that all members of Photon Dynamics’ Audit
Committee are independent (as currently defined in the Nasdaq
listing standards). The Board has determined that each of Terry
Carlitz and Curtis Wozniak qualifies as an “audit committee
financial expert,” as defined in the rules of the
Securities and Exchange Commission (the “SEC”).
Compensation and Employee Ownership
Committee. The Compensation Committee of the
Board of Directors reviews and approves the overall compensation
strategy and policies for Photon Dynamics. Among other things,
the Compensation Committee:
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For fiscal year 2006, the Compensation Committee has been
composed of the following non-employee directors: Nicholas
Brathwaite, Michael Kim and, until March 7, 2006, Floyd
Kvamme. All members of the Compensation Committee are
independent (as independence is currently defined in the Nasdaq
listing standards). The Compensation Committee met five times
during the fiscal year.
Nominating and Corporate Governance
Committee. The Nominating and Corporate
Governance Committee of the Board of Directors, in consultation
with the Chief Executive Officer, has the primary responsibility
for establishing criteria for Board membership and identifying,
evaluating, reviewing and recommending qualified candidates to
serve as directors of Photon Dynamics. The Nominating and
Corporate Governance Committee also has the primary
responsibility for evaluating, reviewing and considering the
recommendation for nomination of current directors for
re-election to the Board of Directors. In addition, the
Nominating and Corporate Governance Committee monitors the size
of the Board, has the power and authority to consider Board
nominees and proposals submitted by Photon Dynamics’
shareholders, and establishes procedures to facilitate
shareholder communication with the Board of Directors. The
Nominating and Corporate Governance Committee also periodically
reviews, discusses and assesses the performance of the Board of
Directors and Board committees; annually recommends to the Board
of Directors the chairmanship and membership of each Board
committee; develops corporate governance principles and
periodically reviews and assesses these principles and their
application; oversees and reviews the processes and procedures
used by Photon Dynamics to provide information to the Board of
Directors and its committees; and periodically reviews the
compensation paid to non-employee directors for their service on
the Board and its committees, and recommends any changes to the
full Board for its approval. The Board has adopted a written
Nominating and Corporate Governance Committee Charter, which is
available on our website at
http://www.photondynamics.com/governance.
For fiscal year 2006, the Nominating and Corporate Governance
Committee was composed of four non-employee directors: Curtis
Wozniak (Chair), Terry Carlitz, Nicholas Brathwaite and Michael
Kim. All members of the Nominating and Corporate Governance
Committee are independent (as currently defined in the Nasdaq
listing standards). The Nominating and Corporate Governance
Committee met once during the fiscal year.
The Nominating and Corporate Governance Committee believes that
candidates for director should have certain minimum
qualifications, including being able to read and understand
basic financial statements, being over 21 years of age and
having the highest personal integrity and ethics. The Committee
also intends to consider such factors as possessing relevant
expertise upon which to be able to offer advice and guidance to
management, having sufficient time to devote to the affairs of
Photon Dynamics, demonstrated excellence in his or her field,
having the ability to exercise sound business judgment and
having the commitment to rigorously represent the long-term
interests of Photon Dynamics’ shareholders. However, the
Committee retains the right to modify these qualifications from
time to time.
Candidates for director nominees are evaluated by the Nominating
and Corporate Governance Committee in the context of the current
composition of the Board, the operating requirements of Photon
Dynamics and the long-term interests of Photon Dynamics’
shareholders. In conducting this assessment, the Committee
considers the criteria for director qualifications set by the
Board of Directors, as well as diversity, age, skills and such
other factors as it deems appropriate given the current needs of
the Board and Photon Dynamics to maintain a balance of
knowledge, experience and capability. In the case of incumbent
directors whose terms of office are set to expire, the
Nominating and Corporate Governance Committee reviews such
directors’ overall service to Photon Dynamics during their
term, including the number of meetings attended, level of
participation, quality of performance, and any other
relationships and transactions that might impair such
directors’ independence. In the case of new director
candidates, the Nominating and Corporate Governance Committee
also determines whether the nominee must be independent for
Nasdaq purposes, which determination is based upon Nasdaq
listing standards, SEC rules and regulations and the advice of
counsel, if necessary. The Nominating and Corporate Governance
Committee then uses its network of contacts to compile a list of
potential candidates, but may also engage, if it deems
appropriate, a professional search firm. The Nominating and
Corporate Governance Committee conducts any appropriate and
necessary inquiries into the backgrounds and qualifications of
possible candidates after considering the function and needs of
the Board. The Nominating and Corporate Governance Committee
meets to discuss and consider such candidates’
qualifications and then selects a nominee for recommendation to
the Board by majority vote.
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The Nominating and Corporate Governance Committee will consider
director candidates recommended by shareholders. The Nominating
and Corporate Governance Committee does not intend to alter the
manner in which it evaluates candidates based on whether the
candidate was recommended by a shareholder or not. Shareholders
who wish to recommend individuals for consideration by the
Nominating and Corporate Governance Committee to become nominees
for election to the Board may do so by delivering a written
recommendation to the Nominating and Corporate Governance
Committee at the following address: 5970 Optical Court,
San Jose, CA
95138-1400
not less than six months prior to any meeting at which directors
are to be elected. Submissions must include the full name of the
proposed nominee, a description of the proposed nominee’s
business experience for at least the previous five years,
complete biographical information, a description of the proposed
nominee’s qualifications as a director and a representation
that the nominating shareholder is a beneficial or record owner
of Photon Dynamics’ stock. Any such submission must be
accompanied by the written consent of the proposed nominee to be
named as a nominee and to serve as a director if elected. To
date, the Nominating and Corporate Governance Committee has not
received a timely director nominee from a shareholder of Photon
Dynamics.
The Board of Directors met eleven times during the last fiscal
year. All directors attended at least 75% of the aggregate of
the total number of meetings of the Board and the committees on
which they served, that were held during the period for which
they were a director or committee member, respectively.
Photon Dynamics’ Board of Directors has adopted a formal
process by which shareholders may communicate with the Board or
any of its directors. Shareholders who wish to communicate with
the Board or an individual director may send a written
communication addressed as follows: Photon Dynamics Board
Communication, 5970 Optical Court, San Jose, CA
95138-1400.
Communications may also be sent by
e-mail to
the following address: board@photondynamics.com. Each
communication sent must state the number of shares owned by the
shareholder making the communication. Each communication will be
reviewed by the Secretary of Photon Dynamics who will forward
such communication to the Board or to any individual director to
whom the communication is addressed unless the communication is
unduly frivolous, hostile, threatening or similarly
inappropriate, in which case, the Secretary will discard the
communication.
On December 15, 2006 the Board of Directors formalized and
adopted the Photon Dynamics, Inc. Corporate Governance
Guidelines. The Guidelines include, but are not limited to:
The Corporate Governance Guidelines are posted on our website
at: http://www.photondynamics.com/governance.
Photon Dynamics has adopted a Code of Business Conduct and
Ethics that applies to all of its directors, officers and
employees, including its principal executive officer, principal
financial officer and principal accounting officer. The Code of
Business Conduct and Ethics is posted on our website at:
http://www.photondynamics.com/governance. We intend to
satisfy the disclosure requirement under Item 5.05 of
Form 8-K,
regarding an amendment to, or waiver from, a provision of the
Code of Business Conduct and Ethics by posting such information
on our website at the address specified above.
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PROPOSAL 2
Our Board of Directors has determined that it would be in the
best interests of Photon Dynamics and its shareholders to
implement a one-time stock option exchange program (the
“exchange offer”) whereby certain underwater stock
options held by employees excluding our executive officers and
members of our Board of Directors (the “eligible
employees”) may be exchanged for restricted share units.
On November 13, 2006, our Board of Directors authorized,
subject to shareholder approval, an amendment to our 2005 Equity
Incentive Plan and any predecessor plans (collectively, the
“Plans”) to permit the exchange offer. If implemented,
the exchange offer will permit our eligible employees to
exchange outstanding stock options that are significantly
underwater for a lesser number of unvested restricted share
units to be granted under the 2005 Equity Incentive Plan. The
exchange offer will be open to all eligible employees of Photon
Dynamics and our domestic and foreign subsidiaries. Our
executive officers and members of our Board of Directors will
not be eligible to participate. Options eligible for the
exchange offer will be those having an exercise price that is
more than 130% of the average closing price of our common stock
as reported on the Nasdaq Global Market for the 90 days
preceding the date on which we commence the exchange offer.
Shareholder approval is required for this proposal under the
listing rules of the Nasdaq. If Photon Dynamics’
shareholders approve this proposal, the Board of Directors
intends to commence the exchange offer promptly following the
annual meeting. If Photon Dynamics’ shareholders do not
approve this proposal, the exchange offer will not take place.
The affirmative vote of a majority of the shares of common stock
present at the Annual Meeting and entitled to vote on this
matter is required to approve this proposal.
THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
IN FAVOR OF THIS PROPOSAL 2.
Photon Dynamics has granted stock options to a significant
portion of its employees consistent with the view that long-term
compensation should align employees’ interests with the
interests of shareholders. We believe equity compensation
encourages employees to work toward our success and provides a
means by which employees benefit from the value of our common
stock. We also believe that equity compensation plays a vital
role in the retention and recruiting of employees.
During the last several years, Photon Dynamics’ stock price
has experienced significant volatility. The per share exercise
price of our stock options is set at the closing price of our
common stock on the Nasdaq Global Market on the date of grant.
The decrease in our stock price over the last three years has
resulted in most of our stock options having exercise prices
significantly higher than the current market price of our common
stock, meaning an important component of our compensation
program is perceived by employees as having little value. The
closing price of our stock has declined from a high of $45.82 on
January 20, 2004 to a low of $10.30 on July 27, 2006.
On September 29, 2006, the last trading day of our 2006
fiscal year, approximately 95.5% of our outstanding stock
options held by eligible employees had exercise prices greater
than $13.27, the closing price of our common stock on that date.
At the conclusion of our fiscal year, these underwater options
had a weighted average exercise price of $23.32 and a weighted
average remaining term of 6.28 years. For approximately 98%
of our eligible employees, every one of their options was
underwater as of September 30, 2006. On November 30,
2006, our stock price closed at $11.11, further increasing the
percentage of outstanding underwater options.
Our Board of Directors believes that exclusive reliance on the
use of stock options for grants to our employees and
non-employee directors is no longer the most effective equity
compensation policy given the current stage of our growth,
compensation trends and market conditions. In the future, the
Board of Directors expects to mix the use of restricted share
units and stock options, with stock option grants being used
primarily for employees in more
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senior positions with management responsibilities. Restricted
share units would be subject to vesting requirements as
determined by the Compensation Committee. By using restricted
share units, we intend to reduce the total number of shares
granted for equity compensation purposes because fewer
restricted share units are needed to deliver the comparable
value of stock options to our employees. In addition, we believe
use of restricted share units will reduce our employees’
exposure to the volatility associated with stock options, which
creates retention and morale concerns when our stock price does
not increase significantly.
We do not intend to use restricted share units exclusively, but
to utilize the wider range of equity compensation tools
available in order to maximize the effectiveness of our equity
compensation among different categories of employees. The
proposed exchange offer is an important part of our strategy to
move toward an equity compensation model that uses restricted
share units in addition to stock option grants.
Accordingly, we have designed the terms of the proposed exchange
offer to balance the interests of our shareholders with the
objective of increasing the retentive and motivational value of
equity awards for employees. Some of the features of the
exchange offer include the following:
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Effect on
Shareholders
We are not able to predict the impact the exchange offer will
have on our shareholders because we are unable to predict how
many or which eligible employees will exchange their eligible
options. Assuming that the average closing market price of our
common stock for the 90 days preceding the commencement of
the exchange offer is $12.16 (which would be the price if the
exchange offer had been launched on November 30, 2006),
options with an exercise price of $15.81 and above would be
eligible for exchange. In that case, options for a total of
1,089,981 shares (or 95.5% of our outstanding eligible
employee stock options) would be eligible for exchange. Assuming
that all of these eligible options are surrendered for
cancellation, we would issue restricted share units for
363,327 shares, based on the exchange ratio of three
eligible options to one restricted share unit, resulting in a
net reduction in overhang of 726,654 shares, or
approximately 4.4% of the 16,590,372 shares of our common
stock issued and outstanding as of December 8, 2006. The
actual reduction in our overhang that could result from the
exchange offer could differ materially and is dependent on a
number of factors, including the actual level of employee
participation in the program. The reduction in overhang may also
be partially offset by the grant of additional awards under our
2005 Equity Incentive Plan. Consistent with the terms of the
2005 Equity Incentive Plan, we intend to return the shares
subject to the options issued under the 2005 Equity Incentive
Plan that are cancelled in the exchange offer to the 2005 Equity
Incentive Plan for issuance pursuant to future awards. However,
459,930 shares that were issued under the 1995 Stock Option
Plan will be permanently cancelled if tendered in the exchange
because the 1995 Stock Option Plan has expired pursuant to its
terms. Accordingly, a net of up to 266,724 shares currently
subject to outstanding options may become available for future
awards under the 2005 Equity Incentive Plan (which assumes full
participation in the exchange on a hypothetical exchange offer
date of November 30, 2006 and accounts for the shares to be
used in the grant of restricted share units in the exchange
offer). If our stock price increases or decreases by 20% from
November 30, 2006 to the date of the exchange, the number
of options eligible for exchange would decrease by less than 1%
or would increase by 4.5%, respectively, which we do not believe
would result in a material impact on the projected number of
shares available for grant under the 2005 Equity Incentive Plan,
assuming full participation in the exchange. For a summary in
tabular format of the historical and projected numbers of shares
available under our equity compensation plans, please refer to
the table below.
Historical
and Projected Number of Shares Available for
Grant
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Historical
and Projected Number of Outstanding Shares under all Option
Plans(5)
We have not commenced the exchange offer and will not do so
unless and until our shareholders approve this proposal. Upon
shareholder approval, the amendment to the 2005 Equity Incentive
Plan would authorize Photon Dynamics to implement the exchange
offer. Under the exchange offer, eligible employees would have a
one-time opportunity to exchange their eligible options for a
lower number of restricted share units based on a fixed exchange
ratio of three eligible options to one restricted share unit.
Restricted share units granted in exchange for options that are
at least 50% vested as of the exchange offer date would vest
over a two-year period in equal annual installments. Restricted
share units granted in exchange for options that are less than
50% vested as of the exchange offer date would vest over a
three-year period in equal annual installments. Vesting of the
restricted share units would be measured from the date that the
restricted share units are granted. Participation in the stock
option exchange program would be voluntary.
If approved by shareholders, the exchange offer will commence at
a time determined by the Compensation Committee. The
Compensation Committee will retain the authority, in its
discretion, to terminate, amend or postpone the exchange offer
at any time prior to expiration of the election period under the
exchange offer.
Upon the commencement of the exchange offer, eligible employees
holding eligible options will receive written materials in the
form of an “Offer to Exchange” explaining the precise
terms and timing of the exchange offer. Employees will be given
at least 20 business days to elect to surrender their eligible
options in exchange for restricted share units. At or before the
commencement of the exchange offer, we will file the Offer to
Exchange with the Securities and Exchange Commission as part of
a tender offer statement on Schedule TO.
Eligible options. Options eligible for the
exchange offer (the “eligible options”) will be those
having an exercise price that is more than 130% of the average
closing price of our common stock as reported on the Nasdaq
Global Market for the 90 days preceding the date on which
we commence the exchange offer.
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Eligible employees. All of our employees who
hold eligible options would be eligible to participate in the
exchange offer, excluding our executive officers and directors.
In addition, we may exclude employees in certain
non-U.S. jurisdictions
from the exchange offer if local laws would make their
participation infeasible or impractical. To be eligible, an
employee must be employed by us or one of our subsidiaries both
at the time the exchange offer commences and on the date the
surrendered options are cancelled and restricted share units are
granted to replace them. Any eligible employee holding eligible
options who elects to participate but whose employment
terminates for any reason prior to the grant of the restricted
share units, including voluntary resignation, retirement,
involuntary termination, layoff, death or disability, will not
be eligible to participate in the exchange offer and will
instead retain his or her eligible options subject to their
existing terms. As of November 30, 2006, there were
approximately 313 eligible employees who held options who
would qualify for exchange.
Exchange ratio. The number of outstanding
stock options that an eligible employee would surrender for
cancellation in exchange for the grant of a restricted share
unit representing one share of common stock is known as the
exchange ratio. In the proposed exchange offer, eligible
employees would be offered a one-time opportunity to exchange
their current stock options for a smaller number of restricted
share units based on a
3-to-1
exchange ratio. For example, if an employee surrendered options
to purchase 300 shares of our common stock, the employee
would receive restricted share units representing
100 shares of our common stock. The
3-to-1
exchange ratio has been selected to result in the issuance of
restricted share units that have an aggregate value that is
equal to or less than the value of the options to be cancelled,
based on the recommendations of a third party consultant, who
calculated the effects of the exchange using the binomial option
valuation method.
Restricted share units are rights to receive shares of common
stock on specified future dates when those rights have vested
following a required period of employment. A participant is not
required to pay any monetary consideration to receive shares of
our common stock upon settlement of restricted share units.
Restricted share units issued in the exchange offer will be
completely unvested at the time they are granted and will become
vested on the basis of the eligible employee’s continued
employment with Photon Dynamics or any of its subsidiaries. The
restricted share units will vest in equal annual installments
over a two-year period or, with respect to options that are less
than 50% vested on the date of the exchange, in equal annual
installments over a three-year period, in either case measured
from the date that the restricted share units are granted. A
participant in the exchange offer will generally forfeit any
restricted share units received that remain unvested at the time
his or her employment with us terminates for any reason. The
Compensation Committee has the authority to adopt such
additional terms and conditions for replacement restricted share
units as it determines to be necessary and appropriate,
including accelerating the vesting date of the restricted share
units on change in control events.
Generally, employees participating in the exchange offer will
recognize taxable income in connection with their restricted
share unit awards no later than the vesting of the award,
although the applicable tax laws may vary from country to
country. For our U.S. employees and many of our
non-U.S. employees,
this income is subject to income and employment tax withholding.
The Company may satisfy its tax withholding obligations by
deducting from the shares of common stock that would otherwise
be issued in settlement of restricted share units a number of
whole shares having a fair market value that does not exceed the
applicable minimum statutory withholding requirements.
The terms of the exchange offer will be described in an Offer to
Exchange that will be filed with the SEC. Although we do not
anticipate that the SEC would require us to materially modify
the program’s terms, it is possible that we will need to
alter the terms of the exchange offer to comply with comments
from the SEC. Changes in the terms of the exchange offer may
also be required for tax or accounting purposes. In addition, we
intend to make the exchange offer available to our employees who
are located outside of the United States, where permitted by
local law and where we determine it is feasible and practical to
do so. It is possible that we may need to make modifications to
the terms offered to employees in countries outside the
U.S. to comply with local requirements. The Compensation
Committee will retain the discretion to make any such necessary
or desirable changes to the terms of the exchange offer.
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We believe that the exchange offer will be treated as a
non-taxable exchange for U.S. federal income tax purposes.
Therefore, we believe that participating U.S. employees
should not realize any income for U.S. federal income tax
purposes upon the grant of the replacement restricted share
units. Employees will generally be subject to tax upon vesting
of the restricted share units, including income and employment
tax withholding. Photon Dynamics will generally be entitled to a
tax deduction equal to the income recognized by the employee.
The tax consequences of the receipt of restricted share units
for participating
non-U.S. employees
may differ significantly from the U.S. federal income tax
consequences described above. Notwithstanding the foregoing,
all employees are urged to seek the advice of their own tax
advisor in connection with the exchange offer.
Effective with our fiscal year beginning on our first quarter of
fiscal 2006, we have adopted the provisions of Financial
Accounting Standards Board’s Statement of Financial
Accounting Standard No. 123 (revised 2004),
“Share-Based Payment”
(“SFAS No. 123R”), on accounting for
share-based payments. Under SFAS No. 123R, to the
extent the fair value of each award of restricted share units
granted to employees exceeds the fair value of the stock options
surrendered, such excess is considered additional compensation.
This excess, in addition to any remaining unrecognized expense
for the stock options surrendered in exchange for the restricted
stock rights, will be recognized by Photon Dynamics as an
expense for compensation. This expense will be recognized
ratably over the vesting period of the restricted share units in
accordance with the requirements of SFAS No. 123R. In
the event that any of the restricted share units are forfeited
prior to their settlement due to termination of employment, the
expense for the forfeited restricted share units will be
reversed and will not be recognized.
Because participation in the exchange offer is voluntary, the
benefits or amounts that will be received by any participant or
groups of participants, if the proposal is approved, are not
currently determinable. None of our executive officers or
members of our Board of Directors will be eligible to
participate in the exchange offer. Based on the average closing
price of our stock for the
90-day
period preceding November 30, 2006, the maximum number of
shares underlying options that would be cancelled would be
1,089,981 shares, and the maximum number of shares
underlying the new restricted share units that would be granted
would be 363,327 shares.
If shareholders approve this proposal and we commence the
exchange offer, we will provide additional information to
eligible employees regarding the exchange offer, including
information regarding its risks, mechanics and timing. The
exchange offer would not commence before January 25, 2007.
Eligible employees should read the additional materials received
at that time because they will contain important information
about the exchange offer. In accordance with applicable law,
these materials would be filed with the SEC and available
without charge from its website, http://www.sec.gov. The
materials would also be available on Photon Dynamics’
website at http://www.photondynamics.com. Eligible
employees would have at least 20 business days to decide whether
to participate in the exchange offer.
PROPOSAL 3
Our Board of Directors has determined that it would be in the
best interests of Photon Dynamics and its shareholders to amend
our 2005 Equity Incentive Plan to increase the shares
available for issuance under the 2005 Equity Incentive Plan
by 800,000 shares. The additional requested shares
represent only 4.8% of our total outstanding shares as of
December 8, 2006.
The Board adopted our 2005 Equity Incentive Plan (the “2005
Plan”) on January 21, 2005, and our shareholders
approved the 2005 Plan at our 2005 Annual Meeting. An aggregate
of 1,450,000 shares of Common
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Stock initially were reserved for issuance under the 2005 Plan,
including 650,000 shares of Common Stock carried over from
our predecessor 2001 Incentive Plan. Our Board of Directors has
authorized, subject to shareholder approval, an amendment to the
2005 Plan to increase the number of shares available by
800,000 shares. At the end of our fiscal year on
September 30, 2006, we had outstanding options to purchase
731,508 shares under the 2005 Plan, options to purchase
1,124,187 shares under other employee plans (not including
the 2005 Non-Employee Directors’ Plan), and
493,336 shares available for future awards under the 2005
Plan. For further detail, please refer to the table under
Proposal No. 2 above entitled “Historical and
Projected Number of Shares Available for Grant.”
The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy and voting at the
Annual Meeting will be required to approve this amendment to the
2005 Plan. For purposes of this vote, abstentions and broker
non-votes will not be counted for any purpose in determining
whether this matter has been approved.
THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
IN FAVOR OF THIS PROPOSAL 3.
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The 2005 Plan and our long-term equity compensation strategy are
designed to be in the interests of both employees and
shareholders. We seek to increase the number of shares available
for grant under the 2005 Plan in the context of the following
plan features and facts:
General. The 2005 Plan provides for the grant
of incentive stock options, nonstatutory stock options, stock
purchase awards, stock bonus awards, stock appreciation rights,
stock unit awards and other forms of equity compensation
(collectively, “equity awards”), which may be granted
to employees (including officers), non-employee directors, and
consultants. The Board adopted the 2005 Plan to secure and
retain the services of employees (including officers),
non-employee directors, and consultants eligible to receive
equity awards, to
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provide incentives to exert maximum efforts for the success of
Photon Dynamics and its affiliates, and to provide a means by
which key service providers may be given an opportunity to
benefit from increases in value of our Common Stock through the
granting of equity awards.
Grant Limitations. No person may be granted
stock options or stock appreciation rights covering more than
1,000,000 shares of Common Stock under the 2005 Plan during
any calendar year. This limitation is designed to help ensure
that any deductions to which we would otherwise be entitled upon
the exercise of a stock option or stock appreciation right or
upon the subsequent sale of shares purchased under such an
award, will not be subject to the $1 million limitation on
the income tax deductibility of compensation paid per covered
executive officer imposed under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the “Code”).
Share Availability. If an equity award granted
under the 2005 Plan expires or otherwise terminates without
being exercised in full, the shares of Common Stock not issued
again become available for subsequent issuance under the 2005
Plan. In addition, shares may again become available for the
grant of new awards under the 2005 Plan if they are forfeited to
or repurchased by Photon Dynamics prior to becoming fully
vested, or if they are withheld or tendered to Photon Dynamics
to satisfy withholding taxes or exercise prices. Shares issued
under the 2005 Plan may be previously unissued shares or
reacquired shares bought on the market or otherwise.
Stock Options. Either incentive or
nonstatutory stock options may be granted under the 2005 Plan.
Options granted under the 2005 Plan vest at the rate specified
by the plan administrator. Stock options granted under the Plan
generally have the following terms:
Stock Purchase Awards. Acceptable
consideration for the purchase price for a stock purchase award
will be determined by the plan administrator and may include
(i) cash or check, or (ii) any other form of legal
consideration. Shares of Common Stock acquired under a stock
purchase award may, but need not, be subject to a share
repurchase option in our favor in accordance with a vesting
schedule to be determined by the plan administrator. Rights to
acquire shares under a stock purchase award may be transferred
only upon such terms and conditions as set by the plan
administrator.
Stock Bonus Awards. A stock bonus award may be
granted in consideration for the recipient’s past services
performed for Photon Dynamics or its affiliates or for any other
form of legal consideration. Shares of Common Stock acquired
under a stock bonus award may, but need not, be subject to
forfeiture to Photon Dynamics in accordance with a vesting
schedule to be determined by the plan administrator. Rights to
acquire shares under a stock bonus award may be transferred only
upon such terms and conditions as set by the plan administrator.
Stock bonus awards will have a minimum vesting schedule of three
years and any terms with respect to accelerated vesting will be
limited to acceleration upon a change of control, death or
disability of a holder or involuntary termination of a holder.
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Stock Unit Awards. A stock unit award is the
right to receive shares of our Common Stock on a future
specified date. Payment of any purchase price for the shares may
be made in any form permitted under applicable law; however, we
will settle a payment due to a recipient of a stock unit award
by cash, delivery of stock, a combination of cash and stock as
deemed appropriate by the plan administrator, or in any other
form of consideration set forth in the stock unit award
agreement. Additionally, dividend equivalents may be credited in
respect of shares covered by a stock unit award. Stock unit
awards may be subject to vesting requirements determined by the
plan administrator. Stock unit awards will have a minimum
vesting schedule of three years (excluding certain restricted
stock units to be issued in the exchange offer as described
under Proposal No. 2) and any terms providing for
accelerated vesting will be limited to acceleration upon a
change of control, death or disability of a holder or
involuntary termination of a holder.
Stock Appreciation Rights. A stock
appreciation right is the right to receive, at the time of
exercise, an amount in cash
and/or stock
equal to the product of (i) the excess of the per share
fair market value of our Common Stock on the date of exercise
over the strike price, multiplied by (ii) the number of
shares of Common Stock with respect to which the stock
appreciation right is exercised. The plan administrator
determines the strike price for a stock appreciation right. The
vesting schedule and other terms are determined by the plan
administrator. If a participant’s service relationship with
us ceases, then the participant, or the participant’s
beneficiary, may exercise any vested stock appreciation right
for three months (or such longer or shorter period specified in
the stock appreciation right agreement) after the date such
service relationship ends. In no event, however, may an option
be exercised beyond the expiration of its term.
Other Equity Awards. The plan administrator
may grant other awards based in whole or in part by reference to
our Common Stock. The plan administrator will set the number of
shares under the award, the purchase price, if any, the timing
of exercise and vesting and any repurchase rights associated
with such awards.
Changes to Capital Structure. In the event
that there is a specified type of change in our capital
structure, such as a stock split, appropriate adjustments will
be made to the number of shares reserved under the 2005 Plan and
outstanding equity awards.
Corporate Transactions. In the event of
certain corporate transactions (such as a merger or sale of
substantially all of the assets of Photon Dynamics), all
outstanding equity awards under the 2005 Plan may be assumed,
continued or substituted for by any surviving or acquiring
entity. If the surviving or acquiring entity elects not to
assume, continue or substitute for such equity awards, then the
vesting and exercisability provisions of equity awards held by
current service providers will be accelerated in full. In
addition, the Board has the discretion to provide that an equity
award under the 2005 Plan will immediately vest and become
exercisable upon or after the occurrence of a change in control
of Photon Dynamics.
Duration, Amendment and Termination. The Board
may suspend or terminate the 2005 Plan at any time, except that
any suspension or termination may not impair rights under equity
awards previously granted without the written consent of the
award holder. Unless sooner terminated, the 2005 Plan will
terminate on January 20, 2015. The Board may also amend the
2005 Plan or equity awards granted under the 2005 Plan at any
time, except that no amendment may impair rights under any award
without the written consent of the award holder. In addition, no
amendment of the 2005 Plan will be effective unless approved by
our shareholders to the extent such approval is necessary to
satisfy applicable law.
The following is a summary of the principal U.S. federal
income taxation consequences to participants and Photon Dynamics
with respect to awards granted under the 2005 Plan. This summary
is not intended to be exhaustive, and does not discuss the
income tax laws of any city, state or foreign jurisdiction in
which a participant may reside.
Incentive Stock Options. Incentive stock
options granted under the 2005 Plan are intended to be eligible
for the favorable federal income tax treatment accorded
“incentive stock options” under Section 422 of
the Code. There generally are no federal income tax consequences
to the participant or Photon Dynamics by reason of the grant or
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exercise of an incentive stock option. However, the exercise of
an incentive stock option may increase the participant’s
alternative minimum tax liability, if any.
If a participant holds stock acquired through exercise of an
incentive stock option for more than two years from the date on
which the option was granted and more than one year after the
date the option was exercised for those shares, any gain or loss
on a disposition of those shares will be a long-term capital
gain or loss, and Photon Dynamics will not be entitled to any
income tax deduction.
Generally, if the participant disposes of the stock before the
expiration of either of these holding periods
(a “disqualifying disposition”), then at the time
of disposition the participant will realize taxable ordinary
income equal to the lesser of (i) the excess of the
stock’s fair market value on the date of exercise over the
exercise price, or (ii) the participant’s actual gain,
if any, on the purchase and sale. The participant’s
additional gain or any loss upon the disqualifying disposition
will be a capital gain or loss, which will be long-term or
short-term depending on whether the stock was held for more than
one year. To the extent the participant recognizes ordinary
income by reason of a disqualifying disposition, generally
Photon Dynamics may be entitled to a corresponding income tax
deduction in the tax year in which the disqualifying disposition
occurs.
Nonstatutory Stock Options. No taxable income
is recognized by a participant upon the grant of a nonstatutory
stock option. Upon exercise of a nonstatutory stock option, the
participant will recognize ordinary income equal to the excess,
if any, of the fair market value of the purchased shares on the
exercise date over the exercise price paid for those shares.
Generally, Photon Dynamics will be entitled to a corresponding
income tax deduction in the tax year in which such ordinary
income is recognized by the participant.
However, if the shares acquired upon exercise of the
nonstatutory stock option are unvested and subject to repurchase
by Photon Dynamics in the event of the participant’s
termination of service prior to vesting in those shares, the
participant will not recognize any taxable income at the time of
exercise, but will have to report as ordinary income, as and
when Photon Dynamics’ repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the
shares on the date the repurchase right lapses, over
(ii) the exercise price paid for the shares. The
participant may, however, elect under Section 83(b) of the
Code to include as ordinary income in the year of exercise of
the option an amount equal to the excess of (i) the fair
market value of the purchased shares on the exercise date, over
(ii) the exercise price paid for such shares. If the
Section 83(b) election is made, the participant will not
recognize any additional income as and when the repurchase right
lapses.
Upon disposition of the stock, the participant will recognize a
capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any
amount recognized as ordinary income upon acquisition (or
vesting) of the stock. Such gain or loss will be long-term or
short-term depending on whether the stock was held for more than
one year.
Stock Appreciation Rights. No taxable income
is realized upon the receipt of a stock appreciation right. Upon
exercise of the stock appreciation right, the fair market value
of the shares (or cash in lieu of shares) received is recognized
as ordinary income to the participant in the year of such
exercise. Generally, with respect to employees, Photon Dynamics
is required to withhold from the payment made on exercise of the
stock appreciation right or from regular wages or supplemental
wage payments an amount based on the ordinary income recognized.
Generally, Photon Dynamics will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by
the participant.
Stock Purchase Awards and Stock Bonus
Awards. Upon receipt of a stock purchase or stock
bonus award, the participant will recognize ordinary income
equal to the excess, if any, of the fair market value of the
shares on the date of issuance over the purchase price, if any,
paid for those shares. Generally, Photon Dynamics will be
entitled to a corresponding income tax deduction in the tax year
in which such ordinary income is recognized by the participant.
However, if the shares issued upon the grant of a stock purchase
or stock bonus award are unvested and subject to repurchase by
Photon Dynamics in the event of the participant’s
termination of service prior to vesting in those shares, the
participant will not recognize any taxable income at the time of
issuance, but will have to report as ordinary income, as and
when Photon Dynamics’ repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the
shares on the date the repurchase right lapses, over
(ii) the purchase price, if any, paid for the
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shares. The participant may, however, elect under
Section 83(b) of the Code to include as ordinary income in
the year of issuance an amount equal to the excess of the fair
market value of the shares on the date of issuance over the
purchase price, if any, paid for such shares. If the
Section 83(b) election is made, the participant will not
recognize any additional income as and when the repurchase right
lapses.
Upon disposition of the stock acquired upon the receipt of a
stock purchase or stock bonus award, the participant will
recognize a capital gain or loss equal to the difference between
the selling price and the sum of the amount paid for such stock
plus any amount recognized as ordinary income upon issuance (or
vesting) of the stock. Such gain or loss will be long-term or
short-term depending on whether the stock was held for more than
one year from the date of vesting or a Section 83(b)
election.
Stock Unit Awards. No taxable income is
recognized upon receipt of a stock unit award. The participant
will recognize ordinary income in the year in which the shares
subject to that unit are actually issued to the participant in
an amount equal to the fair market value of the shares on the
date of issuance. The participant and Photon Dynamics will be
required to satisfy certain tax withholding requirements
applicable to such income. Generally, Photon Dynamics will be
entitled to an income tax deduction equal to the amount of
ordinary income recognized by the participant at the time the
shares are issued.
Potential Limitation on Company
Deductions. Section 162(m) of the Code
denies a deduction to any publicly-held corporation for
compensation paid to certain “covered employees” in a
taxable year to the extent that compensation to such covered
employee exceeds $1 million. It is possible that
compensation attributable to awards, when combined with all
other types of compensation received by a covered employee from
Photon Dynamics, may cause this limitation to be exceeded in any
particular year.
Certain kinds of compensation, including qualified
“performance-based compensation,” are disregarded for
purposes of the deduction limitation. In accordance with
Treasury Regulations issued under Section 162(m) of the
Code, compensation attributable to stock options and stock
appreciation rights will qualify as performance-based
compensation if such awards are granted by a compensation
committee comprised solely of “outside directors” and
the plan contains a per-employee limitation on the number of
shares for which such awards may be granted during a specified
period, the per-employee limitation is approved by the
shareholders, and the exercise or strike price of the award is
no less than the fair market value of the stock on the date of
grant.
Photon Dynamics’ executive officers and directors, other
than non-employee directors, have an interest in approval of the
amendment to the 2005 Plan because it relates to the issuance of
equity awards for which they may be eligible. Because the
Compensation Committee has the discretion to grant awards, it is
not possible as of the date of this proxy statement to determine
future awards that will be received by executive officers and
other employees under the 2005 Plan. Non-employee directors are
not eligible to receive awards under the 2005 Plan. The table
under the caption “Option Grants In Last Fiscal Year”
provides information with respect to the grant of options under
the 2005 Plan to the named executive officers during the most
recent fiscal year. The following table sets forth additional
information with respect to options granted under the 2005 Plan
during the most recent fiscal year to certain groups:
PROPOSAL 4
Shareholders are requested in this Proposal to approve the 2006
Non-Employee Directors’ Stock Incentive Plan (the
“2006 Directors’ Plan”). The
2006 Directors’ Plan amends and restates the 2005
Non-Employee
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Directors’ Stock Option Plan (the
“2005 Directors’ Plan”) and reflects three
primary changes. First, the 2006 Directors’ Plan
increases the authorized share reserve that was available under
the 2005 Directors’ Plan by 200,000 shares.
Second, the 2006 Directors’ Plan provides for grants
of stock awards, including restricted share awards and
restricted share units, to non-employee directors in addition to
stock options, which are the only form of equity compensation
allowed by the 2005 Directors’ Plan. Third, the
2006 Directors’ Plan replaces the non-discretionary
initial and annual grants that were made under the
2005 Directors’ Plan with grants made at the
discretion of the independent directors of the Board (for
purposes of this Proposal No. 4, the “Board”).
The other terms and conditions of the 2006 Directors’
Plan remain substantially consistent with the terms and
conditions of the 2005 Directors’ Plan approved by our
shareholders in 2005.
The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy and voting at the
meeting will be required to approve the
2006 Directors’ Plan. For purposes of this vote
abstentions and broker non-votes will not be counted for any
purpose in determining whether this matter has been approved.
THE BOARD
OF DIRECTORS RECOMMENDS
A VOTE IN
FAVOR OF PROPOSAL 4.
If shareholders do not approve the 2006 Directors’
Plan, we intend to continue to grant options to our Non-Employee
Directors under the 2005 Directors’ Plan to the extent
shares remain available.
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Unless otherwise described below, the 2006 Directors’
Plan does not materially alter the terms of the
2005 Directors’ Plan.
General. The 2006 Directors’ Plan
provides for the discretionary grant of nonstatutory stock
options and stock awards, including restricted stock and
restricted share units, to our non-employee directors. The
2005 Directors’ Plan only provided for
non-discretionary initial and annual grants of nonstatutory
stock options to purchase shares of Common Stock. The Board
adopted the 2006 Directors’ Plan to retain the
services of its non-employee directors, to secure and retain the
services of new non-employee directors, to reduce shareholder
dilution resulting from the exclusive use of stock option grants
by allowing for stock awards that enable smaller grants, and to
provide incentives for non-employee directors to exert maximum
efforts for the success of Photon Dynamics and its affiliates.
Share Reserve. The aggregate number of shares
of our Common Stock that may be issued pursuant to awards
granted under the 2006 Directors’ Plan is
505,000 shares, which represents an increase of
200,000 shares compared to the authorized share reserve
available under the 2005 Directors’ Plan as of
September 30, 2006. If any award expires or terminates for
any reason, in whole or in part, without having been exercised
or vested in full, or if any shares issued pursuant to an award
are forfeited to or repurchased by Photon Dynamics, the shares
of Common Stock not acquired under such stock award, or
forfeited to or repurchased by Photon Dynamics, will become
available for future issuance under the
2006 Directors’ Plan.
The following additional types of shares issued under the
2006 Directors’ Plan may also become available for the
grant of new awards: (i) any shares withheld to satisfy
withholding taxes, (ii) any shares used to pay the exercise
price of an option in a net exercise arrangement, and
(iii) shares tendered to Photon Dynamics to pay the
exercise price of an option. As of the date hereof, no shares of
Common Stock have been issued under the
2006 Directors’ Plan.
Administration. The independent directors of
the Board (as defined in the Nasdaq listing standards) will
administer the 2006 Directors’ Plan and will determine
the provisions of each option to the extent not specified in the
2006 Directors’ Plan. The entire Board, as opposed to
only independent directors, administered the 2005
Directors’ Plan.
Option Awards. The exercise price of options
granted under the 2006 Directors’ Plan will be no less
than the fair market value of our Common Stock on the date of
grant.
No option granted under the 2006 Directors’ Plan may
be exercised after the expiration of ten years from the date it
was granted. If an optionee’s service relationship with
Photon Dynamics, or any of its affiliates, whether as a
non-employee director or subsequently as an employee, director
or consultant of Photon Dynamics or an affiliate, ceases for any
reason other than disability, death, for cause, or following a
change in control, the optionee may exercise any vested Awards
for a period of three months following the cessation of service.
If an optionee’s service relationship with Photon Dynamics,
or any of its affiliates, ceases due to disability or death (or
an optionee dies within a certain period following cessation of
service), the optionee or a beneficiary may exercise any vested
Awards for a period of 12 months in the event of
disability, and 18 months in the event of death. If an
optionee’s service relationship with Photon Dynamics, or
any of its affiliates, is terminated for cause, the option will
terminate immediately upon the optionee’s termination date.
If an optionee’s service relationship with Photon Dynamics,
or any of its affiliates terminates as of or within
12 months following a specified change in control
transaction, the optionee may exercise vested Awards for a
period of 12 months following the optionee’s
termination of service. In no event, however, may an option be
exercised beyond the expiration of its term.
The exercise price of an option may be paid in any combination
of the following: (i) cash or check, (ii) pursuant to
a broker-assisted cashless exercise, or (iii) by tender of
other Common Stock previously owned by the optionee. Awards
granted under the 2006 Directors’ Plan are generally
not transferable except by will, the laws of descent and
distribution, or pursuant to a domestic relations order.
Stock Awards. Stock awards may be granted
either alone, in addition to, or in tandem with other awards
granted under the 2006 Directors’ Plan. After the
Board determines that it will grant a stock award, it will
advise the
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non-employee director in writing or electronically, by means of
an agreement, of the terms, conditions and restrictions related
to the grant, including vesting and the number of shares that
the director will be entitled to receive.
If a stock award holder’s continued service with Photon
Dynamics ceases for any reason other than following a change in
control, any unvested portion of the stock award holder’s
stock award will be forfeited and returned to Photon Dynamics.
The 2005 Directors’ Plan only provides for the grant
of stock options and not the grant of stock awards.
Discretionary Grants. The Board may grant
options, restricted shares or restricted share units in its
discretion to any non-employee director. Awards will vest as the
Board deems appropriate, except with respect to restricted stock
awards, including restricted share units, which will vest in
equal annual installments over three years at a minimum.
Acceleration of the vesting of restricted stock awards,
including restricted share units, may only occur upon a change
of control or certain corporate transactions as provided in the
2006 Directors’ Plan. The 2005 Directors’ Plan
only provides for non-discretionary initial and annual grants of
nonstatutory stock options to purchase shares of Common Stock.
Initial Policy. The 2006 Directors’
Plan provides for the following grants to be made until the
Board determines otherwise: (i) an initial grant of
restricted share units representing 3,300 shares and an
option to purchase 10,000 shares of our Common Stock when
an individual first becomes a non-employee director, each of
which will vest annually over four years; and (ii) on the
date of each annual meeting of our stockholders, a grant of
restricted share units representing 2,500 shares, which
will vest in equal annual installments over three years, and an
option to purchase 7,500 options, which will vest after one year.
Under the 2005 Directors’ Plan, each newly appointed
non-employee director receives a non-discretionary initial grant
of an option to purchase 20,000 shares of our Common Stock,
which vests in four equal installments measured from the date of
grant. On the date of each annual meeting of our shareholders
under the 2005 Directors’ Plan, each non-employee
director is granted an option to purchase 15,000 shares of
our Common Stock, which vests in twelve equal monthly
installments measured from the date of grant.
Changes to Capital Structure. In the event
that there is a specified type of change in our capital
structure, such as a stock split, appropriate adjustments will
be made to (i) the number of shares reserved under the
2006 Directors’ Plan, (ii) the number of shares
to be issued pursuant to initial and annual grants, and
(iii) the number of shares and exercise price, as
applicable, of all outstanding awards.
Corporate Transactions. In the event of
certain corporate transactions, as defined in the
2006 Directors’ Plan, all outstanding awards under the
2006 Directors’ Plan may be assumed, continued or
substituted for by any surviving or acquiring entity (or its
parent company). If the surviving or acquiring entity (or its
parent company) elects not to assume, continue or substitute for
the awards, then (i) with respect to any awards that are
held by award holders then performing services for Photon
Dynamics, the vesting and exercisability of the awards will be
accelerated in full and any options will be terminated if not
exercised prior to the effective date of the corporate
transaction. All outstanding options will terminate if not
exercised prior to the effective date of the corporate
transaction.
Changes in Control. If a specified change in
control transaction occurs, as defined in the
2006 Directors’ Plan, and an award holder’s
service relationship with Photon Dynamics has not terminated
immediately prior to the effective time of the transaction, then
the vesting and exercisability of the award holder’s awards
will be accelerated in full immediately prior to (and contingent
upon) the effectiveness of the transaction. If an award holder
is terminated or required to resign his or her position as a
non-employee director as a condition of the transaction, the
vesting and exercisability of the award holder’s awards
will be accelerated in full immediately prior to the
effectiveness of such resignation, contingent upon the
effectiveness of the transaction.
Duration, Amendment and Termination. The Board
may suspend or terminate the 2006 Directors’ Plan at
any time. Such suspension or termination may not impair the
rights and obligations under any awards granted prior to such
suspension or termination without the written consent of the
optionee.
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The Board may also amend the 2006 Directors’ Plan or
awards granted under the 2006 Directors’ plan at any
time. The amendment of an award may not impair the rights of an
award holder without the written consent of the award holder. In
addition, no amendment of the 2006 Directors’ Plan
will be effective unless approved by our shareholders to the
extent such approval is necessary to satisfy applicable law. The
Board may submit amendments to the 2006 Directors’
Plan for shareholder approval.
The following is a summary of the principal United States
federal income taxation consequences to participants and Photon
Dynamics with respect to participation in the
2006 Directors’ Plan. This summary is not intended to
be exhaustive, and does not discuss the income tax laws of any
city, state or foreign jurisdiction in which a participant may
reside.
Nonstatutory Stock Options. No taxable income
is recognized by a participant upon the grant of a nonstatutory
stock option. Upon exercise of a nonstatutory stock option, the
participant will recognize ordinary income equal to the excess,
if any, of the fair market value of the purchased shares on the
exercise date over the exercise price paid for those shares.
Generally, Photon Dynamics will be entitled (subject to the
requirement of reasonableness, the provisions of
Section 162(m) of the Code, and the satisfaction of a tax
reporting obligation) to a corresponding income tax deduction in
the tax year in which such ordinary income is recognized by the
participant.
However, if the shares acquired upon exercise of the
nonstatutory stock option are unvested and subject to repurchase
by Photon Dynamics in the event of the participant’s
termination of service prior to vesting in those shares, the
participant will not recognize any taxable income at the time of
exercise, but will have to report as ordinary income, as and
when the Photon Dynamics’ repurchase right lapses, an
amount equal to the excess of (i) the fair market value of
the shares on the date the repurchase right lapses, over
(ii) the exercise price paid for the shares. The
participant may, however, elect under Section 83(b) of the
Code to include as ordinary income in the year of exercise of
the option an amount equal to the excess of (i) the fair
market value of the purchased shares on the exercise date, over
(ii) the exercise price paid for such shares. If the
Section 83(b) election is made, the participant will not
recognize any additional income as and when the repurchase right
lapses.
Upon disposition of the stock, the participant will recognize a
capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any
amount recognized as ordinary income upon acquisition (or
vesting) of the stock. Such gain or loss will be long-term or
short-term depending on whether the stock was held for more than
one year.
Stock Awards. Upon receipt of a vested stock
award, the participant will recognize ordinary income in an
amount equal to the fair market value of the shares on the date
of issuance. If shares issued upon the grant of a stock award
are unvested and subject to forfeiture, the participant will not
recognize any taxable income at the time of issuance, but will
have to report as ordinary income, as and when the stock vests,
an amount equal to the fair market value of the shares on the
date of vesting. The participant may, however, elect under
Section 83(b) of the Code to include as ordinary income in
the year of issuance an amount equal to the fair market value of
the shares on the date of issuance. If the Section 83(b)
election is made, the participant will not recognize any
additional income as and when the stock vests. Generally, Photon
Dynamics will be entitled to a corresponding income tax
deduction in the tax year in which ordinary income is recognized
by the participant.
Upon disposition of the stock acquired upon the receipt of a
stock award, the participant will recognize a capital gain or
loss equal to the difference between the selling price and any
amount recognized as ordinary income upon issuance (or vesting)
of the stock. Such gain or loss will be long-term or short-term
depending on whether the stock was held for more than one year
from the date of vesting or a Section 83(b) election.
Stock Unit Awards. No taxable income is
recognized upon receipt of a stock unit award. The participant
will recognize ordinary income in the year in which the shares
subject to that unit are actually issued to the participant in
an amount equal to the fair market value of the shares on the
date of issuance. Generally, Photon Dynamics will be entitled to
an income tax deduction equal to the amount of ordinary income
recognized by the participant at the time the shares are issued.
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Photon Dynamics’ non-employee directors have an interest in
approval of the 2006 Directors’ Plan because it
relates to the issuance of equity awards for which non-employee
directors are eligible. Because the Board has the discretion to
grant awards, it is not possible as of the date of this proxy
statement to determine future awards that will be received by
non-employee directors under the 2006 Directors’ Plan.
The table included in the section of this proxy entitled
“Executive Compensation — Compensation of
Directors” provides information with respect to the grant
of options under the 2005 Directors’ Plan to our
non-employee directors during the most recent fiscal year. The
following table presents certain information with respect to
awards to be granted under the 2006 Directors’ Plan to
Photon Dynamics’ non-employee directors as a group under
the initial policy contemplated by the 2006 Directors’
Plan, assuming shareholder approval of the
2006 Directors’ Plan:
PROPOSAL 5
The Audit Committee of the Board of Directors has selected
Ernst & Young LLP as Photon Dynamics’ independent
registered public accounting firm for the fiscal year ending
September 30, 2007, and has further directed that
management submit the selection of Photon Dynamics’
independent registered public accounting firm for ratification
by the shareholders at the Annual Meeting. Ernst &
Young LLP has audited Photon Dynamics’ financial statements
since the fiscal year ended September 30, 1994.
Representatives of Ernst & Young LLP are expected to be
present at the Annual Meeting. They will have an opportunity to
make a statement if they so desire and will be available to
respond to appropriate questions.
Neither Photon Dynamics’ Bylaws nor other governing
documents or law require shareholder ratification of the
selection of Ernst & Young LLP as Photon Dynamics’
independent registered public accounting firm. However, the
Board of Directors, on behalf of the Audit Committee, is
submitting the selection of Ernst & Young LLP to the
shareholders for ratification as a matter of good corporate
practice. If the shareholders fail to ratify the selection, the
Audit Committee will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Audit Committee in
its discretion may direct the appointment of a different
independent registered public accounting firm at any time during
the year if they determine that such a change would be in the
best interests of Photon Dynamics and its shareholders.
The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy and voting at the
Annual Meeting will be required to ratify the selection of
Ernst & Young LLP. For purposes of this vote,
abstentions and broker non-votes will not be counted for any
purpose in determining whether this matter has been approved.
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The following is a summary of the aggregate fees billed to
Photon Dynamics by Ernst & Young LLP for professional
services rendered during the fiscal years ended
September 30, 2006 and 2005.
Audit Fees. Consists of fees billed for
professional services rendered for the audit of Photon
Dynamics’ consolidated financial statements and review of
the interim consolidated financial statements included in
quarterly reports and services that are normally provided by
Ernst & Young LLP in connection with statutory and
regulatory filings or engagements. Fees relating to
Section 404 compliance for fiscal 2006 and 2005 are
included as part of the audit of Photon Dynamics’
consolidated financial statements and of its internal control
over financial reporting and such fees are included under
“Audit Fees”.
Audit-Related Fees. Consists of fees billed
for assurance and related services that are reasonably related
to the performance of the audit or review of Photon
Dynamics’ consolidated financial statements and are not
reported under “Audit Fees.” During fiscal 2006, these
services were rendered in connection with consultations related
to potential mergers and acquisitions. During fiscal 2005, these
services were rendered in connection with an investigation of
Photon Dynamics’ restatement of its financial statements
for the year ended September 30, 2004, the quarters within
that year, and for the quarter ended December 31, 2004.
All Other Fees. Consists of fees for products
and services other than the services described above. During
fiscal 2006 and fiscal 2005, these fees related to a
subscription to Ernst & Young’s online accounting
and auditing research tool.
All fees described above were either approved in advance by the
Audit Committee or approved in advance in accordance with the
policy and procedures adopted by our Audit Committee for the
pre-approval of audit and permissible non-audit services
provided by our independent registered public accounting firm.
Photon Dynamics’ Audit Committee has adopted a policy and
procedures for the pre-approval of audit and permissible
non-audit services provided by our independent registered public
accounting firm, Ernst & Young LLP. The policy
generally pre-approves specified services in the defined
categories of audit services, audit-related services and tax
services. Pre-approval may also be given as part of the Audit
Committee’s approval of the scope of the engagement of our
independent registered public accounting firm or on an
individual explicit
case-by-case
basis before our independent registered public accounting firm
is engaged to provide each service. The policy also provides
that pre-approval of services may be delegated to one or more
members of the Audit Committee. Pursuant to the policy, our
Audit Committee has delegated specific pre-approval authority to
the Chair of the Audit Committee, provided that the Chair of the
Audit Committee is required to report any pre-approval decisions
to the Audit Committee at its next scheduled meeting and that
the Chair of the Audit Committee may not pre-approve services
that, together with all other services that have not yet been
reported to the Audit Committee, exceed $20,000 in the aggregate.
The Audit Committee has determined that the rendering of
preapproved services other than audit services by
Ernst & Young LLP does not result in a compromise of
auditor independence.
ON BEHALF OF THE AUDIT COMMITTEE, THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 5.
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The following table sets forth certain information regarding the
ownership of Photon Dynamics’ Common Stock as of
September 30, 2006 by: (i) each director and each
nominee for director; (ii) each of the executive officers
named in the Summary Compensation Table; (iii) all
executive officers and directors of Photon Dynamics as a group;
and (iv) all those known by Photon Dynamics to be
beneficial owners of more than five percent of its Common Stock.
This table is based upon information supplied by officers,
directors and principal shareholders and Schedules 13G and
Forms 13F filed with the SEC. Unless otherwise indicated in
the footnotes to this table and subject to community property
laws where applicable, Photon Dynamics believes that each of the
shareholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on
16,526,782 shares of Photon Dynamics’ Common Stock
outstanding on September 30, 2006, adjusted as required by
rules promulgated by the SEC. Unless otherwise indicated, the
address of each of the individuals and entities listed in this
table is c/o Photon Dynamics at the address on the first
page of this proxy statement.
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Section 16(a) of the Securities Exchange Act of 1934
requires Photon Dynamics’ directors and executive officers,
and persons who own more than ten percent of a registered class
of Photon Dynamics’ equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of Photon Dynamics.
Officers, directors and greater than ten percent shareholders
are required by SEC regulations to furnish Photon Dynamics with
copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such
reports furnished to Photon Dynamics and written representations
that no other reports were required, during the fiscal year
ended September 30, 2006, our officers, directors and
greater than ten percent beneficial owners complied with all
applicable Section 16(a) filing requirements.
EQUITY
COMPENSATION PLAN INFORMATION
Set forth in the table below is information pertaining to
securities authorized for issuance with respect to all of Photon
Dynamics’ equity compensation plans in effect as of
September 30, 2006. There are options but no warrants or
other rights existing under these plans.
Photon Dynamics assumed the CR Technology, Inc. 1991 Stock
Option Plan, or the CRT 1991 Plan, in connection with Photon
Dynamics’ acquisition of CR Technology in November 1999,
without the approval of Photon Dynamics’ shareholders.
Options are no longer granted under the CRT 1991 Plan and any
outstanding options that were granted under the CRT 1991 Plan
are exercisable for shares of Photon Dynamics’ Common
Stock. As of September 30, 2006, there were outstanding
options to purchase 625 shares of Photon Dynamics’
Common Stock under the CRT 1991 Plan, with a weighted average
exercise price of $16.88. All of these outstanding options
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were granted prior to Photon Dynamics’ acquisition of CR
Technology. Previously granted but unexercised options are
subject to adjustment for any future stock dividends, splits,
combinations, or other changes in capitalization as described in
the CRT 1991 Plan.
Terms of Options. Under the CRT 1991 Plan, the
exercise price of incentive stock options may not be less than
the fair market value of the stock into which the option is
exercisable at the time of grant, and, in the case of
nonqualified stock options, may not be less than 85% of the fair
market value of the stock into which the option is exercisable
at the time of grant. At the time the outstanding options under
the CRT 1991 Plan were granted, the options were exercisable for
shares of common stock of CR Technology. Following Photon
Dynamics’ acquisition of CR Technology, these options
became exercisable for shares of Photon Dynamics’ Common
Stock. The number of shares for which these options were
exercisable and their exercise prices were adjusted in
accordance with the Agreement and Plan of Merger and
Reorganization under which Photon Dynamics acquired CR
Technology. Payment of the exercise price may be made in cash at
the time the option is exercised or by delivery of other Common
Stock of Photon Dynamics, or, at the discretion of the Board,
pursuant to a deferred payment arrangement. Outstanding options
granted under the CRT 1991 Plan were generally made subject to
vesting over time.
Effect of Certain Corporate Events. The CRT
1991 Plan requires that, in the event of specified types of
mergers or other corporate reorganizations affecting Photon
Dynamics, unless any surviving corporation either assumes stock
awards outstanding under the CRT 1991 Plan or substitutes
similar stock awards for those outstanding under this plan, the
outstanding stock awards will be accelerated so that they are
fully vested.
EXECUTIVE
COMPENSATION
Each non-employee director of Photon Dynamics is currently
entitled to receive an annual retainer fee of $20,000, plus a
per meeting fee of $2,000 for in person meetings and $1,000 for
telephonic meetings. Each member of the Audit Committee, the
Compensation Committee and the Nominating and Corporate
Governance Committee is entitled to receive, in addition to his
or her Board compensation, a per meeting fee of $1,500 for in
person meetings and $750 for telephonic meetings. The Chairman
of each Board committee is entitled to receive, in addition to
his or her Board compensation and committee attendance fees, an
annual retainer as follows: Chairman of the Audit
Committee — $20,000; Chairman of the Compensation
Committee — $10,000; and Chairman of the Nominating
and Corporate Governance Committee — $8,000. The
non-employee members of the Board are also eligible for
reimbursement for their expenses incurred in connection with
attendance at Board meetings in accordance with company policy.
The following table summarizes the cash retainer and meeting
fees paid to our non-employee directors:
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Each of Photon Dynamics’ non-employee directors receives
the following automatic, non-discretionary option grants under
Photon Dynamics’ 2005 Non-Employee Directors’ Stock
Option Plan (the “2005 Directors’ Plan”),
which was approved by our shareholders in March 2005:
The exercise price of options granted under the
2005 Directors’ Plan to non-employee directors equals
100% of the fair market value (defined under the
2005 Directors’ Plan as the closing stock price on an
established exchange or market) of our Common Stock on the date
of the option grant. The term of options granted under the
2005 Directors’ Plan is ten years. Generally,
directors’ options will be subject to accelerated vesting
in the event of specified change in control transactions.
If shareholders approve Proposal No. 4, the
2006 Directors’ Plan will provide for the following
grants to be made beginning at our 2007 Annual Meeting and until
the Board determines otherwise: (i) an initial grant of
restricted share units representing 3,300 shares of our
Common Stock and an option to purchase 10,000 shares of our
Common Stock when an individual first becomes a non-employee
director, each of which will vest annually over four years; and
(ii) an annual grant of restricted share units representing
2,500 shares of our Common Stock, which would vest in equal
annual installments over three years, and an option to purchase
7,500 shares of our Common Stock, which would vest after
one year.
During the fiscal year ended September 30, 2006, each
non-employee directors earned the following cash and equity
compensation:
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The following table shows for the fiscal years ended
September 30, 2006, 2005 and 2004, compensation awarded or
paid to, or earned by, the persons who served as our Chief
Executive Officer during the 2006 fiscal year and each of our
other executive officers (which consisted of no more than three
executive officers in addition to the Chief Executive Officer
during the 2006 fiscal year) at September 30, 2006 (the
“Named Executive Officers”):
SUMMARY
COMPENSATION TABLE
Our current policy with respect to annual stock option grants to
key employees, including our executive officers but excluding
grants to newly hired employees or grants based on promotions,
is to only grant options during open trading windows and not
during blackout periods.
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The following tables show for the fiscal year ended
September 30, 2006 certain information regarding options
granted to, exercised by, and held at year end by, the Named
Executive Officers:
Mr. Hawthorne is a party to an agreement which provides for
certain severance and other benefits in the event of a
termination of his employment following a change of control of
Photon Dynamics. Pursuant to the agreement, in the event of a
termination of Mr. Hawthorne’s employment without
cause or Mr. Hawthorne’s resignation for good reason,
in each case within 12 months after a change of control of
Photon Dynamics, Mr. Hawthorne is entitled to receive one
year of his base salary and on-target bonuses and accelerated
vesting of all of his stock options. Based on his current
compensation and assuming full out target bonuses of 75%, his
cash severance payment under these circumstances would equal
approximately $568,750.
Pursuant to an offer letter agreement with Ms. Lamb entered
into in connection with her appointment as Secretary and Chief
Financial Officer in May 2005, Photon Dynamics agreed to pay
Ms. Lamb a base salary of $250,000 per year. Pursuant
to this offer letter agreement, Ms. Lamb was eligible for a
$150,000 sign on bonus, $75,000 of which was paid to
Ms. Lamb as an immediate sign on bonus and $75,000 of which
was paid in November 2005. Ms. Lamb’s offer letter
also provided that in the event of a termination of
Ms. Lamb’s employment without
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cause or Ms. Lamb’s resignation for good reason, in
each case within 12 months after a change of control of
Photon Dynamics, Ms. Lamb would be entitled to receive one
year of her base salary and on-target bonuses and accelerated
vesting of all of her stock options. This offer letter is no
longer in effect after her departure in September 2006.
Mr. Song is a party to an amended employment agreement
which provides for a base salary of $240,000 per year.
Mr. Song is also eligible to participate in the Photon
Dynamics Inc. Management Incentive Bonus program up to a maximum
of 60% of base salary as well as certain discretionary bonuses
on quarterly basis up to a maximum of 10,000 per quarter,
subject to the approval of the Compensation Committee of the
Board of Directors, as well as sales commissions. The agreement
also provides that in the event of a termination of
Mr. Song’s employment without cause or
Mr. Song’s resignation for good reason, in each case
within 12 months after a change of control of Photon
Dynamics, all stock options granted to him by Photon Dynamics
will become fully vested and exercisable as of the date of such
termination or resignation.
Pursuant to an offer letter agreement with Mr. Merrill
entered into in connection with his appointment as Vice
President, Marketing in April 2004, Photon Dynamics agreed to
grant Mr. Merrill stock options to purchase an aggregate of
80,000 shares of Photon Dynamics’ Common Stock and to
pay Mr. Merrill a base salary of $250,000 per year.
Pursuant to this offer letter agreement, Mr. Merrill was
also eligible for a $200,000 sign on bonus, $100,000 of which
was paid to Mr. Merrill as an immediate sign on bonus,
$50,000 of which was paid in September 2004, and $50,000 of
which was paid in January 2005. Mr. Merrill is also
eligible to participate in the Photon Dynamics Inc. Management
Incentive Bonus Program, which provides for a bonus up to a
maximum 65% of his base salary, subject to the approval of the
Compensation Committee of the Board of Directors.
Mr. Merrill’s offer letter agreement was subsequently
amended to provide that in the event of a termination of
Mr. Merrill’s employment without cause or
Mr. Merrill’s resignation for good reason, in each
case within 12 months after a change of control of Photon
Dynamics, all stock options granted to him by Photon Dynamics
will become fully vested and exercisable as of the date of such
termination or resignation.
During the fiscal year ended September 30, 2006, the
Compensation Committee consisted of Curtis Wozniak, Michael Kim
and, until March 7, 2006, Floyd Kvamme. None of the current
members of the Compensation Committee is or was an officer or
employee of Photon Dynamics or its subsidiaries. None of Photon
Dynamics’ executive officers serves as a member of the
board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of Photon
Dynamics’ Board or Compensation Committee.
Photon Dynamics has entered into indemnity agreements with
certain officers and directors which provide, among other
things, that Photon Dynamics will indemnify such officer or
director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements
he or she may be required to pay in actions or proceedings which
he or she is or may be made a party by reason of his or her
position as a director, officer or other agent of Photon
Dynamics, and otherwise to the fullest extent permitted under
California law and Photon Dynamics’ Bylaws.
The Compensation and Employee Ownership Committee (the
“Compensation Committee”) administers Photon
Dynamics’ executive compensation program. In this regard,
the role of the Compensation Committee is to oversee and
determine our compensation plans, policies and objectives,
annually review and approve all executive
2 The
material in this report is not “soliciting material,”
is not deemed “filed” with the SEC, and is not to be
incorporated by reference into any filing of Photon Dynamics
under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after
the date hereof and irrespective of any general incorporation
language contained in such filing.
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officers’ compensation decisions, and administer our stock
option plans (including reviewing and approving stock option
grants to executive officers) and employee stock purchase plan.
The Compensation Committee’s charter reflects these various
responsibilities, and the Compensation Committee and our Board
periodically reviews and assesses and, when appropriate, revises
the charter. The Compensation Committee charter is posted on our
website at http://www.photondynamics.com/governance. The
Compensation Committee’s membership is determined by the
Board and is composed entirely of independent directors. The
Compensation Committee meets at various times during the year,
and it also considers and takes action by written consent. The
Compensation Committee Chairman reports on Compensation
Committee actions and recommendations at Board meetings. The
Compensation and Benefits Group in Photon Dynamics’ Human
Resources Department supports the Compensation Committee in its
work and in some cases acts at the direction of the Compensation
Committee to fulfill various functions in administering Photon
Dynamics’ compensation programs. In addition, the
Compensation Committee has the authority to engage the services
of outside advisers, experts and others to assist the
Compensation Committee. For the past three fiscal years, the
Compensation Committee has directly engaged an outside
compensation consulting firm to assist the Compensation
Committee in its review of the compensation for the executive
officers.
During fiscal 2006, the Compensation Committee was composed of
the following independent members of our Board: Nicholas
Brathwaite (Chair), Michael Kim and, until March 7, 2006,
Floyd Kvamme. The Compensation Committee met five times during
fiscal 2006.
Objectives. The objectives of Photon
Dynamics’ executive compensation program are to:
Compensation Philosophy. Our general
compensation philosophy is that total cash compensation should
vary with Photon Dynamics’ performance in achieving
financial and non-financial objectives, and that any long-term
incentive compensation should be closely aligned with
shareholder interests. This philosophy applies to all of our
employees, with a more significant level of variability and
compensation at risk as an employee’s level of
responsibility increases. The Compensation Committee believes
that Photon Dynamics’ overall compensation program should
be structured to motivate management to create shareholder
value. In fiscal 2006, the Compensation Committee engaged in a
review of the executive compensation philosophy, with the goal
of ensuring the appropriate mix of fixed and variable
compensation linked to individual and corporate performance. In
the course of this review, the Compensation Committee sought the
advice and input of both an outside compensation consultant and
Photon Dynamics’ management. Through this review, the
Compensation Committee also identified the key strategic
compensation design priorities for Photon Dynamics: employee
retention, cost management, alignment with shareholder interests
and continued focus on corporate governance. Accordingly, the
compensation program is designed to attract and retain talented
executives and technical personnel, to reward achievement of
Photon Dynamics’ short-term and long-term performance
goals, to link executive compensation to shareholder interests
through incentive compensation and long term equity-based plans,
and to recognize and reward individual contributions to
operating group and company-wide performance objectives. This
compensation review confirmed that our compensation program
elements individually and in the aggregate strongly support and
reflect our compensation philosophy and strategic design
priorities, both on a cash and long-term incentive basis.
In fiscal 2006, the Compensation Committee directly engaged an
outside compensation consultant to provide an independent
analysis of Photon Dynamics’ executive compensation program
and practices. Based upon the results of the analysis completed
by this independent consultant, as well as input from management
and the Compensation Committee’s experience in compensation
matters, the Compensation Committee concluded the following with
respect to Photon Dynamics’ executive compensation
structure at the time of the report:
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Components of Executive Compensation. During
fiscal 2006, compensation for Photon Dynamics’ executive
officers consisted of base salary, annual cash incentives
available through participation in the Photon Dynamics
Management Incentive Plan, and longer-term equity incentives.
Photon Dynamics also offers to its executive officers
participation in plans available generally to all employees of
Photon Dynamics, including its 401(k) plan (including matching
contributions), employee stock purchase plan (which allows
employees to use a percentage of pay to purchase stock at a 15%
discount), and medical and dental plan participation.
Base Salary. The Compensation Committee
reviews and approves base salaries for each of Photon
Dynamics’ executive officers at least annually in
connection with annual performance reviews. In setting or
adjusting base salaries, the Compensation Committee examines
both qualitative and quantitative factors relating to corporate
and individual performance. In many instances, the qualitative
factors necessarily involve a subjective assessment by the
Compensation Committee. The Compensation Committee neither bases
its considerations on any single performance factor nor does it
specifically assign relative weights to factors but rather
considers a mix of factors and evaluates individual performance
against that mix both in absolute terms and in relation to other
company executives. Generally, in approving salary levels for
executive officers (other than the Chief Executive Officer); the
Compensation Committee considers the evaluation and
recommendations of Photon Dynamics’ Chief Executive Officer.
The Compensation Committee reviews an independent survey of
compensation of executive officers of other high technology
companies to enable it to set base salaries based on each
executive officer’s level of responsibility and within the
parameters of companies of comparable size and complexity in
Photon Dynamics’ industry. The survey includes a broader
group of technology companies than those companies included in
the Nasdaq Stock Market Index and the Philadelphia Semiconductor
Index used in the performance measurement comparison graph
included in this proxy statement.
Generally, base salaries paid to executive officers for fiscal
2006 were set at levels above the mid-range of salaries paid to
executives under the independent survey. In addition to
individual and corporate performance, the factors considered
include relative salaries and responsibilities in Photon
Dynamics, factors such as inflation and the competitive
environment relative to other technology companies, independent
survey data, number of years within and outside of Photon
Dynamics and anticipated future responsibilities of each
individual within the next year. Following the standard approach
taken by most companies, payment of base salary is not
conditioned upon the achievement of any specific, pre-determined
performance targets.
Executive Incentive Compensation. On
January 18, 2006, the Compensation Committee adopted the
Photon Dynamics Management Incentive Plan (the “Incentive
Plan”). The Compensation Committee established the
Incentive Plan to reward Photon Dynamics’ executive
officers, director-level employees, managers and key
contributors (the “Plan Participants”) for assisting
the Company in achieving its business objectives. Awards under
the Incentive Plan are paid out in the form of year-end bonuses.
The following description of the Incentive Plan is a summary of
the material terms of the Incentive Plan and does not purport to
be complete, and is qualified in its entirety by reference to
the Incentive Plan.
Under the Incentive Plan, bonus payments are determined on a
yearly basis based upon a formula taking into account corporate,
business unit and individual objectives. Bonus payments are
awarded upon the approval of the Compensation Committee.
Corporate and individual objectives are reviewed on a yearly
basis in consultation with the Compensation Committee. The
Incentive Plan is most heavily weighted toward the corporate
factor (weighted 70%), which takes into account the performance
of Photon Dynamics against documented business plan objectives.
The business unit factor (weighted 30%) is based on the overall
performance of the particular business unit for which the Plan
Participant performs services. The individual factor is based on
individual performance objectives achieved during the applicable
year, which vary depending on the positions and responsibilities
held by the Plan Participants. The combination of the corporate
factor and the business unit factor multiplied by the individual
factor determines the percentage of target bonus to be awarded
to the Plan Participants.
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The annual base salary and target bonus eligibility with respect
to each of our executive officers for the 2006 fiscal year are
set forth in the following table. For fiscal 2006, incentive
bonuses were not determined as of December 20, 2006.
In the past, the main component of our long-term equity
incentive program has been granting stock options with exercise
prices equal to the fair market value of the Common Stock. Stock
options require Photon Dynamics stock price to appreciate in
order for the employees to realize any benefit. All general
full-time and part-time employees are eligible to receive equity
awards, including executive officers. After careful review, the
Compensation Committee has recently begun to make grants of
restricted stock units as well as stock options. The
Compensation Committee believes that this mix of different types
of equity increases the incentive and retentive value of our
equity program by offering recipients the opportunity to realize
value in equity compensation even in a declining market, while
still providing an incentive for recipients to work toward
improving our stock performance. The Compensation Committee
remains committed to the view that equity awards further align
the interests of shareholders and management by providing
executive officers and other employees with a significant
economic interest in the long-term appreciation of Photon
Dynamics’ stock.
Some of the Compensation Committee’s considerations in
granting equity awards are as follows:
In fiscal 2006, Photon Dynamics granted stock options to
purchase 8,000 shares to Mark Merrill, stock options to
purchase 15,000 shares to Maureen Lamb and stock options to
purchase 354,950 shares to other employees under the
shareholder-approved Photon Dynamics, Inc. 2005 Equity Incentive
Plan (“2005 Incentive Plan”). All options granted in
fiscal 2006 under the 2005 Incentive Plan were granted with
exercise prices set at 100% of the fair market value of the
underlying stock on the date of grant and have a term of ten
years.
Generally, all options granted in fiscal 2006 were granted
subject to a sixty-month vesting period, which is designed to
motivate option holders to achieve stated objectives, thereby
aiding Photon Dynamics’ efforts to maximize revenue and
profit together with shareholder value, and to remain with
Photon Dynamics for the long-term. In determining the number of
shares subject to an option to be granted to an executive
officer, the Compensation Committee takes into account the
officer’s position and level of responsibility within
Photon Dynamics, the officer’s existing stock and unvested
option holdings, the potential reward to the officer if the
stock price appreciates in the public market, and the
competitiveness of the officer’s overall compensation
arrangement, including stock options, although outstanding
performance by an individual may also be taken into
consideration. Option grants may also be made to new executives
upon commencement of employment and, on occasion, to executives
in connection with a significant change in job responsibility.
The Compensation Committee may grant options taking into account
multiple year periods. In fiscal 2006, based on the factors
described above, the
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Compensation Committee granted options to purchase
23,000 shares of Common Stock to executive officers of
Photon Dynamics. All grants were made from the 2005 Incentive
Plan and were based on the recommendations of an independent
third party consultant.
During fiscal 2006, we reviewed our compensation practices for
long-term awards. During fiscal 2007, we have begun to grant
other types of equity awards including restricted share units
and we expect to continue this practice in the future.
The Compensation Committee has reviewed and approved the
proposal to exchange certain underwater stock options, the
proposal for increasing the shares reserved under the 2005
Equity Incentive Plan, and the proposal to approve the 2006
Non-Employee Directors’ Plan.
The Compensation Committee believes that a significant portion
of the Chief Executive Officer’s compensation should be
performance-based, whether in the form of annual cash bonuses or
long-term equity incentive awards. In particular, in addition to
the procedures and goals described above for its executive
compensation program generally, the Compensation Committee
considered such factors as Photon Dynamics’ revenue and
profits and Photon Dynamics’ market capitalization. The
Compensation Committee set Mr. Hawthorne’s base salary
for fiscal 2006 at $325,000, which is at the
50th percentile among companies in the Russell 3000
industry group according to an independent study, together with
a target bonus opportunity in an amount equal to 75% of his base
salary. He was eligible to receive a bonus if goals set by the
Compensation Committee at the beginning of the year were met.
Mr. Hawthorne was eligible for a bonus of up to $243,750
dollars if certain management objectives and company performance
factors had been met. Mr. Hawthorne was not awarded a bonus
during fiscal 2006.
Section 162(m) of the Internal Revenue Code, or
Section 162(m), limits Photon Dynamics to a deduction for
federal income tax purposes of no more than $1 million of
compensation paid in a taxable year to our executive officers
named in the Summary Compensation Table. Compensation above
$1 million may be deducted if it is
“performance-based” compensation within the meaning of
Section 162(m). The Compensation Committee has not
established a policy for determining which forms of incentive
compensation awarded to its named executive officers shall be
designed to qualify as “performance-based compensation. It
is not currently expected that any compensation deemed paid to
any of our executive officers, other than the stock option
grants, will exceed the $1 million limit per officer. The
terms of our 2005 Plan are intended to maximize the
deductibility under Section 162(m) of stock option grants
to executives.
In summary, it is the opinion of the Compensation Committee that
the executive compensation policies and plans adopted by Photon
Dynamics provide a balanced and reasonable remuneration program
that properly aligns our performance and the interest of our
shareholders with competitive and equitable executive
compensation over the short- and long-term.
THE
COMPENSATION AND EMPLOYEE OWNERSHIP COMMITTEE
Nicholas E. Brathwaite, Chair
Michael J. Kim
The following graph shows the total shareholder return of an
investment of $100 in cash on September 30, 2000 for
(i) Photon Dynamics’ Common Stock, (ii) the
Nasdaq Stock Market (U.S.) Index, and (iii) the
Philadelphia
3 This
Section is not “soliciting material,” is not deemed
“filed” with the SEC, and is not to be incorporated by
reference into any filing of Photon Dynamics under the
Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made
before or after the date hereof and irrespective of any general
incorporation language contained in such filing.
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Semiconductor Index. All values assume reinvestment of the full
amount of all dividends and are calculated as of
September 30 of each year:
The SEC has adopted rules that permit companies and
intermediaries (e.g., brokers) to satisfy the delivery
requirements for proxy statements and annual reports with
respect to two or more shareholders sharing the same address by
delivering a single proxy statement addressed to those
shareholders. This process, which is commonly referred to as
“householding,” potentially means extra convenience
for shareholders and cost savings for companies.
This year, a number of brokers with account holders who are
Photon Dynamics shareholders will be “householding”
our proxy materials. A single proxy statement may be delivered
to multiple shareholders sharing an address unless contrary
instructions have been received from the affected shareholders.
Once you have received notice from your broker that it will be
“householding” communications to your address,
“householding” will continue until you are notified
otherwise or until you notify your broker or Photon Dynamics
that you no longer wish to participate in
“householding.” If, at any time, you no longer wish to
participate in “householding” and would prefer to
receive a separate proxy statement and annual report in the
future you may (1) notify your broker, (2) direct your
written request to: Investor Relations, 5970 Optical Court,
San Jose, CA 95138, or (3) contact our Investor
Relations department, at
(408) 360-3561.
Shareholders who currently receive multiple copies of the proxy
statement at their address and would like to request
“householding” of their communications should contact
their broker. In addition, Photon Dynamics will promptly
deliver, upon written or oral request to the address or
telephone
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number above, a separate copy of the annual report and proxy
statement to a shareholder at a shared address to which a single
copy of the documents was delivered.
The Board of Directors knows of no other matters that will be
presented for consideration at the Annual Meeting. If any other
matters are properly brought before the Annual Meeting, it is
the intention of the persons named in the accompanying proxy to
vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
Carl C. Straub Jr.
General Counsel & Secretary
San Jose, California
December 20, 2006
A copy of Photon Dynamics’ Annual Report to the
Securities and Exchange Commission on
Form 10-K
for the fiscal year ended September 30, 2006 is available
without charge upon written request to: Corporate Secretary,
Photon Dynamics, Inc., 5970 Optical Court, San Jose,
California 95138.
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Appendix A
Photon
Dynamics, Inc.
2006
Non-Employee Directors’ Stock Incentive Plan
Adopted:
December 15, 2006
(a) Amendment and Restatement. The Plan
is a complete amendment and restatement of the Company’s
2005 Non-Employee Directors’ Stock Option Plan that was
previously adopted on January 21, 2005 (as thereafter
amended, the “Prior Plan”). All
outstanding options granted under the Prior Plan shall remain
subject to the terms of the Prior Plan. All Awards granted
subsequent to the effective date of this Plan shall be subject
to the terms of this Plan.
(b) Eligible Award Recipients. The
persons eligible to receive Awards are the Non-Employee
Directors of the Company.
(c) Available Awards. The purpose of the
Plan is to provide a means by which Non-Employee Directors may
be given an opportunity to benefit from increases in value of
the Common Stock through the granting of Awards.
(d) General Purpose. The Company, by
means of the Plan, seeks to retain the services of its
Non-Employee Directors, to secure and retain the services of new
Non-Employee Directors and to provide incentives for such
persons to exert maximum efforts for the success of the Company
and its Affiliates.
As used in the Plan, the following definitions shall apply to
the capitalized terms indicated below:
(a) “Affiliate” means any parent
corporation or subsidiary corporation of the Company, whether
now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) “Agreement” has the meaning set forth
in Section 7.
(c) “Annual Meeting” means the annual
meeting of the shareholders of the Company.
(d) “Award” means a grant of either:
(i) one or more Options; (ii) a Stock Award; or
(iii) a Stock Award and one or more Options.
(e) “Award Holder” means a person to whom
an Award is granted pursuant to the Plan or, if applicable, such
other person who holds an outstanding Award.
(f) “Board” means the independent
directors of the Board of Directors (as defined in the Nasdaq
listing standards) of the Company.
(g) “Capitalization Adjustment” has the
meaning ascribed to that term in Section 11(a).
(h) “Cause” means, with respect to any
Award Holder, the occurrence of any of the following:
(i) such Award Holder’s commission of any felony or
any crime involving fraud, dishonesty or moral turpitude under
the laws of the United States or any state thereof;
(ii) such Award Holder’s attempted commission of, or
participation in, a fraud or act of dishonesty against the
Company; (iii) such Award Holder’s intentional,
material violation of any material contract or agreement between
the Award Holder and the Company or any statutory duty owed to
the Company; (iv) such Award Holder’s unauthorized use
or disclosure of the Company’s confidential information or
trade secrets; or (v) such Award Holder’s gross
misconduct. The determination that a termination is for Cause
shall be made by the Company in its sole discretion. Any
determination by the Company that the Continuous Service of an
Award Holder was terminated by reason of dismissal without Cause
for the purposes of outstanding Awards held by such Award Holder
shall have no
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effect upon any determination of the rights or obligations of
the Company or such Award Holder for any other purpose.
(i) “Change in Control” means the
occurrence, in a single transaction or in a series of related
transactions, of any one or more of the following events:
(i) any Exchange Act Person becomes the Owner, directly or
indirectly, of securities of the Company representing more than
fifty percent (50%) of the combined voting power of the
Company’s then outstanding securities other than by virtue
of a merger, consolidation or similar transaction.
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur (A) on account of the acquisition of
securities of the Company by an investor, any affiliate thereof
or any other Exchange Act Person from the Company in a
transaction or series of related transactions the primary
purpose of which is to obtain financing for the Company through
the issuance of equity securities or (B) solely because the
level of Ownership held by any Exchange Act Person (the
“Subject Person”) exceeds the designated
percentage threshold of the outstanding voting securities as a
result of a repurchase or other acquisition of voting securities
by the Company reducing the number of shares outstanding,
provided that if a Change in Control would occur (but for the
operation of this sentence) as a result of the acquisition of
voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any
additional voting securities that, assuming the repurchase or
other acquisition had not occurred, increases the percentage of
the then outstanding voting securities Owned by the Subject
Person over the designated percentage threshold, then a Change
in Control shall be deemed to occur;
(ii) there is consummated a merger, consolidation or
similar transaction involving (directly or indirectly) the
Company and, immediately after the consummation of such merger,
consolidation or similar transaction, the shareholders of the
Company immediately prior thereto do not Own, directly or
indirectly, either (A) outstanding voting securities
representing more than fifty percent (50%) of the combined
outstanding voting power of the surviving Entity in such merger,
consolidation or similar transaction or (B) more than fifty
percent (50%) of the combined outstanding voting power of the
parent of the surviving Entity in such merger, consolidation or
similar transaction, in each case in substantially the same
proportions as their Ownership of the outstanding voting
securities of the Company immediately prior to such transaction;
(iii) there is consummated a sale, lease, license or other
disposition of all or substantially all of the consolidated
assets of the Company and its Subsidiaries, other than a sale,
lease, license or other disposition of all or substantially all
of the consolidated assets of the Company and its Subsidiaries
to an Entity, more than fifty percent (50%) of the combined
voting power of the voting securities of which are Owned by
shareholders of the Company in substantially the same
proportions as their Ownership of the outstanding voting
securities of the Company immediately prior to such sale, lease,
license or other disposition; or
(iv) individuals who, on the date this Plan is adopted by
the Board, are members of the Board (the “Incumbent
Board”) cease for any reason to constitute at least a
majority of the members of the Board; provided, however, that if
the appointment or election (or nomination for election) of
any new Board member was approved or recommended by a majority
vote of the members of the Incumbent Board then still in office,
such new member shall, for purposes of this Plan, be considered
as a member of the Incumbent Board.
The term Change in Control shall not include a sale of assets,
merger or other transaction effected exclusively for the purpose
of changing the domicile of the Company.
Notwithstanding the foregoing or any other provision of this
Plan, the definition of Change in Control (or any analogous
term) in an individual written agreement between the Company or
any Affiliate and the Award Holder shall supersede the foregoing
definition with respect to Awards subject to such agreement (it
being understood, however, that if no definition of Change in
Control or any analogous term is set forth in such an individual
written agreement, the foregoing definition shall apply).
(j) “Code” means the Internal Revenue Code
of 1986, as amended.
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(k) “Common Stock” means the common stock
of the Company.
(l) “Company” means Photon Dynamics, Inc.,
a California corporation.
(m) “Consultant” means any person,
including an advisor, who (i) is engaged by the Company or
an Affiliate to render consulting or advisory services and is
compensated for such services or (ii) is serving as a
member of the Board of Directors of an Affiliate and is
compensated for such services. However, service solely as a
Director, or payment of a fee for such services, shall not cause
a Director to be considered a “Consultant” for
purposes of the Plan.
(n) “Continuous Service” means that the
Award Holder’s service with the Company or an Affiliate,
whether as an Employee, Director or Consultant, is not
interrupted or terminated. A change in the capacity in which the
Award Holder renders service to the Company or an Affiliate as
an Employee, Consultant or Director or a change in the entity
for which the Award Holder renders such service, provided that
there is no interruption or termination of the Award
Holder’s service with the Company or an Affiliate, shall
not terminate an Award Holder’s Continuous Service. For
example, a change in status from a Non-Employee Director of the
Company to a Consultant of an Affiliate or an Employee of the
Company will not constitute an interruption of Continuous
Service. The Board or the chief executive officer of the
Company, in that party’s sole discretion, may determine
whether Continuous Service shall be considered interrupted in
the case of any leave of absence approved by that party,
including sick leave, military leave or any other personal
leave. Notwithstanding the foregoing, a leave of absence shall
be treated as Continuous Service for purposes of vesting of an
Award only to such extent as may be provided in the
Company’s leave of absence policy or in the written terms
of the Award Holder’s leave of absence.
(o) “Corporate Transaction” means the
occurrence, in a single transaction or in a series of related
transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially
all, as determined by the Board in its sole discretion, of the
consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least ninety percent
(90%) of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction
following which the Company is not the surviving
corporation; or
(iv) a merger, consolidation or similar transaction
following which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the
merger, consolidation or similar transaction are converted or
exchanged by virtue of the merger, consolidation or similar
transaction into other property, whether in the form of
securities, cash or otherwise.
(p) “Director” means a member of the Board.
(q) “Disability” means the permanent and
total disability of a person within the meaning of
Section 22(e)(3) of the Code.
(r) “Employee” means any person employed
by the Company or an Affiliate. However, service solely as a
Director or Consultant, or payment of a fee for such services,
shall not cause a Director to be considered an
“Employee” for purposes of the Plan.
(s) “Entity” means a corporation,
partnership or other entity.
(t) “Exchange Act” means the Securities
Exchange Act of 1934, as amended.
(u) “Exchange Act Person” means any
natural person, Entity or “group” (within the meaning
of Section 13(d) or 14(d) of the Exchange Act), except that
“Exchange Act Person” shall not include (i) the
Company or any Subsidiary of the Company, (ii) any employee
benefit plan of the Company or any Subsidiary of the Company or
any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any Subsidiary of the
Company, (iii) an underwriter temporarily holding
securities pursuant to an offering of such securities,
(iv) an Entity Owned, directly or indirectly, by the
shareholders of the Company in
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substantially the same proportions as their Ownership of stock
of the Company; or (v) any natural person, Entity or
“group” (within the meaning of Section 13(d) or
14(d) of the Exchange Act) that, as of the effective date of the
Plan as set forth in Section 14, is the Owner, directly or
indirectly, of securities of the Company representing more than
fifty percent (50%) of the combined voting power of the
Company’s then outstanding securities.
(v) “Fair Market Value” means, as of any
date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or market, the Fair Market Value of a share of Common
Stock shall be the closing sales price for such Common Stock (or
the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest
volume of trading in the Common Stock) on the day of
determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable. If such date falls on
a non-Trading Day, then the Fair Market Value of a share of
Common Stock shall be the closing sales price for such Common
Stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the
greatest volume of trading in the Common Stock) on the next
subsequent Trading Day, as reported in The Wall Street Journal
or such other source as the Board deems reliable.
(ii) In the absence of such markets for the Common Stock,
the Fair Market Value shall be determined by the Board in good
faith.
(w) “Non-Employee Director” means a
Director who is not an Employee.
(x) “Nonstatutory Stock Option” means an
Option not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(y) “Officer” means a person who is an
officer of the Company within the meaning of Section 16 of
the Exchange Act and the rules and regulations promulgated
thereunder.
(z) “Option” means a Nonstatutory Stock
Option granted pursuant to the Plan.
(aa) “Optionholder” means a person to whom
an Option is granted pursuant to the Plan or, if applicable,
such other person who holds an outstanding Option.
(bb) “Own,” “Owned,”
“Owner,” “Ownership”. A person or Entity
shall be deemed to “Own,” to have “Owned,”
to be the “Owner” of, or to have acquired
“Ownership” of securities if such person or Entity,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting
power, which includes the power to vote or to direct the voting,
with respect to such securities.
(cc) “Plan” means this Photon Dynamics,
Inc. 2006 Non-Employee Directors’ Stock Incentive Plan.
(dd) “Restricted Share Award” means shares
of Common Stock subject to restrictions in accordance with the
terms and conditions of the Plan.
(ee) “Restricted Share Unit” means the
right to (i) receive a share of Common Stock or
(ii) receive a cash payment, in accordance with the terms
and conditions of the Plan, of the Fair Market Value of a share
of Common Stock.
(ff) “Rule 16b-3”
means
Rule 16b-3
promulgated under the Exchange Act or any successor to
Rule 16b-3,
as in effect from time to time.
(gg) “Securities Act” means the Securities
Act of 1933, as amended.
(hh) “Stock Award” means a grant of shares
of Common Stock or a right to receive shares or their cash
equivalent (or both), in accordance with the terms and
conditions of the plan which shall include Restricted Share
Units and Restricted Share Awards.
(ii) “Stock Award Holder” means a person
to whom a Stock Award is granted pursuant to the Plan or, if
applicable, such other person who holds an outstanding Stock
Award.
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(jj) “Subsidiary” means, with respect to
the Company, (i) any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary
voting power to elect a majority of the board of directors of
such corporation (irrespective of whether, at the time, stock of
any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any
contingency) is at the time, directly or indirectly, Owned by
the Company, and (ii) any partnership in which the Company
has a direct or indirect interest (whether in the form of voting
or participation in profits or capital contribution) of more
than fifty percent (50%).
(kk) “Trading Day” means any day the
exchange(s) or market(s) on which shares of Common Stock are
listed, whether it be any established stock exchange or
otherwise, is open for trading.
(a) Administration by the Board. The
Board, as defined herein for purposes of the Plan to include
only independent directors, shall administer the Plan.
(b) Powers of Board. The Board shall have
the power, subject to, and within the limitations of, the
express provisions of the Plan:
(i) To determine the provisions of each Award to the extent
not specified in the Plan.
(ii) To construe and interpret the Plan and Awards granted
under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise
of this power, may correct any defect, omission or inconsistency
in the Plan or any Agreement in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully
effective.
(iii) To amend the Plan or an Award as provided in
Section 12.
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the
best interests of the Company and that are not in conflict with
the provisions of the Plan.
(c) Effect of the Board’s
Decision. All determinations, interpretations and
constructions made by the Board in good faith shall not be
subject to review by any person and shall be final, binding and
conclusive on all persons.
(a) Share Reserve. Subject to the
provisions of Section 11 relating to adjustments upon
changes in the Common Stock, the Common Stock that may be issued
pursuant to Awards shall not exceed in the aggregate
505,000 shares of Common Stock.
(b) Reversion of Shares to the Share
Reserve. If any Award shall for any reason expire
or otherwise terminate, in whole or in part, without having been
exercised in full or vesting, as the case may be, or if any
shares of Common Stock issued to an Award Holder are forfeited
to or repurchased by the Company, including, but not limited to,
any repurchase or forfeiture caused by the failure to meet a
contingency or condition required for the vesting of such Award,
then the shares of Common Stock not issued under such Award, or
forfeited to or repurchased by the Company, shall revert to and
again become available for issuance under the Plan. If any
shares subject to an Award are not delivered to an Award Holder
because such shares are withheld for the payment of taxes or the
Award is exercised or vests, as the case may be, through a
reduction of shares subject to or constituting the Award, the
number of shares that are not delivered to the Award Holder
shall remain available for issuance under the Plan. If the
exercise price of any Option is satisfied by tendering shares of
Common Stock held by the Optionholder (either by actual delivery
or attestation), then the number of shares so tendered shall
remain available for issuance under the Plan.
(c) Source of Shares. The shares of
Common Stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
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The Awards shall only be granted under the Plan to Non-Employee
Directors pursuant to Section 6 of the Plan.
Pursuant to this Plan, the Board may grant Awards in its
discretion to any Non-Employee Director, provided that no Awards
under this Section 6 may be granted to any individual
Non-Employee Director with respect to more than
200,000 shares for any fiscal year or, in the case of a
newly elected Non-Employee Director, more than
100,000 shares for the fiscal year in which the
Non-Employee Director is first elected. No Non-Employee Director
shall have any claim or right to be granted an Award under this
Plan. Having received an Award under this Plan shall not give a
Non-Employee Director any right to receive any other Award under
this Plan and the Board may determine at its discretion that any
or all Non-Employee Directors are not eligible to receive an
Award under this Plan for an indefinite or specified period of
time. Without limiting the foregoing, the initial policy
approved by the Board shall be as follows until the Board
determines otherwise:
(a) Initial Grants. Each person who,
after the Plan is approved by the Company’s shareholders,
is elected or appointed for the first time to be a Non-Employee
Director shall, upon the date of his or her first election or
appointment to be a Non-Employee Director, be granted Restricted
Share Units representing 3,300 shares of Common Stock and
an Option to purchase 10,000 shares of Common Stock and on
the terms and conditions set forth herein. 1/4th of the
shares subject to the initial grant shall vest on each
anniversary of the date of grant (or, if such vesting date falls
on a day during a blackout period, on the first open Trading Day
thereafter).
(b) Annual Grants. On the date of each
Annual Meeting, commencing with the Annual Meeting in 2007 and
subject to shareholder approval, each person who is then a
Non-Employee Director shall initially be granted an annual grant
consisting of Restricted Share Units representing
2,500 shares of Common Stock and an Option to purchase
7,500 shares of Common Stock on terms and conditions as
determined by the board; provided, however, that if the person
has not been serving as a Non-Employee Director for the entire
period since the preceding Annual Meeting, then the number of
shares granted in such annual grant shall be reduced pro rata
for each full quarter prior to the date of grant during which
such person did not serve as a Non-Employee Director. 1/3rd of
the Restricted Share Units from the annual grant shall vest on
each anniversary of the date of grant (or, if such vesting date
falls on a day during a blackout period, on the first open
Trading Day thereafter). The Option from the annual grant shall
vest in full on the first anniversary of the date of grant (or,
if such vesting date falls on a day during a blackout period, on
the first open Trading Day thereafter).
7. Award
Provisions.
Each Award granted under the Plan shall be evidenced by an Award
agreement (the “Agreement”). Agreements may but
need not be identical and shall comply with and be subject to
the terms and conditions of the Plan. Each Award shall contain
such additional terms and conditions, not inconsistent with the
Plan, as the Board shall deem appropriate. Each Award shall
include (through incorporation of the provisions hereof by
reference in the applicable Agreement) the substance of each of
the following provisions:
(a) Terms Applicable to All Awards.
(i) General. As the Board shall deem
appropriate, Awards may be (i) subject to deferral at the
election of each Non-Employee Director or (ii) awarded in
lieu of retainer fees at the election of each Non-Employee
Director.
(ii) Transferability. An Award shall be
transferable pursuant to a domestic relations order and to such
further extent provided in the Agreement defining the terms of
such Award. If the Award does not provide for transferability,
then the Award shall not be transferable except by will or by
the laws of descent and distribution.
(iii) Vesting. Awards shall vest as the
Board shall deem appropriate except for Stock Awards, which
shall vest in equal annual installments over a minimum vesting
schedule of at least three years.
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(b) Terms Applicable to Options.
(i) Term. No Option shall be exercisable
or vest, as the case may be, after the expiration of ten
(10) years from the date it was granted.
(ii) Exercise Price. The exercise price
of each Option shall be one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Option on the
date that the Option is granted.
(iii) Consideration for Options. The
purchase price of Common Stock acquired pursuant to an Option
may be paid, to the extent permitted by applicable law, in any
combination of (i) cash or check, (ii) delivery to the
Company of other Common Stock or (iii) pursuant to a
program developed under Regulation T as promulgated by the
Federal Reserve Board that, prior to the issuance of Common
Stock, results in either the receipt of cash (or check) by the
Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.
The purchase price of Common Stock acquired pursuant to an
Option that is paid by delivery to the Company of other Common
Stock acquired, directly or indirectly, from the Company, shall
be paid only by shares of Common Stock of the Company that have
been held for more than six months (or such longer or shorter
period of time required to avoid a charge to earnings for
financial accounting purposes).
(iv) Exercise of Options. Upon exercise
of the Option, delivery of a certificate for fully paid and
non-assessable shares of Common Stock shall be made at the
principal office of the Company in the State of California to
the Optionholder or other person entitled to exercise the Option
as soon as practicable after the date of receipt of the notice
of exercise by the Company, or at such time, place and manner as
may be agreed upon by the Company and the Optionholder or person
exercising the Option. Any Option shall be exercisable during
the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by
delivering written notice to the Company, in a form provided by
or otherwise satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall
thereafter be entitled to exercise the Option.
(v) Early Exercise of Options. An Option
may, but need not, include a provision whereby the Optionholder
may elect at any time before the Optionholder’s Continuous
Service terminates to exercise the Option as to any part or all
of the shares of Common Stock subject to the Option prior to the
full vesting of the Option. Any unvested shares of Common Stock
so purchased may be subject to a repurchase option in favor of
the Company or to any other restriction the Board determines to
be appropriate. The Company will not exercise its repurchase
option until at least six months (or such longer or shorter
period of time required to avoid a charge to earnings for
financial accounting purposes) have elapsed following exercise
of the Option unless the Board otherwise specifically provides
in the Option.
(vi) Termination of Continuous Service of
Optionholder. In the event that an
Optionholder’s Continuous Service terminates (other than
for Cause, upon the Optionholder’s death or Disability or
upon a Change in Control), the Optionholder may exercise his or
her Option (to the extent that the Optionholder was entitled to
exercise such Option as of the date of termination of Continuous
Service) but only within such period of time ending on the
earlier of (i) the expiration of the term of the Option as
set forth in the Agreement or (ii) the date three months
following the termination of the Optionholder’s Continuous
Service. If, after termination of Continuous Service, the
Optionholder does not exercise his or her Option within the time
specified herein or in the Agreement (as applicable), the Option
shall terminate.
(vii) Extension of Termination Date. If
the exercise of the Option following the termination of the
Optionholder’s Continuous Service (other than for Cause or
upon the Optionholder’s death or Disability) would be
prohibited at any time solely because the issuance of shares
would violate the registration requirements under the Securities
Act, then the Option shall terminate on the earlier of
(i) the expiration of the term of the Option as set forth
in the Agreement or (ii) the expiration of a period of
three months after the termination of the Optionholder’s
Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(viii) Disability of Optionholder. In the
event an Optionholder’s Continuous Service terminates as a
result of the Optionholder’s Disability, the Optionholder
may exercise his or her Option (to the extent that the
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Optionholder was entitled to exercise it as of the date of
termination), but only within such period of time ending on the
earlier of (i) the expiration of the term of the Option as
set forth in the Agreement or (ii) the date 12 months
following such termination of Continuous Service. If, after
termination of Continuous Service, the Optionholder does not
exercise his or her Option within the time specified herein, the
Option shall terminate.
(ix) Death of Optionholder. In the event
(i) an Optionholder’s Continuous Service terminates as
a result of the Optionholder’s death or (ii) the
Optionholder dies within the three-month period after the
termination of the Optionholder’s Continuous Service for a
reason other than death, then the Option may be exercised (to
the extent the Optionholder was entitled to exercise the Option
as of the date of death) by the Optionholder’s estate, by a
person who acquired the right to exercise the Option by bequest
or inheritance or by a person designated to exercise the Option
upon the Optionholder’s death, but only within the period
ending on the earlier of (i) the expiration of the term of
such Option as set forth in the Agreement or (ii) the date
18 months following the date of death. If, after the
Optionholder’s death, the Option is not exercised within
the time specified herein, the Option shall terminate.
(x) Termination for Cause. In the event
that an Optionholder’s Continuous Service is terminated for
Cause, the Option shall terminate upon the termination date of
such Optionholder’s Continuous Service and the Optionholder
shall be prohibited from exercising his or her Option from and
after the time of such termination of Continuous Service.
(xi) Termination Upon Change in
Control. In the event that an Optionholder’s
Continuous Service terminates as of, or within 12 months
following a Change in Control, the Optionholder may exercise his
or her Option (to the extent that the Optionholder was entitled
to exercise such Option as of the date of termination of
Continuous Service) within such period of time ending on the
earlier of (i) the expiration of the term of the Option as
set forth in the Agreement or (ii) the date 12 months
following the termination of the Optionholder’s Continuous
Service. If, after termination of Continuous Service, the
Optionholder does not exercise his or her Option within the time
specified herein or in the Agreement (as applicable), the Option
shall terminate.
(c) Terms Applicable to Stock Awards.
(i) General Terms. Stock Awards may be
granted either alone, in addition to, or in tandem with other
Awards granted under the Plan. After the Board determines that
it will grant a Stock Award, it will advise the Non-Employee
Director in writing or electronically, by means of an Agreement,
of the terms, conditions and restrictions related to the grant,
including the number of shares that the director shall be
entitled to receive and vesting restrictions.
(ii) Termination of Continuous Service of Stock Award
Holder. In the event that a Stock Award
Holder’s Continuous Service terminates (other than upon a
Change in Control), any unvested portion of such Stock Award
Holder’s Stock Award shall be forfeited and returned to the
Company.
(iii) Acceleration of Stock
Awards. Notwithstanding anything herein to the
contrary, the Board may provide for the accelerated vesting of
Stock Awards only as provided in Section 11(c) and
Section 11(d).
The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as
may be required to grant Awards and to issue and sell shares of
Common Stock upon vesting or exercise of Awards; provided,
however, that this undertaking shall not require the Company to
register under the Securities Act the Plan, any Award or any
Common Stock issued or issuable pursuant to any such Award. If,
after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance
and sale of Common Stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell Common
Stock upon exercise of such Awards unless and until such
authority is obtained.
Proceeds from the sale of Common Stock pursuant to Options shall
constitute general funds of the Company.
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(a) Shareholder Rights. Neither an Award
Holder under the Plan nor his or her successors in interest
shall have any rights as a stockholder of the Company with
respect to any shares subject to an Award granted to such Award
Holder until such Award Holder becomes a holder of record of
such shares.
(b) No Service Rights. Nothing in the
Plan or any Agreement or other instrument executed or Award
granted pursuant thereto shall confer upon any Award Holder any
right to continue to serve the Company as a Non-Employee
Director or shall affect the right of the Company or an
Affiliate to terminate (i) the employment of an Employee
with or without notice and with or without cause, (ii) the
service of a Consultant pursuant to the terms of such
Consultant’s agreement with the Company or an Affiliate or
(iii) the service of a Director pursuant to the Bylaws of
the Company or an Affiliate, and any applicable provisions of
the corporate law of the state in which the Company or the
Affiliate is incorporated, as the case may be.
(c) Investment Assurances. The Company
may require an Award Holder, as a condition of exercising or
acquiring Common Stock under any Award, to give certain written
assurances satisfactory to the Company that the Company may deem
necessary or appropriate for compliance with applicable
securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not
limited to, legends restricting the transfer of the Common Stock.
(d) Withholding Obligations. The Award
Holder may satisfy any federal, state or local tax withholding
obligation relating to the exercise or acquisition of Common
Stock under an Award by any of the following means (in addition
to the Company’s right to withhold from any compensation
paid to the Award Holder by the Company) or by a combination of
such means: (i) tendering a cash payment;
(ii) authorizing the Company to withhold shares from the
shares of the Common Stock otherwise issuable to the Award
Holder as a result of the exercise or acquisition of Common
Stock under the Award; provided, however, that no shares of
Common Stock are withheld with a value exceeding the minimum
amount of tax required to be withheld by law; or
(iii) delivering to the Company owned and unencumbered
shares of the Common Stock.
(e) Electronic Delivery. Any reference
herein to a “written” agreement or document shall
include any agreement or document delivered electronically or
posted on the Company’s intranet.
(a) Capitalization Adjustments. If any
change is made in, or other events occur with respect to, the
Common Stock subject to the Plan, without the receipt of
consideration by the Company (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split,
liquidating dividend, combination of shares, exchange of shares,
change in corporate structure or other transaction not involving
the receipt of consideration by the Company (each a
“Capitalization Adjustment”)), the Plan will be
appropriately adjusted in the class(es) and maximum number of
securities subject both to the Plan pursuant to Section 4
and to the initial policy for discretionary Awards specified in
Section 6, and the outstanding Awards will be appropriately
adjusted in the class(es), number of securities and price per
share of Common Stock subject to such outstanding Awards. The
Board shall make such adjustments, and its determination shall
be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a
transaction “without receipt of consideration” by the
Company.)
(b) Dissolution or Liquidation. In the
event of a dissolution or liquidation of the Company, then all
outstanding Awards shall terminate immediately prior to the
completion of such dissolution or liquidation.
(c) Corporate Transaction. In the event
of a Corporate Transaction, any surviving corporation or
acquiring corporation (or the surviving or acquiring
corporation’s parent company) may assume or continue any or
all Awards outstanding under the Plan or may substitute similar
awards for Awards outstanding under the Plan (it being
understood that similar awards include, but are not limited to,
awards to acquire the same consideration paid to the
shareholders or the Company, as the case may be, pursuant to the
Corporate Transaction). In the event that any surviving
corporation or acquiring corporation (or its parent company)
does not assume or continue all such outstanding Awards or
substitute similar awards for such outstanding Awards, then with
respect to Awards that have
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not been assumed, continued or substituted and are held by Award
Holders whose Continuous Service has not terminated prior to the
effective time of the Corporate Transaction, the vesting of such
Awards (and, if applicable, the time at which such Awards may be
exercised) shall (contingent upon the effectiveness of the
Corporate Transaction) be accelerated in full to a date prior to
the effective time of such Corporate Transaction as the Board
shall determine (or, if the Board shall not determine such a
date, to the date that is five days prior to the effective time
of the Corporate Transaction), and the Awards shall terminate if
not exercised (if applicable) at or prior to such effective
time. With respect to any other Awards outstanding under the
Plan that have not been assumed, continued or substituted, the
vesting of such Awards (and, if applicable, the time at which
such Awards may be exercised) shall not be accelerated unless
otherwise provided in Section 11(d) or, with respect to
Options only, in a written agreement between the Company or any
Affiliate and the holder of such Awards, and such Awards shall
terminate if not exercised (if applicable) prior to the
effective time of the Corporate Transaction.
(d) Change in Control. If a Change in
Control occurs and an Award Holder’s Continuous Service
with the Company has not terminated immediately prior to the
effective time of the Change in Control, then, immediately prior
to the effective time of such Change in Control (and contingent
upon the effectiveness of the Change in Control), the vesting
and exercisability of an Award Holder’s Awards shall be
accelerated in full. In the event that an Award Holder is
required to resign his or her position as a Non-Employee
Director as a condition of a Change in Control, the outstanding
Awards of such Award Holder shall become fully vested and
exercisable immediately prior to the effectiveness of such
resignation (and contingent upon the effectiveness of the Change
in Control).
(a) Amendment of Plan. The Board, at any
time and from time to time, may amend the Plan. However, except
as provided in Section 11 relating to adjustments upon
changes in Common Stock, no amendment shall be effective unless
approved by the shareholders of the Company to the extent
shareholder approval is necessary to satisfy the requirements of
applicable laws.
(b) Shareholder Approval. The Board, in
its sole discretion, may submit any amendment to the Plan for
shareholder approval.
(c) No Impairment of Rights. Rights under
any Award granted before amendment of the Plan shall not be
impaired by any amendment of the Plan unless (i) the
Company requests the consent of the Award Holder and
(ii) the Award Holder consents in writing.
(d) Amendment of Awards. The Board, at
any time, and from time to time, may amend the terms of any one
or more Awards; provided, however, that the rights under any
Award shall not be impaired by any such amendment unless
(i) the Company requests the consent of the Award Holder
and (ii) the Award Holder consents in writing.
(a) Plan Term. The Board may suspend or
terminate the Plan at any time. No Awards may be granted under
the Plan while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension
or termination of the Plan shall not impair rights and
obligations under any Awards granted while the Plan is in effect
except with the written consent of the Award Holder.
The Plan shall become effective on the date that the Plan is
approved by the shareholders of the Company.
The law of the state of California shall govern all questions
concerning the construction, validity and interpretation of this
Plan, without regard to such state’s conflict of laws rules.
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IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION,
DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 6
 PHOTONDYNAMICS Proxy — PHOTON DYNAMICS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD ON JANUARY 24, 2007
The undersigned hereby appoints Jeffrey A. Hawthorne and Carl C. Straub Jr., and each of them, as attorneys and proxies of the undersigned, with full power of substitution, to vote all of the
shares of stock of Photon Dynamics, Inc., which the undersigned may be entitled to vote at the Annual Meeting of Shareholders of Photon Dynamics, Inc. to be held at the offices of
Photon Dynamics, Inc. at 5970 Optical Court, San Jose, California 95138 on Wednesday, January 24, 2007 at 9:00 a.m. local time, and at any and all postponements, continuations and
adjournments thereof, with all powers that the undersigned would possess if personally present, upon and in respect of the matters stated on the reverse side and in accordance with the following
instructions, with discretionary authority as to any and all other matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4 AND 5 AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
OTHER MATTERS: The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters, in accordance with their best judgment.
A COPY OF THE COMPANY’S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006 IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO: CORPORATE SECRETARY, PHOTON DYNAMICS, INC., 5970 OPTICAL COURT, SAN JOSE, CALIFORNIA 95138.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
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IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION,
DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 6
Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, corporate officer, trustee, guardian, or custodian, please give full title.
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