UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

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

INTEVAC, INC.

 

(Exact Name of Registrant as Specified in its Charter)

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April 5, 2010

 

Dear Stockholder:

 

You are cordially invited to attend the 2010 Annual Meeting of Stockholders of Intevac, Inc., a Delaware corporation, which will be held Thursday, May 20, 2010, at 4:30 p.m., local time, at our principal executive offices located at 3560 Bassett Street, Santa Clara, California 95054. The accompanying notice of Annual Meeting, proxy statement and form of proxy card are being distributed to you on or about April 7, 2010.

 

Details regarding admission to the Annual Meeting and the business to be conducted are described in the accompanying proxy materials. Also included is a copy of our 2009 Annual Report. We encourage you to read this information carefully.

 

Your vote is important. Whether or not you plan to attend the Annual Meeting, we hope you will vote as soon as possible. You may vote over the Internet, by telephone or by mailing a proxy card. Voting over the Internet, by telephone or by written proxy will ensure your representation at the Annual Meeting regardless of whether or not you attend in person. Please review the instructions on the proxy card regarding each of these voting options.

 

Thank you for your ongoing support of Intevac. We look forward to seeing you at the Annual Meeting. Please notify Joanne Diener at (408) 496-2242 if you plan to attend.

 

Sincerely yours,

 

Kevin Fairbairn

President and Chief Executive Officer

INTEVAC, INC.

3560 Bassett Street

Santa Clara, California 95054

 

NOTICE OF ANNUAL MEETING

FOR 2010 ANNUAL MEETING OF STOCKHOLDERS

 

 

 

All stockholders are cordially invited to attend the Annual Meeting in person.

 

By Order of the Board of Directors,

 

JEFFREY ANDRESON

Executive Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary

 

This notice of Annual Meeting, proxy statement and accompanying form of proxy card are being distributed on or about April 7, 2010

 

TABLE OF CONTENTS

 

INTEVAC, INC.
3560 Bassett Street
Santa Clara, California 95054

 

PROXY STATEMENT
FOR 2010 ANNUAL MEETING OF STOCKHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial owners — Many Intevac stockholders hold their shares through a broker, trustee or other nominee, rather than directly in their own name. If your shares are held in a brokerage account or by a bank or another nominee, you are considered the “beneficial owner” of shares held in “street name.” In this case the proxy materials will have been forwarded to you by your broker, trustee or nominee, who is considered, with respect to those shares, the stockholder of record.

 

As the beneficial owner, you have the right to direct your broker, trustee or other nominee on how to vote your shares. For directions on how to vote shares beneficially held in street name, please refer to the voting instruction card provided by your broker, trustee or nominee. Since a beneficial owner is not the stockholder of record, you may not vote these shares in person at the Annual Meeting unless you obtain a “legal proxy” from the broker, trustee or nominee that holds your shares, giving you the right to vote those shares at the Annual Meeting.

 

 

 

Under the General Corporation Law of the State of Delaware, abstentions and broker “non-votes” are counted as present and entitled to vote and are, therefore, included for purposes of determining whether a quorum is present at the Annual Meeting.

 

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 item and has not received instructions from the beneficial owner.

 

 

 

At the Record Date, we had 22,254,434 shares of our Common Stock outstanding and entitled to vote at the Annual Meeting, held by 115 stockholders of record. We believe that approximately 4,000 beneficial owners hold shares through brokers, fiduciaries and nominees. No shares of Intevac’s preferred stock were outstanding.

 

 

 

 

 

By mail — Stockholders of record of Intevac Common Stock may submit proxies by completing, signing and dating their proxy cards and mailing them in the accompanying pre-addressed envelopes. Proxy cards submitted by mail must be received by the time of the meeting in order for your shares to be voted. Intevac stockholders who hold shares beneficially in street name may vote by mail by completing, signing and dating the voting instructions provided by their brokers, trustees or nominees and mailing them in the accompanying pre-addressed envelopes.

 

By Internet — Stockholders of record of Intevac Common Stock with Internet access may submit proxies by following the “Vote by Internet” instructions on their proxy cards until 11:00 p.m., Pacific daylight time, on May 19, 2010. Most Intevac stockholders who hold shares beneficially in street name may vote by accessing the web site specified in the voting instructions provided by their brokers, trustees or nominees. Please check the voting instructions for Internet voting availability.

 

By telephone — Stockholders of record of Intevac Common Stock who live in the United States, Puerto Rico or Canada may submit proxies by following the “Vote by Phone” instructions on their proxy cards until 11:00 p.m., Pacific daylight time, on May 19, 2010. Most Intevac stockholders who hold shares beneficially in street name may vote by phone by calling the number specified in the voting instructions provided by their brokers, trustees or nominees. Please check the voting instructions for telephone voting availability.

 

 

 

 

(3)  The ratification of the appointment of Grant Thornton LLP as independent public accountants of Intevac for the fiscal year ending December 31, 2010.

 

 

 

Proposal Two — The affirmative vote of a majority of votes represented and voting at the Annual Meeting, or “votes cast”, is required for approval of the amendment to add an additional 500,000 shares to the Intevac 2004 Equity Incentive Plan and approve the material terms of the plan. You may vote “FOR,” “AGAINST” or “ABSTAIN” on this proposal. Abstentions are deemed to be votes cast and have the same effect as a vote against this proposal. However, broker non-votes are not deemed to be votes cast and, therefore, are not included in the tabulation of the voting results on this proposal.

 

Proposal Three — The affirmative vote of a majority of votes cast is required to ratify the appointment of Grant Thornton LLP as Intevac’s independent public accountants. You may vote “FOR,” “AGAINST” or “ABSTAIN” on this proposal. Abstentions are deemed to be votes cast and have the same effect as a vote against this proposal. However, broker non-votes are not deemed to be votes cast and, therefore, are not included in the tabulation of the voting results on this proposal.

 

Stockholder ratification of the selection of Grant Thornton LLP as Intevac’s independent public accountants is not required by our Bylaws or other applicable legal requirements. However, the Board is submitting the selection of Grant Thornton LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders 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 accounting firm at any time during the year, if it determines that such a change would be in the best interests of Intevac and its stockholders.

 

 

 

If you are a beneficial owner of shares held in street name, it is critical that you cast your vote if you want it to count in the election of directors (Proposal One) and in the approval of an amendment to Intevac’s 2004 Equity Incentive Plan (Proposal Two). In the past, if you held your shares in street name and you did not indicate how you wanted your shares voted in the election of directors, your bank or broker was allowed to vote those shares on your behalf in the election of directors as they felt appropriate. Recent changes in regulation were made to take away the ability of your bank or broker to vote your uninstructed shares in the election of directors on a discretionary basis. Thus, if you hold your shares in street name and you do not instruct your bank or broker how to vote in the election of directors or approval of the amendment, no votes will be cast on your behalf. Your bank or broker will, however, continue to have discretion to vote any uninstructed shares on the ratification of the appointment of Intevac’s independent public accountants (Proposal Three).

 

 

 

 

 

 

 

 

 

If you are a stockholder of record, you may change your vote by (1) filing with Intevac’s Secretary, prior to your shares being voted at the Annual Meeting, a written notice of revocation or a duly executed proxy card, in either case dated later than the prior proxy card relating to the same shares, or (2) attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not, by itself, revoke a proxy). A stockholder of record that has voted on the Internet or by telephone may also change his or her vote by making a timely and valid later Internet or telephone vote.

 

If you are a beneficial owner of shares held in street name, you may change your vote (1) by submitting new voting instructions to your broker, trustee or other nominee or (2) if you have obtained a legal proxy from the broker, trustee or other nominee that holds your shares giving you the right to vote the shares, by attending the Annual Meeting and voting in person.

 

Any written notice of revocation or subsequent proxy card must be received by Intevac’s Secretary prior to the taking of the vote at the Annual Meeting. Such written notice of revocation or subsequent proxy card should be hand delivered to Intevac’s Secretary or should be sent so as to be delivered to Intevac’s principal executive offices, Attention: Secretary.

 

 

 

 

 

 

 

Requirements for stockholder proposals to be considered for inclusion in Intevac’s proxy materials — Stockholders may present proper proposals for inclusion in Intevac’s proxy statement and for consideration at the next annual meeting of its stockholders by submitting their proposals in writing to Intevac’s Secretary in a timely manner. In order to be included in the proxy statement for the 2011 annual meeting of stockholders, stockholder proposals must be received by Intevac’s Secretary no later than December 7, 2010, and must otherwise comply with the requirements of Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

Requirements for stockholder proposals to be brought before an annual meeting — In addition, Intevac’s bylaws establish an advance notice procedure for stockholders who wish to present certain matters before an annual meeting of stockholders. In general, nominations for the election of directors may be made by (1) the Board of Directors, (2) the Nominating and Governance Committee or (3) any stockholder entitled to vote who has delivered written notice to Intevac’s Secretary no later than the Notice Deadline (as defined below), which notice must contain specified information concerning the nominees and concerning the stockholder proposing such nominations.

 

Intevac’s bylaws also provide that the only business that may be conducted at an annual meeting is business that is (1) specified in the notice of meeting given by or at the direction of the Board of Directors, (2) properly brought before the meeting by or at the direction of the Board of Directors or (3) properly brought before the meeting by a stockholder who has delivered written notice to the Secretary of Intevac no later than the Notice Deadline (as defined below).

 

The “Notice Deadline” is defined as that date which is 120 days prior to the one year anniversary of the date on which Intevac first mailed its proxy materials to stockholders for the previous year’s annual meeting of stockholders. As a result, the Notice Deadline for the 2011 annual meeting of stockholders is December 7, 2010.

 

If a stockholder who has notified Intevac of his or her intention to present a proposal at an annual meeting does not appear to present his or her proposal at such meeting, Intevac need not present the proposal for a vote at such meeting.

 

If a stockholder intends to raise a proposal at our 2010 Annual Meeting of Stockholders that is not eligible for inclusion in the proxy statement relating to the meeting and the stockholder has failed to give us notice in accordance with the requirements set forth in the Exchange Act by February 17, 2010 and the bylaw notice requirements set forth above are inapplicable or waived, the proxy holders will be allowed to use their discretionary authority when and if the proposal is raised at our 2010 Annual Meeting.

 

 

 

 

 

 

 

Stockholders who do not receive a separate copy of the proxy materials and 2009 Annual Report may request to receive a separate copy of the proxy materials and 2009 Annual Report by calling 408-986-9888 or by writing to Investor Relations at Intevac’s principal executive offices. Alternatively, stockholders who share an address and receive multiple copies of our proxy materials and 2009 Annual Report can request to receive a single copy by following the instructions above, although each stockholder of record or beneficial owner must still submit a separate proxy card.

 

 

 

Any written requests for additional information, additional copies of the proxy materials and 2009 Annual Report, notices of stockholder proposals, recommendations of candidates to the Board of Directors, communications to the Board of Directors or any other communications should be sent to this address.

 

The proxy statement and the 2009 Annual Report are available at www.intevac.com

 

At the Annual Meeting, six directors (constituting the entire board) are to be elected to serve until the next Annual Meeting of Stockholders and until a successor for any such director is elected and qualified, or until the death, resignation or removal of such director. The six candidates receiving the highest number of affirmative votes of the shares entitled to vote at the Annual Meeting will be elected directors of Intevac.

 

It is intended that the proxies will be voted for the six nominees named below unless authority to vote for any such nominee is withheld. All six nominees are currently directors of Intevac, and all were elected to the Board by the stockholders at the last annual meeting. Each person nominated for election has agreed to serve if elected, and the Board of Directors has no reason to believe that any nominee will be unavailable or will decline to serve. In the event, however, that any nominee is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any other person who is designated by the current Board of Directors to fill the vacancy. The proxies solicited by this Proxy Statement may not be voted for more than six nominees.

 

Set forth below is information regarding the nominees to the Board of Directors.

 

 

The Board of Directors recommends a vote “FOR” all the nominees listed above.

 

Each nominee brings a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a wide variety of areas, including corporate governance and board service, executive management, financial management, and operations. Set forth below are the conclusions reached by the Board with regard to each of its directors.

 

As described elsewhere in this proxy under the heading “Policy Regarding Board Nominees”, the Company believes that Board members should possess a balance of knowledge, experience and capability on the Board, and considers the following issues: the current size and composition of the Board and the needs of the Board and the respective committees of the Board, such factors as issues of character, judgment, diversity, age, expertise, business experience, length of service, independence, other commitment and the like, the relevance of the candidate’s skills and experience to the business, and such other factors as the Nominating and Governance Committee may consider appropriate. In addition to fulfilling the above criteria, 4 of the 6 directors named above are considered independent under the applicable Nasdaq rules.

 

Mr. Pond is a founder of Intevac and has served as Chairman of the Board since February 1991. Mr. Pond served as President and Chief Executive Officer from February 1991 until July 2000 and again from September 2001 through January 2002. Mr. Pond also held executive management positions at Varian Associates, Inc. and Teledyne. Mr. Pond holds a BS in physics from the University of Missouri at Rolla and an MS in physics from the University of California at Los Angeles. The Board believes Mr. Pond’s qualifications to sit on our Board include his years of experience in the hard disk drive, semiconductor, communication and defense industries including as our Chairman for 19 years and as our President and Chief Executive Officer for 10 years and prior executive management experience.

Mr. Fairbairn joined Intevac as President and Chief Executive Officer (the “CEO”) in January 2002 and was appointed a director in February 2002. Before joining Intevac, Mr. Fairbairn was employed by Applied Materials from July 1985 to January 2002, most recently as Vice President and General Manager of the Conductor Etch Organization with responsibility for the Silicon and Metal Etch Divisions. From 1996 to 1999, Mr. Fairbairn was General Manager of Applied’s Plasma Enhanced Chemical Vapor Deposition Business Unit and from 1993 to 1996; he was General Manager of Applied’s Plasma Silane CVD Product Business Unit. Mr. Fairbairn holds an MA in engineering sciences from Cambridge University. The Board believes Mr. Fairbairn’s qualifications to sit on our Board include his years of executive experience for a large multinational company in the high technology and semiconductor industries and as our CEO for 8 years, his strong leadership abilities, management skills and technical expertise.

 

Mr. Dury has served as a director of Intevac since July 2002. Mr. Dury is a co-founder of Mentor Capital Group, a venture capital firm formed in July 2000. From 1996 to 2000, Mr. Dury served as Senior Vice President and Chief Financial Officer of Aspect Development, a software development firm. Mr. Dury holds a BA in psychology from Duke University and an MBA from Cornell University. The Board believes Mr. Dury’s qualifications to sit on our Board include his experience as a CEO of a venture capital firm, his experience with financial accounting matters as a previous CFO, as well as his operational, management and corporate governance expertise working on other companies’ boards of directors.

 

Mr. Hill was appointed as a director of Intevac in March 2004. Mr. Hill joined Kaiser Aerospace and Electronics Corporation, a privately held manufacturer of electronic and electro-optical systems, in 1969 and served as Chief Executive Officer and Chairman of both Kaiser and K Systems, Inc., Kaiser’s parent company, from 1997 until his retirement in 2000. Prior to his appointment as Chief Executive Officer, Mr. Hill served in a number of executive positions at Kaiser. Mr. Hill holds a BS in mechanical engineering from the University of Maine an MS in engineering from the University of Connecticut and has completed post-graduate studies at the University of Santa Clara business school. He is also a director of First Aviation Services, Inc. The Board believes Mr. Hill’s qualifications to sit on our Board include his operational and corporate governance expertise, which he obtained through experience as a CEO leading a complex global organization, and his years of experience in the government, military and electro-optical industries.

 

Mr. Lemos has served as a director of Intevac since August 2002. Mr. Lemos retired from Varian Associates, Inc. in 1999 after 23 years, including serving as Vice President and Chief Financial Officer from 1988 to 1999. Mr. Lemos has a BS in business from the University of San Francisco, a JD in law from Hastings College and an LLM in law from New York University. The Board believes Mr. Lemos’ qualifications to sit on our Board include his extensive experience with public and financial accounting matters for a large global company as their chief financial officer.

 

Dr. Yang was appointed as a director of Intevac in March 2006. Dr. Yang was employed by Taiwan Semiconductor Manufacturing Company beginning in 1997 and served as Vice President of Research and Development from 1999 until 2005. Prior to joining TSMC, Dr. Yang worked at Texas Instruments from 1980 to 1997 where he was Director of Device and Design Flow. Dr. Yang is currently an independent consultant. Dr. Yang holds a BS in physics from National Taiwan University, and an MS and a PhD in electrical engineering from the University of Illinois. He is also a director of LTX Credence and Apache Design Solutions. The Board believes Dr. Yang’s qualifications to sit on our Board include his extensive experience with global companies, his years of experience in the semiconductor industry, his experience providing strategic advisory services to complex organizations, as well as his operational, management and corporate governance expertise working with other companies’ boards of directors.

 

APPROVAL OF AN AMENDMENT TO THE INTEVAC 2004 EQUITY INCENTIVE
PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER
BY 500,000 SHARES AND APPROVE THE MATERIAL TERMS OF THE PLAN

 

We have historically provided stock options as an incentive to our employees, directors and consultants to promote increased stockholder value. The Board of Directors and management believe that stock options and other types of equity awards are one of the primary ways to attract and retain key personnel responsible for the continued development and growth of the our business, and to motivate all employees to increase stockholder value. In addition, stock options are considered a competitive necessity in the high technology sector in which we compete.

 

The Board of Directors recommends that stockholders vote “FOR” the adoption of
the amendment to add an additional 500,000 shares to the Intevac 2004 Equity
Incentive Plan and Approval of the Material Terms of the Plan.

 

As a result of the desire to attract, give further incentive to and retain current employees, officers and directors, options to purchase 536,000 shares were granted from the 2004 Equity Incentive Plan (the “2004 Plan”) during fiscal 2009. As of December 31, 2009, there were 3,111,000 unexercised options outstanding and 535,000 shares available for grant under the 2004 Plan, not including the 500,000 share increase subject to stockholder approval at this 2010 Annual Meeting. The unexercised options and shares available for grant represent 17% of the total Intevac shares outstanding at December 31, 2009. Including the 500,000 shares subject to stockholder approval at this Annual Meeting, the percentage will increase to 19% of the shares outstanding. We are also seeking stockholder approval of the material terms of the 2004 Plan for purposes of complying with Section 162(m) of the Internal Revenue Code. If stockholders approve amending and restating the 2004 Plan, the amended and restated 2004 Plan will replace the current version of the 2004 Plan.

 

Proposed Amendment

 

At the 2010 Annual Meeting, we are asking our stockholders to approve an amendment to the 2004 Plan to increase the number of shares reserved for issuance under the 2004 Plan by 500,000 shares, to an aggregate of 3,900,000 shares reserved for issuance thereunder plus shares remaining from or that otherwise would return to the 1995 Stock Option/Stock Issuance Plan. The Board of Directors approved the proposed amendment to the 2004 Plan in February 2010, subject to stockholder approval at this 2010 Annual Meeting. The amendment to increase the number of shares reserved under the 2004 Plan is proposed in order to give the Board and the Compensation Committee of the Board continued flexibility to grant stock options and other types of equity awards. We are also seeking stockholder approval of the material terms of the 2004 Plan for purposes of complying with Section 162(m) of the Internal Revenue Code. If stockholders approve amending and restating the 2004 Plan, the amended and restated 2004 Plan will replace the current version of the 2004 Plan.

 

The Board and management believe that granting equity awards motivates higher levels of performance, aligns the interests of employees and stockholders by giving employees the perspective of owners with equity stakes in Intevac, and provides an effective means of recognizing employee contributions to our success. The Board and management also believe that equity awards are of great value in recruiting and retaining highly qualified technical and other key personnel who are in great demand, as well as rewarding and encouraging current employees and other service providers. Finally, the Board and management believe that the ability to grant equity awards will be important to our future success by helping us to accomplish these objectives. If our stockholders approve its material terms, our 2004 Plan will continue to provide the Company with the potential to continue to take tax deductions associated with certain executive compensation, particularly with respect to certain full-value awards subject to vesting based upon the attainment of specified objective performance criteria.

 

The following paragraphs provide a summary of the principal features of the 2004 Plan and its operation. The following summary is qualified in its entirety by reference to the 2004 Plan.

Background and Purpose of the Plan

 

The 2004 Plan permits the grant of the following types of incentive awards: (1) stock options, (2) stock appreciation rights, (3) restricted stock, (4) performance units, and (5) performance shares (individually, an “Award”). The 2004 Plan is intended to help us to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to employees, directors and consultants, and to promote the success of Intevac.

 

Administration of the Plan

 

Our Board of Directors or the Compensation Committee of our Board of Directors (in either case, the “Committee”) administers the 2004 Plan. Members of the Committee generally must qualify as “outside directors” under Section 162(m) of the Internal Revenue Code (so that we are entitled to receive a federal tax deduction for certain compensation paid under the 2004 Plan) and must meet such other requirements as are established by the Securities and Exchange Commission for plans intended to qualify for exemption under Rule 16b-3. For the plan to qualify for exemption under Rule 16b-3, members of the Committee must be “non-employee directors.” Notwithstanding the foregoing, the Board of Directors also may appoint one or more separate committees to administer the 2004 Plan.

 

Subject to the terms of the 2004 Plan, the Committee has the sole discretion to select the employees and consultants who will receive Awards, determine the terms and conditions of Awards (for example, the vesting schedule), interpret the provisions of the Plan and outstanding Awards, and with the consent of the stockholders implement an exchange program under which outstanding Awards are exchanged for different awards and/or cash or the exercise price of an outstanding Award is reduced.

 

A total of 1,200,000 shares of our Common Stock were originally reserved for issuance under the 2004 Plan, and additional 500,000, 900,000 and 800,000 shares were reserved and approved by the stockholders at the Company’s 2008, 2007 and 2006 Annual Meetings, respectively. Proposal Two, if approved, will raise the number of shares reserved by 500,000 shares, to 3,900,000 shares. No more than 20% of the shares reserved for issuance under the 2004 Plan may be issued pursuant to Awards that are not stock options or stock appreciation rights that are granted at exercise prices equal to 100% of the fair market value on the date of grant (that is, pursuant to Awards of restricted stock, performance units, performance shares, discounted stock options or discounted stock appreciation rights). In addition, shares which were reserved but not issued under our 1995 Stock Option/ Stock Issuance Plan (the “1995 Plan”) as of the effective date of the 2004 Plan, as well as any shares that would otherwise return to the 1995 Plan, upon cancellation or expiration of awards, are available for issuance under the 2004 Plan up to a maximum of 1,500,000 shares.

 

If an Award expires or is cancelled without having been fully exercised or vested, the unvested or cancelled shares generally will be returned to the available pool of shares reserved for issuance under the 2004 Plan. Also, if we experience a stock split, reverse stock split, stock dividend, combination or reclassification of our Common Stock or other similar change in our capital structure, the Committee shall adjust the number of shares available for issuance under the 2004 Plan, the price and number of shares subject to outstanding Awards, and the per-person limits on Awards, as appropriate to reflect the stock dividend or other change.

 

Eligibility to Receive Awards

 

The Committee selects the directors who will be granted Awards under the 2004 Plan and grants Awards for employees and consultants under management’s recommendations. The actual number of individuals who will receive an Award under the Plan cannot be determined in advance because the Committee has the discretion to select the participants. As of March 31, 2010, approximately 218 employees, directors and consultants would be eligible to participate in the 2004 Plan.

 

Stock Options

 

A stock option is the right to acquire shares of our Common Stock at a fixed exercise price for a fixed period of time. Under the 2004 Plan, the Committee may grant non-statutory stock options and/or incentive stock options

(which entitle employees, but not Intevac, to more favorable tax treatment). The Committee determines the number of shares covered by each option, but during any fiscal year, no participant may be granted a combination of options or stock appreciation rights for more than 200,000 shares, except that a participant may be granted a combination of options or stock appreciation rights for an additional 300,000 shares in connection with his or her initial employment.

 

The exercise price of the shares subject to each option is set by the Committee but cannot be less than 100% of the fair market value (on the date of grant) of the shares covered by incentive stock options or by non-statutory options that are intended to qualify as “performance-based” under Section 162(m) of the Internal Revenue Code. In addition, the exercise price of an incentive stock option must be at least 110% of fair market value if (on the grant date) the participant owns stock possessing more than 10% of the total combined voting power of all classes of our stock or any of our subsidiaries. The aggregate fair market value of the shares (determined on the grant date) covered by incentive stock options that first become exercisable by any participant during any calendar year also may not exceed $100,000.

 

An option granted under the 2004 Plan generally cannot be exercised until it becomes vested. Options become exercisable at the times and on the terms established by the Committee at the time of grant. Options granted under the 2004 Plan expire at the times established by the Committee, but the term of an incentive stock option cannot be greater than 10 years after the grant date (5 years in the case of an incentive stock option granted to a participant who owns stock possessing more than 10% of the total combined voting power of all classes of our stock or any of our subsidiaries).

 

The exercise price of each option granted under the 2004 Plan must be paid in full at the time of exercise. The exercise price may be paid in any form determined by the Committee, including, but not limited to, cash, check, surrender of certain shares, or pursuant to a cashless exercise program. The Committee may also permit, in some cases, the exercise price to be paid by means of a promissory note or through a reduction in the amount of our liability to the participant.

 

After a termination of service with Intevac, a participant will be able to exercise the vested portion of his or her option for the period of time stated in the option agreement. If no such period of time is stated in the participant’s Option agreement, the participant will generally be able to exercise his or her option for (i) three months following his or her termination for reasons other than death or disability, and (ii) twelve months following his or her termination due to death or disability.

 

Stock Appreciation Rights

 

Stock appreciation rights are awards that grant the participant the right to receive an amount, payable in cash or stock (or a combination of cash and stock) as specified at the time of grant, equal to (1) the number of shares exercised, times (2) the amount by which our then current stock price exceeds the exercise price. The exercise price will be set on the date of grant, but can vary in accordance with a predetermined formula. An individual will be able to profit from a stock appreciation right only if the fair market value of our stock increases above the exercise price.

 

Awards of stock appreciation rights may be granted in connection with all or any part of an option, either concurrently with the grant of an option or at any time thereafter during the term of the option, or may be granted independently of options. There are three types of stock appreciation rights available for grant under the 2004 Plan. A “tandem” stock appreciation right is a stock appreciation right granted in connection with an option that entitles the participant to exercise the stock appreciation right by surrendering to us a portion of the unexercised related option. A tandem stock appreciation right may be exercised only with respect to the shares for which its related option is then exercisable. An “affiliated” stock appreciation right is a stock appreciation right granted in connection with an option that is automatically deemed to be exercised upon the exercise of the related option, but does not necessitate a reduction in the number of shares subject to the related option. A “freestanding” stock appreciation right is one that is granted independent of any options. No participant may be granted a combination of options or stock appreciation rights covering more than 200,000 shares in any fiscal year, except that a participant may be granted a combination of options or stock appreciation rights covering an additional 300,000 shares in connection with his or her initial employment.

The Committee determines the terms of stock appreciation rights, except that the exercise price of a tandem or affiliated stock appreciation right must be equal to the exercise price of the related option. When a tandem stock appreciation right granted in connection with an option is exercised, the related option, to the extent surrendered, will cease to be exercisable. A tandem or affiliated stock appreciation right that is granted in connection with an option will be exercisable until, and will expire, no later than the date on which the related option ceases to be exercisable or expires. A freestanding stock appreciation right that is granted without a related option will be exercisable, in whole or in part, at such time as the Committee specifies in the stock appreciation right agreement.

 

No stock appreciation right may have a term of more than ten years from the date of grant. After termination of service with Intevac, a participant will be able to exercise the vested portion of his or her stock appreciation right for the period of time stated in the Award agreement. If no such period of time is stated in a participant’s Award agreement, a participant will generally be able to exercise his or her vested stock appreciation rights for the same period of time as applies to stock options.

 

Restricted Stock

 

Awards of restricted stock are shares that are issued to participants but that vest in accordance with the terms and conditions established by the Committee. Awards of restricted stock are rights to acquire or purchase shares of our Common Stock, which vest in accordance with the terms and conditions established by the Administrator in its sole discretion. For example, the Committee may set restrictions based on the achievement of specific performance goals or continued employment. The Committee, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.

 

The Committee determines the number of shares of restricted stock granted to any employee or consultant, but no participant may be granted more than 125,000 shares of restricted stock in any fiscal year, except that a participant may be granted up to an additional 175,000 shares of restricted stock in connection with his or her initial employment.

 

In determining whether an Award of restricted stock should be made, and/or the vesting schedule for any such Award, the Committee may impose whatever conditions to vesting as it determines to be appropriate. Upon termination of service, unvested shares of restricted stock generally will be forfeited.

 

Performance Units and Performance Shares

 

Performance units and performance shares are Awards that will result in a payment to a participant only if performance objectives established by the Committee are achieved or the Awards otherwise vest. The applicable performance objectives will be determined by the Committee, and may be based upon the achievement of Company-wide, divisional or individual goals or upon any other basis determined by the Committee. Performance units have an initial value that is established by the Committee on or before the date of grant. Performance shares have an initial value equal to the fair market value of a share on the date of grant. The Committee determines the number of performance units and performance shares granted to a participant, but no participant may be granted performance units with an initial value greater $750,000 or granted more than 125,000 performance shares in any fiscal year, except that a participant may be granted performance units with an initial value up to an additional $750,000 and/or an additional 175,000 performance shares in connection with his or her initial employment.

 

Performance Goals

 

Under Section 162(m) of the Internal Revenue Code, the annual compensation paid to our CEO and to each of our other three most highly compensated executive officers (other than the CEO or the chief financial officer) may not be deductible to the extent it exceeds $1 million. However, we are able to preserve the deductibility of compensation in excess of $1 million if the conditions of Section 162(m) are met. These conditions include stockholder approval of the 2004 Plan (including this amendment), setting limits on the number of Awards that any individual may receive and, for Awards other than options and stock appreciation rights, establishing performance criteria that must be met before the Award actually will vest or be paid.

We have designed the 2004 Plan so that it permits us to pay compensation that qualifies as performance-based under Section 162(m). Thus, the Committee (in its discretion) may make performance goals applicable to a participant with respect to an Award. At the Committee’s discretion, one or more of the following performance goals may apply (all of which are defined in the 2004 Plan): cost of sales as a percentage of sales, earnings per share, free cash flow, marketing and sales expenses as a percentage of sales, net income as a percentage of sales, operating margin, revenue, total stockholder return and working capital. The performance goals may differ from participant to participant and from Award to Award, may be used alone or in combination, may be used to measure the performance of Intevac in absolute terms, relative terms, on a per share basis, against the performance of Intevac as a whole or a segment of the business and/or on a pre-tax or after-tax basis.

 

Change of Control

 

In the event of a “change in control” of Intevac, the successor corporation may either assume or provide a substitute award for each outstanding Award. In the event the successor corporation refuses to assume or provide a substitute award, the Award will immediately vest and become exercisable as to all of the shares subject to such Award. In such case, the Committee will provide at least 15 days’ notice of the immediate vesting and exercisability of stock options and stock appreciation rights that will not be assumed or substituted for. The Award will then terminate upon the expiration of the notice period.

 

Limited Transferability of Awards

 

Awards granted under the 2004 Plan generally may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the applicable laws of descent and distribution.

 

The following brief summary of the effect of U.S. federal income taxation of an award upon the participant and Intevac with respect to Awards granted under the 2004 Plan does not purport to be complete, and does not discuss the tax consequences of a participant’s death or the income tax laws of any state or foreign country in which the participant may reside.

 

Non-statutory Stock Options

 

No taxable income generally is reportable when a non-statutory stock option is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the shares purchased over the exercise price of the option. Any additional gain or loss recognized upon any later disposition of the shares will be capital gain or loss, which may be long- or short-term depending on the holding period after exercise.

 

As a result of Section 409A of the Code and the Treasury regulations promulgated thereunder (“Section 409A”), however, non-statutory stock options and stock appreciation rights granted with an exercise price below the fair market value of the underlying stock or with a deferral feature may be taxable to the recipient in the year of vesting in an amount equal to the difference between the then fair market value of the underlying stock and the exercise price of such Awards and may be subject to an additional 20% federal income tax plus penalties and interest. In addition, certain states, such as California, have adopted similar tax provisions.

 

Incentive Stock Options

 

No taxable income is reportable when an incentive stock option is granted or exercised, unless the alternative minimum tax rules apply, in which case taxation occurs upon exercise. If the participant exercises the option and then later sells or otherwise disposes of the shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as long-term capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two- or one-year holding periods described above, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the

exercise price of the option. Any additional gain or loss generally will be taxable at long-term or short-term capital gain rates, depending on whether the participant has held the shares for more than one year.

 

Stock Appreciation Rights

 

No taxable income generally is reportable when a stock appreciation right is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss. As a result of Section 409A, however, stock appreciation rights granted with an exercise price below the fair market value of the underlying stock may be taxable to the participant before exercise of an award.

 

Restricted Stock, Performance Units and Performance Shares

 

A participant generally will not have taxable income upon grant of restricted stock, performance units or performance shares. Instead, he or she will recognize ordinary income at the time of vesting equal to the fair market value (on the vesting date) of the shares or cash received minus any amount paid for the shares. However, the recipient of a restricted stock Award may elect to recognize income at the time he or she receives the Award in an amount equal to the fair value of the shares underlying the Award (less any cash paid for the shares) on the date the Award is granted.

 

Section 409A

 

Section 409A, which was added by the American Jobs Creation Act of 2004, provides certain new requirements on non-qualified deferred compensation arrangements. Awards granted under the 2004 Plan with a deferral feature will be subject to the requirements of Section 409A, including discount stock options and stock appreciation rights discussed above. If an Award is subject to and fails to satisfy the requirements of Section 409A, the recipient of that Award may recognize ordinary income on the amounts deferred under the Award, to the extent vested, which may be prior to when the compensation is actually or constructively received. Also, if an Award that is subject to Section 409A fails to comply with Section 409A’s provisions, Section 409A imposes an additional 20% federal income tax on compensation recognized as ordinary income, as well as interest on such deferred compensation. Some states may also apply a penalty tax (for instance, California imposes a 20% penalty tax in addition to the 20% federal penalty tax). We strongly encourage recipients of such Awards to consult their tax, financial, or other advisor regarding the tax treatment of such Awards.

 

Tax Effect for the Company — Section 162(m)

 

Intevac generally will be entitled to a tax deduction in connection with an Award under the 2004 Plan in an amount equal to the ordinary income realized by a participant at the time the participant recognizes such income (for example, upon the exercise of a non-statutory stock option). Special rules limit the deductibility of compensation paid to our CEO (i.e., our principal executive officer) and to each of our three most highly compensated executive officers for the taxable year (other than the principal executive officer or principal financial officer). Under Section 162(m) of the Code, the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However we can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include stockholder approval of the 2004 Plan, and its material terms, setting limits on the number of Awards that any individual may receive and for Awards other than certain stock options, establishing performance criteria (see the discussion under “Performance Goals” above) that must be met before the Award actually will vest or be paid. The 2004 Plan has been designed to permit the Committee to grant Awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting Intevac to continue to receive a federal income tax deduction in connection with such Awards.

 

The Board generally may amend or terminate the 2004 Plan at any time and for any reason. Amendments will be contingent on stockholder approval if required by applicable law or stock exchange listing requirements. By its terms, the 2004 Plan automatically will terminate in 2014, although any Awards outstanding at that time will continue for their terms.

 

The number of Awards that an employee, director or consultant may receive under the 2004 Plan is in the discretion of the Committee and therefore cannot be determined in advance. Our executive officers and our non-employee directors have an interest in this proposal, because they are eligible to receive discretionary Awards under the 2004 Plan.

 

As of the date of this proxy statement, there has been no determination by the Committee with respect to future awards under the 2004 Plan. Accordingly, future awards are not determinable. The following table, however, sets forth information with respect to the grant of options under the 2004 Plan to the executive officers named in the Summary Compensation Table below, to executive officers as a group, to all non-employee directors as a group and to all other employees as a group during the Company’s last fiscal year:

 

 

 

 

Summary

 

We believe strongly that approval of the amendment to the 2004 Plan and its material terms is essential to our continued success. Awards such as those provided under the 2004 Plan constitute an important incentive for our key employees and other service providers and help us to attract, retain and motivate people whose skills and performance are critical to our success. Our employees are our most valuable assets. We strongly believe that the 2004 Plan is essential for us to compete for talent in the labor markets in which we operate.

 

The Audit Committee of the Board of Directors has selected Grant Thornton LLP as our independent public accountants for the fiscal year ending December 31, 2010. Grant Thornton LLP began auditing our financial statements in 2000. Its representatives are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions.

 

The Board of Directors recommends a vote “FOR” ratification of the selection of Grant Thornton LLP as Intevac’s independent registered public accounting firm for the fiscal year ending December 31, 2010.

 

The following table presents fees billed for professional audit services and other services rendered to us by Grant Thornton LLP for the years ended December 31, 2009 and 2008.

 

 

 

 

In making its recommendation to ratify the appointment of Grant Thornton LLP as our independent auditor for the fiscal year ending December 31, 2010, the Audit Committee has considered whether services other than audit and audit-related services provided by Grant Thornton LLP are compatible with maintaining the independence of Grant Thornton LLP and has determined that such services are compatible.

 

Our Audit Committee approves in advance all engagements with Grant Thornton LLP, including the audit of our annual financial statements, the review of the financial statements included in our Quarterly Reports on Form 10-Q and tax compliance services. Fees billed by Grant Thornton LLP are reviewed and approved by the Audit Committee on a quarterly basis.

 

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We have also adopted a Director Code of Ethics that applies to all of our directors. You can find both our Code of Business Conduct and Ethics and our Director Code of Ethics on our website at www.intevac.com. We post any amendments to the Code of Business Conduct and Ethics and the Director Code of Ethics, as well as any waivers, which are required to be disclosed by the rules of either the Securities and Exchange Commission (“SEC”) or The NASDAQ Global Select Market (“Nasdaq”) on our website.

 

The Board of Directors has determined that, with the exception of Mr. Pond and Mr. Fairbairn, all of its members are “independent directors” as that term is defined in the listing standards of Nasdaq.

 

During 2009, the Board of Directors held a total of 4 meetings (including regularly scheduled and special meetings) and also took certain actions by written consent. All members of the Board of Directors during fiscal 2009 attended at least seventy-five percent of the aggregate of the total number of meetings of the Board of Directors held during the fiscal year and the total number of meetings held by all committees of the Board on which each such director served (based on the time that each member served on the Board of Directors and the committees). The Board of Directors has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee.

 

Audit Committee

 

The Audit Committee, which has been established in accordance with Section 3(a)(58)(A) of the Exchange Act, currently consists of Mr. Dury, Mr. Hill and Mr. Lemos, each of whom is “independent” as such term is defined for audit committee members by the Nasdaq listing standards. Mr. Dury is the chairman of the Audit Committee. The Board of Directors has determined that each member of the committee is an “audit committee financial expert” as defined under the rules of the SEC. The Audit Committee met 9 times during 2009.

 

The Audit Committee is responsible for:

 

 

The Audit Committee has adopted a written charter approved by the Board of Directors, which is available on Intevac’s website at www.intevac.com under “Company — Governance.”

 

The Audit Committee Report is included in this proxy statement on page 42.

Compensation Committee

 

The Compensation Committee currently consists of Mr. Hill, Mr. Dury and Dr. Yang, each of whom is “independent” as such term is defined by the Nasdaq listing standards. The composition of the Compensation Committee underwent changes in 2009, with the appointment of a new Compensation Committee Chairman, Mr. Hill. The Compensation Committee met 6 times during 2009.

 

The Compensation Committee is responsible for:

 

 

See “Executive Compensation — Compensation Discussion and Analysis” and “Executive Compensation — Compensation of Directors” below for a description of Intevac’s processes and procedures for the consideration and determination of executive and director compensation.

 

The Compensation Committee has adopted a written charter approved by the Board of Directors, a copy of which is available on Intevac’s website at www.intevac.com under “Company — Governance.”

 

The Compensation Committee Report is included in this proxy statement on page 32.

 

Nominating and Governance Committee

 

The Nominating and Governance Committee currently consists of Mr. Lemos and Dr. Yang, each of whom is “independent” as such term is defined by the Nasdaq listing standards. The composition of the Nominating and Governance Committee underwent changes in 2009, with the appointment of a new Nominating and Governance Committee Chairman, Mr. Lemos. The Nominating and Governance Committee met 2 times during 2009.

 

The primary focus of the Nominating and Governance Committee is on the broad range of issues surrounding the composition and operation of the Board of Directors. The Nominating and Governance Committee provides assistance to the Board, the Chairman and the CEO in the areas of membership selection, committee selection and rotation practices, evaluation of the overall effectiveness of the Board, and review and consideration of developments in corporate governance practices. The Nominating and Governance Committee’s goal is to ensure that the composition, practices, and operation of the Board contribute to value creation and effective representation of Intevac stockholders.

 

The Nominating and Governance Committee will consider recommendations of candidates for the Board of Directors submitted by the stockholders of Intevac; for more information, see “Policy Regarding Board Nominees” below.

 

The Nominating and Governance Committee has adopted a written charter approved by the Board of Directors, a copy of which is available on Intevac’s website at www.intevac.com under “Company — Governance.”

 

Compensation Committee Interlocks and Insider Participation

 

Mr. Hill (commencing May 2009), Mr. Lemos (until May 2009), Mr. Dury (commencing November 2009) and Dr. Yang served as members of the Compensation Committee during fiscal 2009. No interlocking relationship exists between any member of Intevac’s Board of Directors or Compensation Committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. No member of the Compensation Committee is or was formerly an officer or an employee of Intevac.

 

Intevac encourages members of the Board of Directors to attend the annual meeting of stockholders, but does not have a policy requiring attendance. Mr. Fairbairn, Mr. Pond, Mr. Dury, and Dr. Yang attended Intevac’s 2009 annual meeting of stockholders.

Lead Director

 

Mr. David Dury serves as Lead Director and liaison between management and the other non-employee directors. The Lead Director schedules and chairs meetings of the independent directors. The independent directors (including the Lead Director) hold a closed session at each regularly scheduled Board meeting.

 

Board Leadership Structure

 

Our company is led by Mr. Fairbairn, our CEO. Mr. Pond, who founded Intevac in 1991, serves as the Chairman of our Board, and has served as chair since the Company’s inception. As discussed above under “Lead Director”, one of our independent directors, Mr. Dury, acts as our independent lead director. The Company believes the stockholders are best served by this structure, which provides us with a dynamic leader, a steady connection to the Company’s history, and a strong independent voice. Our Board of Directors also contains 3 independent directors in addition to Mr. Dury.

 

As further discussed above under “Board Meetings and Committees”, the Board has three standing committees — Audit, Compensation, and Nominating and Governance. Each of the Board committees is comprised solely of independent directors, with each of the three committees having a separate chair. Our corporate governance guidelines provide that our non-employee directors meet in an executive session at each Board meeting. We also have a mechanism for stockholders to communicate directly with independent directors as a group or with any individual director.

 

Our directors bring a broad range of leadership experience to the Board and regularly contribute to the oversight of the Company’s business and affairs. We believe that all Board members are well engaged in their responsibilities and that all Board members express their views and consider the opinions expressed by other directors. On an annual basis as part of our governance review, the Board (led by the Nominating and Governance Committee) evaluates our leadership structure to ensure that it remains the optimal structure for our company and our stockholders.

 

We believe that our leadership structure has been effective for the Company. We believe that having an independent lead director and independent chairs for each of our Board committees provides the right amount of independence for our company. We have a leader for our company, a strong chairman position, and oversight of company operations by experienced independent directors who have appointed an independent lead director and committee chairs.

 

Policy Regarding Board Nominees

 

It is the policy of the Nominating and Governance Committee of the Company to consider recommendations for candidates to the Board of Directors from stockholders. Stockholder recommendations of candidates for election to the Board should be directed in writing to: Intevac, Inc., 3560 Bassett Street, Santa Clara, California, 95054, and must include the candidate’s name, home and business contact information, detailed biographical data and qualifications, information regarding any relationships between the candidate and the Company within the last three years, and evidence of the nominating person’s ownership of Company stock. Stockholder nominations to the Board must also meet the requirements set forth in the Company’s bylaws.

 

The Nominating and Governance Committee’s criteria and process for identifying and evaluating the candidates that it selects, or recommends to the full Board for selection, as director nominees are as follows:

 

 

 

Director Qualifications and Review of Director Nominees

 

The Nominating and Corporate Governance Committee makes recommendations to the Board of Directors regarding the size and composition of the Board. The Committee reviews annually with the Board the composition of the Board as a whole. The Committee is responsible for ensuring that the composition of the Board accurately reflects the needs of the Company’s business and, in furtherance of this goal, proposing the addition of members and the necessary resignation of members for purposes of obtaining the appropriate members and skills. The specific qualifications of each director are set forth along with their biographical information under “Business Experience and Qualifications of Nominees for Directors” starting on page 7 of this proxy.

 

Intevac does not maintain a formal diversity policy with respect to its Board of Directors. As noted above, however, Intevac does consider diversity to be a relevant consideration, among others, in the process of evaluating and identifying director candidates. Intevac believes each director brings a strong and unique background and set of skills to the Board of Directors that contributes to the Board’s competence and experience in a wide variety of areas. When identifying director candidates, we take into account the present and future needs of the Board of Directors and the committees of the Board of Directors. For instance, depending on the composition of the Board of Directors at a given time, a candidate capable of meeting the requirements of an audit committee financial expert might be a more attractive candidate than a candidate with significantly more technology industry expertise, or vice versa. We also consider the character, judgment and integrity of director candidates, which we evaluate through reference checks, background verification and reputation in the business community. We believe all of our directors to be of high character, good judgment and integrity. Our principal goal with respect to director qualifications is to seat directors who are able to increase the overall effectiveness of the Board of Directors and increase stockholder value.

 

Any stockholder who desires to contact our Chairman of the Board or the other members of our Board of Directors may do so by writing to: Board of Directors, c/o Robert Lemos, Chairman, Nominating and Governance Committee, Intevac, Inc., 3560 Bassett Street, Santa Clara, California, 95054. Communications received by

Mr. Lemos will also be communicated to the Lead Director, the Chairman of the Board or the other members of the Board as appropriate depending on the facts and circumstances outlined in the communication received.

 

Risk Assessment

 

Our Board of Directors is responsible for overseeing enterprise risk in general, while our Audit Committee is responsible for overseeing risk management of financial matters and the adequacy of our risk-related internal controls and our Compensation Committee oversees risk related to compensation policies. Both the Audit and Compensation Committees report their findings to the full Board of Directors. In addition, at each of its meetings, the Board discusses the risks that we are currently facing. We believe that our directors provide effective oversight of the risk management function.

 

Employee Compensation Risks

 

The Compensation Committee has assessed the risks associated with the Company’s compensation policies and practices for all employees, including non-executive officers. The Committee reviewed a list of the Company’s compensation policies and practices, which were discussed extensively, and reviewed with management the potential risks associated with the Company’s policies and practices and the factors that management believe mitigate such risks. Based on the results of its assessment, the Committee does not believe that the Company’s compensation policies and practices for all employees, including non-executive officers, create risks that are reasonably likely to have a material adverse effect on the Company.

 

Compensation Consultant

 

The Compensation Committee has engaged its own independent advisor, Farient Advisors (“Farient”) to provide advice and recommendations on the amount and form of executive and director compensation. Farient does not provide other non-executive compensation consulting services to the Company, nor did the Company pay Farient fees in excess of $120,000 during 2009.

 

The following is a discussion of our executive compensation program and the compensation decisions made for the fiscal year 2009 with respect to Kevin Fairbairn, our CEO, and the other executive officers named in the 2009 Summary Compensation Table on page 33 (the “Named Executive Officers”).

 

Executive Summary

 

Intevac’s businesses are characterized by rapidly changing technology and customer requirements; intense competition; cyclical revenues; and significant competition for management talent. In this environment, the objectives of our executive compensation program are to:

 

 

During fiscal 2009, our Compensation Committee worked with its independent advisor, Farient, and our senior management to assess these objectives and the compensation plan design to ensure that it continues to meet our business needs. Through the course of this assessment, the Compensation Committee confirmed these objectives for fiscal 2009 and also determined they were appropriate for 2010.

 

The 2009 fiscal year was challenging for many companies, including Intevac, due to the global crisis in the credit and financial markets. But we took significant actions during the year intended to enable us to emerge in a stronger competitive position. For fiscal 2009, we believe our compensation programs delivered payouts commensurate with a generally weak economic environment. The Company had a salary freeze in place for our employees and accordingly, the Compensation Committee did not increase the salary of any of our Named Executive Officers. The Company reported net losses in 2009 and 2008 and therefore no incentive bonuses were paid for those years.

 

The specific compensation principles, components and decisions during 2009 are discussed in more detail below.

 

Principles of Executive Compensation

 

Our compensation structure is designed to attract, retain, motivate, and reward high-performing executives consistent with the profitability of our business and performance for our stockholders. The guiding principles of our executive compensation plan are as follows:

 

 

 

 

In general, our executives do not receive any benefits or perquisites other than those offered to all of Intevac’s employees.

 

2009 Independent Advisor and Competitive Market Data

 

The Compensation Committee retained Farient to assist it in evaluating 2009 executive and director compensation programs and to provide advice and recommendations on the amount and form of executive and director compensation. The instructions provided to Farient included assessing target compensation levels for our executives relative to market practices and evaluating the overall design of our executive compensation program. Farient also provided input into the form and amounts of compensation based on these external assessments, at the request of the Compensation Committee. In addition, Farient was engaged by the Compensation Committee to update the assessment of the competiveness of compensation for our Board of Directors. Farient reported directly to the Compensation Committee. From time to time at the Compensation Committee’s request, Farient attends Compensation Committee meetings. As noted above, Farient did not provide other non-executive compensation consulting services to the Company during 2009, nor did the Company pay Farient fees in excess of $120,000 during 2009.

 

Executive compensation data was drawn from the Radford Executive Benchmark Survey for technology companies with annual revenues of $200 million to $500 million and semiconductor related companies with annual revenues of $200 million to $1.0 billion and from publicly available proxy filings for the peer companies (the “Peer Companies”) selected for 2009 and identified below. In the case of the data from the proxy filings of the Peer Companies, only data for the CEO and Chief Financial Officer positions was obtained, as these are the only two positions reported with sufficient frequency among the peers to draw meaningful conclusions on competitive pay. The market compensation levels for comparable positions were examined by Farient and the Compensation Committee as part of the process to determine overall program design, base salary, target incentives and annual stock option grants, including the total equity pool for allocation to all employees.

 

The Peer Companies we used to evaluate market compensation positioning for executives in making 2009 compensation decisions were selected in late 2008 based on factors that were relevant for the Compensation Committee at that time. Specifically, the peers were selected from technology companies with annual revenues of $200 to $700 million that were comparable to Intevac based on factors such as lines of business, profitability, and technical sophistication. The only change to the Peer Companies in 2009 compared to 2008 was to remove FLIR Systems, Inc. due to the increased revenue size of the company, which was over the top end of the targeted range of $700 million.

 

The 2009 Peer Companies we selected are as follows:

 

•   II-VI Inc.		•   Advanced Energy Industries, Inc.
•   Axcelis Technologies, Inc.		•   Brooks Automation, Inc.
•   Cohu, Inc.		•   Cymer, Inc
•   Electro Scientific Industries, Inc.		•   FEI Company
•   Formfactor, Inc.		•   GSI Group, Inc.
•   Mattson Technology, Inc.		•   Newport Corporation
•   Rofin Sinar Technologies, Inc.		•   Rudolph Technologies, Inc.
•   Veeco Instruments, Inc.

The base salary, total cash compensation (base salary plus performance-based annual cash bonus) and total compensation (including stock options) for each of Intevac’s twelve most senior executives were compared to median market pay levels for executives with similar levels of responsibility. The Compensation Committee concluded that Intevac’s executive compensation was:

 

 

The Compensation Committee believes that managing overall compensation to the market median allows us to attract, motivate, and retain the quality executive talent Intevac needs.

 

Role of the CEO

 

The CEO provides recommendations to the Compensation Committee with respect to base salary amounts, target bonus percentages, and stock option grants for each Named Executive Officer (other than himself). These compensation recommendations are based on market data reviewed by the Compensation Committee and a review by the CEO of each executive officer’s overall performance and contribution to the Company during the prior year. While the Compensation Committee considers the recommendations of the CEO with respect to these elements of compensation, the Compensation Committee independently evaluates the recommendations and makes all final compensation decisions. The CEO does not make any recommendations as to his own compensation and such decisions are made solely by the Board of Directors.

 

Compensation Components

 

The components of executive compensation are:

 

 

We also provide our executives the same benefits and perquisites that we offer our other employees. These standard employee benefits include participation in our 401(k) plan and employee stock purchase plan, and medical, dental and life insurance benefits, each with the same terms and conditions available to employees. We do not provide any benefits or perquisites to our Named Executive Officers that are not available to the majority of employees.

 

2009 Executive Compensation

 

Base Salary:

 

We provide our Named Executive Officers and other employees with base salary to compensate them for services rendered during the fiscal year. The purpose of base salary is to reward effective fulfillment of the assigned job responsibilities, and to reflect the position’s relative value to the Company and competitiveness of the executive job market. The Compensation Committee believes that targeting base salaries at or near the median among the Peer Companies generally is appropriate to meet these objectives.

New Named Executive Officers:  Prior to making an offer of employment to an executive officer, the Compensation Committee approves the executive officer’s base salary after consideration of the recommendation of the CEO. In setting the executive officer’s base salary, a number of factors are taken into account, in the Compensation Committee’s discretion, including the executive’s compensation with his previous employer, the compensation of other Intevac executives, the competitive labor market for similar executives, and how difficult it is to recruit and retain executive officers with similar skills and experience. None of these factors is specifically weighted and the evaluation includes a subjective evaluation of skills, experience and responsibilities in the Compensation Committee’s judgment.

 

Continuing Named Executive Officers:  Once an executive officer has joined Intevac, the Compensation Committee approves changes to his or her base salary during its annual review. The competitive market data provided by Farient is used, in addition to an assessment of each executive’s responsibilities and performance against objectives (See “Performance-based annual cash bonus, Management by Objectives” below for details relating to these objectives), to determine annual changes to base salary. As with new hires, these factors are evaluated at the Compensation Committee’s discretion and in the Compensation Committee’s judgment. Annual adjustments to base salary also proportionately affect the executive’s target bonus (“Target Bonus”) which is determined by multiplying each executive’s base salary by the applicable target bonus percentage determined for such executive by the Compensation Committee (“Target Bonus Percentage”).

 

Base Salary:  2009 base salaries for the Named Executive Officers were approved by the Compensation Committee (with the exception of Mr. Fairbairn, whose base salary was approved by the independent members of the Board of Directors, upon recommendation of the Compensation Committee). As a result of the global economic crisis as well as the cyclical downturn in our Equipment business in 2009, no salary increases were made to our Named Executive Officers in 2009.

 

The annual base salaries for the CEO and other Named Executive Officers in 2008 and 2009 were as follows:

 

 

 

 

Performance-based annual cash bonus:

 

We provide the opportunity to earn performance-based annual cash bonuses to our Named Executive Officers and other vice president and director level employees under our Executive Incentive Plan. The total amount payable under the Executive Incentive Plan is determined based on Intevac’s financial performance. The objective of the Executive Incentive Plan is to align our executive compensation with actual short-term business performance and with strategic business objectives.

The components to determine the performance-based cash bonus include:

 

 

Each of these components and the resulting calculation of the annual bonus payments are described in more detail below.

 

Bonus Pool:  Proforma Annual Income before Income Taxes is the single largest determinant of individual bonuses. For the purposes of calculating the Bonus Pool, “Proforma Annual Income before Income Taxes,” is equal to income before income taxes, adding back the Bonus Pool expense, employee profit sharing expense and equity-based compensation expense. The Compensation Committee reserves the right to exclude amounts, such as extraordinary or unusual items, gains or losses when determining Proforma Annual Income before Income Taxes, but did not make any adjustments to the formula during 2009.

 

At the beginning of each year, the Compensation Committee sets a percentage of the Company’s Proforma Annual Income before Income Taxes that will be used to fund performance-based annual cash bonuses for our Named Executive Officers and other management employees (the “Bonus Pool”). The amount of bonus earned by each executive will vary substantially with financial performance. If profitability increases versus the annual operating plan, the funding of the Bonus Pool will increase, and if profitability decreases versus the annual operating plan, bonus funding will decrease, regardless of the individual Target Bonuses or individual performance. If Proforma Annual Income before Income Taxes is a loss during a given year, no bonuses will be paid. Also Executive Incentive Plan participant performance-based annual cash bonuses are capped at a maximum of two times the target bonus, subject to the availability of such amount under the total Bonus Pool.

 

The Bonus Pool funding percentage is determined by the Compensation Committee each year based on a number of factors, evaluated in the Compensation Committee’s discretion, including:

 

 

For 2009, the bonus funding percentage was set at 10% of Proforma Annual Income before Income Taxes. The Company believes that the bonus funding percentage is appropriate because it balances incentives to our executives with appropriate returns to our stockholders.

 

For 2008 and 2009, the bonus funding percentage was set at a level below what would be needed to fund Target Bonuses at the level of expected performance for the year. In other words, unless the Company significantly exceeded the annual operating plan approved by the Board for the year, bonus funding levels would be below the level needed to fund Target Bonuses for each participant. The Compensation Committee believed that this level of stretch performance was warranted given the difficult operating environment expected for the Company during the year.

 

Target Bonus:  Each Named Executive Officer is assigned an annual Target Bonus, computed by multiplying each executive’s base salary times his or her Target Bonus Percentage. Executive Incentive Plan participant performance-based annual cash bonuses are capped at a maximum of two times the Target Bonus, subject to the availability of such amount under the total Bonus Pool.

 

Target Bonus Percentages are determined based on competitive market data, internal equity considerations, and the degree of difficulty associated with achieving performance levels. Each factor is evaluated by the Compensation Committee based on data and input provided by management and Farient. No change was made to the Target Bonus Percentages in 2009 for any of the Named Executive Officers. The Compensation Committee believes that the 2009 Target Bonus Percentages are appropriate for each Named Executive Officer based upon his or her position within the Company, level of responsibility and performance objectives.

Target Bonus Percentages for the CEO and other Named Executive Officers during 2008 and 2009 were as follows:

 

 

Management by Objectives:  In addition to the determination of the Bonus Pool as a whole and the Target Bonuses, each Named Executive Officer receives a comprehensive set of Management by Objective Goals (“MBO Goals”) established at the beginning of the fiscal year. The MBO Goals cover four general categories — business results, market development, product excellence and strategic objectives. The MBO Goals were approved by the Compensation Committee at the beginning of 2009, and examples of specific goals within each category are set forth below.

 

 

In 2009, each Named Executive Officer had more than 50 specific factors across the areas listed above, each of which was equally weighted with respect to the category. While each Named Executive Officer has a unique total set of targeted goals, some of the MBO Goals were assigned to more than one of the Named Executive Officers to reinforce the teamwork required to achieve results. The relative importance of the each of the categories of MBO Goals was weighted differently for each Named Executive Officer according to his or her area of responsibility. Certain categories may not apply to some Named Executive Officers, so for example the Company’s Chief Financial Officer has goals solely related to business results and strategic objectives. The weightings typically ranged from 10% to 50% per category. For example, Dr. Pietras’ objectives were more heavily weighted towards Intevac Photonics business results, Dr. Barnes’ and Dr. Russak’s objectives were more heavily weighted towards Equipment product excellence and Mr. Fairbairn’s, Mr. Andreson’s and Ms. Burk’s objectives were more heavily weighted towards company-wide performance.

The Named Executive Officers’ performance against each of the MBO Goals is scored at the end of the year by the CEO. The performance and evaluation is then reviewed and approved by the Compensation Committee and Mr. Fairbairn’s performance is evaluated by the independent members of the Board of Directors. This numerical grading is used to formulaically adjust the allocation of individual bonuses from the Bonus Pool, if any, with higher graded executives receiving a larger allocation and lower graded executives receiving a smaller allocation compared to all of the participants in the plan. The Compensation Committee may adjust the grading of the Named Executive Officers or their individual bonus at its sole discretion but did not do so during 2009. The actual amount of adjustment depends on the rating of each executive relative to all other participants, as the total amount required for bonus payments to all participants cannot exceed the Bonus Pool. Therefore, if all participants received the same rating, the pool would be allocated exclusively based on the relative size of each participant’s Target Bonus compared to all other participants. In each instance, the total bonus amount available is ultimately dictated by the size of the Bonus Pool.

 

Likelihood of Achievement of MBO Goals:  In general, total performance targets for the MBO Goals of each Named Executive Officer are set at aggressive levels, such that they anticipate performance in excess of what would be considered normal performance in the expected economic environment. The CEO recommends the MBO Goals to the Compensation Committee, and these goals are typically considered stretch goals and therefore perceived by the Compensation Committee to be reasonably difficult to achieve. The performance measures established by the Committee to determine payouts under the plan are tied both to the Company’s actual Proforma Annual Income before Income Taxes and to the individual’s MBO goals. Even where the Proforma Annual Income before Income Taxes target is achieved, the actual payout to each participant employee depends on his or her MBO goal achievement for the measurement period. The performance measures at both the Company and individual levels are aggressive and difficult to achieve, and if achieved at 100% would exceed the Company’s operational and financial expectations for the measurement period. Due to their challenging nature, historical achievement of performance goals has fluctuated from year to year. In early fiscal 2009, achievement of the target business results was believed to be attainable with significant effort, but because of difficult market conditions within the industry, achievement was not believed to be certain. In fact, the Company reported a net loss in 2009. As a result, no bonuses were paid to the Named Executive Officers for fiscal 2009.

 

Actual Bonus Payments:  No bonus payments were made to the Named Executive Officers in 2008 and 2009 as Proforma Annual Income before Income Taxes was a loss for those years. The 2009 target and actual bonuses of the CEO and other Named Executive Officers are shown in the following table:

 

 

Stock Options:

 

We grant stock options to our Named Executive Officers to align their interests with the long-term interests of our stockholders and to provide our executives with incentives to manage Intevac from the perspective of an owner with an equity stake in the business.

 

Stock Option Terms:  Stock options enable our executives to acquire shares of our Common Stock at a fixed price per share (the closing market price on the grant date). The stock options granted by the Company typically have had a 10-year term, subject to earlier termination following the executive’s cessation of service with Intevac in accordance with our 2004 Equity Incentive Plan. Starting in 2010 the Company began granting options with a term of 7 years. Options granted to executives generally vest in four equal annual installments, as measured from the option grant date. The Compensation Committee believes that four-year vesting of stock options was consistent with peer group practices and provides retention incentives associated with long-term stock price appreciation.

Timing of Stock Option Grants:  The Compensation Committee grants options to Named Executive Officers shortly after their start date in accordance with our 2004 Equity Incentive Plan. Generally, the Compensation Committee also grants stock options annually to our Named Executive Officers and other exempt employees. Such renewal grants have typically been made during the third quarter of each fiscal year. However, during 2009 the grants were made in the first quarter in order to provide motivation and retention incentives to our executives during a time when no salary increases were made, no bonuses were being paid for 2008 performance, and 2009 performance conditions were expected to be difficult due to the general economic environment at the beginning of the year.

 

Annual renewal grants are made only on days when our insider trading window is open. The Company’s insider trading window opens the third business day after quarterly earnings have been released, and closes at the end of the last day of the second month of each quarter. Our policy is not to make our annual renewal grants during such times as management and/or the Compensation Committee may be in possession of material, non-public information. New hire grants are made each month on the third Thursday of the month, by unanimous written consent of the Compensation Committee members.

 

Individual Grant Determinations:  Annually, the Compensation Committee approves a pool of renewal options to be granted to all grant recipients taking into consideration the total dilutive impact of all shares to be granted, the stock option overhang (the total number of shares to be granted as a percentage of shares outstanding), and projected compensation expense related to employee stock options. Each year, the Compensation Committee sets guidelines for the number of options to be granted to each Named Executive Officer and other exempt employees. Actual stock option grants to Named Executive Officers are made within the ranges set forth in these guidelines, based on the factors discussed below. For the Named Executive Officers, the guidelines reflect each Named Executive Officers’ position within the Company and are set at a level that the Compensation Committee considers appropriate to create a meaningful opportunity for reward predicated on increasing stockholder value. In determining the appropriate grant levels, the Compensation Committee reviews competitive market practices, taking into consideration both the potential value to individual participants compared to executives at other companies with similar responsibilities. Generally, the Compensation Committee does not change its guidelines substantially from year to year even when share prices and the implied value of grants change significantly. This is because the Compensation Committee believes that it would be difficult to manage total share dilution from equity incentives in a responsible manner if the number of shares to be granted fluctuated with share prices each year in a volatile market environment. In addition, the Compensation Committee believes that the value of shares granted, over time and on average, remains consistent with market practices.

 

Actual annual renewal grants to Named Executive Officers, except for Mr. Fairbairn, were proposed by management and reviewed and approved at a Compensation Committee meeting. In determining the number of option shares to grant to each individual, including Mr. Fairbairn, the Compensation Committee takes into account factors such as each executive’s recent performance, level of responsibility, job assignment, the competitive climate, market data, and retention considerations. Each of these factors was considered by the Compensation Committee, in its judgment, and no formal weighting of these factors was used.

 

The number of renewal stock options granted to the Named Executive Officers in 2009 is shown in the table below.

 

 

Ownership Guidelines and Hedging Policies:  We do not currently have a stock ownership policy for our executive officers. However, all of our named executive officers own shares of the company’s common stock or

vested, but unexercised, equity awards. The Company has an insider trading policy which, among other things, prohibits insiders from short sales of Intevac Common Stock. Other than these prohibitions, the Company has no specific policy regarding hedging of stock ownership positions.

 

2010 Executive Compensation

 

Competitive Market Data

 

The Compensation Committee again retained Farient to assist it in evaluating 2010 compensation programs. The instructions provided to Farient were consistent with past instructions provided and included assessing target compensation levels for our executives relative to market practices and evaluating the overall design of our executive compensation program. Farient was also engaged by the Compensation Committee to update the assessment of the competiveness of compensation for our Board of Directors. Executive compensation data was drawn from the Radford Executive Benchmark Survey for general technology companies with annual revenues of $50 million to $500 million and from publicly available proxy filings for the peer companies identified below (the “2010 Peer Companies”). The market compensation levels for comparable positions were examined by Farient and the Compensation Committee as part of the process to determine overall program design, base salary, target incentives and annual stock option grants.

 

Based on the decline in revenue for Intevac and the Peers in 2008 and 2009, the Committee reviewed and adjusted the Peer Companies in late 2009 for evaluating 2010 compensation decisions. Specifically, for 2010, the Committee reduced the revenue range for Peer Companies to $100 million to $500 million. As a result, the 2010 Peer Companies were modified to include the following companies:

 

•   II-VI Inc.		•   Advanced Energy Industries, Inc.
•   ATMI, Inc.		•   Axcelis Technologies, Inc.
•   Cognex Corp.		•   Cymer Inc.
•   Cohu, Inc.		•   Electro Scientific Industries, Inc.
•   Formfactor, Inc.		•   Kulicke & Soffa Industries, Inc.
•   Mattson Technology, Inc.		•   Newport Corporation
•   Rudolph Technologies, Inc.		•   Semitool Inc.
•   Veeco Instruments, Inc.

 

The base salary, total cash compensation (base salary plus performance-based annual cash bonus) and total compensation (including stock options) for each of Intevac’s eleven most senior executives were compared to their respective 2010 Peer Company averages for executives with similar levels of responsibility.

 

Base Salary:  2010 base salaries, effective as of April 3, 2010, for the Named Executive Officers were approved by the Compensation Committee (with the exception of Mr. Fairbairn, whose base salary was approved by the independent members of the Board of Directors). Salaries for both Mr. Andreson and Ms. Burk were increased by 6.0% to better align their base salary with the market. Mr. Fairbairn’s, Dr. Pietras’ and Dr. Russak’s base salaries were increased by 4.0%, 4.0%, 2.0%, respectively, within the range of raises given to Intevac employees. The base salaries for our Named Executive Officers for 2010 and 2009 are as follows:

 

Target Bonus Percentages:  The Compensation Committee also approved 2010 Target Bonus Percentages for the Named Executive Officers, with the exception of Mr. Fairbairn, whose 2010 Target Bonus Percentage was approved by the independent members of the Board of Directors, based on the same considerations discussed above with respect to 2009 Target Bonus Percentages. In 2010 Mr. Andreson’s target bonus was increased from 75% to 125% of salary based on the competitive data on total compensation provided by Farient. No other changes were made to the 2010 Target Bonus Percentages from their 2009 levels.

 

Target Bonus:  As a result of the base salaries and 2010 Target Bonus percentages set by the Compensation Committee (and the independent members of the Board of Directors with respect to Mr. Fairbairn), Target Bonuses for each of our Named Executive Officers are as follows:

 

 

Bonus Pool:  The Compensation Committee met in early 2010 to establish 2010 compensation targets for our Named Executive Officers. The Compensation Committee did not change the 10% bonus pool funding percentage for the Executive Incentive Plan as a percentage of Proforma Annual Income before Income Taxes. The Company believes that the bonus funding percentage is appropriate because it balances incentives to our executives with appropriate returns to our stockholders. In order to pay Target Bonuses in 2010 the Company will need to outperform its 2010 operational plan and achieve financial performance similar to 2007 levels.

 

Although the Compensation Committee projected that the Bonus Pool may fall short of the amount necessary to pay performance-based annual cash bonuses at Target Bonus levels, the Compensation Committee determined that it was not in the best interests of Intevac’s stockholders to allocate more than 10% of Proforma Annual Income Before Income Taxes to the Bonus Pool, which is used to fund performance-based annual cash bonuses for the Named Executive Officers and all other vice president and director level employees.

 

Termination of Employment and Severance Agreements

 

With the exception of Mr. Fairbairn, none of Intevac’s executive officers have an employment agreement. Employment of all of our executive officers may be terminated at any time at the discretion of the Board of Directors. The terms of Mr. Fairbairn’s employment agreement are described in the section entitled “Potential Payments Upon Termination or Change of Control.” The Compensation Committee believes that entering into the employment agreement with Mr. Fairbairn was necessary to attract and retain Mr. Fairbairn. An agreement was negotiated with and entered into with Mr. Fairbairn at the original time of his hire as a precondition of Mr. Fairbairn to his accepting the offer, and was subsequently updated in 2007 and 2008 primarily to clarify its terms and to comply with Section 409A of the Internal Revenue Code. In negotiating the terms of Mr. Fairbairn’s severance arrangements, we recognized that concerns over termination and the potential for a change of control of the Company could create uncertainty for Mr. Fairbairn regarding his continued employment, since such transactions often result in changes in senior management. The Company felt that by providing certain benefits upon his termination of employment in certain instances, such as involuntary termination or his termination in connection with a change of control of the Company, the risk of potential job loss to Mr. Fairbairn would be mitigated, and would provide encouragement to remain with the Company and to make decisions that are in the best interests of the Company’s stockholders. We felt that such considerations were critical to attracting and retaining Mr. Fairbairn.

 

Impact of Accounting and Tax Treatment

 

Accounting Treatment

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model in accordance with applicable accounting standards. Once the fair value of each award is determined, it is expensed in the Company’s income statement using the graded vesting attribution method over the service

period. (See Note 2 of the notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for fiscal 2009 filed with the SEC on February 26, 2010.) Projected compensation expense related to employee stock options in the aggregate is one of the factors taken into consideration by the Compensation Committee in determining Named Executive Officer and other employee stock option grants as noted under “Individual Grant Determinations.”

 

Tax Treatment

 

Under Section 162(m) of the Internal Revenue Service Code, Intevac receives a federal income tax deduction for compensation paid to each of our CEO and the other Named Executive Officers only if the compensation paid to the individual executive is less than $1 million during any fiscal year or is “performance-based” as defined under Section 162(m). Intevac’s 2004 Equity Incentive Plan permits our Compensation Committee to grant equity compensation that is considered “performance-based” and thus fully tax-deductible under IRC Section 162(m). Our Compensation Committee currently intends to continue seeking a tax deduction for all of our executive compensation, to the extent we determine it is in the best interests of Intevac.

 

The information contained in this report shall not be deemed to be “soliciting material” or to be filed with the SEC, nor shall such information be incorporated by reference into any past or future filing under the Securities Act or the Exchange Act, except to the extent Intevac specifically incorporates it by reference into such filing.

 

The Compensation Committee oversees Intevac’s compensation policies, plans and benefit programs. The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

This report is submitted by the members of the Compensation Committee.

 

Stanley J. Hill (Chairman)
David S. Dury
Ping Yang

 

The following table presents information concerning the total compensation of Intevac’s CEO, Chief Financial Officer, each of the three most highly compensated officers at the end of the last fiscal year, and the former Chief Technology Officer (the “Named Executive Officers”) for services rendered to Intevac in all capacities for the fiscal years ended December 31, 2009, 2008 and 2007.

 

 

 

 

The following table presents information concerning grants of plan-based awards to each of the Named Executive Officers during the fiscal year ended December 31, 2009.

 

 

 

 

The following table shows all outstanding option awards held by each of the Named Executive Officers at the end of fiscal 2009. The option awards identified in the table below with an expiration date of February 27, 2019 for each of the Named Executive Officers are also reported in the “Grants of Plan-Based Awards” table on the previous page. We have not granted any stock awards.

 

 

 

 

 

The following table shows all stock options exercised and value realized upon exercise by the Named Executive Officers during fiscal 2009. We have not granted any stock awards. No options were exercised during fiscal 2009.

 

 

 

 

Termination or Change of Control Arrangements

 

With the exception of Mr. Fairbairn, none of Intevac’s executive officers have an employment agreement with the Company. Employment of all of our executive officers may be terminated at any time at the discretion of the Board of Directors. The terms of Mr. Fairbairn’s employment are specified in his offer letter of employment.

 

Employment Agreement:  For Mr. Fairbairn, the terms of his employment agreement include the following:

 

 

 

The Compensation Committee believes that the terms of this agreement with Mr. Fairbairn support the goals of attracting and retaining highly talented individuals by clarifying the terms of employment and reducing the risks to the executive in situations where the Company may undergo a merger or be acquired. In addition, the Compensation Committee believes that such an agreement aligns the interests of Mr. Fairbairn with the interests of stockholders if a qualified offer to acquire the Company is made, in that it is to the benefit of stockholders to have Mr. Fairbairn negotiating in the best interests of the Company without concerns regarding his personal financial interests.

 

1995 Stock Option/Stock Issuance Plan:  Under the 1995 Stock Option/Stock Issuance Plan, unvested stock options would immediately accelerate and vest in full if the employment of the executive were to be terminated either involuntarily or through a forced resignation within twelve months after any acquisition of Intevac.

 

2004 Equity Incentive Plan:  Under the 2004 Equity Incentive Plan, all unvested options vest in full upon an acquisition of Intevac by merger or asset sale, unless the option is assumed by the acquiring entity. Each option also includes a limited stock appreciation right which provides the holder with a right, exercisable upon the successful completion of a hostile tender offer for fifty percent or more of Intevac’s outstanding voting securities, to surrender the option to Intevac, to the extent the option is at that time exercisable for vested shares, in return for a cash distribution for each surrendered option share equal to the difference between the highest price per share of Common Stock paid in the hostile tender offer and the option exercise price.

 

The Board of Directors or its Compensation Committee, as administrator of the 2004 Equity Incentive Plan, has the authority to provide for the accelerated vesting of any or all outstanding options under the 2004 Equity Incentive Plan, including options held by our directors and executive officers, under such circumstances and at such times as the Compensation Committee deems appropriate, including in the event of termination of the executive or a Change of Control of Intevac.

 

The following table sets forth summary information concerning compensation paid or accrued for services rendered to the Company in all capacities to the members of the Company’s Board of Directors for the fiscal year ended December 31, 2009, other than Kevin Fairbairn, whose compensation is set forth under the Summary Compensation Table, and Norman Pond, whose compensation is discussed below.

 

 

 

 

Standard Director Compensation Arrangements

 

Intevac uses a combination of cash and equity compensation to attract and retain qualified candidates to serve on our Board of Directors. The Compensation Committee of the Board of Directors conducts an annual review of director compensation and, if appropriate, recommends any changes in the type or amount of compensation to the Board of Directors. In reviewing director compensation, the Compensation Committee takes into consideration the compensation paid to non-employee directors of comparable companies, including competitive non-employee director compensation data and analyses prepared by compensation consulting firms and the specific duties and committee responsibilities of particular directors. In addition, the Compensation Committee may make recommendations or approve changes in director compensation in connection with the Compensation Committee’s administration and oversight of our 2004 Equity Incentive Plan. Any change in director compensation is approved by the Board of Directors.

 

Cash Compensation

 

Non-employee directors receive annual cash fees for service on the Board of Directors and its various committees. During 2009, each of Intevac’s non-employee directors received a cash payment of $7,500 per quarter for serving as a director; and Intevac’s Lead Director received an additional cash payment of $1,875 per quarter for serving as the Lead Director. Effective April 1, 2010, the quarterly cash payment for serving as a director was increased to $11,250. In addition, the Audit Committee Chair began receiving an annual cash payment of $6,500 for serving as the Audit Committee Chair, and the Compensation and Nominating and Governance Committee Chairs began receiving annual cash payments of $5,000 for serving as chairs of those respective committees. The quarterly payment of $1,875 per quarter to the Lead Director remained the same. Directors do not receive cash compensation for attending meetings of the Board of Directors.

 

Equity Compensation

 

Our non-employee directors are eligible to receive grants of options to purchase shares of our Common Stock pursuant to our 2004 Equity Incentive Plan when and as determined by our Board of Directors. During fiscal 2009,

Mr. Dury, Mr. Hill, Mr. Lemos and Dr. Yang each received an option to purchase 12,000 shares under the 2004 Equity Incentive Plan.

 

Other Arrangements

 

Non-employee directors also have their travel, lodging and related expenses associated with attending Board or committee meetings and for participating in Board-related activities paid or reimbursed by Intevac.

 

Compensation Arrangement with Norman Pond

 

As an executive officer of Intevac, the Chairman of the Board, Mr. Pond received a salary of $118,444 for fiscal 2009. In addition, Mr. Pond received a matching contribution of $250 under our tax-qualified 401(k) Plan, which provides for broad-based employee participation. Mr. Pond received a stock option grant to purchase 12,000 shares of Common Stock made on May 14, 2009 at an exercise price of $6.73 per share with a grant date fair value of $44,239. Mr. Pond did not receive any additional fees for attending Board or committee meetings.

 

The following table summarizes the number of outstanding shares underlying options granted to employees and directors, as well as the number of securities remaining available for future issuance, under our equity compensation plans at December 31, 2009.

 

 

 

 

The following table sets forth certain information regarding the ownership of our Common Stock as of February 15, 2010, for each person or entity who is known by us to own beneficially more than 5% of the outstanding shares of our Common Stock, each of the Named Executive Officers in the 2009 Summary Compensation Table on page 33, each of our directors, and all directors and executive officers of Intevac as a group.

 

 

 

 

 

Review, Approval or Ratification of Related Person Transactions

 

In accordance with our Code of Business Conduct and Ethics and our Director Code of Ethics and the charter for the Audit Committee of the Board of Directors, our Audit Committee reviews and approves in advance in writing any proposed related person transactions. The most significant related person transactions, as determined by the Audit Committee, must be reviewed and approved in writing in advance by our Board of Directors. Any related person transaction will be disclosed in the applicable SEC filing as required by the rules of the SEC. For purposes of these procedures, “related person” and “transaction” have the meanings contained in Item 404 of Regulation S-K.

 

Related Person Transactions

 

We did not enter into any transactions, and no relationships existed during the fiscal year ending December 31, 2009, which are required to be disclosed pursuant to Item 404 of Regulation S-K.

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership on Form 3, and reports of changes in ownership on Form 4 or Form 5, of our Common Stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish Intevac with copies of all Section 16(a) forms they file.

 

Based solely upon review of the copies of such reports furnished to us and written representations that no other reports were required, we believe that during the fiscal year ended December 31, 2009, our officers, directors and holders of more than ten percent of our Common Stock complied with all Section 16(a) filing requirements.

 

The primary role of the Audit Committee is to provide oversight and monitoring of Intevac’s management and the independent registered public accounting firm and their activities with respect to Intevac’s financial reporting process. In the performance of its oversight function, the Audit Committee has:

 

 

Based upon the review and discussions described in this report, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Intevac’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

Respectfully submitted by the members of the Audit Committee of the Board of Directors

 

David S. Dury (Chairman)
Stanley J. Hill
Robert Lemos

 

The Board of Directors knows of no other business that will be presented for consideration at the Annual Meeting. If other matters are properly brought before the Annual Meeting, however, it is the intention of the persons named in the accompanying proxy to vote the shares represented thereby on such matters in accordance with their best judgment.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

JEFFREY ANDRESON

Executive Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Secretary

 

April 7, 2010

APPENDIX A

INTEVAC, INC.

2004 EQUITY INCENTIVE PLAN

AS AMENDED, FEBRUARY 2010

     1. Purposes of the Plan. The purposes of this Plan are:

	•		to attract and retain the best available personnel for positions of substantial responsibility,
	•		to provide additional incentive to Employees, Directors and Consultants, and
	•		to promote the success of the Company’s business.

          The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Performance Units and Performance Shares.

     2. Definitions. As used herein, the following definitions will apply:

          (a) “Administrator” means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.

          (b) “Affiliated SAR” means a SAR that is granted in connection with a related Option, and which automatically will be deemed to be exercised at the same time that the related Option is exercised.

          (c) “Applicable Laws” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.

          (d) “Award” means, individually or collectively, a grant under the Plan of Options, SARs, Restricted Stock, Performance Units or Performance Shares.

          (e) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.

          (f) “Awarded Stock” means the Common Stock subject to an Award.

          (g) “Board” means the Board of Directors of the Company.

          (h) “Change in Control” means the occurrence of any of the following events:

APPENDIX A

               (i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or

               (ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets;

               (iii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or

               (iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.

          (i) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to any successor or amended section of the Code.

          (j) “Committee” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

          (k) “Common Stock” means the common stock of the Company, or in the case of Performance Units, the cash equivalent thereof.

          (l) “Company” means Intevac, Inc., a California corporation, or any successor thereto.

          (m) “Consultant” means any natural person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

          (n) “Cost of Sales as a Percentage of Sales” means as to any Performance Period, the Company’s cost of sales stated as a percentage of sales, determined in accordance with generally accepted accounting principles.

          (o) “Director” means a member of the Board.

          (p) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

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          (q) “Earnings Per Share” means as to any Performance Period, the Company’s Profit After Tax, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding, determined in accordance with generally accepted accounting principles.

          (r) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.

          (s) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (t) “Exchange Program” means a program under which (i) outstanding Awards are surrendered or cancelled in exchange for Awards of the same type (which may have lower exercise prices and different terms), Awards of a different type, and/or cash, and/or (ii) the exercise price of an outstanding Award is reduced. The terms and conditions of any Exchange Program will be determined by the Administrator in its sole discretion.

          (u) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

               (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

               (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock will be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

               (iii) In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.

          (v) “Fiscal Year” means the fiscal year of the Company.

          (w) “Free Cash Flow” means as to any Performance Period, the Company’s earnings before interest, taxes, depreciation and amortization (EBITDA), determined in accordance with generally accepted accounting principles.

          (x) “Freestanding SAR” means a SAR that is granted independently of any Option.

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          (y) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

          (z) “Inside Director” means a Director who is an Employee.

          (aa) “Marketing and Sales Expenses as a Percentage of Sales” means as to any Performance Period, the Company’s marketing and sales expenses stated as a percentage of sales, determined in accordance with generally accepted accounting principles.

          (bb) “Net Income as a Percentage of Sales” means as to any Performance Period, the Company’s net income stated as a percentage of sales, determined in accordance with generally accepted accounting principles.

          (cc) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.

          (dd) “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.

          (ee) “Operating Margin” means as to any Performance Period, the Company’s net operating income divided by Revenues, determined in accordance with generally accepted accounting principles.

          (ff) “Option” means a stock option granted pursuant to the Plan.

          (gg) “Outside Director” means a Director who is not an Employee.

          (hh) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

          (ii) “Participant” means a Service Provider who holds an outstanding Award granted under the Plan.

          (jj) “Performance Goals” means the goal(s) (or combined goal(s)) determined by the Committee (in its discretion) to be applicable to a Participant with respect to an Award. As determined by the Committee, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (a) Cost of Sales as a Percentage of Sales, (b) Earnings Per Share, (c) Free Cash Flow, (d) Marketing and Sales Expenses as a Percentage of Sales, (e) Net Income as a Percentage of Sales, (f) Operating Margin, (g) Revenue, (h) Total Shareholder Return and (i) Working Capital. The Performance Goals may differ from Participant to Participant and from Award to Award. Any criteria used may be measured, as applicable, (i) in absolute terms, (ii) in relative terms (including, but not limited to, passage of time and/or against another company or companies), (iii) on a per-share basis, (iv) against the performance of the Company as a whole or a segment of the Company and/or (v) on a pre-tax or after-tax basis. Prior to the latest possible date that will not jeopardize an Award’s qualification as “performance-based compensation” under Section 162(m) of the Code, the Committee shall

APPENDIX A

determine whether any element(s) or item(s) shall be included in or excluded from the calculation of any Performance Goal with respect to any Participants.

          (kk) “Performance Period” means the time period of any Fiscal Year or such longer period as determined by the Committee in its sole discretion during which the performance objectives must be met.

          (ll) “Performance Share” means an Award granted to a Participant pursuant to Section 10.

          (mm) “Performance Unit” means an Award granted to a Participant pursuant to Section 10.

          (nn) “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator.

          (oo) “Plan” means this 2004 Equity Incentive Plan.

          (pp) “Profit After Tax” means as to any Performance Period, the Company’s income after taxes, determined in accordance with generally accepted accounting principles.

          (qq) “Restricted Stock” means shares of Common Stock issued pursuant to a Restricted Stock award under Section 8 of the Plan or issued pursuant to the early exercise of an Option.

          (rr) “Revenue” means as to any Performance Period, the Company’s net revenues generated from third parties, determined in accordance with generally accepted accounting principles.

          (ss) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

          (tt) “Section 16(b)” means Section 16(b) of the Exchange Act.

          (uu) “Service Provider” means an Employee, Director or Consultant.

          (vv) “Share” means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan.

          (ww) “Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with an Option, that pursuant to Section 9 is designated as a SAR.

          (xx) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

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          (yy) “Tandem SAR” means a SAR that is granted in connection with a related Option, the exercise of which will require forfeiture of the right to purchase an equal number of Shares under the related Option (and when a Share is purchased under the Option, the SAR will be canceled to the same extent).

          (zz) “Total Shareholder Return” means as to any Performance Period, the total return (change in share price plus reinvestment of any dividends) of a Share.

          (aaa) “Unvested Awards” shall mean Options or Restricted Stock that (i) were granted to an individual in connection with such individual’s position as an Employee and (ii) are still subject to vesting or lapsing of Company repurchase rights or similar restrictions.

          (bbb) “Working Capital” means the Company’s current assets minus current liabilities, determined in accordance with generally accepted accounting principles.

     3. Stock Subject to the Plan.

          (a) Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 3,900,000 Shares plus (a) the number of shares which have been reserved but not issued under the Company’s 1995 Stock Option/Stock Issuance Plan (the “1995 Plan”) as of the effective date of the Plan, and (b) any Shares returned to the 1995 Plan as a result of termination of options or repurchase of Shares issued under such plan, with the maximum number of Shares to be added to the Plan pursuant to clauses (a) and (b) equal to 1,500,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. Shares shall not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is settled in cash. Upon payment in Shares pursuant to the exercise of an SAR, the number of Shares available for issuance under the Plan shall be reduced only by the number of Shares actually issued in such payment. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of Shares owned by the Participant, the number of Shares available for issuance under the Plan shall be reduced by the gross number of Shares for which the Option is exercised. Notwithstanding anything to the contrary herein, the total number of Shares subject to Awards other than Options or SARs that were granted at per Share exercise prices equal to 100% of Fair Market Value per Share on the grant date may not exceed 20% of the Shares reserved for issuance under the Plan.

          (b) Lapsed Awards. If an Award expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Exchange Program, or, with respect to Options, Restricted Stock, Performance Shares or Performance Units, is forfeited back to or repurchased by the Company, the unpurchased Shares (or for Awards other than Options and SARs, the forfeited or repurchased Shares) which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to SARs, only Shares actually issued pursuant to an SAR shall cease to be available under the Plan; all remaining Shares under SARs shall remain available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan under any Award shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if unvested Shares of Restricted Stock, Performance Shares or Performance Units are repurchased by the Company or are forfeited to the Company, such Shares shall become available

APPENDIX A

for future grant under the Plan. To the extent an Award under the Plan is paid out in cash rather than stock, such cash payment shall not result in reducing the number of Shares available for issuance under the Plan.

     4. Administration of the Plan.

          (a) Procedure.

               (i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.

               (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan will be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.

               (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.

               (iv) Other Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, which committee will be constituted to satisfy Applicable Laws.

          (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:

               (i) to determine the Fair Market Value;

               (ii) to select the Service Providers to whom Awards may be granted hereunder;

               (iii) to determine the number of Shares to be covered by each Award granted hereunder;

               (iv) to approve forms of agreement for use under the Plan;

               (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;

               (vi) to institute an Exchange Program;

APPENDIX A

               (vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;

               (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws and/or qualifying for preferred tax treatment under applicable foreign laws;

               (ix) to modify or amend each Award (subject to Section 17(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Awards longer than is otherwise provided for in the Plan;

               (x) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares or cash to be issued upon exercise or vesting of an Award that number of Shares or cash having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of any Shares to be withheld will be determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares or cash withheld for this purpose will be made in such form and under such conditions as the Administrator may deem necessary or advisable;

               (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

               (xii) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award;

               (xiii) to make all other determinations deemed necessary or advisable for administering the Plan.

          (c) Exchange Program. Notwithstanding anything in this Plan to the contrary, the Administrator shall not have the authority to institute an Exchange Program without the consent of the shareholders.

          (d) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards.

     5. Eligibility. Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Performance Units and Performance Shares may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

     6. Limitations.

          (a) Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options will be taken

APPENDIX A

into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted.

          (b) The following limitations will apply to grants of Options and Stock Appreciation Rights with an exercise price equal to or exceeding 100% of Fair Market Value on the grant date:

               (i) No Service Provider will be granted, in any Fiscal Year, Options or SARs to purchase more than 200,000 Shares.

               (ii) In connection with his or her initial service, a Service Provider may be granted Options or SARs to purchase up to an additional 300,000 Shares, which will not count against the limit set forth in Section 6(b)(i) above.

               (iii) The foregoing limitations will be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 13.

               (iv) If an Option or SAR is cancelled in the same Fiscal Year in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option or SAR will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option.

     7. Stock Options.

          (a) Term of Option. The term of each Option will be stated in the Award Agreement. In the case of an Incentive Stock Option, the term will be ten (10) years from the date of grant or such shorter term as may be provided in the Award Agreement. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.

          (b) Option Exercise Price and Consideration.

               (i) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by the Administrator, subject to the following:

                    (1) In the case of an Incentive Stock Option

                         a) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than 110% of the Fair Market Value per Share on the date of grant.

APPENDIX A

                         b) granted to any Employee other than an Employee described in paragraph (a) immediately above, the per Share exercise price will be no less than 100% of the Fair Market Value per Share on the date of grant.

                    (2) In the case of a Nonstatutory Stock Option, the per Share exercise price will be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, the per Share exercise price will be no less than 100% of the Fair Market Value per Share on the date of grant.

                    (3) Notwithstanding the foregoing, Incentive Stock Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction.

               (ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised.

               (iii) Form of Consideration. The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (1) cash; (2) check; (3) promissory note; (4) other Shares, provided Shares acquired directly or indirectly from the Company, (A) have been owned by the Participant and not subject to substantial risk of forfeiture for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option will be exercised; (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (6) a reduction in the amount of any Company liability to the Participant, including any liability attributable to the Participant’s participation in any Company-sponsored deferred compensation program or arrangement; (7) any combination of the foregoing methods of payment; or (8) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

          (c) Exercise of Option.

               (i) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.

                    An Option will be deemed exercised when the Company receives: (x) written or electronic notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise the Option, and (y) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as

APPENDIX A

evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Awarded Stock, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan.

                     Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

          (d) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

          (e) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

          (f) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant’s death within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to Participant’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following Participant’s death. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the

APPENDIX A

Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

          (g) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Participant at the time that such offer is made.

     8. Restricted Stock.

          (a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine provided that during any Fiscal Year, no Service Provider shall receive more than 125,000 Shares of Restricted Stock except that such Service Provider may receive up to an additional 175,000 Shares of Restricted Stock in the fiscal year of the Company in which his or her service as a Service Provider first commences.

          (b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines otherwise, Shares of Restricted Stock will be held by the Company as escrow agent until the restrictions on such Shares have lapsed.

          (c) Transferability. Except as provided in this Section 8, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.

          (d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.

               (i) General Restrictions. The Administrator may set restrictions based upon the achievement of specific performance objectives (Company-wide, departmental, or individual), applicable federal or state securities laws, or any other basis determined by the Committee in its discretion.

               (ii) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” under Section 162(m) of the Code, the Committee, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the Restricted Stock to qualify as “performance-based compensation” under Section 162(m) of the Code. In granting Restricted Stock which is intended to qualify under Section 162(m) of the Code, the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under Section 162(m) of the Code (e.g., in determining the Performance Goals).

          (e) Removal of Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction. The

APPENDIX A

Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.

          (f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.

          (g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.

          (h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the Plan.

     9. Stock Appreciation Rights.

          (a) Grant of SARs. Subject to the terms and conditions of the Plan, a SAR may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion. The Administrator may grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination thereof.

          (b) Number of Shares. The Administrator will have complete discretion to determine the number of SARs granted to any Service Provider, subject to the limits set forth in Section 6.

          (c) Exercise Price and Other Terms. The Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of SARs granted under the Plan; provided, however, that no SAR may have a term of more than ten (10) years from the date of grant. However, the exercise price of Tandem or Affiliated SARs will equal the exercise price of the related Option.

          (d) Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. With respect to a Tandem SAR granted in connection with an Incentive Stock Option: (a) the Tandem SAR will expire no later than the expiration of the underlying Incentive Stock Option; (b) the value of the payout with respect to the Tandem SAR will be for no more than one hundred percent (100%) of the difference between the exercise price of the underlying Incentive Stock Option and the Fair Market Value of the Shares subject to the underlying Incentive Stock Option at the time the Tandem SAR is exercised; and (c) the Tandem SAR will be exercisable only when the Fair Market Value of the Shares subject to the Incentive Stock Option exceeds the Exercise Price of the Incentive Stock Option.

APPENDIX A

          (e) Exercise of Affiliated SARs. An Affiliated SAR will be deemed to be exercised upon the exercise of the related Option. The deemed exercise of an Affiliated SAR will not necessitate a reduction in the number of Shares subject to the related Option.