PROGRESS SOFTWARE CORPORATION

14 Oak Park

Bedford, Massachusetts 01730

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Progress Software Corporation will be held on April 24, 2008, commencing at 10:00 a.m., local time, at our principal executive offices located at 14 Oak Park, Bedford, Massachusetts 01730, for the following purposes:

 

 

Our Board of Directors has fixed the close of business on February 27, 2008 as the record date for determination of the shareholders entitled to receive notice of and to vote at the annual meeting and any adjournment or postponement of that meeting.

 

By Order of the Board of Directors,

 

James D. Freedman

Secretary

 

March 24, 2008

 

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

 

PROGRESS SOFTWARE CORPORATION
14 Oak Park

Bedford, Massachusetts 01730

 

PROXY STATEMENT

 

This proxy statement is being furnished in connection with the solicitation by the Board of Directors of Progress Software Corporation of proxies for use at the 2008 Annual Meeting of Shareholders to be held on April 24, 2008, at 10:00 a.m., local time, at our principal executive offices located at 14 Oak Park, Bedford, Massachusetts 01730. We anticipate that this proxy statement and the accompanying form of proxy will first be mailed to shareholders on or about March 24, 2008.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual

Meeting of Shareholders to Be Held on April 24, 2008:

This proxy statement and our 2007 Annual Report to Shareholders are available at:

http://www.amstock.com/ProxyServices/ViewMaterials.asp

 

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

 

 

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

 

VOTING PROCEDURES

 

Only holders of record of our common stock, par value $.01 per share, outstanding at the close of business on February 27, 2008 are entitled to vote at the annual meeting and any adjournment or postponement of that meeting. As of that date, there were 41,428,011 shares outstanding and entitled to vote. Each outstanding share entitles the holder to one vote on any proposal presented at the annual meeting. A list of the shareholders entitled to notice of the annual meeting is available for inspection by any shareholder at our principal executive offices at the address above.

 

Any shareholder who has given a proxy may revoke it at any time prior to its exercise at the annual meeting by giving written notice of such revocation to our Secretary, by signing and duly delivering a proxy bearing a later date, or by attending and voting in person at the annual meeting. Duly executed proxies received and not revoked prior to the annual meeting will be voted in accordance with the instructions indicated in the proxy. If no instructions are indicated, such proxies will be voted FOR each of the proposals set forth above, and in the discretion of the individuals named in the proxy as to other matters that may properly come before the annual meeting or any adjournment or postponement of that meeting.

 

A quorum at the annual meeting will consist of a majority in interest of the shares of our common stock outstanding on the record date for the meeting. Votes withheld from any nominee for election as director, abstentions and broker “non-votes” will be counted as present or represented at the annual meeting for purposes of determining the presence or absence of a quorum for the meeting. A broker “non-vote” occurs when a broker or

other nominee who holds shares for a beneficial owner withholds its vote on a particular proposal with respect to which it does not have discretionary voting power or instructions from the beneficial owner. Abstentions and broker “non-votes” with respect to a proposal are not included in calculating the number of votes cast on the proposal and, therefore, do not have the effect of voting against the proposal. An automated system administered by our transfer agent tabulates the votes.

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of this proxy statement and our 2007 Annual Report to Shareholders may have been sent to multiple shareholders in a single household. We will promptly deliver a separate copy of either document to shareholders who so request by calling or writing to us at the following address: Progress Software Corporation, 14 Oak Park, Bedford, Massachusetts 01730, phone: 781-280-4000, Attn: Investor Relations, or by submitting an email request to finance-info@progress.com.

 

Shareholders who would like to receive separate copies of our annual report and proxy statement in the future, or who would like to receive only one copy per household, should contact his or her bank, broker or other nominee record holder, or contact us at the above address, phone number or email.

 

PROPOSALS 1 AND 2: ELECTION OF DIRECTOR NOMINEES

 

Our by-laws provide for a Board of Directors, the number of which shall be fixed from time to time by our shareholders and may be enlarged or reduced by vote of a majority of the Board. Currently our Board of Directors is comprised of seven members. Upon the recommendation of the Nominating and Corporate Governance Committee, our Board of Directors has proposed that the number of directors be fixed at six, and has nominated for election as directors Joseph W. Alsop, Barry N. Bycoff, Roger J. Heinen, Jr., Charles F. Kane, David A. Krall and Michael L. Mark, each of whom is currently a director of our company. Scott A. McGregor, who has been a director of our company since 1998, will not stand for re-election to the Board at the annual meeting. Each director elected at the annual meeting will hold office until the next annual meeting of shareholders or special meeting in lieu of such annual meeting and until his successor has been duly elected and qualified, or until his earlier death, resignation or removal. There are no family relationships among any of our executive officers or directors.

 

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

 

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

 

Our Board of Directors recommends that you vote FOR the proposal fixing the number of directors at six and FOR the election of the following six individuals as directors: Joseph W. Alsop, Barry N. Bycoff, Roger J. Heinen, Jr., Charles F. Kane, David A. Krall and Michael L. Mark.

 

DIRECTORS

 

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

 

 

 

 

Mr. Alsop, our co-founder, has been a director and Chief Executive Officer since our inception in 1981.

 

Mr. Bycoff has been a director since March 2007. From 1996 to 2004, Mr. Bycoff was Chairman and CEO of Netegrity, Inc. Mr. Bycoff is a private investor.

 

Mr. Heinen has been a director since March 1999. From 1999 to 2008, Mr. Heinen was a Partner of Flagship Ventures, a venture capital company. Mr. Heinen formerly served as Senior Vice President, Developer Division, Microsoft Corporation. Mr. Heinen also is a director of Monotype Imaging Holdings Inc.

 

Mr. Kane has been a director since November 2006. Mr. Kane is currently Senior Advisor to One Laptop Per Child. From May 2006 to October 2006, Mr. Kane served as CFO of RSA Security Inc. and from July 2002 to May 2006, as CFO of Aspen Technology, Inc. Mr. Kane also is a director of Netezza Corporation and Borland Software Corporation.

 

Mr. Krall has been a director since February 2008. From 2000 to 2007, he served as President, CEO, and member of the Board of Directors of Avid Technology, Inc. Prior to that, Mr. Krall was Chief Operating Officer of Digidesign, the audio division of Avid. Mr. Krall is currently an advisor to high tech companies based in Silicon Valley and a private investor.

 

Mr. Mark was elected Chairman of the Board in December 2006, and has been a director since July 1987. Mr. Mark is a private investor.

 

THE BOARD OF DIRECTORS AND ITS COMMITTEES

 

Board of Directors

 

Our Board of Directors met eight times during the fiscal year ended November 30, 2007. Each of the directors attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings of all committees of the Board on which he served during fiscal year 2007. Our Board of Directors has standing Audit, Compensation, and Nominating and Corporate Governance Committees.

Audit Committee

 

The Audit Committee of our Board of Directors currently consists of Messrs. Bycoff, Kane and Mark, with Mr. Kane serving as Chairman. The Board has determined that each member of the Audit Committee meets the independence requirements promulgated by The NASDAQ Stock Market LLC, or NASDAQ, and the Securities and Exchange Commission, or SEC, including Rule 10A-3(b)(1) under the Securities Exchange Act of 1934. In addition, the Board has determined that each member of the Audit Committee is financially literate and that Mr. Kane qualifies as an “audit committee financial expert” under the rules of the SEC. The Audit Committee met five times during fiscal year 2007.

 

The Audit Committee operates under a written charter adopted by our Board of Directors, a copy of which can be found on our website at http://www.progress.com under the Corporate Governance page. As described more fully in its charter, the Audit Committee oversees our accounting and financial reporting processes, internal controls and audit functions. For fiscal year 2007, among other functions, the Audit Committee reviewed with our independent registered public accounting firm the scope of the audit for the year, the results of the audit when completed and the independent registered public accounting firm’s fees for services performed. The Audit Committee also appointed the independent registered public accounting firm and reviewed with management various matters related to our internal controls.

 

Compensation Committee

 

The Compensation Committee of our Board of Directors during fiscal year 2007 consisted of Messrs. Heinen and McGregor, with Mr. Heinen serving as Chairman. In March 2008, Mr. Krall was appointed to the Compensation Committee. The Board has determined that each member of the Compensation Committee meets the independence requirements promulgated by NASDAQ. The Compensation Committee met eight times during fiscal year 2007. The Compensation Committee operates under a written charter adopted by our Board of Directors, a copy of which can be found on our website at http://www.progress.com under the Corporate Governance page.

 

In accordance with its charter, the Compensation Committee:

 

 

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

 

The Compensation Committee has sole authority under its charter to retain, approve fees for, determine the scope of the assignment of, and terminate advisors and consultants as it deems necessary to assist in the fulfillment of its responsibilities. In fiscal year 2007, the Compensation Committee retained Radford Surveys + Consulting and Buck Consultants to assist it in evaluating the compensation of our officers and directors. Please read the

“Compensation Discussion and Analysis” included in this proxy statement for additional information on the role of Radford Surveys + Consulting and Buck Consultants in the executive compensation process.

 

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

 

In addition, the Compensation Committee reviews recommendations from management on the current fiscal year short-term incentive programs relative to anticipated corporate performance.

 

In April, the Compensation Committee reviews and approves changes to executive officers’ total target cash compensation, which includes base salary and target bonus. Changes, as discussed in the “Compensation Discussion and Analysis” in this proxy statement, were approved and implemented as of May 1, 2007.

 

In April, the Compensation Committee also reviews and makes recommendations to the full Board of Directors regarding any changes to Board compensation.

 

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

 

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

 

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

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee of our Board of Directors currently consists of Messrs. Bycoff and Heinen, with Mr. Heinen serving as Chairman. The Board has determined that each member of the Nominating and Corporate Governance Committee meets the independence requirements promulgated by NASDAQ. The Nominating and Corporate Governance Committee met two times during fiscal year 2007. The Nominating and Corporate Governance Committee operates under a written charter adopted by our Board of Directors, a copy of which can be found on our website at http://www.progress.com under the Corporate Governance page.

 

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

 

 

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

Director Compensation

 

The following table sets forth a summary of the compensation earned by or paid to our non-employee directors in fiscal year 2007.

 

DIRECTOR COMPENSATION TABLE — FISCAL YEAR 2007

 

 

 

 

 

See “Discussion of Director Compensation Table” below for further information regarding these stock option grants.

 

Each director had the following unexercised stock options outstanding at November 30, 2007: Mr. Bycoff, options to purchase 25,000 shares of our common stock; Mr. Heinen, options to purchase 35,500 shares of our common stock; Mr. Kane, options to purchase 25,000 shares of our common stock; Mr. Mark, options to purchase 116,931 shares of our common stock; and Mr. McGregor, options to purchase 81,547 shares of our common stock.

 

 

Discussion of Director Compensation Table

 

For fiscal year 2007, the non-employee directors of our company were paid an annual retainer of $275,000. In addition, the Chairman of the Board received $25,000 for serving in that capacity. With respect to service on the committees of the Board of Directors, the following fees were paid: Audit Committee — $25,000 for the Chairman and $20,000 for the other members; Compensation Committee — $15,000 for the Chairman and $12,500 for the other members; Nominating and Corporate Governance Committee — $10,000 for the Chairman and $7,500 for the other members; and special committees (while in use) — $30,000 for the Chairman and $25,000 for the other members. Mr. Alsop receives no compensation for serving as a director, except that he, like all directors, is eligible to be reimbursed for expenses incurred in attending board or committee meetings.

 

These fees were paid 25% in cash and 75% in equity, either in the form of fully vested deferred stock units or fully vested stock options at the election of each director. Each director, other than Mr. Mark, elected to receive the equity component of his compensation in the form of deferred stock units. The number of option shares was determined by dividing the compensation amount by the grant date Black Scholes value. The number of deferred stock units was determined by dividing the compensation amount by the grant date closing price of our common stock as reported by NASDAQ. The deferred stock units will be settled for an equivalent number of shares of our common stock (1) following the date upon which the director ceases to provide services to our company in that capacity or (2) upon a change of control of our company, except in the event that the company is involved in a transaction in which shares of our common stock will

be exchanged for cash or other consideration, in which case the director will receive cash or other consideration equal in value to the aggregate number of deferred stock units credited to the director as of the change of control.

 

The fiscal year 2007 compensation was paid to our non-employee directors in two installments, coincident with the April and October dates upon which we made our broad-based employee equity grants. Amounts paid were pro-rated for Mr. Bycoff, who was elected a director on March 7, 2007. Mr. Bycoff also received an option to acquire 25,000 shares of our common stock in connection with his appointment to our Board of Directors. Mr. Kane, who was appointed to the Board on November 9, 2006, received an option to purchase 10,000 shares of our common stock in fiscal year 2006 and an option to purchase an additional 15,000 shares of our common stock in fiscal year 2007, both in connection with such appointment.

 

During 2006, it was brought to our attention that our 1997 Stock Incentive Plan (the “1997 Plan”) contained language that prohibited directors who serve on our Compensation Committee from receiving any option grants under the 1997 Plan. It was our position that such language was the result of a scrivener’s error and should not have been included in the 1997 Plan. Nevertheless, to satisfy NASDAQ listing requirements, we obtained shareholder approval to amend the 1997 Plan to delete this language. We also cancelled all outstanding stock options granted to members of our Board of Directors while serving on the Compensation Committee. With respect to options that had already been exercised, the director agreed to return to us the shares acquired through option exercise, and we agreed to refund to the director the exercise price. In instances where the director already sold the shares, the director agreed to return to us the net profit from the sale of the shares, less any taxes paid.

 

Following shareholder approval of the amendment to the 1997 Plan, we committed to grant make-whole equity awards and cash payments to Mr. Heinen and Mr. McGregor, the two directors whose stock options were cancelled. As a result, Mr. Heinen received an option to purchase 35,500 shares of our common stock and a make-whole cash payment of $504,517, and Mr. McGregor received an option to purchase 81,547 shares of our common stock and a make-whole cash payment of $845,146.

 

During 2006, we undertook a review of our historical stock option practices, covering all option grants since the beginning of our 1996 fiscal year. The review was conducted under the direction of a Special Committee of independent members of our Board of Directors, with assistance from counsel, including special counsel with no prior relationship to us or our management. In connection with this review, each of our non-employee directors agreed to voluntarily amend any below-market option he received to increase the exercise price of that option. There was no incremental fair value associated with the grant of these amended stock options under SFAS No. 123R. To the extent that any below-market option had already been exercised, each of these directors also agreed to pay us an amount equal to the bargain element of the grant (i.e., the amount by which the fair market value exceeded the exercise price on the measurement date). The payment was reduced by the amount of any federal and state taxes on the bargain element already paid or incurred by the director in connection with such exercise. The payment could be made in the form of cash, surrender of stock or outstanding stock options with an equivalent intrinsic value. The following table provides, for each of these directors, the aggregate value relinquished as a result of the increased exercise prices, the aggregate amount of the bargain element attributable to prior option exercises that was paid to us and the sum of these two amounts.

 

 

Messrs. Bycoff, Kane and Krall are not included in the above table because they joined our Board of Directors subsequent to the commencement of this review and, thus, did not receive any below-market options.

In April 2007, we adopted stock retention guidelines for our non-employee directors. These guidelines provide for all non-employee directors to hold at least 10,000 shares of our common stock and/or deferred stock units. Directors have three years to attain this ownership threshold.

 

CORPORATE GOVERNANCE

 

Independence of Members of our Board of Directors

 

Our Board of Directors has determined that each of our non-employee directors (Messrs. Bycoff, Heinen, Kane, Krall, Mark, and McGregor) is independent within the meaning of the director independence standards of NASDAQ and the applicable rules of the SEC. In making this determination, our Board solicited information from each of the directors regarding whether such director, or any member of his immediate family, had a direct or indirect material interest in any transactions involving our company, was involved in a debt relationship with our company or received personal benefits outside the scope of the director’s normal compensation. Our Board considered the responses of the directors, and independently considered the commercial agreements, acquisitions and other material transactions entered into by us during fiscal year 2007, and determined that none of our non-employee directors had a material interest in those transactions.

 

Executive Sessions of Independent Directors

 

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

 

Policies Governing Director Nominations

 

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

 

 

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

 

The Nominating and Corporate Governance Committee may also consider other criteria that it deems appropriate from time to time for the overall composition and structure of our Board, and intends to seek a board of directors that, as a whole, reflects a diversity of background, experience, skills, ages, race and gender.

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

 

Generally, the Nominating and Corporate Governance Committee identifies candidates for director nominees in consultation with management and the other directors through the use of search firms or other advisors, through recommendations submitted by shareholders or through such other methods as the Nominating and Corporate Governance Committee deems to be helpful to identify candidates. In particular, the Nominating and Corporate Governance Committee identified Mr. Bycoff during fiscal year 2007 and Mr. Krall during fiscal year 2008 as potential director candidates through then current directors. Once a candidate has been identified, the Nominating and Corporate Governance Committee confirms that the candidate meets all of the minimum qualifications for a director nominee established by the Committee. The Nominating and Corporate Governance Committee then meets to discuss and evaluate the qualities and skills of each candidate, both on an individual basis and taking into account the overall composition and needs of the Board. The same procedures apply to all candidates for director nomination, including candidates submitted by shareholders. Based on the results of the evaluation process, the Nominating and Corporate Governance Committee recommends candidates for the Board’s approval as director nominees for election to our Board of Directors. The Nominating and Corporate Governance Committee also recommends candidates to the Board for appointment to its committees.

 

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

 

 

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

 

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

Policy Governing Shareholder Communications with our Board of Directors

 

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

 

Policy Governing Director Attendance at Annual Meetings of Shareholders

 

We do not require members of our Board of Directors to attend the annual meeting of shareholders. Other than Messrs. Alsop and Mark, no members of our Board attended the annual meeting of shareholders held in 2007.

 

Codes of Conduct

 

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

 

Stock Option Grant Policy

 

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

 

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

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview

 

Our philosophy is to reward executives based upon corporate and individual performance, as well as to provide long-term incentives for the achievement of future financial and strategic goals. We emphasize pay-for-performance compensation programs, which we believe advance both the short and long-term interests of our shareholders. We use a combination of total target cash compensation, composed of base salary and an annual cash incentive compensation program, a long-term equity incentive compensation program, and a broad-based benefits program to create a competitive compensation package for our executive management team. We describe below our compensation philosophy, policies and practices with respect to our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers, who are collectively referred to as our named executive officers.

 

Administration and Objectives of our Executive Compensation Program

 

Our Compensation Committee is responsible for establishing and administering our policies governing the compensation for our executive officers, including salaries, cash incentives and equity incentive compensation. During fiscal year 2007, our Compensation Committee consisted of two independent members of our Board of Directors, both with extensive experience in the industry.

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

 

 

We use a mix of short-term compensation (base salaries and cash incentive bonuses) and long-term compensation (equity incentive compensation) to provide a total compensation structure that is designed to achieve these objectives. The Compensation Committee uses its judgment and experience and the recommendations of the Chief Executive Officer (except for his own compensation) to determine the appropriate mix of compensation for each individual.

 

In determining whether to adjust the compensation of any one of our named executive officers, the Compensation Committee takes into account market compensation levels for each role, the contributions and performance of each named executive officer, and any changes in the responsibilities and roles of each named executive officer.

 

The Compensation Committee utilizes industry group data and analysis as provided by two external compensation consultants hired by the Compensation Committee, Radford Surveys + Consulting and Buck Consultants, to assist it in making decisions on total direct compensation for executives and peer and industry group data to assist it in making decisions on equity grants. Each firm provided the following studies: Executive Compensation Pay Review and Equity Burn Rate.

 

The survey data is comprised of compensation information from companies in the software industry with revenue ranging from $0.2 billion to $1.0 billion. There were 55 companies within this criteria. The peer group list is comprised of 15 other companies in the software industry with revenue and market capitalization comparable to us. This peer group list is reviewed on an annual basis to ensure the companies remain a valid comparison and to account for any corporate structure changes in the peer groups, such as an acquisition by another company. The companies in the peer group for fiscal year 2007 ranged in size on a revenue basis from approximately $0.1 billion to $1.5 billion with a median of $0.7 billion as compared to our revenue of $0.5 billion, and on a market capitalization basis from approximately $0.2 billion to $8.5 billion with a median of $1.7 billion as compared to our market capitalization of $1.1 billion.

 

The reports prepared by Radford Surveys + Consulting utilized the survey data from the Radford High Tech Executive Total Direct Compensation survey to benchmark the various elements of executive pay and utilized the peer group data for details of equity practices, in particular stock option burn rates. We participate in the Radford Surveys + Consulting Executive survey to benchmark other executives to the marketplace. The materials from Radford Surveys + Consulting include a comprehensive report providing details on the benchmark positions used for each executive as well as analysis on base salary, short term incentives, total actual cash compensation, total target cash compensation, total actual direct compensation and total target direct compensation. The materials prepared by Buck Consultants used data from the Buck Total Direct Compensation Survey — High Tech Companies to provide a comprehensive compensation report on the benchmark positions used for each executive plus analysis on base salary, short-term incentives, total actual cash compensation, total target cash compensation, total actual direct compensation and total target direct compensation.

Executive Compensation Components

 

Our executive compensation program is primarily composed of three elements: (1) base salary; (2) incentive compensation in the form of annual cash bonus awards; and (3) equity-based long-term incentive compensation in the form of stock options. Our Compensation Committee has not adopted a formal policy for allocating between these various forms of compensation; however, we generally strive to provide our named executive officers with a balance of short-term and long-term incentives. In addition, we provide our executives with benefits that are generally available to our employees, including medical, dental, group life and disability insurance and our 401(k) plan. We also have entered into an Employee Retention and Motivation Agreement with each of our named executive officers, which provides for payments and benefits upon a change of control of our company and/or certain involuntary terminations of employment thereafter.

 

Within the context of the overall objectives of our compensation programs, the Compensation Committee determined the specific amounts of compensation, including base salary, incentive cash compensation and equity compensation, to be paid to each of our executives for our fiscal year ended November 30, 2007 based on a number of factors, including:

 

 

Our philosophy in designing our executive compensation plan is to target base salary at or below the 50^th percentile, total cash compensation around the median level of actual cash compensation and equity awards between the 50^th and 75^th percentile as compared to the compensation studies prepared by the outside compensation firms. In fiscal year 2007, our named executive officers ranged from 75% to 129% of the 50^th percentile for total target cash compensation and ranged from 26% to 104% of the 75^th percentile for equity awards in comparison to the survey data. These total cash compensation levels are only achieved if we perform against our goals. The Compensation Committee uses between the 50^th and 75^th percentile for equity awards in order to reward executive officers for superior performance and align the interests of the executive officers with the interests of shareholders by having a significant portion of their compensation based on increases in shareholder value.

 

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

 

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

 

 

As part of our annual review process in April 2007, our Compensation Committee adjusted annual base salaries for our named executive officers, other than Mr. Alsop. In doing so, with respect to our named executive officers, other than Mr. Alsop, our Compensation Committee considered the recommendations of Mr. Alsop in determining appropriate base salary levels. The Compensation Committee decided to increase the base salary of

each of Messrs. Ireland, Reidy and Robertson by between 1% and 8%. Mr. Stamen’s base salary increased 32% due in part to a change in status from part-time employment. The Board, based on the recommendation of the Compensation Committee, did not change Mr. Alsop’s base salary. These base salary increases were made by the Compensation Committee based upon a review of individual, business unit and/or departmental contribution and performance by each named executive officer, and were made in connection with an overall review of the named executive officer’s total target cash compensation for the fiscal year, including both his annual base salary and target cash bonus amount. Based on their salaries as of the beginning of the fiscal year and these changes, the named executive officers were paid the salary amounts for the fiscal year ended November 30, 2007 as set forth below in the Summary Compensation Table.

 

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

 

Executive officers may receive a bonus payment under the bonus plan based upon the attainment of performance targets which are established by the Compensation Committee. These performance goals are based on our growth strategy as reflected in our annual operating budget. The Board discussed and reviewed operating plans with management during board presentations in September and December. The Compensation Committee reviewed and discussed performance goals and incentive bonus plan designs with management during committee meetings in December and January. In April 2007, our Compensation Committee formally approved corporate goals under the bonus plan for our named executive officers based on total revenue and non-GAAP operating income for our fiscal year ended November 30, 2007.

 

Forty percent of a named executive officer’s bonus was contingent upon the attainment of the performance goal related to our total revenue and the remaining 60% was contingent upon the attainment of the performance goal related to our non-GAAP operating income. A higher percentage of the annual cash incentive program was allocated to non-GAAP operating income than to total revenue as there was a desire to align more of the incentive compensation towards increased profitability. The Compensation Committee communicated the bonus criteria to the named executive officers after such criteria were established. The Compensation Committee may in its discretion adjust bonuses payable under the bonus plan based on the achievement of individual performance goals, although no such adjustments occurred in fiscal year 2007.

 

The Compensation Committee established a minimum level of total revenue and a minimum level of non-GAAP operating income for fiscal year 2007, which minimum level must be achieved for an executive officer to receive any portion of his target bonus amount allocated to that performance goal. Once the minimum threshold has been achieved, the attainment percentage for each performance goal for an executive officer’s bonus is a linear calculation of:

 

  actual amount — threshold amount  

target amount — threshold amount

 

For our fiscal year ended November 30, 2007, the total revenue target was $479 million and the minimum threshold amount was $399 million. Our total revenue for fiscal year 2007 for bonus purposes was $488 million, resulting in the payment of 112% of the portion of each named executive officer’s bonus allocated to that performance goal. The difference between the total revenue for bonus purposes of $488 million and total revenue in our financial statements of $494 million related to adjustments for translation differences between actual and budgeted foreign exchange rates and differences between open software license orders at the beginning and end of the fiscal year.

For our fiscal year ended November 30, 2007, the non-GAAP operating income target was $108 million and the minimum threshold amount was $64 million. Our non-GAAP operating income for fiscal year 2007 for bonus purposes was $107 million, resulting in the payment of 98% of the portion of each named executive officer’s bonus allocated to that performance goal. The difference between the non-GAAP operating income for bonus purposes of $107 million and non-GAAP operating income in our earnings announcements of $109 million related to adjustments for translation differences between actual and budgeted foreign exchange rates and differences between open software license orders at the beginning and end of the fiscal year.

 

Non-GAAP operating income differs from GAAP operating income by excluding amortization of acquired intangibles, stock-based compensation, impairment of goodwill, and professional services fees associated with the investigation and shareholder derivative lawsuits related to the company’s historical stock option grant practices. We use non-GAAP operating income to make operational and investment decisions because we believe the costs and expenses that we exclude from GAAP operating income are not tied to our core operating results. For these reasons, we also use non-GAAP operating income as a performance goal.

 

As part of the annual review process in April, the Compensation Committee reviewed and approved changes to target incentive bonuses for each named executive officer, other than Mr. Alsop. In doing so, our Compensation Committee considered the recommendations of Mr. Alsop with respect to each of the other named executive officers. These target incentive bonus amounts were $210,000 for Mr. Robertson, $240,000 for Mr. Ireland, $200,000 for Mr. Reidy, and $161,500 for Mr. Stamen. The Compensation Committee decided to increase the target incentive bonus of each of Messrs. Ireland, Reidy and Robertson by between 2% and 12%. Mr. Stamen’s target incentive bonus increased 35% due in part to a change in status from part-time employment. The Board, based on the recommendation of the Compensation Committee, did not change Mr. Alsop’s target incentive bonus amount of $325,000. These target incentive bonus amounts represented over 40% of the named executive officers’ total target cash compensation. Thus, these targets represented a significant percentage of our named executive officers’ total target cash compensation and varied depending on the position of the named executive officer, with our Chief Executive Officer having the greatest percentage of his compensation tied to the company’s targets since he has the most influence over the success of our company. Based on the achievement of the performance goals described above, the named executive officers were paid the bonus amounts set forth below in the Summary Compensation Table.

 

Equity Compensation.  We also use stock options to attract, retain, motivate and reward our named executive officers. Stock option grants are intended to correlate executive compensation with our long-term success as measured by our stock price. Stock options are tied to our future success because options granted have an exercise price equal to the closing market value at the date of grant and will only provide value to the extent that the price of our stock increases above the exercise price. The Compensation Committee’s decisions regarding the amount and type of equity incentive compensation, the allocation of equity and relative weighting of these awards within total executive compensation have been based on the Compensation Committee’s understanding and individual experiences of market practices of similarly-situated companies. Equity-based incentive awards are intended to be the longer-term components of our overall executive compensation program. While annual incentive cash compensation is designed to encourage shorter-term performance (generally performance over a one-year period), equity-based awards are designed to encourage performance by our executive officers over several years.

 

The Compensation Committee utilizes the grant data from the peer group and the survey data provided by the compensation consultants to assist them in determining the size of the overall option pool for our company, as well as the individual grants to the named executive officers. In fiscal year 2007, our equity compensation program for executive officers consisted exclusively of stock options. Our executive officers realize value on these options only if our stock price increases (which benefits all shareholders) and only if the executive officers remain employed with us beyond the date their options vest.

The Compensation Committee believes that option grants to executive officers provide the following benefits:

 

 

Stock option awards provide our named executive officers with the right to purchase shares of our common stock at a fixed exercise price, typically for a period of either ten years, if awarded prior to 2005, or seven years, if awarded since 2005, subject to continued employment with our company. Stock options are earned on the basis of continued service to us and generally vest in monthly increments over a five-year period versus a software industry norm of four years.

 

During 2006, we undertook a review of our historical stock option practices and related accounting in connection with an inquiry made by the SEC into our option-granting practices. Following this review, in February 2007, our Board of Directors adopted a Stock Option Grant Policy providing for stock options and other equity awards to be made on fixed grant dates during the year. Consistent with this Stock Option Grant Policy, our current practice is to make annual grants of stock options to our employees, including our named executive officers, in two equal installments during the fiscal year. As a result, on each of April 26, 2007 and October 15, 2007, the Compensation Committee granted a stock option to each of our named executive officers set forth below in the Grants of Plan-Based Awards Table based on the factors listed above.

 

Severance and Change in Control Benefits

 

We have entered into an Employee Retention and Motivation Agreement with each of the named executive officers. Each agreement provides for certain payments and benefits upon a change of control of our company and/or certain involuntary terminations of employment thereafter. Our Board of Directors determined that it is in the best interests of our company and its shareholders to assure that we will have the continued dedication and objectivity of our key employees, despite the possibility, threat or occurrence of a change of control of the company.

 

In fiscal year 2007, our Board of Directors approved certain amendments to these agreements after considering the existing terms and conditions in the agreements and trends in current practice with similar companies. These amended agreements were offered to the employees with existing Employee Retention and Motivation Agreements, including the named executive officers.

 

Under the amended agreement, upon a change of control, each executive officer’s annual cash bonus award will be fixed and guaranteed at his respective target level. Payment of this bonus will immediately occur on a pro-rata basis with respect to the elapsed part of the relevant fiscal year. In addition, upon a change of control, all outstanding unvested options and restricted equity of the executive officer will fully accelerate, unless the acquirer assumes all such options and restricted equity. Upon involuntary termination of the executive officer within 12 months following a change of control, all remaining outstanding options and restricted equity of the executive officer will automatically become vested, the executive officer will be entitled to receive a lump sum payment equal to 15 months of total target compensation, and his benefits will continue for 15 months.

 

401(k) Plan

 

We currently provide a matching contribution under our 401(k) plan. All employees who participated in our 401(k) plan received a discretionary matching contribution for fiscal year 2007, representing up to 6% of such employee’s calendar year compensation, including base salary, commissions and bonus, depending upon the employee’s length of service with the company and the employee’s contribution level. This matching contribution

was approved by the Compensation Committee. The named executive officers also received this matching contribution, except that, due to limitations imposed on 401(k) matching to higher-paid individuals under Federal tax law, a portion of the contributions that otherwise would have been received by the named executive officers were instead paid directly to them in cash in a manner consistent with other employees subject to the matching limitations.

 

Other Benefits

 

We believe that establishing competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. The named executive officers are eligible to participate in all of our health and insurance plans, in each case on the same basis as other employees. In addition, our stock purchase plan is available to all employees other than employees, if any, who hold 5% or more of our common stock. Mr. Alsop is not allowed to participate in the stock purchase plan because he holds in excess 5% of our common stock as defined under the plan.

 

Tax and Accounting Implications

 

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

 

Accounting for Stock-Based Compensation.  As of December 1, 2005, we began accounting for stock-based awards in accordance with the requirements of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (SFAS 123R).

 

COMPENSATION COMMITTEE REPORT

 

This report is submitted by the Compensation Committee of the Board of Directors. The Compensation Committee has reviewed the Compensation Discussion and Analysis included in this proxy statement and discussed it with management. Based on 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.

 

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

 

Respectfully submitted by the Compensation Committee,

 

Roger J. Heinen, Jr., Chairman

Scott A. McGregor

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

The members of the Compensation Committee of our Board of Directors during fiscal year 2007 were Messrs. Heinen and McGregor. Neither of these directors is or has ever been an officer or employee of our company or of any of its subsidiaries, or had any relationship with us requiring disclosure in this proxy statement. There are no compensation committee interlocks amongst any of our directors.

 

EXECUTIVE COMPENSATION

 

Summary of Executive Compensation

 

The following table sets forth certain information with respect to compensation for the fiscal year ended November 30, 2007 earned by our Chief Executive Officer, our Chief Financial Officer, and our three other most highly compensated executive officers, referred to collectively as our named executive officers, as determined in accordance with applicable SEC rules.

 

Summary Compensation Table — Fiscal Year 2007

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The following table sets forth certain information with respect to grants of plan-based awards for the fiscal year ended November 30, 2007 to the named executive officers. Option grants to each named executive officer were made pursuant to our 1997 Plan.

 

GRANTS OF PLAN-BASED AWARDS TABLE — FISCAL YEAR 2007

 

 

 

 

Discussion of Summary Compensation and Grants of Plan-Based Awards Tables

 

Our executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table and the Grants of Plan-Based Awards Table was paid or awarded, are described above under “Administration and Objectives of our Executive Compensation Program” and “Executive Compensation Components” within the “Compensation Discussion and Analysis.” A description of the application of those policies and practices to each of the named executive officers for the fiscal year ended November 30, 2007 is included above under the heading “Executive Compensation Components” within the “Compensation Discussion and Analysis.”

 

The terms of the stock options granted in calendar year 2007 to our named executive officers were consistent with the vesting schedules and expiration dates of the majority of the options granted to employees during the year, except that the stock options listed in the Grants of Plan-Based Awards Table also include options to purchase 60,000 shares related to Mr. Alsop’s annual option award for fiscal year 2005. The stock option grant to Mr. Alsop for fiscal 2005 was deferred due to an insufficient number of shares being available for grant under our 1997 Stock Incentive Plan. Following the approval by our shareholders of an increase in the number of shares authorized for issuance under the 1997 Plan, our Compensation Committee subsequently made a grant to Mr. Alsop related to one-half of his award for fiscal year 2005, with the remaining portion of the grant (consisting of options to purchase an additional 60,000 shares) to be made in fiscal year 2007. The grants related to fiscal year 2005 will vest as if they had been granted as originally scheduled in 2005. Stock options to acquire a total of 1,495,000 shares of our common stock were granted to our employees in fiscal year 2007.

 

In connection with our review of our historical stock option practices in 2006, a Special Committee of our Board of Directors concluded that there was no evidence to indicate that the practices that caused errors related to stock option grant measurement dates and stock-based compensation resulted from willful misconduct, but the Special Committee also concluded that it would be inappropriate for certain employees who participated in, or knew or should have known of, such practices, to retain the benefit arising from the below-market nature of the option grants. These employees included Mr. Alsop and Mr. Robertson, each of whom agreed that all outstanding options to purchase our common stock issued to him during such periods would be amended to increase the exercise prices to an amount equal to the fair market value of our common stock on the measurement dates of such options for accounting purposes. To the extent that any below-market option had already been exercised, each of these

named executive officers also agreed to pay us an amount equal to the bargain element of the grant (i.e., the amount by which the fair market value exceeded the exercise price on the measurement date). The payment was reduced by the amount of any federal and state taxes on the bargain element already paid or incurred by the named executive officer in connection with such exercise. The payment could be made in the form of cash, surrender of stock or outstanding stock options with an equivalent intrinsic value.

 

The following table provides, for each of these named executive officers, the aggregate value relinquished as a result of the increased exercise prices, the aggregate amount of the bargain element attributable to prior option exercises that was paid to us and the sum of these two amounts.

 

 

In addition, to the extent that any options with exercise prices below the fair market value of our common stock on the actual date of grant were to vest subsequent to December 2004, holders of the options could have been deemed to have received nonqualified deferred compensation for purposes of Section 409A of the Internal Revenue Code, and could have been subject to an excise tax on the value of the options in the year in which they vest. We agreed with each of Messrs. Ireland, Reidy and Stamen to amend his affected options to increase the exercise price to the fair market value of our common stock on the revised grant date, and to make a cash payment to him to compensate for the increase in the exercise price, payable in up to five installments in 2008 and 2009. The following table provides, for each of these named executive officers, the aggregate increase in the exercise prices of his amended options and the maximum aggregate amount of the cash payment to him in consideration of such increase.

 

Outstanding Equity Awards

 

The following table sets forth certain information with respect to the outstanding equity awards at November 30, 2007 for each of the named executive officers.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END