NETAPP, INC.

495 East Java Drive

Sunnyvale, California 94089

 

 

 

 

Dear NetApp Stockholder:

 

NetApp, Inc., a Delaware corporation, will be holding our Annual Meeting of Stockholders on September 2, 2008, at 3:00 p.m., local time. The meeting will be held at our company headquarters located at 495 East Java Drive, Sunnyvale, California, 94089. At the meeting, you will be asked to consider and vote upon the following proposals:

 

1. To elect the following individuals to serve as members of the Board of the Directors for the ensuing year or until their respective successors are duly elected and qualified: Daniel J. Warmenhoven, Donald T. Valentine, Jeffry R. Allen, Carol A. Bartz, Alan L. Earhart, Thomas Georgens, Edward Kozel, Mark Leslie, Nicholas G. Moore, George T. Shaheen, and Robert T. Wall;

 

2. To approve an amendment to the 1999 Stock Option Plan (1999 Plan) to allow the Company to grant equity awards to the Company’s nonemployee directors under all equity programs under the 1999 Plan;

 

3. To approve an amendment to our 1999 Plan to increase the share reserve by an additional 6,600,000 shares of common stock;

 

4. To approve an amendment to our Employee Stock Purchase Plan (Purchase Plan) to increase the share reserve under the Purchase Plan by an additional 2,900,000 shares of common stock;

 

5. To ratify the appointment of Deloitte & Touche LLP as our independent auditors of the Company for the fiscal year ending April 24, 2009.

 

After careful consideration, our Board of Directors has unanimously approved the proposals and recommends that you vote FOR each of the proposals. Details of the proposals and business to be conducted at the meeting can be found in the enclosed Proxy Statement. Of particular importance is the request to increase the share reserve under our 1999 Plan in Proposal No. 3 by 6,600,000 shares of common stock. In order to achieve our long-term strategic goals, it is crucial to hire additional qualified employees. We request your support in amending the 1999 Plan in order to drive future growth and development of NetApp by attracting and retaining high-quality candidates. We strongly believe that the amendments to the 1999 Plan are essential for us to compete for talent in the highly competitive labor markets in which we operate. Stock grants also remain an important incentive to retaining and motivating key employees who we view as our most valuable assets. Your support of these proposals is key to our success and allows us to plan for additional growth in fiscal 2009 and beyond. Thank you for your consideration and support.

 

Pursuant to new rules promulgated by the Securities and Exchange Commission (“SEC”), we have elected to provide access to our proxy materials over the Internet. Accordingly, the Company will mail, on or about July 21, 2008, a Notice of Internet Availability of Proxy Materials to its stockholders of record and beneficial owners at the close of business on July 9, 2008. On the date of mailing of the Notice of Internet Availability of Proxy Materials, all stockholders and beneficial owners will have the ability to access all of the proxy materials on a Web site referred to in the Notice of Internet Availability of Proxy Materials. These proxy materials will be available free of charge.

 

The Notice of Internet Availability of Proxy Materials will identify the Web site where the proxy materials will be made available; the date, time and location of the Annual Meeting; the matters to be acted upon at the meeting and the Board of Directors’ recommendation with regard to each matter; a toll-free telephone number, an e-mail address, and a Web site where stockholders can request a paper or e-mail copy of the Proxy Statement, our Annual Report to stockholders and a form of proxy relating to the Annual Meeting; information on how to access the form of proxy; and information on how to obtain directions to attend the meeting and vote in person.

Your vote is extremely important. We appreciate your taking the time to vote promptly. After reading the Proxy Statement, please vote, at your earliest convenience by telephone or Internet, or request a proxy card to complete, sign and return by mail. If you decide to attend the Annual Meeting and would prefer to vote by ballot, your proxy will be revoked automatically and only your vote at the Annual Meeting will be counted. YOUR SHARES CANNOT BE VOTED UNLESS YOU (1) VOTE BY TELEPHONE, (2) VOTE BY INTERNET, (3) REQUEST A PAPER PROXY CARD, TO COMPLETE, SIGN AND RETURN BY MAIL, OR (4) ATTEND THE ANNUAL MEETING AND VOTE IN PERSON.

 

Thank you for your participation in this important activity.

 

Sincerely yours,

 

Daniel J. Warmenhoven

Chief Executive Officer

 

Sunnyvale, California

July 14, 2008

 

 

 

NETAPP, INC.

495 East Java Drive

Sunnyvale, California 94089

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held September 2, 2008

 

 

TO OUR STOCKHOLDERS:

 

The Annual Meeting of Stockholders (Annual Meeting) of NetApp, Inc., a Delaware corporation (“NetApp” or “Company”), will be held on September 2, 2008, at 3:00 p.m. local time, at the Company’s headquarters, 495 East Java Drive, Sunnyvale, California 94089, for the following purposes:

 

1. To elect the following individuals to serve as members of the Board of the Directors for the ensuing year or until their respective successors are duly elected and qualified: Daniel J. Warmenhoven, Donald T. Valentine, Jeffry R. Allen, Carol A. Bartz, Alan L. Earhart, Thomas Georgens, Edward Kozel, Mark Leslie, Nicholas G. Moore, George T. Shaheen, and Robert T. Wall;

 

2. To approve an amendment to the 1999 Stock Option Plan (“1999 Plan”) to allow the Company to grant equity awards to the Company’s nonemployee directors under all equity programs under the 1999 Plan.

 

3. To approve an amendment to the Company’s 1999 Plan to increase the share reserve by an additional 6,600,000 shares of common stock;

 

4. To approve an amendment to the Company’s Employee Stock Purchase Plan (Purchase Plan) to increase the share reserve by an additional 2,900,000 shares of common stock;

 

5. To ratify the appointment of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending April 24, 2009.

 

The foregoing items of business are more fully described in the Proxy Statement that accompanies this Notice.

 

Stockholders of record at the close of business on July 9, 2008 are entitled to Notice of Internet Availability of Proxy Materials and to vote at the Annual Meeting and at any adjournment or postponement thereof.

 

To assure your representation at the Annual Meeting, you are urged to cast your vote, as instructed in the Notice of Internet Availability of Proxy Materials, over the Internet or by telephone as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer. Any stockholder of record attending the Annual Meeting may vote in person, even if she or he has voted over the Internet, by telephone or returned a completed proxy card.

 

Thank you for your participation.

 

BY ORDER OF THE BOARD OF DIRECTORS,

 

Daniel J. Warmenhoven

Chief Executive Officer

 

Sunnyvale, California

July 14, 2008

 

 

 

 

 

PROXY STATEMENT

 

 

FOR THE ANNUAL MEETING OF STOCKHOLDERS OF NETAPP, INC.

To Be Held September 2, 2008

 

 

 

 

 

General

 

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors (“Board” or “Board of Directors”) of the Company, of proxies to be voted at the Annual Meeting of Stockholders (“Annual Meeting”) to be held on September 2, 2008, or at any adjournment or postponement thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. Stockholders of record on July 9, 2008 will be entitled to vote at the Annual Meeting. The Annual Meeting will be held at 3:00 p.m.. local time at the Company’s headquarters, 495 East Java Drive, Sunnyvale, California 94089.

 

In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each stockholder of record, we are now furnishing proxy materials to our stockholders on the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the proxy materials. Instead, the Notice of Internet Availability of Proxy Materials will instruct you as to how you may access and review all of the important information contained in the proxy materials. The Notice of Internet Availability of Proxy Materials also instructs you as to how you may submit your proxy on the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a printed copy of our proxy materials you should follow the instructions for requesting such materials included in the Notice of Internet Availability of Proxy Materials.

 

It is anticipated that the Notice of Internet Availability of Proxy Materials will be available to stockholders on or about July 21, 2008.

 

Record Date and Shares Outstanding

 

The close of business on July 9, 2008 was the record date for stockholders entitled to vote at the Annual Meeting and any adjournments or postponements thereof. At the record date, the Company had approximately 326,876,886 shares of its common stock outstanding and entitled to vote at the Annual Meeting and approximately 1,058 registered stockholders. No shares of the Company’s preferred stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held by such stockholder on July 9, 2008.

 

Abstentions and Broker Nonvotes

 

While there is no definitive statutory or case law authority in Delaware as to the proper treatment of abstentions, the Company believes that abstentions should be counted for purposes of determining both (1) the presence or absence of a quorum for the transaction of business and (2) the total number of shares entitled to vote in person or by proxy at the Annual Meeting (Votes Cast) with respect to a proposal. In the absence of controlling precedent to the contrary, the Company intends to treat abstentions in this manner. Accordingly, with the exception of the proposal for the election of directors, abstentions will have the same effect as a vote against the proposal. Because directors are elected by a plurality vote, abstentions in the election of directors have no impact on the election of directors once a quorum exists.

 

Broker nonvotes (that is, votes from shares held of record by brokers as to which the beneficial owners have given no voting instructions) will be counted for purposes of determining the presence or absence of a quorum for the transaction of business, but will not be counted for purposes of determining the number of Votes Cast with respect to the particular proposal on which the broker has expressly not voted. Accordingly, broker nonvotes will not affect the outcome of the voting on a proposal that requires a majority of the Votes Cast (such as the approval of an amendment to an option plan). Thus, a broker nonvote will make a quorum more readily attainable, but the broker nonvote will not otherwise affect the outcome of the vote on a proposal.

If your shares are held in street name and you do not instruct your broker on how to vote your shares, your brokerage firm, at its discretion, may either leave your shares unvoted or vote your shares on routine matters. The election of directors (Proposal No. 1) and the proposal to ratify the appointment of our independent registered public accounting firm for the current fiscal year (Proposal No. 5) should be treated as routine matters. To the extent your brokerage firm votes your shares on your behalf on these two proposals, your shares also will be counted as present for the purpose of determining a quorum. The proposals to approve Proposal Nos. 2, 3, and 4 are not considered routine matters and, consequently, without your voting instructions, your brokerage firm cannot vote your shares.

 

Methods of Voting

 

Stockholders may vote by proxy. The Company is offering stockholders of record four methods of voting: (1) you may vote by telephone; (2) you may vote over the Internet; (3) you may vote in person at the Annual Meeting; and (4) finally, you may request a proxy card from us and indicate your vote by completing, signing and dating the card where indicated and by mailing or otherwise returning the card in the enclosed prepaid envelope. Each stockholder is entitled to one vote on all matters presented at the Annual Meeting for each share of common stock held by such stockholder. Stockholders do not have the right to cumulate their votes for the election of directors.

 

If a proxy card is voted by telephone or Internet or signed and returned by mail, without choices specified, in the absence of contrary instructions, subject to the limitations described in Rule 14a-4(d)(1) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the shares of common stock represented by such proxy will be voted FOR Proposal Nos. 1, 2, 3, 4, and 5 and will be voted in the proxy holders’ discretion as to other matters that may properly come before the Annual Meeting.

 

Votes Required for Proposals

 

For Proposal No. 1, the 11 director nominees receiving the highest number of affirmative votes will be elected. Approval of each of Proposal Nos. 2, 3, 4, and 5 requires the affirmative vote of a majority of the number of Votes Cast. Votes will be tabulated by a representative of Broadridge Financial Solutions, Inc., the independent inspector of elections appointed for the meeting, who will separately tabulate affirmative and negative votes, abstentions and broker nonvotes. Voting results will be published in the Company’s Quarterly Report on Form 10-Q for the second fiscal quarter of 2009, which will be filed with the SEC.

 

Revocability of Proxies

 

Any stockholder giving a proxy has the power to revoke it at any time before its exercise. You may revoke or change your proxy by filing with the Secretary of the Company an instrument of revocation or a duly executed proxy bearing a later date or by attending the Annual Meeting and voting in person.

 

Quorum Requirement

 

A majority of the shares of common stock issued and outstanding and entitled to vote, in person or by proxy, constitutes a quorum for the transaction of business at the Annual Meeting.

 

Solicitation of Proxies

 

The Company will bear the cost of soliciting proxies. Copies of solicitation material will be made available upon request to brokerage houses, fiduciaries, and custodians holding shares in their names that are beneficially owned by others to forward to such beneficial owners. The Company may reimburse such persons for their costs of forwarding the solicitation material to such beneficial owners. The original solicitation of proxies may be supplemented by solicitation by telephone, electronic communication, or other means by directors, officers, employees, or agents of the Company. No additional compensation will be paid to these individuals for any such services. The Company may retain a proxy solicitor to assist in the solicitation of proxies, for which the Company will pay an estimated fee of $10,000 plus reimbursement of expenses.

Annual Report

 

The Notice of Annual Meeting, this Proxy Statement and the Annual Report of the Company for the fiscal year ended April 25, 2008 have been made available to all stockholders entitled to vote at the Annual Meeting. The Annual Report is not incorporated into this Proxy Statement and is not considered proxy-soliciting material. The Annual Report is posted at the following Web site address: http://investors.netapp.com/

 

Stockholder Proposals

 

The Company’s stockholders may submit proposals that they believe should be voted upon at the Company’s 2009 Annual Meeting of Stockholders. Stockholders may also recommend candidates for election to our Board of Directors for such Annual Meeting (See “Corporate Governance and Nominating/Corporate Governance Committee”).

 

Pursuant to Rule 14a-8 under the Exchange Act and subject to the requirements of our bylaws, stockholder proposals may be included in our 2009 proxy statement. Any such stockholder proposals must be submitted in writing to the attention of the Corporate Secretary, NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089, no later than March 24, 2009, which is the date 120 calendar days prior to the anniversary of the mailing date of the proxy statement for the fiscal 2008 Annual Meeting.

 

Alternatively, under the Company’s bylaws, a proposal that a stockholder does not seek to include in the Company’s proxy materials for the 2009 Annual Meeting (whether or not it relates to nominations to the Company’s Board of Directors) must be received by the Corporate Secretary (at the address specified in the immediately preceding paragraph) not less than 120 calendar days prior to the date of the 2009 Annual Meeting. The stockholder’s submission must include the information specified in the bylaws.

 

Stockholders interested in submitting such a proposal are advised to contact knowledgeable legal counsel with regard to the detailed requirements of applicable securities laws.

 

If a stockholder gives notice of a proposal or a nomination after the applicable deadline specified above, the notice will not be considered timely, and the stockholder will not be permitted to present the proposal or the nomination to the stockholders for a vote at the meeting.

 

PROPOSAL NO. 1:

 

ELECTION OF DIRECTORS

 

At the Annual Meeting, 11 directors constituting the entire Board are to be elected to serve until the next Annual Meeting of Stockholders or until successors for such directors are elected and qualified, or until the death, resignation or removal of such directors. It is intended that the proxies will be voted for the 11 nominees named below for election to the Company’s Board unless authority to vote for any such nominee is withheld. There are 11 nominees, each of whom is currently a director of the Company. All of the current directors except for Mr. Georgens were elected to the Board by the stockholders at the last Annual Meeting. Mr. Georgens was appointed by the Board to be a member of the Board on March 10, 2008. The Nominating/Corporate Governance Committee recommended Mr. Georgens, and the inclusion of Mr. Georgens in this Proxy Statement was approved at a meeting of the Board. Each person nominated for election has agreed to serve if elected, and the Board 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 nominee who is designated by the current Board to fill the vacancy. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the nominees named below. The 11 nominees receiving the highest number of affirmative votes of the shares entitled to vote at the Annual Meeting will be elected directors of the Company. The proxies solicited by this Proxy Statement may not be voted for more than 11 nominees.

Nominees

 

The nominees for directors of the Company, and their ages as of May 23, 2008, are as follows:

 

 

 

 

The members of the committees are identified in the following table:

 

 

DANIEL J. WARMENHOVEN joined NetApp in October 1994 as President and Chief Executive Officer and has been a member of the Board of Directors since October 1994. Mr. Warmenhoven currently serves as Chief Executive Officer, and as of March 2008 he was appointed Chairman of the Board. Prior to joining the Company, Mr. Warmenhoven served in various capacities, including President, Chief Executive Officer, and Chairman of the Board of Directors of Network Equipment Technologies, Inc., a telecommunications equipment company, from November 1989 to January 1994. Prior to Network Equipment Technologies, Mr. Warmenhoven held executive and managerial positions at Hewlett-Packard from 1985 to 1989 and IBM Corporation from 1972 to 1985. Mr. Warmenhoven is a Director of Aruba Networks, Inc. Mr. Warmenhoven holds a BS degree in electrical engineering from Princeton University.

 

DONALD T. VALENTINE has been a member of the Board since 1994 and Lead Independent Director since January 2008. Mr. Valentine was Chairman of the Board of Directors from September 1994 to January 2008. Mr. Valentine has been a general partner of Sequoia Capital, a venture capital firm, since 1972. Mr. Valentine holds a BA degree from Fordham University.

 

JEFFRY R. ALLEN has been a member of the Board since May 2005. Prior to joining the Board, Mr. Allen was the Executive Vice President of Business Operations at the Company. Mr. Allen joined the Company in 1996 as the Chief Financial Officer and Vice President of Finance and Operations. Before coming to the Company, Mr. Allen served as Senior Vice President of Operations for Bay Networks, where he was responsible for manufacturing and

distribution functions. From 1990 to 1995, he held the position of Controller for SynOptics Communications and subsequently became Vice President and Controller for Bay Networks, the new company created via the merger of SynOptics and Wellfleet Communications. Previously, Mr. Allen had a 17-year career at Hewlett-Packard Company, where he served in a variety of financial, information systems, and financial management positions, including controller for the Information Networks Group. Mr. Allen holds a BS degree from San Diego State University.

 

CAROL A. BARTZ has been a member of the Board since September 1995. From April 1992 to 2006, Ms. Bartz served as Chairman of the Board and Chief Executive Officer of Autodesk, Inc., a design software company. Ms Bartz resigned as the Chief Executive Officer of Autodesk in May 2006. Ms. Bartz has been Executive Chairman of the Board of Autodesk since May 2006. Ms. Bartz held a number of positions with Sun Microsystems, Inc. from September 1983 to April 1992, most recently as Vice President of Worldwide Field Operations. In addition, Ms. Bartz currently serves on the board of directors of Cisco Systems, Inc. and Intel, Inc. Ms. Bartz received a BA degree in computer science from the University of Wisconsin.

 

ALAN L. EARHART has been a member of the Board since December 2004. Mr. Earhart has more than three decades of financial and accounting expertise that includes close involvement with many technology companies, including Cisco Systems, Legato, Varian and Polycom. A former PricewaterhouseCoopers office managing partner, he began his career as a certified public accountant in 1970 with Coopers & Lybrand’s San Francisco office. There he rose through the company to become regional managing partner before its merger with Price Waterhouse. After the merger, he was named managing partner for PricewaterhouseCoopers’ Silicon Valley offices. In addition, he previously served as chair of Coopers & Lybrand’s National Venture Capital Industry Group. Mr. Earhart, who retired from PricewaterhouseCoopers in 2001, also serves on the board of directors and is chairman of the audit committee of Foundry Networks, Macrovision Solutions and Monolithic Power Systems. Mr. Earhart is currently an independent consultant and retired partner of PricewaterhouseCoopers.

 

THOMAS GEORGENS has been a member of the Board since March 2008. Mr. Georgens is the President and Chief Operating Officer of the Company and is responsible for all product operations and field operations worldwide. Mr. Georgens joined the Company in 2005 and served as the Company’s Executive Vice President of Product Operations from January 2007 until February 2008. Prior to January 2007, Mr. Georgens served as the Company’s Executive Vice President and General Manager of Enterprise Storage Systems. Before joining the Company, Mr. Georgens spent nine years at Engenio, a subsidiary of LSI Logic, the last two years as Chief Executive Officer. He has also served in various other positions, including President of LSI Logic Storage Systems and Executive Vice President of LSI Logic. Prior to Engenio, Mr. Georgens spent 11 years at EMC in a variety of engineering and marketing positions. Mr. Georgens holds a BS degree and an ME degree in computer and systems engineering from Rensselaer Polytechnic Institute as well as an MBA degree from Babson College.

 

EDWARD KOZEL has been a member of the Board since May 2006. Mr. Kozel is Managing Member of Open Range LLC, a private venture firm. Previously he was President and Chief Executive Officer of Skyrider, Inc., a search-based marketing company for peer-to-peer networks, a Managing Director of Integrated Finance, Ltd., a private advisory services firm and as a Managing Member of Open Range Ventures, LLC. Mr. Kozel joined Cisco Systems in 1989 and served as its Chief Technology Officer and Senior Vice President of Business Development until 2001. Mr. Kozel previously worked at Boeing, McDonnell Douglas and SRI International, where he participated in the early design and development of the Internetwork Protocol model and TCP/IP, packet radio networks and highly distributed information systems. Mr. Kozel has a BS degree in electrical engineering from the University of California, Davis.

 

MARK LESLIE has been a member of the Board since July 2004. Mr. Leslie is currently the managing director of Leslie Ventures. Mr. Leslie was the founding CEO of Veritas Software. He joined the board of directors of Veritas Software in May of 1988, and became the Chairman, President and CEO when Veritas was restarted as a software company in 1990. Mr. Leslie currently serves on the board of directors for a number of privately held technology companies. In addition, Mr. Leslie chairs the NYU Science Advisory Board, serves on the NYU Board of Overseers, Chairs the Leslie Family Foundation and serves on the board of TKCJL. Mr. Leslie is also a lecturer at the Stanford Graduate School of Business teaching courses in entrepreneurship and sales. Mr. Leslie received a BA degree in

physics and mathematics from New York University in 1966 and completed Harvard Business School’s program for management development in 1980.

 

NICHOLAS G. MOORE has been a member of the Board since 2002. Mr. Moore served as Global Chairman of PricewaterhouseCoopers from July 1998 until June 2001, and Chief Executive Officer of PricewaterhouseCoopers LLP from July 1998 until June 2000. Prior to that, he served as Chairman and Chief Executive Officer of Coopers & Lybrand LLP from October 1994 until June 1998, when it was merged into PricewaterhouseCoopers LLP. Mr. Moore is a member of the board of Wells Fargo, Gilead Sciences and Bechtel Corporation. Mr. Moore received a BS degree in accounting from St. Mary’s College and a JD degree from Hastings College of Law, University of California.

 

GEORGE T. SHAHEEN has been a member of the Board since June 2004. Mr. Shaheen is the Chairman and Chief Executive Officer of Entity Labs. He was the Chief Executive Officer of Siebel Systems, Inc. from April 2005 to January 2006. From 1989 to 1999, he was the Chief Executive Officer and Global Managing Partner of Andersen Consulting, which later became Accenture. He then became the Chief Executive Officer and Chairman of the Board of Webvan Group, Inc. Mr. Shaheen serves on the boards of 24/7 Customer, newScale, PRA International, Theranos, and Entity Labs. He is a member of the Advisory Boards of the Marcus & Millichap Company and Genstar Capital and he is an advisor to the Boston Consulting Group. He has served as an IT Governor of the World Economic Forum, and he is a member of the Board of Advisors for the Northwestern University Kellogg Graduate School of Management. He has also served on the Board of Trustees of Bradley University. Mr. Shaheen is a graduate of Bradley University (BS degree 1966 & an MBA degree 1968).

 

ROBERT T. WALL has been a member of the Board since January 1993. Since August 1984, Mr. Wall has been the Founder and President of On Point Developments, LLC, a venture management and investment company. Mr. Wall was a founder and, from November 2000 to December 2006, the Chairman of the Board of Directors of Airgo Networks, Inc., a Wi-Fi wireless networking systems company that was acquired by QUALCOMM, Inc. in December 2006. From June 1997 to November 1998, he was Chief Executive Officer and a member of the board of directors of Clarity Wireless, Inc., a broadband wireless data communications company that was acquired by Cisco Systems, Inc. in November 1998. Mr. Wall was Chairman of the Board, President, and Chief Executive Officer of Theatrix Interactive, Inc., a consumer educational software publisher, from April 1994 to August 1997. He received an AB degree in economics from De Pauw University and an MBA degree from Harvard Business School.

 

Board Meetings and Committees

 

The Board of Directors held nine regular meetings during fiscal 2008. Each member of the Board of Directors during fiscal 2008 attended more than 75% of the aggregate of (1) the total number of meetings of the Board of Directors held during such period and (2) the total number of meetings held during such period by all Committees of the Board on which he or she served. There are no family relationships among executive officers, directors or nominees of the Company. The Board of Directors has an Audit Committee, a Nominating/Corporate Governance Committee, an Investment Committee and a Compensation Committee.

 

During fiscal 2008, the Audit Committee was composed of Directors Shaheen, Earhart, and Moore, all of whom are independent in accordance with the requirements of applicable SEC and NASDAQ rules and regulations. The Company’s Board has determined that Mr. Moore and Mr. Earhart qualify as “audit committee financial experts” under the rules and regulations of the SEC. The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company’s auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of the Company’s auditors, the accounting practices of the Company and other such functions as detailed in the Audit Committee Charter, which can be found on the Company’s Web site at www.netapp.com. The Audit Committee of the Board of Directors held 12 meetings during fiscal 2008.

 

During fiscal 2008, the Nominating/Corporate Governance Committee was composed of Directors Moore, Bartz, Leslie and Valentine, all of whom are independent in accordance with applicable NASDAQ rules. The committee evaluates and recommends to the Board of Directors candidates for Board membership and considers nominees recommended by stockholders. The committee also develops and recommends corporate governance policies and other governance guidelines and procedures to the Board of Directors. The Nominating/Corporate Governance Committee held one meeting during fiscal 2008.

During fiscal 2008, the Investment Committee was composed of Directors Allen, Earhart, Kozel, Leslie, and Wall. The Investment Committee was formed for the purpose of reviewing, evaluating, and approving acquisitions and divestitures for the Company. The Investment Committee held two (2) meetings during fiscal 2008.

 

The Compensation Committee, which is composed of Directors Bartz, Kozel, and Wall, establishes salaries, incentive compensation programs, and other forms of compensation for officers; creates the compensation guidelines under which management establishes salaries for nonofficers and other employees of the Company; and administers the incentive compensation and benefit plans of the Company. Directors Bartz, Kozel, and Wall are independent in accordance with applicable NASDAQ rules. The Compensation Committee of the Board of Directors held 7 meetings during fiscal 2008. In addition, the Committee approved stock option and award grants as needed by means of Unanimous Written Consents.

 

Vote Required

 

Directors shall be elected by a plurality vote. The nominees for director receiving the highest number of affirmative votes of the shares entitled to be voted for them shall be elected as directors. Votes against, abstentions and broker nonvotes have no legal effect on the election of directors due to the fact that such elections are by plurality.

 

The Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal No. 1.

 

PROPOSAL NO. 2

 

AMENDMENT TO THE COMPANY’S 1999 STOCK OPTION PLAN

 

The Company is asking its stockholders to approve an amendment to the 1999 Stock Option Plan (“1999 Plan”) so that it can grant equity awards to the Company’s nonemployee directors under all equity programs under the 1999 Plan. The Board has approved this amendment to the 1999 Plan, subject to approval from our stockholders at the Annual Meeting. Approval of the amendment to the 1999 Plan requires the affirmative vote of a majority of the Votes Cast. Our nonemployee directors have an interest in this proposal. Please note that this proposal is separate and distinct from Proposal No. 3 relating to the approval of additional shares of common stock to be reserved for issuance under the 1999 Plan. Accordingly, a vote for this proposal will not affect your vote for or against Proposal No. 3, and how you vote on Proposal No. 3 will not affect your vote for or against this proposal.

 

Summary

 

The 1999 Plan is divided into five separate equity programs: (1) the Discretionary Option Grant Program, (2) the Stock Appreciation Rights Program, (3) the Stock Issuance Program, (4) the Performance Share and Performance Unit Program, and (5) the Automatic Option Grant Program.

 

The Company’s employees, consultants, and other independent advisors are eligible to participate in the Discretionary Option Grant Program, the Stock Appreciation Rights Program, the Stock Issuance Program, and the Performance Share and Performance Unit Program. Currently under the 1999 Plan, the Company’s nonemployee directors only receive stock options through the Automatic Option Grant Program. The terms and conditions of the stock options are fixed and are granted on predetermined dates, subject to a director continuing to provide services to us through the applicable grant date. Because the Company is limited in how it can compensate its nonemployee directors, and nonemployee board of director compensation is changing given the increased responsibilities placed on directors in the last few years due to overall market conditions, the Company’s ability to attract and retain the most highly qualified nonemployee directors may be compromised. Through the proposed amendments to the 1999 Plan, we hope to have sufficient flexibility to structure the equity component of director compensation so that we are able to quickly react to changing market conditions in director compensation to allow us to attract and retain highly qualified individuals to serve on the Board.

 

We are asking our stockholders to approve an amendment to the 1999 Plan so that the Company’s nonemployee directors are eligible to participate in all programs under the 1999 Plan. The Company may then

make discretionary grants to its nonemployee directors to compensate them for responsibilities such as committee service or chairmanship. If our stockholders do not approve this proposal, the Company’s nonemployee directors will only receive stock options through the Automatic Option Grant Program. While the Company will continue to make grants under the Automatic Option Grant Program, the Company believes strongly that the participation of the nonemployee director in the entire 1999 Plan is essential in light of the increased responsibilities of nonemployee directors over the last few years, which has resulted in the need to adjust and enhance their compensation.

 

Description of the 1999 Plan

 

The following paragraphs provide a summary of the principal features of the 1999 Plan and its operation, including a description of the amendment to the 1999 Plan if stockholders approve Proposal No. 2 of this Proxy Statement. The 1999 Plan is set forth in its entirety and has been filed as Appendix A to this Proxy Statement with the SEC. The following summary is qualified in its entirety by reference to the complete text of the 1999 Plan. Any stockholder who wants to obtain a copy of the actual plan document may do so by written request to the Corporate Secretary at the Company’s principal offices in Sunnyvale, California.

 

Background and Purpose of the 1999 Plan

 

The 1999 Plan is divided into five separate equity programs:

 

1. Discretionary Option Grant Program — Under the Discretionary Option Grant Program, the Plan Administrator is able to grant options to purchase shares of Company common stock (“Shares”) at an exercise price not less than the fair market value of those Shares on the grant date.

 

2. Stock Appreciation Rights Program — Under the Stock Appreciation Rights Program, the Plan Administrator is able to grant stock appreciation rights that will allow individuals to receive the appreciation in the Shares subject to the award between the date of grant and the exercise date.

 

3. Stock Issuance Program — Under the Stock Issuance Program, the Plan Administrator is able to make direct issuances of Shares either through the issuance (or promise to issue) or immediate purchase of such Shares or as a bonus for services rendered by participants on such terms as the Plan Administrator deems appropriate.

 

4. Performance Share and Performance Unit Program — Under the Performance Share and Performance Unit Program, the Plan Administrator is able to grant performance shares and performance units, which are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest.

 

5. Automatic Option Grant Program — Under the Automatic Option Grant Program, option grants are automatically made at periodic intervals to nonemployee directors.

 

The 1999 Plan is intended to increase incentives and to encourage Share ownership on the part of eligible employees, nonemployee directors and consultants who provide significant services to the Company and its affiliates.

 

Administration of the 1999 Plan

 

The Compensation Committee of the Board of Directors (“Compensation Committee”) administers the 1999 Plan (“Plan Administrator”). The members of the Compensation Committee qualify as nonemployee directors under Rule 16b-3 of the Exchange Act of 1934, as amended, and as outside directors under Section 162(m) of the Internal Revenue Code (“Code”) such that the Company can receive a federal tax deduction for certain compensation paid under the 1999 Plan.

 

Subject to the terms of the 1999 Plan, the Plan Administrator has the sole discretion to select the employees, consultants and other independent advisors who will receive awards, determine the terms and conditions of awards (for example, the exercise price and vesting schedule), and interpret the provisions of the 1999 Plan and outstanding awards, provided, however, that the Company is unable (without the approval of stockholders) to reprice any outstanding stock options granted under the 1999 Plan or cancel any outstanding stock option and immediately replace it with a new stock option with a lower exercise price. Administration of the Automatic Option Grant

Program will be self-executing in accordance with the terms of the program and the Plan Administrator will not have any discretionary functions with respect to option grants made under the program. The Compensation Committee may delegate any part of its authority and powers under the 1999 Plan to one or more directors and/or officers of the Company, but only the Compensation Committee itself can make awards to participants who are executive officers of the Company.

 

If our stockholders approve this proposal, our nonemployee directors will be eligible to receive awards pursuant to all equity programs under the 1999 Plan. If this proposal is not approved, our nonemployee directors will only be able to participate in the Automatic Option Grant Program.

 

Shares Subject to the 1999 Plan

 

A total of 94,500,000 Shares has been reserved for issuance under the 1999 Plan. As of May 23, 2008, 54,931,193 Shares were subject to outstanding awards granted under the 1999 Plan, 14,054,642 Shares remained available for any new awards to be granted in the future and 25,514,165 Shares have been issued pursuant to awards thereunder. These numbers do not reflect the request for additional Shares set forth in Proposal No. 3.

 

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 1999 Plan. Also, in the event any change is made to our common stock issuable under the 1999 Plan by reason of any stock split, stock dividend, combination of shares, merger, reorganization, consolidation, recapitalization, exchange of shares, or other change in capitalization of the Company affecting the common stock as a class without the Company’s receipt of consideration, appropriate adjustments will be made to (1) the maximum number and/or class of securities issuable under the 1999 Plan, (2) the maximum number and/or class of securities for which any one individual may be granted stock options, stock appreciation rights, stock issuances, or performance shares and performance units under the 1999 Plan per calendar year, (3) the class and/or number of securities and the purchase price per share in effect under each outstanding award, and (4) the class and/or number of securities for which automatic option grants are to be subsequently made under the Automatic Option Grant Program. The Plan Administrator will make adjustments to outstanding awards to prevent the dilution or enlargement of benefits intended to be provided thereunder.

 

Discretionary Option Grant Program

 

A stock option is the right to acquire Shares at a fixed exercise price for a fixed period of time. Under the Discretionary Option Grant Program, the Plan Administrator may grant nonstatutory stock options and/or incentive stock options (which entitle employees, but not the Company, to more favorable tax treatment). The Plan Administrator will determine the number of Shares covered by each option, but during any calendar year, no participant may be granted options and/or stock appreciation rights covering more than 3,000,000 Shares.

 

The exercise price of each option is set by the Plan Administrator but cannot be less than 100% of the fair market value of the Shares covered by the option on the date of grant. 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 stock of the Company or any of its subsidiaries.

 

An option granted under the Discretionary Option Grant Program cannot be exercised until it becomes vested. The Plan Administrator establishes the vesting schedule of each option at the time of grant. Options become exercisable at the times and on the terms established by the Plan Administrator. To the extent the aggregate fair market value of the Shares (determined on the grant date) covered by incentive stock options first becomes exercisable by any participant during any calendar year is greater than $100,000, the excess above $100,000 will be treated as a nonstatutory stock option. Options granted under the 1999 Plan expire at the times established by the Plan Administrator, but not later than seven (7) years after the grant date.

 

Stock Appreciation Rights Program

 

A stock appreciation right is the right to receive the appreciation in fair market value of the Shares subject to the award between the exercise date and the date of grant. We can pay the appreciation in either cash or Shares. Stock appreciation rights will become exercisable at the times and on the terms established by the Plan Administrator, subject to the terms of the 1999 Plan. No participant will be granted stock appreciation rights and/or options covering more than 3,000,000 Shares during any calendar year. The exercise price of each stock appreciation right is

set by the Plan Administrator but cannot be less than 100% of the fair market value of the Shares covered by the award on the date of grant. A stock appreciation right granted under the 1999 Plan cannot be exercised until it becomes vested. The Plan Administrator establishes the vesting schedule of each stock appreciation right at the time of grant. Stock appreciation rights granted under the 1999 Plan expire at the times established by the Plan Administrator, but not later than seven years after the grant date.

 

Stock Issuance Program

 

Stock issuances are awards where Shares are or will be issued to a participant and the participant’s right to retain or receive such Shares will vest in accordance with the terms and conditions established by the Plan Administrator. The number of Shares covered by a stock issuance award will be determined by the Plan Administrator, but during any calendar year no participant may be granted an award covering more than 200,000 Shares. Also, assuming approval of Proposal No. 3, no more than 30% of the sum of (1) the number of Shares added to the 1999 Plan at the 2008 Annual Meeting; (2) the number of Shares available to be granted pursuant to awards under the 1999 Plan (that is, reserved but unissued) as of May 23, 2008; and (3) the number of Shares subject to outstanding awards as of May 23, 2008, that actually return to the 1999 Plan upon the repurchase or reacquisition of unvested Shares or that were subject to awards that terminated without any Shares actually having been issued pursuant thereto may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs. In determining whether a stock issuance should be made and/or the vesting schedule for any such award, the Plan Administrator may impose whatever conditions to vesting as it determines to be appropriate. For example, the Plan Administrator may determine to make a stock issuance only if the participant satisfies performance goals established by the Plan Administrator.

 

Performance Share and Performance Unit Program

 

Performance shares and performance units are awards that will result in a payment to a participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest. The Plan Administrator will establish organizational, individual performance goals or other vesting criteria at its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid to participants. No participant will receive performance units with an initial value greater than $2,000,000 and no participant will receive more than 200,000 performance shares during any calendar year. Performance units will have an initial dollar value established by the Plan Administrator prior to the grant date. Performance shares will have an initial value equal to the fair market value of a Share on the grant date. Also, assuming approval of Proposal No. 3, no more than 30% of the sum of (1) the number of Shares added to the 1999 Plan at the 2008 Annual Meeting, (2) the number of Shares available to be granted pursuant to awards under the 1999 Plan (that is, reserved but unissued) as of May 23, 2008, and (3) the number of Shares subject to outstanding awards as of May 23, 2008 that actually return to the 1999 Plan upon the repurchase or reacquisition of unvested Shares or that were subject to awards that terminated without any Shares actually having been issued pursuant thereto, may be issued pursuant to awards under the Stock Issuance and Performance Share and Performance Unit Programs.

 

Performance Goals

 

The Plan Administrator (at its discretion) may make performance goals applicable to a participant with respect to an award intended to qualify as “performance-based compensation” under Code Section 162(m). At the Plan Administrator’s discretion, one or more of the following performance goals will apply: annual revenue, cash position, earnings per share, individual objectives, net income, operating cash flow, operating income, return on assets, return on equity, return on sales and total stockholder return. The Plan Administrator may utilize other performance criteria for awards not intended to qualify as “performance-based compensation” under Code Section 162(m).

 

Automatic Option Grant Program

 

Under the 1999 Plan, our nonemployee directors will receive annual, automatic, nondiscretionary grants of nonstatutory stock options. If stockholders approve this proposal, nonemployee directors will also be eligible to receive discretionary awards pursuant to the other equity programs under the 1999 Plan.

 

Each new nonemployee director receives an option to purchase 55,000 Shares as of the date he or she first becomes a nonemployee director. Each nonemployee director also receives an option to purchase 20,000 Shares on

the date of each annual stockholder meeting, provided that he or she has been a nonemployee director for at least six months prior to the grant date and remains an eligible nonemployee director through each such meeting.

 

The exercise price of each option granted to a nonemployee director is equal to 100% of the fair market value of the Shares covered by the option on the date of grant. The option granted to a nonemployee director when he or she first becomes a nonemployee director vests over four years, with 25,000 Shares vesting on the first anniversary of the date of grant and 10,000 Shares vesting on each anniversary thereafter (assuming that he or she remains a nonemployee director on each scheduled vesting date). An option granted under the Automatic Option Grant Program is immediately exercisable. However, any Shares purchased under the option program are subject to repurchase by the Company if the nonemployee director ceases Board service prior to vesting. All options granted thereafter to the nonemployee director become 100% vested on the day preceding the Annual Stockholders Meeting following the grant date. If a nonemployee director terminates his or her service on the Board due to death or disability his or her options would immediately vest.

 

Options granted to nonemployee directors generally expire no later than seven years after the date of grant. If a nonemployee director terminates his or her service on the Board prior to an option’s normal expiration date, the option will remain exercisable for 12 months to the extent it has vested. However, the option may not be exercised later than the original expiration date.

 

Awards to be Granted to Certain Individuals and Groups

 

The number of awards that an employee, nonemployee director, or consultant, may receive under the 1999 Plan is at the discretion of the Plan Administrator and therefore cannot be determined in advance. The following table sets forth (1) the aggregate number of Shares subject to options granted under the 1999 Plan during the last fiscal year, (2) the average per Share exercise price of such options, (3) the aggregate number of Shares subject to awards of restricted stock units granted under the 1999 Plan during the last fiscal year, and (4) the dollar value of such Shares based on $23.77 per Share, the fair market value on May 23, 2008.

 

AMENDED PLAN BENEFITS
1999 Plan

 

 

 

 

Limited Transferability of Awards

 

Awards granted under the 1999 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. However, participants may, in a manner specified by the Plan Administrator, transfer nonstatutory stock options (1) to a member of the participant’s family, (2) to a trust or other entity for the sole benefit of the participant and/or a member of his or her family, (3) to a former spouse pursuant to a domestic relations order.

 

Federal Tax Aspects

 

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of awards granted under the 1999 Plan. Tax consequences for any particular individual may be different.

 

Nonstatutory Stock Options

 

No taxable income is reportable when a nonstatutory 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 taxable income recognized in connection with an option exercise by an employee of the Company is subject to tax withholding by the Company. 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 of the Code and the Treasury regulations promulgated thereunder (“Section 409A”), nonstatutory stock options 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% 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 (except for purposes of the alternative minimum tax, in which case taxation is the same as for nonstatutory stock options). If the participant exercises the option and then later sells or otherwise disposes of the Shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the Shares before the end of the two-year 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.

 

Stock Appreciation Rights

 

No taxable income 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 of the Code, however, 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 options and may be subject to an additional 20% tax plus penalties and interest. In addition, certain states, such as California, have adopted similar tax provisions.

 

Stock Issuance, Performance Units and Performance Shares

 

A participant generally will not have taxable income at the time an award of stock, performance shares or performance units is granted. Instead, he or she will recognize ordinary income in the first taxable year in which his or her interest in the Shares underlying the award becomes either (1) freely transferable or (2) no longer subject to

substantial risk of forfeiture. However, the recipient of an award of restricted stock may elect to recognize income at the time he or she receives the award in an amount equal to the fair market value of the Shares underlying the award (less any cash paid for the shares) on the date the award is granted.

 

Tax Effect for the Company

 

The Company generally will be entitled to a tax deduction in connection with an award under the 1999 Plan in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to our Chief Executive Officer and to certain other of our most highly compensated executive officers. 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, the Company 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 1999 Plan, setting limits on the number of awards that any individual may receive and for awards other than stock options, establishing performance criteria that must be met before the award actually will vest or be paid. The 1999 Plan has been designed to permit the Plan Administrator to grant awards that qualify as performance-based compensation for purposes of satisfying the conditions of Section 162(m), thereby permitting the Company to continue to receive a federal income tax deduction in connection with such awards.

 

Amendment and Termination of the Plan

 

The Board generally may amend or terminate the 1999 Plan at any time and for any reason, subject to stockholder approval if applicable.

 

Summary

 

We believe strongly that the approval of the amendment to the 1999 Plan to permit our nonemployee directors to participate in all equity programs of the 1999 Plan is essential given the increase in director responsibilities. The 1999 Plan is designed to assist us in recruiting, motivating and retaining talented nonemployee directors who help us achieve our business goals, including creating long-term value for stockholders. If the stockholders do not approve this proposal, the Company cannot grant discretionary equity awards to our nonemployee directors, even if it is in the best interests of the Company to do so. If the Company is unable to grant discretionary equity awards, it may be difficult to recruit and retain talented and qualified nonemployee directors and potentially will limit the Company’s growth and future success.

 

Vote Required

 

The affirmative vote by a majority of the Votes Cast is required to approve this proposal. The effect of an abstention is the same as that of a vote against the proposal. Unless you indicate otherwise, your proxy will vote “FOR” the proposal.

 

The Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal No. 2

 

PROPOSAL NO. 3:

 

AMENDMENT TO THE COMPANY’S 1999 STOCK OPTION PLAN

 

The Company is asking the stockholders to approve an amendment to the 1999 Plan to increase by 6,600,000 the number of Shares that may be issued thereunder. The Board has approved the increase in the number of Shares reserved for issuance under the 1999 Plan, subject to approval from stockholders at the Annual Meeting. Approval of this amendment to the 1999 Plan requires the affirmative vote of a majority of the Votes Cast. The Company’s named executive officers and directors have an interest in this proposal. Please note that this proposal is separate and distinct from Proposal No. 2 relating to an amendment to the 1999 Plan. Accordingly, a vote for this proposal will not affect your vote for or against Proposal No. 2, and how you vote on Proposal No. 2 will not affect your vote for or against this proposal

The proposal to amend the 1999 Plan also provides that the number of Shares subject to awards granted under the Stock Issuance Program and the Performance Share and Performance Unit Program may not exceed 30% of the sum of (1) the number of Shares added to the 1999 Plan at the 2008 Annual Meeting, (2) the number of Shares available to be granted pursuant to awards under the 1999 Plan (that is, reserved but unissued Shares) as of May 23, 2008, and (3) the number of Shares subject to outstanding awards as of May 23, 2008 that actually return to the 1999 Plan upon the repurchase or reacquisition of unvested Shares or that were subject to awards that terminated without any Shares actually having been issued thereto.

 

The Company believes strongly that the approval of the amendment to the 1999 Plan is essential to attaining and retaining our most valuable asset, our employees. Offering a broad-based equity compensation program is vital to attracting and retaining the most highly skilled people in our industry. The Company believes that employees who have a stake in the future success of our business become highly motivated to achieve our long-term business goals and increase stockholder value. At this important time in our history, the Company’s employees’ innovation and productivity are even more critical to its success in a highly competitive and fast-paced industry. The 1999 Plan is designed to assist in recruiting, motivating and retaining talented employees who help us achieve the Company’s business goals, including creating long-term value for stockholders.

 

Description of the 1999 Plan

 

Please refer to the summary of principal features of the 1999 Plan and its operation as set forth in Proposal No. 2. That summary is qualified in its entirety by reference to the 1999 Plan as set forth in Appendix A to this Proxy statement.

 

Summary

 

The Company is and intends to continue to be a growth company. However, in order to grow, it is critical to hire additional people to achieve its long-term strategic goals. The Company strongly believes that the amendment to the 1999 Plan to increase the number of Shares we can use to grant awards is essential for us to compete for talent in the very competitive labor markets in which we operate.

 

Vote Required

 

The affirmative vote by a majority of the Votes Cast is required to approve this proposal. The effect of an abstention is the same as that of a vote against the proposal. Unless you indicate otherwise, your proxy will vote “FOR” the proposal.

 

The Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal No. 3

 

PROPOSAL NO. 4:

 

AMENDMENT TO THE COMPANY’S EMPLOYEE STOCK PURCHASE PLAN

 

Introduction

 

The Company is asking the stockholders to approve an amendment to the Company’s Employee Stock Purchase Plan (“Purchase Plan”), which will increase the number of Shares authorized for issuance under the Purchase Plan by an additional 2,900,000 Shares.

 

The purpose of the amendment is to ensure that the Company will continue to have a sufficient reserve of Shares of the Company’s common stock available under the Purchase Plan to provide eligible employees of the Company and its participating affiliates (whether now existing or subsequently established) with the opportunity to purchase Shares at semiannual intervals through their accumulated periodic payroll deductions.

 

The Purchase Plan was adopted by the Board on September 26, 1995, and became effective on November 20, 1995, in connection with the Company’s initial public offering of its common stock.

The terms and provisions of the Purchase Plan, as most recently amended, are summarized below. This summary, however, does not purport to be a complete description of the Purchase Plan. The Purchase Plan is set forth in its entirety and has been filed as Appendix B to this Proxy Statement with the SEC. The following summary is qualified in its entirety by reference to the complete text of the Purchase Plan. Any stockholder who wants to obtain a copy of the actual plan document may do so by written request to the Corporate Secretary at the Company’s principal offices in Sunnyvale, California.

 

Description of the Purchase Plan

 

The Purchase Plan is administered by the Compensation Committee of the Board, serving as the plan administrator. As plan administrator, such committee has full authority to adopt administrative rules and procedures and to interpret the provisions of the Purchase Plan.

 

Share Reserve

 

The maximum number of Shares reserved for issuance over the term of the Purchase Plan is limited to 23,500,000 Shares, assuming stockholder approval of the 2,900,000 Share increase that is the subject of this Proposal No. 4. As of May 23, 2008, 16,790,819 Shares had been issued under the Purchase Plan, and 6,709,181 Shares were available for future issuance, assuming stockholder approval of the 2,900,000 Share increase.

 

The Shares issuable under the Purchase Plan may be made available from authorized but unissued Shares or from Shares of common stock reacquired by the Company, including Shares purchased on the open market.

 

In the event that any change is made to the outstanding common stock (whether by reason of any stock split, stock dividend, recapitalization, exchange or combination of shares or other change affecting the outstanding common stock as a class without the Company’s receipt of consideration), appropriate adjustments will be made to (1) the maximum number and class of securities issuable under the Purchase Plan, (2) the maximum number and class of securities purchasable per participant on any one semiannual purchase date, and (3) the number and class of securities subject to each outstanding purchase right and the purchase price per Share in effect thereunder. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the Purchase Plan or the outstanding purchase rights thereunder.

 

Offering Period and Purchase Rights

 

Shares are offered under the Purchase Plan through a series of overlapping offering periods, each with a maximum duration of 24 months. Such offering periods will begin on the first business day of June and on the first business day of December each year over the term of the Purchase Plan. Accordingly, two (2) separate offering periods will begin in each calendar year.

 

Each offering period will consist of a series of one or more successive purchase intervals. Purchase intervals will run from the first business day in June to the last business day in November each year and from the first business day in December each year to the last business day in May in the immediately succeeding year. Accordingly, Shares will be purchased on the last business day in May and November each year with the payroll deductions collected from the participants for the purchase interval ending with each such semiannual purchase date.

 

If the fair market value per share of common stock on any semiannual purchase date within a particular offering period is less than the fair market value per share of common stock on the start date of that offering period, then the participants in that offering period will automatically be transferred from that offering period after the semiannual purchase of Shares on their behalf and enrolled in the new offering period which begins on the next business day following such purchase date.

 

Eligibility and Participation

 

Any individual who is employed on a basis under which he or she is regularly expected to work for more than 20 hours per week for more than five months per calendar year in the employ of the Company or any participating

parent or subsidiary corporation (including any corporation which subsequently becomes such at any time during the term of the Purchase Plan) is eligible to participate in the Purchase Plan.

 

An individual who is an eligible employee on the start date of any offering period may join that offering period at that time. However, no employee may participate in more than one offering period at a time.

 

As of May 23, 2008, approximately 7,628 employees, including five executive officers, were eligible to participate in the Purchase Plan.

 

Purchase Price

 

The purchase price of the Shares purchased on behalf of each participant on each semiannual purchase date will be equal to 85% of the lower of (1) the fair market value per Share on the start date of the offering period in which the participant is enrolled or (2) the fair market value on the semiannual purchase date.

 

The fair market value per Share on any particular date under the Purchase Plan will be deemed to be equal to the closing selling price per share on such date reported on the NASDAQ Global Select Market. On May 23, 2008, the closing selling per share of common stock on the NASDAQ Select Market was $23.77 per share.

 

Payroll Deductions and Stock Purchases

 

Each participant may authorize periodic payroll deductions in any multiple of 1% up to a maximum of 10% of his or her total cash earnings (generally base salary, bonuses, overtime pay and commissions) to be applied to the acquisition of Shares at semiannual intervals. Accordingly, on each semiannual purchase date (the last business day in May and November each year), the accumulated payroll deductions of each participant will automatically be applied to the purchase of whole Shares at the purchase price in effect for the participant for that purchase date.

 

Special Limitations

 

The Purchase Plan imposes certain limitations upon a participant’s rights to acquire common stock, including the following limitations:

 

 

The Plan Administrator will have the discretionary authority to increase, decrease, or implement the per participant and any total participant limitations prior to the start date of any new offering period under the Purchase Plan.

 

Withdrawal Rights and Termination of Employment

 

The participant may withdraw from the Purchase Plan at any time, and his or her accumulated payroll deductions may either be applied to the purchase of shares on the next semiannual purchase date or refunded.

 

Upon the participant’s cessation of employment or loss of eligible employee status, payroll deductions will automatically cease. Any payroll deductions which the participant may have made for the semiannual period in which such cessation of employment or loss of eligibility occurs will be immediately refunded.

 

Stockholder Rights

 

No participant will have any stockholder rights with respect to the Shares covered by his or her purchase rights until the Shares are actually purchased on the participant’s behalf. No adjustment will be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase.

Assignability

 

Purchase rights are not assignable or transferable by the participant and may be exercised only by the participant.

 

Change in Control

 

In the event a change in control occurs, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such change. The purchase price in effect for each participant will be equal to 85% of the lower of (1) the fair market value per Share on the start date of the offering period in which the participant is enrolled at the time the change in control occurs or (2) the fair market value per Share immediately prior to the effective date of such change in control.

 

A change in control will be deemed to occur if (1) the Company is acquired through a merger or consolidation in which more than 50% of the Company’s outstanding voting stock is transferred to a person or persons different from those who held stock immediately prior to such transaction; (2) the Company sells, transfers or disposes of all or substantially all of its assets; or (3) any person or related group of persons acquires ownership of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

 

Share Proration

 

Should the total number of Shares to be purchased pursuant to outstanding purchase rights on any particular date exceed either (1) the maximum number of Shares purchasable in total by all participants on any one purchase date (if applicable) or (2) the number of Shares then available for issuance under the Purchase Plan, then the Plan Administrator will make a pro-rata allocation of the available Shares on a uniform and nondiscriminatory basis. In such an event, the Plan Administrator will refund the accumulated payroll deductions of each participant, to the extent in excess of the purchase price payable for the Shares prorated to such individual.

 

Amendment and Termination

 

The Purchase Plan will terminate upon the earliest of (1) the last business day in May 2011, (2) the date on which all Shares available for issuance thereunder are sold pursuant to exercised purchase rights, or (3) the date on which all purchase rights are exercised in connection with a change in control.

 

The Board may at any time alter, amend, suspend or discontinue the Purchase Plan. However, the Board may not, without stockholder approval, (1) increase the number of Shares issuable under the Purchase Plan, (2) alter the purchase price formula so as to reduce the purchase price, or (3) modify the requirements for eligibility to participate in the Purchase Plan.

Plan Benefits

 

The table below shows, as to the named executive officers and specified groups, the number of Shares purchased under the Purchase Plan during fiscal 2008, together with the value of those Shares as of the date of purchase.

 

 

Participation in the ESPP

 

Participation in the Purchase Plan is voluntary and dependent on each eligible employee’s election to participate and his or her determination as to the level of payroll deductions. Accordingly, future purchases under the Purchase Plan are not determinable. Nonemployee directors are not eligible to participate in the Purchase Plan. The following table sets forth certain information regarding shares purchased under the Purchase Plan during the last fiscal year for each of the named executive officers, for all current executive officers as a group and for all other employees who participated in the Purchase Plan as a group:

 

AMENDED PLAN BENEFITS
Employee Stock Purchase Plan

 

 

 

 

New Plan Benefits

 

No purchase rights have been granted, and no Shares have been issued, on the basis of the 2,900,000 Share increase that is the subject of this Proposal No. 4.

 

Federal Tax Consequences

 

The Purchase Plan is intended to be an employee stock purchase plan within the meaning of Section 423 of the Code. Under an employee stock purchase plan, which so qualifies, no taxable income will be recognized by a participant, and no deductions will be allowable to the Company, upon either the grant or the exercise of the purchase rights. Taxable income will not be recognized until there is a sale or other disposition of the Shares acquired under the Purchase Plan or in the event the participant should die while still owning the purchased Shares.

 

If the participant sells or otherwise disposes of the purchased Shares within two years after the start date of the offering period in which such Shares were acquired or within one year after the actual semiannual purchase date of those Shares, then the participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the fair market value of the Shares on the purchase date exceeded the purchase price paid for those Shares, and the Company will be entitled to an income tax deduction, for the taxable year in which such disposition occurs equal in amount to such excess. The participant will also recognize capital gain equal to the amount by which

the amount realized upon the sale or disposition exceeds the sum of the aggregate purchase price paid for the Shares and the ordinary income recognized in connection with their acquisition.

 

If the participant sells or disposes of the purchased Shares more than two years after the start date of the offering period in which the Shares were acquired and more than one year after the actual semiannual purchase date of those Shares, then the participant will recognize ordinary income in the year of sale or disposition equal to the lesser of (1) the amount by which the fair market value of the Shares on the sale or disposition date exceeded the purchase price paid for those Shares or (2) 15% of the fair market value of the Shares on the start date of that offering period. Any additional gain upon the disposition will be taxed as a long-term capital gain. The Company will not be entitled to an income tax deduction with respect to such disposition.

 

If the participant still owns the purchased Shares at the time of death, the lesser of (1) the amount by which the fair market value of the Shares on the date of death exceeds the purchase price or (2) 15% of the fair market value of the Shares on the start date of the offering period in which those Shares were acquired will constitute ordinary income in the year of death.

 

Summary

 

The Board believes that it is in the best interests of the Company to continue to provide employees with the opportunity to acquire an ownership interest in the Company through their participation in the Purchase Plan and thereby encourage them to remain in the Company’s employ and more closely align their interests with those of the stockholders.

 

Vote Required

 

The affirmative vote of a majority of the Votes Cast is required for approval of the amendment to the Purchase Plan described in this Proposal No. 4. Should such stockholder approval not be obtained, the 2,900,000 Share increase, which is the subject of this Proposal, will not be implemented.

 

The Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal No. 4

 

PROPOSAL NO. 5:

 

RATIFICATION OF INDEPENDENT AUDITORS

 

The Company is asking the stockholders to ratify the selection of Deloitte & Touche LLP as the Company’s independent auditors for the fiscal year ending April 24, 2009.

 

In the event the stockholders fail to ratify the appointment, the Audit Committee of the Board of Directors will consider it as a direction to select other auditors for the subsequent year. Even if the selection is ratified, the Audit Committee at its discretion may direct the appointment of a different independent accounting firm at any time during the year if the Board determines that such a change would be in the best interest of the Company and its stockholders.

 

A representative of Deloitte & Touche LLP is expected to be present at the Annual Meeting, will have the opportunity to make a statement if he or she desires to do so, and will be available to respond to appropriate questions.

 

Vote Required

 

The affirmative vote by a majority of the Votes Cast is required to ratify the selection of Deloitte & Touche LLP. The effect of an abstention is the same as that of a vote against the proposal. Unless you indicate otherwise, your proxy will vote “FOR” the proposal.

 

The Board of Directors Unanimously Recommends That Stockholders

Vote FOR Proposal No. 5

 

 

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

 

To the Company’s knowledge, the following table sets forth certain information regarding beneficial ownership of the Company’s common stock as of May 23, 2008 by (1) each person or entity who is known by the Company to own beneficially more than 5% of the Company’s common stock, (2) each of the Company’s directors and nominees for director, (3) each of the Company’s executive officers set forth in the Summary Compensation Table of the Compensation of Executive Officers section of this Proxy Statement, and (4) all of the Company’s current directors and executive officers as a group.

 

Except as indicated by footnote, the address of the beneficial owners is c/o NetApp, Inc., 495 East Java Drive, Sunnyvale, California 94089. Information related to holders of more than 5% of the Company’s common stock was obtained from filings with the SEC pursuant to Sections 13(d) or 13(g) of the Exchange Act.

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in their ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on the review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the fiscal year ended April 25, 2008, its officers, directors and greater than 10% stockholders complied with all Section 16 filing requirements. However, Mr. Mendoza inadvertently failed to file one Form 4 with respect to a forfeiture of common stock in August 1998 and one Form 4 with respect to a sale of common stock in May 2002 , which transactions are both reflected on a Form 4 filed on July 11, 2008.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The Board has delegated to the Compensation Committee of the Board (“Compensation Committee”) sole authority and responsibility for establishing and overseeing salaries, incentive compensation programs, and other forms of compensation for our executive officers and our other employees and for administering our equity incentive and benefits plans.

 

The principal components of compensation that we pay to our named executive officers consist of the following:

 

1. Base salary and standard employee benefits (including our 401(k) plan, health and life insurance plans, and nonqualified deferred compensation program);

 

2. Cash incentive compensation under the terms of incentive compensation plans established for our senior executive officers (including our named executive officers);

 

3. Equity compensation in the form of grants of stock options, restricted stock and restricted stock units; and

 

4. The Executive Retirement Medical Plan for qualifying senior executive officers (including our named executive officers).

 

Our compensation programs are designed to recruit and retain quality senior executive officers and to motivate and reward our senior executive officers for managing and operating our business in a manner that maximizes stockholder value consistent with good ethical behavior. We use a combination of individual and corporate-wide performance goals and measure these goals on an annual and long-term basis in order to ensure that we achieve our corporate goals. This compensation discussion and analysis explains the material elements of our compensation for our named executive officers and how our compensation program is designed and operated to help us achieve our corporate goals.

Principles and Objectives of Compensation

 

Our compensation program is designed to reward employee behaviors that benefit the Company and its stockholders on a day-to-day, periodic and long-term basis. These behaviors include excellence in performing one’s duties, collegiality and teamwork in meeting individual- and corporate-wide goals and good ethical behavior in performing one’s duties. Our base salary compensation is designed to ensure excellence in the day-to-day management and operation of our business while our cash incentive compensation program rewards behaviors that support the Company’s short-term (typically annual) goals. Our equity award programs target longer term value that we believe should ultimately be expressed as a sustained material increase in our stock price. Our equity awards also represent a key tool for retaining our employees, including our named executive officers. We do so through the granting of equity awards that “vest” over a fixed period of time subject to the continued provision of services by the individual to the Company. Our customary new hire equity award vests over a period of four years, with one-quarter of the total award vesting on the first anniversary of the employee’s hire date and the balance of the award vesting ratably each month thereafter for the next three years such that the entire award vests in full on the fourth anniversary of the hire date, subject to continued provision of service. Our customary performance equity award vests over a period of four years, vesting ratably each month such that the entire award vests in full on the fourth anniversary of the grant date, subject to continued provision of service.

 

Our Executive Retirement Medical Plan provides medical coverage beyond the COBRA maximum benefit period to a defined group of retiring executive officers as a fully insured plan based on minimum age, service and level of responsibility (that is, executive vice president or above) and was adopted by the Company as a method to retain the defined group of executive officers.

 

Total compensation is higher for senior executive officers (including our named executive officers) with greater responsibility and greater ability to influence the Company’s achievement of targeted results and corporate goals. As an executive’s position and responsibility increase, we believe that a greater portion of that executive’s total compensation should be performance-based pay that is contingent on the achievement of specific corporate goals. And as an executive’s performance-based pay increases with increasing levels of responsibility, we also believe that equity-based compensation should compose an increasingly higher portion of performance-based compensation and of total compensation. Therefore, our compensation program is structured such that a significant portion of our most senior executives’ (and all of our named executive officers’) total compensation is tied to long-term appreciation of our stock price.

 

Administration of Our Compensation Program

 

The Compensation Committee meets periodically throughout the year to manage our compensation program. The Compensation Committee determines and approves the principal components of compensation for our named executive officers (including the incentive targets for the cash incentive compensation program) on an annual basis, typically prior to the beginning of the applicable fiscal year. As part of this process, the Compensation Committee establishes targeted total compensation levels (that is, maximum achievable compensation) for each of our named executive officers. In making its decisions regarding compensation, the Compensation Committee obtains the advice and counsel of outside advisors engaged by the Compensation Committee. With respect to our named executive officers (other than the CEO), the Compensation Committee solicits the input of our chief executive officer, who recommends to the Compensation Committee the salary, incentive compensation and equity-based compensation to be paid to our named executive officers other than himself. We expect that the Compensation Committee will continue to solicit input from our chief executive officer with respect to compensation decisions affecting the other named executive officers and other members of our senior management team. With respect to compensation for our chief executive officer, the Compensation Committee deliberates and makes decisions without the presence or participation of the chief executive officer.

 

In addition, the Compensation Committee typically engages an independent compensation consultant to periodically review our compensation programs, based on both benchmarking of a select group of “peer companies” as well as based on our own internal pay equity parameters and our overall corporate goals. For instance, in connection with its determination of compensation for our fiscal year 2009, the Compensation Committee retained an independent compensation consultant to (1) review and assess the total direct compensation levels provided to

our senior management team relative to an appropriate peer group, (2) review and assess our current equity grant guidelines and practices relative to an appropriate peer group, and (3) develop future equity grant guidelines and practices for all employees taking into account current trends in compensation. Based on the analysis by the consultant, input from the senior management team and the Compensation Committee’s deliberations, the Compensation Committee approved our compensation plan for fiscal 2009.

 

The Compensation Committee has designed our compensation program in order to recruit and retain quality executives in a competitive labor environment and to motivate those executives to perform the best job possible consistent with good ethical behavior and to do so over a sustained period of time, which we believe will ultimately be expressed in our stock price. The Company offers each of the elements of compensation outlined above to our named executive officers because we believe that all four elements are necessary in order to meet the goals that we have set for our Company. For instance, if we were to reduce the payments under or eliminate entirely the incentive compensation plan, we would not have an appropriate means to motivate our executives to achieve short-term goals because we would be relying on base salary (which is not tied to specific corporate goals) and equity awards that (because of their vesting) are tied to long-term appreciation of our stock price. Similarly, if we were to reduce or eliminate our equity awards and rely solely on base salary and our incentive compensation plan, our executives might focus their efforts on achieving short-term corporate goals without regard to the creation of long-term value that would be expressed in our stock price.

 

Factors in Determining Compensation

 

The primary factors that the Compensation Committee takes into consideration in establishing the principal components of compensation of our named executive officers are discussed below. While these are typically the considerations upon which the Compensation Committee bases its compensation decisions for our named executive officers, the Compensation Committee may, at its discretion, apply entirely different factors, such as different measures of financial performance, for future fiscal years.

 

Competitive Market Data

 

In February 2007, the Compensation Committee reviewed and approved a peer group of companies to be used for fiscal 2008 for benchmarking and for setting executive compensation. The Compensation Peer Group for fiscal 2008 was as follows:

 

In February 2008, based on the review and recommendations presented by Radford Surveys + Consulting, the Compensation Committee reviewed and approved a revised Compensation Peer Group to be used for benchmarking and for setting executive compensation. To determine the appropriate peer group, the Compensation Committee considered companies with similar revenue, number of employees, market capitalization and annual growth rates. The median annual revenues for the new peer group are $2.3 billion and the group has been increased from 14 to 34 companies. The Compensation Committee will periodically review and update the peer group as appropriate. The Compensation Peer Group established for fiscal 2008 and 2009 is as follows:

 

 

 

 

Base Salary

 

In setting the base salary for each named executive officer, the Compensation Committee considers the executive’s qualifications and experience, scope of responsibilities, future potential contributions to the Company, the goals and objectives of the executive, and the executive’s past performance. In addition, the Compensation Committee reviews published compensation survey data for the industry, engages compensation consultants to perform customized studies for the Compensation Committee and reviews internal pay equity. The base salary for each named executive officer is designed to be competitive with salary levels for comparable positions in the published surveys as well as to reflect the individual’s personal performance and internal alignment considerations. The relative weight given to each factor varies with each individual at the sole discretion of the Compensation Committee. For fiscal 2008, the base salary of the Company’s named executive officers ranged from the 50th percentile to the 75th percentile of the base salary levels in effect for comparable positions in the then surveyed compensation data for the former peer group, which consisted of smaller revenue-sized companies. For fiscal 2009, we expect that the base salary of the Company’s named executive officers will remain within the 50th percentile range for the more comparably sized new peer group. In addition, for the named executive officers, we establish base salaries at a level so that a significant portion (generally 50% or more) of the executive’s total compensation is performance-based (that is, cash incentive and/or equity awards), and, therefore, in connection with its determination of increases or decreases in total compensation for our named executive officers, the Compensation Committee reviews the executive’s current total compensation package in order to ensure that any change in annual base salary is properly balanced relative to those portions of his or her total compensation that consist of incentive compensation and equity awards.

 

While base salary levels (along with all other components of a named executive officer’s compensation) are typically set at fixed and consistent points in our fiscal year cycle, under certain circumstances, the Compensation Committee will revise base salary levels when those levels are not consistent with the Company’s overall compensation policies or are not competitive enough to attract higher quality employees.

Incentive Compensation Plan

 

We have not historically paid any automatic or guaranteed cash incentives to our employees, including our named executive officers. The Compensation Committee believes that a cash incentive compensation plan that is tied to operational performance metrics can better serve to motivate the Company’s named executive officers and employees to achieve annual performance goals because such a plan uses more immediate measures of performance than those reflected in the appreciation in value of equity awards while still putting receipt of such compensation “at risk”. The Compensation Committee administers the incentive compensation plan on a yearly basis and authorizes payment of the incentive compensation payouts at the end of a particular fiscal year and creates a new, similarly structured plan for the succeeding fiscal year. The Compensation Committee determines the specific targets for each of our named executive officers based on the same criteria used to set base salary.

 

Under the 2008 incentive compensation plan, our senior executive officers (including all of our named executive officers) are eligible to receive annual performance-based cash compensation based on such individuals’ assigned target incentive compensation levels (which are expressed as a percentage of actual annual base salary earnings) and the funding of the 2008 incentive compensation plan, which is determined based on the Company achieving operating profits. For fiscal 2008, which ended April 25, 2008, the Company actually achieved 87.5% of its fiscal year 2008 plan. The incentive compensation-to-operating profit payout ratio is ten for one above 100% of the Company’s target operating profit goal and four for one below 100% of the Company’s target operating profit goal. For example, for each incremental percentage point of corporate operating profit beyond 100% of the Company’s targeted operating profit goal for a fiscal year, each eligible executive officer receives additional cash compensation equal to 10% of his actual incentive compensation target payout, up to a maximum of 200% of the target. For each incremental percentage point of the Company’s operating profit below 100% of the Company’s target operating profit goal for fiscal 2008, each eligible officer’s actual incentive compensation target payout is reduced by four percent. This incentive program is illustrated in the following schedule:

 

 

For our named executive officers, the target incentive compensation levels for fiscal year 2008 range from 110% to 130% of such individuals’ base earnings. All executives’ awards are capped at 2.0x target.

 

Long-Term Stock-Based Incentive Compensation

 

The Compensation Committee has the authority to grant stock options, restricted stock and restricted stock units (“RSUs”) to our named executive officers under our Amended and Restated 1995 Stock Incentive Plan and our Amended and Restated 1999 Stock Option Plan. These grants are designed to align the interests of each executive officer with those of the stockholders and provide each executive officer with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each stock option grant allows the executive officer to acquire shares of the Company’s common stock at a fixed price per share (the market price on the grant date) over a specified period of time (up to seven years), thus providing a return to the executive officer only if the market price of the shares appreciates over the option term, and the officer continues to be employed by the Company. The size of the option grant to each executive officer is designed to create a meaningful opportunity for stock ownership and is based on a number of factors, of which the principal ones are the executive officer’s current position with the Company, external comparability with option grants made to executive officers based on

published surveys, internal comparability with option grants made to other executive officers within the Company, the executive officer’s current level of performance and the executive officer’s potential for future responsibility and promotion over the option term. The Compensation Committee also takes into account the number of vested and unvested options and RSUs held by the executive officer in order to maintain an appropriate level of equity incentive for the individual. However, the Compensation Committee does not adhere to any specific guidelines as to the relative option holdings of the Company’s executive officers.

 

Since May of 2003, we have occasionally granted restricted stock in addition to stock options in unique situations when retention was of key strategic importance. As with the granting of stock options, restricted stock and RSU grants allow us to align the interests of each named executive officer with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Restricted stock and RSUs vest annually over four years and, because the restricted stock and RSU entails actual ownership of our common stock without the need to “exercise”, our restricted stock and RSU grants are proportionally smaller than our stock option grants, though the size of the restricted stock and RSU grant for each executive officer is still determined based on the same factors used to determine stock option grants described in the immediately preceding paragraph.

 

Pricing of and Accounting for Equity Awards

 

All grants of stock options to our executive officers, employees, and directors have exercise prices equal to or exceeding the fair market value of the underlying shares of common stock on the grant date, as determined by our Board. All equity-based awards have been reflected in our consolidated financial statements, based on the applicable accounting guidance. Previously, we accounted for equity compensation paid to our employees and directors using the intrinsic value method under APB Opinion No. 25 and FASB Financial Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25.” Under the intrinsic value method, no stock-based compensation was recognized in our consolidated statements of operations for options granted to our directors, employees, consultants and others because the exercise price of the stock options equaled or exceeded the fair market value of the underlying stock on the dates of grant. Effective April 29, 2006, we adopted FAS 123R using the modified prospective method. Under this method, stock-based compensation expense is recognized using the fair-value based method for all awards granted on or after the date of adoption of FAS 123R. FAS 123R requires us to estimate and record an expense over the service period of the stock-based award.

 

Policies Regarding Timing of Equity Award Grants

 

Except in extraordinary circumstances as approved by the Compensation Committee, we grant stock options, restricted stock and RSUs to all of our employees (including our named executive officers) on fixed dates. If the named executive officer is a new hire and is receiving an initial grant in connection with the commencement of employment, the grant to such individual “will be effective” on the 15^th (or the first business day following the 15^th, in the event that the 15^th falls on a weekend or holiday) of the month that immediately follows the month in which the individual first commences employment with us. Regardless of the date of grant, the vesting commencement date is still the actual first day of employment. For named executive officers who receive promotion or retention grants, such grants “will be effective” on the 15^th (or the first business day following the 15^th, in the event that the 15^th falls on a weekend or holiday) of the month that immediately follows the month in which the Compensation Committee approves the grant for such individual. Annual stock option and restricted stock grants to named executive officers are “effective” on June 1^st (or the first business day following June 1^st, in the event that June 1^st falls on a weekend or holiday).

 

We do not have a policy or practice in place to grant equity awards that are timed to precede or follow the release or withholding of material nonpublic information.

Other Compensation for Named Executive Officers

 

Severance and Change of Control Arrangements

 

As of fiscal 2008, we did not have any employment contracts or severance agreements in effect with any of our named executive officers. However, we did have contractual obligations to provide three of our named executive officers with severance benefits in certain circumstances. Specifically, the stock options granted to each of Daniel J. Warmenhoven, our Chief Executive Officer, Thomas F. Mendoza, our Vice Chairman, and Steven J. Gomo, our Executive Vice President of Finance and Chief Financial Officer, under the Discretionary Option Grant Programs of our Amended and Restated 1995 Stock Incentive Plan and our Amended and Restated 1999 Stock Option Plan will immediately accelerate and vest in full in the event that such individual’s employment with us is terminated in connection with an acquisition of the Company pursuant to a merger or reorganization or a sale of all or substantially all of our assets. We also have a general severance policy applicable to all employees (including the named executive officers) providing for additional weeks of pay based on years of service, plus periods of access to a career center and office resources, one-on-one coaching, and access to an online database.

 

In considering total executive compensation for fiscal year 2009, the Compensation Committee recognized that we faced a potential risk of not being able to retain key executives in the event of an acquisition of the Company as a result of not having employment or severance agreements. On April 7, 2008, the Compensation Committee began to discuss entering into change of control severance agreements with certain of our executives. The Compensation Committee worked with an independent compensation consultant, Radford Surveys + Consulting, who provided various suggestions regarding the potential terms of a change of control severance agreement based on competitive market data from our Compensation Peer Group. In considering these potential terms, the Compensation Committee’s objectives were to: (1) assure we would have the continued dedication and objectivity of our executives, notwithstanding the possibility of a change of control of the Company, thereby aligning the interests of these key executives with those of the stockholders in connection with potentially advantageous offers to acquire the Company; and (2) create a total executive compensation plan that is competitive with our Compensation Peer Group.

 

On June 19, 2008, the Compensation Committee approved the terms of a change of control severance agreement and entering into such agreements with certain of our executives. Thereafter, we entered into a Change of Control Severance Agreements with certain executives, including each of the named executive officers. The terms of the individual Change of Control Severance Agreements are described in further detail in the section below titled “Potential Payments upon Termination or Change of Control.”

 

Perquisites

 

The Company’s named executive officers are eligible to participate in the Company’s Executive Retirement Medical Plan, which provides medical coverage beyond the COBRA maximum benefit period to a defined group of retiring executive officers as a fully-insured plan based on minimum age, service and level of responsibility (that is, executive vice president or above), and was adopted by the Company as a method to retain the defined group of executive officers. Our named executive officers are also entitled to a preventive care medical benefit not available to nonexecutives up to $2,500 per calendar year.

 

Other Benefits and Reimbursements

 

Named executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees. We offer up to $3,000 in a matching contribution under our 401(k) plan to each employee. The only retirement benefits that we offer our named executive officers are those under the Executive Retirement Medical Plan.

 

The Board of Directors has adopted a travel policy whereby the Company’s CEO and Vice Chairman are permitted for business travel to fly private or charter aircraft within certain limitations. The CEO and Vice Chairman are two of the most frequently traveled senior executive officers of the Company and are often required to travel on extremely short notice and to areas that have limited access to commercial flights. Because the reimbursement is for business travel only and is integrally and directly related to the performance of the executives’ duties, the

Company’s reimbursement is not compensation or a perquisite. Subject to an annual cap of $500,000, the CEO is reimbursed for expenses incurred in the operation of his privately owned aircraft when used for Company business, provided such expenses do not exceed the rate charged for equivalent commercial charter travel. For further details, see the Certain Transactions with Related Parties section of this Proxy Statement. The Vice Chairman is reimbursed for the actual cost of chartering an aircraft for his qualified business travel as defined in the policy and is also subject to an annual cap of $500,000.

 

Tax Deductibility of Compensation

 

Section 162(m) of the Code generally disallows a tax deduction to publicly held companies for compensation paid to certain executive officers, to the extent that compensation exceeds $1 million per officer in any year. The Company generally seeks to maximize the deductibility for tax purposes of all elements of compensation. The compensation paid to the CEO for the fiscal year 2008 did exceed the $1 million limit per officer, and it is expected the compensation to be paid to the CEO for the 2009 fiscal year will also exceed that limit. Our Amended and Restated 1995 Stock Incentive Plan and our Amended and Restated 1999 Stock Option Plan are structured so that any compensation deemed paid to an executive officer in connection with the exercise of his or her outstanding options under each such plan will qualify as performance-based compensation which will not be subject to the $1 million limitation. At the 2007 Annual Meeting, stockholders approved the Executive Compensation Plan so that cash bonuses paid in accordance with our Executive Compensation Plan could be structured to allow for a deduction under 162(m). The Company does not believe the amount of compensation in excess of $1 million will be significant. However, the Compensation Committee periodically reviews applicable tax provisions, such as Section 162(m), and may revise compensation plans from time to time to maximize deductibility.

 

 

 

 

The information contained in the following Report of the Compensation Committee of the Board of Directors on Executive Compensation shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.

 

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based upon such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Submitted by the Compensation Committee
of the Board of Directors:

 

Carol A. Bartz, Chairman
Edward Kozel
Robert T. Wall

 

 

COMPENSATION OF EXECUTIVE OFFICERS

 

Summary Compensation Table

 

The table below summarizes the compensation information for the named executive officers for the fiscal years ended April 25, 2008 and April 27, 2007.

 

 

 

 

Grants of Plan-Based Awards

 

The table below summarizes information concerning all plan-based awards granted to the named executive officers during fiscal 2008, which ended on April 25, 2008.

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year End

 

The following table sets forth information regarding stock options and stock awards held by the named executive officers as of April 25, 2008.

 

 

 

Option Exercises and Stock Vested for Fiscal 2008

 

The following table provides information regarding options and stock awards exercised and vested, respectively, and value realized for each of the named executive officers during the fiscal year that ended on April 25, 2008.