UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

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FLEXTRONICS INTERNATIONAL LTD.

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FLEXTRONICS INTERNATIONAL LTD.

(Incorporated in the Republic of Singapore)

(Company Registration Number 199002645H)

 

NOTICE OF EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS

To Be Held on July 13, 2009

 

To our shareholders:

 

You are cordially invited to attend, and NOTICE IS HEREBY GIVEN, of an extraordinary general meeting of shareholders of FLEXTRONICS INTERNATIONAL LTD. (the “Company”), which will be held at our principal U.S. offices located at 2090 Fortune Drive, San Jose, California, 95131, U.S.A., at 2:00 p.m., California time, on July 13, 2009. The purpose of the extraordinary general meeting is to approve waivers to the provisions of certain of our existing equity incentive plans to allow for a one-time only stock option exchange program for our eligible employees, other than the members of the Company’s Board of Directors and its executive officers.

 

The full text of the resolution proposed for approval by our shareholders is as follows:

 

 

“RESOLVED THAT:

 

Approval be and is hereby given to amend certain of the Company’s existing equity incentive plans, which are identified in the Company’s proxy statement for the extraordinary general meeting, to allow for a one-time stock option exchange program for employees of the Company and its subsidiaries, other than the members of the Company’s Board of Directors, its executive officers, and certain other designated employees of the Company and its subsidiaries.”

 

 

Notes

 

Eligibility to Vote at Extraordinary General Meeting; Receipt of Notice. The Board of Directors has fixed the close of business on May 20, 2009 as the record date for determining those shareholders of the Company who will be entitled to receive copies of this notice and the accompanying proxy statement. However, all shareholders of record on July 13, 2009, the date of the extraordinary general meeting, will be entitled to vote at the extraordinary general meeting.

 

Quorum. Representation of at least 331/3% of all outstanding ordinary shares of the Company is required to constitute a quorum to transact business at the extraordinary general meeting. Accordingly, it is important that your shares be represented at the meeting.

 

Proxies. If you are entitled to attend and vote at the extraordinary general meeting, you may appoint a proxy to attend the meeting and vote on your behalf. A proxy does not also need to be a shareholder. Whether or not you plan to attend the meeting, please complete, date and sign the enclosed proxy card and return it in the enclosed envelope. In order for your proxy card to be voted at the extraordinary general meeting, it must be received by Flextronics International Ltd. c/o Proxy Services, c/o Computershare Investor Services, PO Box 43101, Providence, RI 02940-5067 not less than 48 hours before the time appointed for holding the meeting. You may revoke your proxy at any time prior to the time it is voted. Shareholders who are present at the meeting may revoke their proxies and vote in person or, if they prefer, may abstain from voting in person and allow their proxies to be voted.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 13, 2009.

 

This notice and the accompanying proxy statement are available on our website at www.flextronics.com/secfilings.

 

 

IMPORTANT:

 

You should read the entire proxy statement

carefully prior to returning your proxy cards.

 

Table of Contents

 

 

PROXY STATEMENT FOR
EXTRAORDINARY GENERAL MEETING OF
SHAREHOLDERS OF

 

FLEXTRONICS INTERNATIONAL LTD.

 

 

To Be Held on July 13, 2009
2:00 p.m. (California Time)

at our principal U.S. offices at

2090 Fortune Drive

San Jose, California, 95131, U.S.A.

 

 

 

We are furnishing this proxy statement in connection with the solicitation by our Board of Directors of proxies to be voted at an extraordinary general meeting of our shareholders, or at any adjournments thereof, for the purpose of approving waivers to the provisions of certain of our existing equity incentive plans to allow for a one-time only stock option exchange program for our eligible employees, other than the members of our Board of Directors and our executive officers. Unless the context requires otherwise, references in this proxy statement to “the company,” “we,” “us,” “our” and similar terms mean Flextronics International Ltd. and its subsidiaries.

 

Proxy Mailing. This proxy statement and the enclosed proxy card were first mailed on or about June 5, 2009 to shareholders of record as of May 20, 2009.

 

Costs of Solicitation. The entire cost of soliciting proxies will be borne by us. Following the original mailing of the proxies and other soliciting materials, our directors, officers and employees may also solicit proxies by mail, telephone, e-mail, fax or in person. These directors, officers and employees will not receive additional compensation for those activities, but they may be reimbursed for any reasonable out-of-pocket expenses. Following the original mailing of the proxies and other soliciting materials, we will request that brokers, custodians, nominees and other record holders of our ordinary shares forward copies of the proxy and other soliciting materials to persons for whom they hold ordinary shares and request authority for the exercise of proxies. In these cases, we will reimburse such holders for their reasonable expenses if they ask that we do so. We have retained Georgeson Inc., an independent proxy solicitation firm, to assist in soliciting proxies at an estimated fee of $11,500, plus the reimbursement of reasonable expenses.

 

Registered Office. The mailing address of our registered office is One Marina Boulevard, #28-00, Singapore 018989.

 

The close of business on May 20, 2009 is the record date for shareholders entitled to notice of the extraordinary general meeting. However, all of the ordinary shares issued and outstanding on July 13, 2009, the date of the extraordinary general meeting, are entitled to be voted at the extraordinary general meeting. Shareholders of record on July 13, 2009 and entitled to vote at the meeting will have one vote on the matters to be voted upon for each ordinary share so held. As of June 1, 2009, we had 810,176,050 ordinary shares issued and outstanding.

 

Proxies. Ordinary shares represented by proxies in the form accompanying this proxy statement that are properly executed and returned to us will be voted at the extraordinary general meeting in accordance with our shareholders’ instructions.

Quorum and Required Vote. Representation at the extraordinary general meeting of at least 331/3% of all of our issued and outstanding ordinary shares is required to constitute a quorum to transact business at the extraordinary general meeting.

 

The affirmative vote of the holders of a majority of all issued and outstanding shares voting in person or by proxy at the extraordinary general meeting is required to approve the option exchange program proposal set forth in Proposal No. 1.

 

Abstentions and Broker Non-Votes. Abstentions and “broker non-votes” are considered present and entitled to vote at the extraordinary general meeting for the purposes of determining a quorum. A “broker non-vote” occurs when a broker or other holder of record who holds shares for a beneficial owner does not vote on a particular proposal because the record holder does not have discretionary power to vote on that particular proposal and has not received directions from the beneficial owner. If a broker or nominee indicates on the proxy card that it does not have discretionary authority to vote as to a particular matter, those shares, along with any abstentions, will not be counted in the tabulation of the votes cast on the proposal being presented to shareholders.

 

If you are a beneficial owner and your broker does not receive voting instructions from you, your broker does not have discretionary authority to vote your shares on the option exchange program proposal set forth in Proposal No. 1.

 

In the absence of contrary instructions, shares represented by proxies will be voted “FOR” the approval of the option exchange program proposal set forth in Proposal No. 1. Our management does not know of any matters to be presented at the extraordinary general meeting other than the matter set forth in this proxy statement and in the notice accompanying this proxy statement. If other matters should properly be put before the meeting, the proxy holders will vote on such matters in accordance with their best judgment.

 

Any shareholder of record has the right to revoke his or her proxy at any time prior to voting at the extraordinary general meeting by:

 

 

Except as otherwise stated herein, all monetary amounts in this proxy statement have been presented in U.S. dollars.

 

 

 

We are asking our shareholders to amend certain of our existing equity incentive plans to allow for a one-time stock option exchange program, which we refer to below as the option exchange program. Our Compensation Committee recommended and our Board of Directors authorized the stock option exchange program on May 14, 2009, subject to shareholder approval of amendments to certain of our equity incentive plans to allow for the option exchange program. If implemented, this option exchange program would permit some of our employees to surrender certain outstanding options that are significantly “underwater” (i.e., those options with an exercise price that is significantly greater than the current trading price of our ordinary shares) for cancellation in exchange for a lesser number of stock options with an exercise price equal to the closing price of our shares on the grant date of the new options. The replacement stock options would be issued under our 2001 Equity Incentive Plan, which we refer to as the 2001 Plan, our 2002 Interim Incentive Plan, which we refer to as the 2002 Plan and the Solectron Corporation 2002 Stock Plan, which we refer to as the SLR Plan.

We believe that this option exchange program would be in the best interests of our shareholders and the company, as the replacement stock options would help us to retain and motivate our most talented employees so that we can continue to build value for our shareholders. In addition, the option exchange program would reduce the total number of outstanding stock options held by our employees and allow us to more effectively utilize the compensation expense that we have already recognized in our financial statements in connection with the grants of the existing underwater stock options.

 

       Summary of the Option Exchange Program

 

The following is a summary of the material terms of the option exchange program, which are described in more detail below under the section captioned “Terms of the Option Exchange Program”:

 

 

 

 

If our shareholders approve this Proposal No. 1 at the extraordinary general meeting, we intend to commence the option exchange program as soon as practicable after the meeting. The actual implementation date will be set by our Board of Directors, the Compensation Committee of our Board of Directors, or an individual designated by the Board or the committee for such purpose. However, we must commence the option exchange program within 12 months of the date that our shareholders approve this Proposal No. 1, unless we seek additional shareholder approval for such program. The equity incentive plan amendments that we are asking our shareholders to approve pursuant to this Proposal No. 1 only permit a one-time option exchange program commenced within twelve months of the date of shareholder approval. For the full text of the amendments, please refer to the section below captioned “Text of Amendments to Equity Plans.”

 

The price of our ordinary shares, along with that of other North American Electronics Manufacturing Services (EMS) companies, has been significantly impacted by the worldwide economic downturn. From January 1, 2008 to June 1, 2009, share prices have declined approximately 46% within our industry, based on a weighted average percentage of the changes in the share prices of the company, Jabil Circuit, Inc., Sanmina-SCI Corporation, Celestica, Inc. and Benchmark Electronics, Inc. This decline compares with the approximately 31% share price decline of the NASDAQ Composite Index during the same period.

 

Market capitalization declines have been particularly pronounced in certain industries, such as the EMS industry, since October 2008. Contributing to these declines has been the dramatic decline in demand for the products we manufacture for our original equipment manufacturer customers, coupled with heightened concerns over credit availability for our customers. The continued slowing of the global economy has meaningfully reduced demand across virtually every product category and every geographic region in which we operate, creating one of the most challenging environments in our history.

 

These market factors have contributed to substantially all employee stock options granted by us prior to December 2008 being significantly underwater, particularly options that we have granted to our employees over the last seven years. As of June 1, 2009, exercise prices for outstanding underwater options that would be eligible to be surrendered for cancellation pursuant to the option exchange program ranged from $10.07 to $29.94, and are approximately 2.38 to 7.08 times above $4.23 per share, the closing price of our ordinary shares on the NASDAQ Global Select Market on such date. Our Board of Directors believes that these underwater options provide little motivational or retention value for our existing employees.

 

Our Board of Directors believes that allowing our employees the opportunity to exchange their underwater stock options for a lesser number of new at-the-money options (i.e., options that have an exercise price equal to the current trading price of our ordinary shares) would help us retain such employees as well as provide an additional incentive for our employees during these difficult economic times. The newly-issued options would include additional vesting requirements to enhance their retentive value and no options would be eligible to be exchanged that have exercise prices below $10, or if greater, the highest trading price of our ordinary shares in the 52-week period immediately preceding the date that we commence the exchange offer to employees. We plan to commence the exchange offer as soon as practicable after the extraordinary general meeting if our shareholders approve this Proposal No. 1. The option exchange program is intended to be a value neutral program from an accounting perspective. Therefore, we do not expect that the program would result in any material incremental increase in our share-based compensation costs. Furthermore, members of our Board of Directors and our executive officers would not be eligible to participate in this option exchange program. While these individuals also hold options that are significantly underwater, we have excluded them from participation in the option exchange program so that their equity incentive compensation remains more closely aligned with the interests of our shareholders.

 

While we are executing an aggressive strategy that we are confident will enable us to emerge from the downturn in the strongest possible position, we are concerned that the strain from these activities could adversely impact the morale and retention of our employees. In addition, as we discuss in more detail below, keeping the existing underwater options outstanding represents stock option dilution for our shareholders and compensation expense for the company even though the options provide minimal retentive value to our employees and may never be exercised. We believe that our proposed option exchange program would significantly mitigate our retention risk and create a positive solution for our employees and shareholders by reducing our stock option dilution and recapturing the compensation expense already recognized for the existing underwater options.

 

       Value to our Employees: Create a “Return on Investment” from our Equity Program

 

We are facing significant challenges relating to how we compensate our most talented employees in the current macroeconomic environment. Under normal circumstances, our success at attracting and retaining the “best and brightest” to expand our capabilities and institutional knowledge base requires us to recruit outside

of the EMS industry. The majority of our extended management team has broad work experience with original equipment manufacturers and other high tech global companies. Because of the worldwide demand for talent, we believe that the use of non-cash incentives — such as a viable equity program — is essential to effectively attract and retain employees that match our current level of expertise and talent.

 

Our desire to maintain our overall stock dilution at or below the dilution levels of our peers and the broader market has limited our issuance of equity awards to a very select group of employees who have a direct impact on helping us to attain our operational and strategic objectives. Approximately 2-3% of our employee base receives equity awards, either at the time of hire or on an ongoing basis. It is critical for the “return on investment” of these equity awards to be meaningful, and we believe that the option exchange program will enable a positive return on investment for these employees.

 

In response to deteriorating macroeconomic conditions, we have implemented restructuring activities to improve the company’s operational efficiencies by reducing excess workforce and capacity. In addition, we have taken the following significant actions to reduce our global total compensation costs:

 

 

In the context of these pronounced benefit reductions and the challenges that we face in attracting and retaining employees that match our current level of expertise and talent, we believe that the exchange program will allow us to provide a meaningful, tangible benefit to our employees at little or no additional cost to the company.

 

       Benefits to our Shareholders: Reduced Overhang and Effective use of Compensation Expense

 

As of June 1, 2009, our stock option “overhang” (i.e., the total number of stock options outstanding as a percentage of our total ordinary shares outstanding) was 9.9%, based on approximately 80,045,643 employee stock options outstanding and 810,176,050 total ordinary shares issued and outstanding. Approximately 29.8 million of these outstanding options are held by employees who would be eligible to be included in the exchange program. We believe that keeping these underwater options outstanding provides little or no retentive value to our employees. Nevertheless, these options will remain in overhang until they are exercised, expire or are cancelled. By replacing these outstanding options with fewer at-the-money options, we would reduce our stock option overhang. The total overhang reduction is difficult to estimate and will only be known when the actual exchange is complete. However, if all eligible employees decided to tender their eligible underwater options in the exchange, and the fair values of the options received in the exchange are similar to our estimate of such fair values as of June 1, 2009, the option exchange program would reduce our overhang by approximately 16% (from 9.9% to 8.3%). In addition, in connection with the option exchange program, we will cancel five million ordinary shares currently available for grant under the SLR Plan, which will further reduce our overhang levels. Therefore, we expect that the option exchange program could meaningfully reduce the stock option dilution for our shareholders while helping us more effectively achieve the objectives of our equity program to attract, retain and motivate our employees.

 

Lastly, the option exchange program will allow us to more effectively utilize the compensation expense that we have already recognized or will recognize with respect to existing stock options. Generally, we recognize an expense that reduces our net income whenever we grant stock options to our employees. This share-based compensation expense is calculated at the time the option is granted (not exercised) in accordance with SFAS 123(R) and is recognized over the vesting period of the option. By implementing a value neutral

exchange with additional vesting requirements for the replacement stock options, the granting of the replacement options should not result in any material incremental SFAS 123(R) costs to the company. Conversely, by allowing us to replace underwater options that have little or no retentive value with a lesser number of new at-the-money options, we believe that the exchange program would result in a meaningful, tangible benefit to our employees. Therefore, the exchange program would allow us to more efficiently utilize the share-based compensation expense that we have already recognized or will recognize in our financial statements. In addition, if approved, the option exchange program would allow us to reduce the number of equity awards that we otherwise would issue to employees in fiscal year 2010 as part of our annual compensation review process.

 

The implementation of the option exchange program is subject to the approval of our shareholders of this Proposal No. 1. If the program is commenced, eligible employees will be offered the opportunity to participate in the option exchange program pursuant to a written offer that will be distributed to all eligible employees. Eligible employees would be given at least 20 business days in which to accept the offer to surrender their eligible options for cancellation in exchange for fewer new stock options. The surrendered options would be cancelled and the new options would be granted upon the cancellation of the surrendered options. However, our Board of Directors reserves the right to postpone or cancel the program at any time before the actual exchange takes place.

 

Prior to the commencement of the option exchange program, we will file the written offer to exchange with the United States Securities and Exchange Commission, or SEC, as part of a tender offer statement on Schedule TO. Eligible employees and our shareholders will be able to review the offer to exchange, and other related documents filed by us with the SEC, free of charge on the SEC’s website at www.sec.gov.

 

       Eligible Options

 

To be eligible for exchange pursuant to the option exchange program, an option must (i) have an exercise price of at least $10.00 per share, or if greater, the highest per share trading price of our ordinary shares for the 52-week period immediately preceding the date of the commencement of the option exchange program and (ii) have been granted at least 12 months prior to the commencement of the option exchange program. This approach seeks to exclude from the option exchange program those stock options which, because they had intrinsic value in the recent past, are more likely to have intrinsic value in the near future.

 

       Eligible Participants

 

The option exchange program would be open to all of our U.S. and international employees who hold eligible options, except for the following individuals:

 

 

 

Although we intend to include our international employees in the option exchange program, we may exclude some employees if local law, expense, complexity, administrative burden or similar considerations would make their participation in the program illegal, inadvisable or impractical and where exclusion otherwise is consistent with our compensation policies with respect to that jurisdiction. To be eligible, an individual must be employed on the date the offer to exchange commences and remain employed through the date that the replacement options are granted. Therefore, the program is not available to former employees or

retirees. As of June 1, 2009, there were approximately 2,272 employees who hold eligible options and would be eligible to participate in the option exchange program.

 

       Exchange Ratios

 

We refer to the number of options that an employee must surrender for cancellation in exchange for one new replacement option as the “exchange ratio.” The exchange ratios for the option exchange program would be based on the exercise price of the existing options that are surrendered for exchange and the estimated fair value of the options that would be received in the exchange. If our shareholders approve this Proposal No. 1, we will determine the exchange ratios shortly before the offer to exchange commences.

 

We intend to establish the exchange ratios by dividing the eligible options into at least two groups based on their current exercise prices and assigning an exchange ratio to each group that is designed to result in a value neutral exchange (calculated using the Black-Scholes option pricing model) for such group as a whole. The calculation of fair value using the Black-Scholes option pricing model takes into account many variables, such as the volatility of our ordinary shares, the remaining term of the applicable options, the exercise prices of such options, the trading price of our ordinary shares on the date of grant and the potential for forfeiture of such options if the service-based vesting requirements are not satisfied. As a result, the exchange ratios would not solely reflect the difference in the exercise prices of the existing options. Setting the exchange ratios in this manner will avoid the company having to recognize any material incremental compensation expense upon the issuance of the replacement options. However, because the exchange ratios would be set prior to the actual exchange of options under the program, it is possible that we would recognize some additional incremental compensation expense due to fluctuations in the trading price of our ordinary shares between the time the ratios are set and the date the replacement options are granted.

 

The exchange ratios have not been determined as of the date of this proxy statement. However, to illustrate the effect of the program on our outstanding options, we have set forth below an estimate of what the exchange ratios would be if they were set as of June 1, 2009, when the closing price of our ordinary shares on the NASDAQ Global Select Market was $4.23 per share.

 

 

The total number of replacement options that an employee would receive in exchange for the surrender of eligible options would be determined, on a grant-by-grant basis, by converting the number of shares underlying the eligible option according to the appropriate exchange ratio and rounding down to the nearest whole share. For example, using the example exchange ratios set forth above, if an employee were to surrender 100 eligible options with an exercise price of $17 per share, the employee would receive 40 replacement options (100 divided by 2.50, rounded down to the nearest whole share) in exchange for the surrendered options. Likewise, if the employee surrendered 100 eligible options with an exercise price of $11 per share, the employee would receive 62 replacement options (100 divided by 1.60, rounded down to the nearest whole share). The exercise prices of the new replacement options will equal the closing price of our ordinary shares on the NASDAQ Global Select Market on the date of the exchange.

 

Assuming the use of the illustrative exchange ratios and the estimated number of eligible options set forth above, if all eligible options are surrendered for cancellation in the option exchange program, the total maximum number of ordinary shares underlying replacement options would be 16,918,953 shares, resulting in a reduction of 12,866,766 ordinary shares subject to outstanding employee stock options.

       Election to Participate

 

Participation in the option exchange program would be completely voluntary and eligible employees would be permitted to exchange all or none of their eligible options on a grant-by-grant basis. If an employee declines to participate in the exchange program with respect to all or a portion of his or her eligible option grants, all existing stock options that are not surrendered will remain outstanding subject to their existing terms, including vesting schedules, expiration dates and exercise prices.

 

If you are both a shareholder and an employee who would be eligible to participate in the option exchange program, your vote to approve this Proposal No. 1 does not constitute an election to participate in the exchange program.

 

       Terms of Replacement Options

 

All replacement options would be non-qualified stock options granted under the 2001 Plan, the 2002 Plan or the SLR Plan. As stated above, the exercise price of all replacement options received in exchange for the surrender of existing eligible options would be equal to the closing price of our ordinary shares on the date of grant. All replacement options will have a new exercise term of seven years. In addition, each replacement option would be subject to a new vesting schedule based on the time remaining in the existing vesting schedule of the options surrendered for cancellation in the exchange. The table below sets forth the new vesting schedules that would apply to the replacement options:

 

 

An employee would not be able to exercise his or her replacement options prior to the time such options have vested in accordance with the schedule listed above. If any employee ceases to provide services to the company prior to the end of the vesting period for any reason, all unvested options would be forfeited, subject to the provisions of the 2001 Plan, the 2002 Plan or the SLR Plan, as the case may be. The other terms and conditions of the replacement options would be set forth in new grant agreements to be entered into as of the grant date. Any additional terms of the replacement options would be comparable to the terms and conditions of the options surrendered in the option exchange.

 

The new vesting schedules of the replacement options will correspond to the typical vesting schedule of our employee stock options. In general, options outstanding under our equity incentive plans have a term of seven to ten years and a vesting schedule of four years, with 25% of the options vesting on the first anniversary of the grant date and the remaining options vesting in equal monthly installments over the remaining three years. In designing the term and vesting schedules of the replacement options, we considered various alternatives, such as applying the weighted average term of the existing eligible options to the replacement options. However, we believe that the use of a seven-year term for all replacement options is appropriate because it enables us to apply a longer associated vesting schedule, which enhances the retentive power of the replacement awards. In addition, the seven-year term of the replacement options would be reflected in the exchange ratios used in the option exchange program.

       Cancellation of Surrendered Options

 

All options that are surrendered pursuant to the option exchange program will be cancelled, and replacement options will be granted upon the cancellation of the surrendered options. In addition, in order to reduce our stock option overhang and minimize dilution for our shareholders, we will cancel five million ordinary shares reserved and available for future grant under the SLR Plan in connection with the option exchange program. All other ordinary shares subject to options cancelled in the exchange program will be returned to the share reserve of the applicable equity incentive plan under which the surrendered options were originally granted and will be available for future grant under such plan, except that shares subject to cancelled options granted under certain of our prior and assumed plans that have been consolidated into the 2001 Plan will be available for future issuance under the 2001 Plan.

 

It is currently our intention to make the option exchange program available to all of our eligible employees (other than directors and executive officers), including eligible employees located in jurisdictions outside of the United States, where the exchange is permitted by local law and we determine that it is feasible and practical for such employees to participate consistent with our compensation policies with respect to a particular jurisdiction. It is possible that we would need to make modifications to the terms of the option exchange program for any offers made to employees outside of the United States in order to comply with local requirements, or for tax or accounting reasons.

 

We have adopted the provisions of SFAS 123(R), which requires employee equity awards to be accounted for in our financial statements under the fair value method. Generally, when we grant new share-based awards, we recognize compensation expense for the fair value of such awards, which we recognize over the vesting schedule of the award. However, under these rules, the exchange of options pursuant to the option exchange program will be characterized as a modification of the existing option awards and no additional expense will be recognized if the modification is value neutral. To be value neutral under SFAS 123(R), the fair value of the stock options surrendered as calculated immediately prior to their surrender must be at least equal to the fair value of the stock options received by employees in the option exchange program. As described above, we use the Black-Scholes option pricing model to determine the fair value of all stock options granted to employees. When we establish the exchange ratios immediately prior to the commencement of the exchange offer, we intend to set exchange ratios that will not cause us to incur any material incremental share-based compensation expense. However, if there are fluctuations in the trading price of our ordinary shares between the date the ratios are established and the effective date of the exchange, there is some risk of incremental compensation expense.

 

Any previously unrecognized compensation expense from the surrendered stock options and incremental compensation costs, if any, associated with the new stock options received in the option exchange program will be recognized over the vesting period of the new options.

 

The following is a general summary as of the date of this proxy statement of the United States federal income tax consequences to the company and the employees who would be eligible to participate in the option exchange program. Tax laws may change and the federal, state and local tax consequences for any participating employee will depend upon his or her individual circumstances. The following general description does not constitute tax advice and should not be relied upon as such. Each participating employee is encouraged to seek the advice of a qualified tax adviser regarding the tax consequences of participation in the option exchange program. In addition, the following discussion does not purport to describe state or local income tax consequences in the United States, nor tax consequences for participants who are subject to tax in other countries.

The surrender of options for cancellation in the option exchange program in exchange for new options should be treated as a non-taxable exchange for U.S. federal income tax purposes, provided that the new stock options have an exercise price equal to the fair market value of our ordinary shares on the date of grant. Therefore, neither the company nor any of our employees should recognize any income for U.S. federal income tax purposes upon the grant of the replacement options. However, there is no assurance that the Internal Revenue Service would not adopt a contrary position. All new stock options granted under the option exchange program will be non-qualified stock options for U.S. federal income tax purposes. The tax consequences of the option exchange program in foreign jurisdictions may differ from the U.S. federal income tax consequences, and will depend on applicable foreign tax rules and regulations.

 

 

The members of our Board of Directors and our executive officers will not be eligible to participate in the option exchange program. With respect to those employees who are eligible to participate in the option exchange program, the decision to participate in the program is voluntary and, therefore, we are not able to predict:

 

 

 

 

Mr. Greg Westbrook, who serves as our President, VistaPoint Technologies, was an executive officer of the company during the 2009 fiscal year. Because he is no longer an executive officer, Mr. Westbrook would be eligible to participate in the option exchange program if it is approved by our shareholders. Mr. Westbrook holds options to purchase 240,000 shares at $10.53 per share and options to purchase 400,000 shares at $10.59 per share.

 

 

Although we are not able to predict the precise impact of the option exchange program on our shareholders because of the voluntary nature of the program, we have designed the program in a manner intended to ensure, from an accounting perspective, that the value of the options granted in the program is not materially greater than the value of the options surrendered. In addition, the option exchange program is intended to reduce our stock option overhang and minimize the stock option dilution for our shareholders, while effectively advancing the objectives of our equity program to attract, retain and motivate our employees. Lastly, because the program is designed to be value neutral, it is also intended to more effectively recapture value from the share-based compensation expense that we have already recognized or will recognize in our financial statements.

 

 

Shareholder approval of the option exchange program is required by the terms of certain of our existing equity incentive plans and by the listing qualifications of The Nasdaq Stock Market LLC. Therefore, we are asking our shareholders pursuant to this Proposal No. 1 to approve amendments to such equity incentive plans to permit the one-time option exchange program notwithstanding any provision to the contrary in the respective plans. The following equity incentive plans would be amended by this Proposal No. 1:

 

 

 

The amendments to the aforementioned equity incentive plans, which we refer to below as the amended plans, would read substantially as follows:

 

Notwithstanding any other provision of this Plan to the contrary, upon approval of this provision by the Company’s shareholders, the Board, the Committee or any designee of the Board or the Committee may provide for, and the Company may implement, a one-time Option exchange offer, pursuant to which certain outstanding Options would, at the election of the holder of such Options, be surrendered to the Company for cancellation, whereupon the surrendered Options shall terminate and have no legal effect whatsoever, in exchange for the grant of a lesser number of new Options, which new Options will have reduced Exercise Prices and different vesting and expiration periods from the surrendered Options; provided, however, that such offer shall be commenced within twelve months of the date of such shareholder approval. For the avoidance of doubt, the surrendering and cancellation of the Options shall not at any time, result in the Company acquiring, directly or indirectly, a right or interest in the surrendered Options.

 

 

All replacement options issued in the option exchange program will be granted under either the 2002 Plan, the SLR Plan or the 2001 Plan. Replacement options received in exchange for options originally granted under the 2002 Plan or the SLR Plan, will be granted under the 2002 Plan and the SLR Plan, respectively. Replacement options received in exchange for options originally granted under the 2004 plan will be granted under the 2001 Plan, the 2002 Plan or the SLR Plan. All other replacement options will be granted under the 2001 Plan. We have summarized below the principal features of the 2001 Plan. A summary of the other amended plans, including the 2002 Plan and the SLR Plan, is included in the section below captioned “Summary of the Other Amended Plans.” These summaries are not complete descriptions of all of the provisions of the amended plans and are qualified in their entirety by reference to the full text of the amended plans as proposed to be amended, which we have filed electronically and is available on the SEC’s website at www.sec.gov. Such text is not included in the printed version of this proxy statement.

 

       Shares Available for Awards

 

Our Board of Directors adopted the 2001 Plan in August of 2001 and our shareholders approved the Board’s adoption of the plan in September 2001 with an initial reserve of 7,000,000 ordinary shares. Subsequently, the Board and our shareholders approved increases in the share reserve by an aggregate of 55,000,000 ordinary shares. In addition, in 2004, the Board and our shareholders approved the consolidation of prior and assumed stock plans of the company into the 2001 Plan. The combined effect of these actions brought the total number of shares issued or issuable under the 2001 Plan to 62,000,000 ordinary shares, plus ordinary shares issued or issuable pursuant to stock awards available for grant under the 2001 Plan as a result of the forfeiture, expiration or termination of options granted under the prior and assumed plans (if such ordinary shares are issued under such other stock options, they will not become available under the 2001 Plan) and shares that were available for grant under such plans at the time of the consolidation of such plans into the 2001 Plan. As of April 22, 2009, there were 15,437,381 ordinary shares available for issuance pursuant to additional awards under the 2001 Plan.

 

As described above, all shares underlying options surrendered for cancellation in the option exchange program that were granted pursuant to the 2001 Plan or pursuant to the Consolidated Plans will be returned to the share reserve of the 2001 Plan. In addition, shares underlying all replacement options granted pursuant to the option exchange program will be granted out of the 2001 Plan, except with respect to options issued in exchange for surrendered options originally granted out of the 2002 Plan, the 2004 Plan (which may be granted out of the 2001 Plan, the 2002 Plan or the SLR Plan) and the SLR Plan.

 

       Administration

 

The 2001 Plan contains two separate equity incentive programs: a discretionary stock option/share bonus program and an automatic stock option grant program. The discretionary program is administered by

the Compensation Committee, which is referred to in this section as the plan administrator. The plan administrator has complete discretion, subject to the provisions of the 2001 Plan, to authorize option grants and awards of share bonuses under the 2001 Plan. All grants under the automatic option grant program must be made in strict compliance with the provisions of that program, and no administrative discretion may be exercised by the plan administrator with respect to the automatic grants.

 

       Eligibility

 

Our executive officers, members of our Board of Directors, and all of our employees and those of our subsidiaries are eligible to be selected as award recipients under the discretionary program of the 2001 Plan. Non-employee directors may also participate in the automatic option grant program, unless such participation is prohibited or restricted, either absolutely or subject to various securities law requirements then in effect in the jurisdiction in which such director is a resident. Non-employee directors may not receive awards pursuant to the discretionary program in excess of an aggregate of 100,000 ordinary shares per calendar year. In addition, any one participant in the 2001 Plan may not receive awards for more than 6,000,000 ordinary shares in the aggregate per calendar year under the 2001 Plan.

 

As of June 1, 2009, eight executive officers, eight non-employee directors and approximately 2,750 employees were eligible to participate in the discretionary stock option/share bonus program under the 2001 Plan, and eight non-employee directors were eligible to participate in the automatic option grant program.

 

       Transferability

 

In general, awards granted under the 2001 Plan may not be transferred in any manner other than by will or by the laws of descent and distribution. Awards may be transferred to family members through a gift or domestic relations order. Subject to applicable laws, certain optionees who reside outside of the United States and Singapore may assign their award to a financial institution located outside of the United States and Singapore.

 

       Equity Incentive Programs

 

            Discretionary Stock Option/ Share Bonus Program

 

Options may be granted under the discretionary program at an exercise price per share not less than 100% of the fair market value of our ordinary shares on the option grant date. Each option granted under this program generally is exercisable as determined by the plan administrator. However, no option may be exercisable more than 10 years after the date of grant, and options granted to non-employees may not be exercisable more than five years after the date of grant.

 

Options granted under the 2001 Plan generally may be exercised as to vested shares for a period of time after the termination of the option holder’s service to the company. Generally, the plan administrator has complete discretion to extend the period following the optionee’s cessation of service during which his or her outstanding options may be exercised and/or to accelerate the exercisability or vesting of such options in whole or in part. Such discretion may be exercised at any time while the options remain outstanding, whether before or after the optionee’s actual cessation of service.

 

Singapore law prevents us from granting certain forms of restricted stock. As a result, we expanded our compensation program in 2004 by adding share bonus awards — either an outright grant of shares or a type of contingent stock award sometimes referred to as restricted stock units — as a type of award under the 2001 Plan. Contingent share bonuses vest upon satisfaction of conditions determined by the plan administrator and communicated to the potential recipient in advance. As the conditions to the issuance of shares must be met in advance, the shares when issued are not subject to vesting and no additional payment is required (satisfaction of the condition(s) being viewed as a form of payment). The condition(s) to issuances of

shares under a share bonus award could be a single requirement, such as remaining in the company’s service for a period of time, or many requirements, such as meeting individual or company-wide performance goals. Subject to waiver in cases of death, disability or termination of service, any share bonus awards which vest based on performance goals are subject to a minimum performance period of one year, and any share bonus awards with vesting based solely on the passage of time and continued service to the company are subject to a minimum performance period of three years. However, up to 5% of the total shares reserved and available for issuance under the 2001 Plan may be granted as share bonus awards that do not satisfy these minimum performance or service periods.

 

            Automatic Option Grant Program

 

Under the automatic option grant program, each individual who initially becomes a non-employee director will automatically be granted at that time options to purchase 25,000 ordinary shares. In addition, on the date of each annual general meeting, continuing non-employee directors will automatically be granted options to purchase 12,500 ordinary shares.

 

Each option granted under this program must have an exercise price per share equal to 100% of the fair market value of our ordinary shares on the grant date and a maximum term of five years. Each option becomes exercisable as to 25% of the total shares one year after the date of grant and as to 1/48th of the total shares each month thereafter.

 

Each automatic option grant will automatically accelerate upon an acquisition of the company by merger or asset sale or a hostile change in control of the company. In addition, upon the successful completion of a hostile take-over, each automatic option grant which has been outstanding for at least six months may be surrendered to us for a cash distribution per surrendered option in an amount equal to the excess of (a) the take-over price per share over (b) the exercise price payable per share.

 

       Valuation

 

The fair market value of our ordinary shares on any relevant date under the 2001 Plan is the closing sales price per share on that date on the NASDAQ Global Select Market. As of June 1, 2009, the closing price of our ordinary shares on the NASDAQ Global Select Market was $4.23 per share.

 

       Adjustments

 

In the event any change is made to our outstanding ordinary shares by reason of any recapitalization, bonus issue, stock split, combination of shares, exchange of shares or other changes affecting the outstanding shares as a class, appropriate adjustments will be made to the maximum number and/or class of securities issuable under the 2001 Plan, the maximum number and/or class of securities for which any participant may be granted awards over the term of the 2001 Plan or that may be granted generally under the terms of the 2001 Plan, the number and/or class of securities and price per share in effect under each outstanding award, and the number and/or class of securities for which automatic option grants are to be subsequently made to newly-elected or continuing non-employee directors.

 

       Acceleration

 

In accordance with the provisions of the 2001 Plan (with respect to stock options), except for grants made under the automatic option grant program described above, in the event of a dissolution or liquidation or if we are acquired by merger or asset sale or in the event of other change of control events, each outstanding option under the discretionary program shall automatically accelerate so that each such option shall, immediately prior to the effective date of such transaction, become fully vested with respect to the total number of shares then subject to such option. However, subject to the specific terms of a given option award, vesting shall not so accelerate if, and to the extent that, such option is either to be assumed or replaced with a comparable right covering shares of the capital stock of the successor corporation or parent thereof or is

replaced with a cash incentive program of the successor corporation which preserves the inherent value of the award existing at the time of such transaction. The form of grant agreement for certain of the share bonus awards granted to our employees, including our executives, contains a change of control provision substantially the same as the one described above.

 

The acceleration of vesting in the event of a change in the ownership or control of the company may be seen as an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of the company.

 

       Payment for Shares

 

The consideration for shares to be issued under the 2001 Plan may be paid in cash, by executing a same-day sale or margin commitment transaction, by cancellation of indebtedness, by conversion of a convertible note issued by us or through a waiver of compensation due.

 

       Amendment and Termination

 

Our Board of Directors may at any time amend or modify the 2001 Plan in any or all respects, except that any such amendment or modification may not adversely affect the rights of any holder of an award previously granted under the 2001 Plan unless such holder consents. The Board may terminate the 2001 Plan at any time. In addition, the automatic option grant program may not be amended more frequently than once every six months, other than to the extent necessary to comply with applicable U.S. income tax laws and regulations. Moreover, without the approval of our shareholders, the Board may not:

 

 

       Term of the 2001 Plan

 

Unless terminated earlier, the 2001 Plan will continue until August 2011, 10 years after the date the 2001 Plan was adopted by our Board of Directors.

 

       U.S. Federal Income Tax Consequences of Option Grants and Share Bonus Awards

 

The following is a general summary as of the date of this proxy statement of the United States federal income tax consequences to the company and the directors, officers and employees participating in the 2001 Plan. Tax laws may change and the federal, state and local tax consequences for any participating employee will depend upon his or her individual circumstances. The following general description does not constitute tax advice and should not be relied upon as such. Each participating employee has been and is encouraged to seek the advice of a qualified tax adviser regarding the tax consequences of participation in the 2001 Plan. In addition, the following discussion does not purport to describe state or local income tax consequences in the United States, nor tax consequences for participants who are subject to tax in other countries.

 

Options granted under the 2001 Plan may be either incentive stock options which satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended or non-statutory options

which are not intended to meet such requirements. In general, the United States federal income tax treatment for the two types of options differs as follows:

 

Incentive Stock Options. No taxable income is recognized by the optionee at the time of the option grant, and no taxable income is generally recognized at the time the option is exercised unless the optionee is subject to the alternative minimum tax or the optionee exercises the option more than three months after the termination of his or her employment with us. The optionee will, however, recognize taxable income in the year in which the acquired shares are sold or otherwise disposed of. For United States federal income tax purposes, dispositions are either qualifying or disqualifying dispositions. A qualifying disposition occurs if the sale or other disposition is made after the optionee has held the shares for more than two years after the option grant date and more than one year after the date on which the shares are transferred to the optionee pursuant to the option’s exercise. Upon a qualifying disposition, any gain or loss, generally measured by the difference between the amount realized on the sale of shares and the option exercise price, will be treated as capital gain or loss. However, if either of the two holding period requirements set forth above is not satisfied, then a disqualifying disposition results. Upon a disqualifying disposition, the optionee generally recognizes ordinary income in the amount of the lesser of (i) the difference between the fair market value of the shares at the time of the option’s exercise and the option’s exercise price, or (ii) the difference between the amount realized on the sale and the option’s exercise price. Any ordinary income recognized is added to the optionee’s basis for purposes of determining any additional gain on the sale; any such additional gain will be capital gain.

 

If the optionee makes a disqualifying disposition of the acquired shares, we may be entitled to a deduction from our U.S. taxable income for the taxable year in which such disposition occurs, equal to the amount of ordinary income the employee recognizes. In no other instance will we be allowed a deduction with respect to the optionee’s disposition of the acquired shares.

 

Non-Statutory Options. Taxable income generally is not recognized by an optionee upon the grant of a non-statutory option. The optionee will, in general, recognize ordinary income in the year in which the option is exercised, equal to the excess of the fair market value of the acquired shares on the exercise date over the exercise price paid for the shares, and we will be entitled to a deduction with respect to, and be required to satisfy the tax withholding requirements applicable to, such income.

 

Share bonuses. Upon issuance of shares pursuant to a share bonus award, the employee will have ordinary income in the amount of the fair market value of the issued stock on the date of issuance. Any further gain or loss upon disposition of the stock will be short- or long-term capital gain or loss, depending on the employee’s holding period as measured from the date of issuance. We will generally have a withholding obligation, and be entitled to a deduction, in the amount the employee recognizes as ordinary income.

 

Section 162(m). Any United States income tax deductions that would otherwise be available to us may be subject to a number of restrictions under the Internal Revenue Code, including Section 162(m), which, under guidance issued by the Internal Revenue Service, can limit the deduction for compensation paid to our Chief Executive Officer and our three most highly compensated executive officers other than the Chief Executive Officer and the Principal Financial Officer.

 

The U.S. federal income tax consequences of awards granted under the equity incentive plans (other than the 2001 Plan) that are proposed to be amended to allow for the option exchange program are the same as the consequences for similar awards granted under our 2001 Plan.

 

The material terms of the 2002 Plan and the 2004 Plan are substantially the same as the terms of the 2001 Plan, except that the 2004 Plan may be amended at the discretion of our Board of Directors, subject to compliance with the shareholder approval requirements of The NASDAQ Stock Market LLC. In addition, the 2002 Plan and the 2004 Plan differ from the 2001 Plan with respect to the duration of the plans, available shares under the plans, numerical limitations on individual awards and eligibility for participation in the plans. For a summary of these and other material terms of the 2002 Plan and the 2004 Plan, please see footnotes

(4) and (5) to the Equity Compensation Plan Information table immediately following this Proposal No. 1, which are incorporated into this proposal by this reference. A summary of the SLR Plan is provided below.

 

No additional grants may be made pursuant to any of the Consolidated Plans. Any ordinary shares that become available for future grant as a result of the forfeiture, expiration or termination of outstanding stock awards under such plans may only be granted under the 2001 Plan. As noted above, the replacement options that would be issued in the option exchange program would only be issued pursuant to the 2001 Plan, the 2002 Plan and the SLR Plan.

 

Outstanding awards issued under the Consolidated Plans include incentive stock options and nonqualified stock options. Options outstanding under the Consolidated Plans generally vest over four years and generally expire 10 years from the date of grant. Options outstanding under Consolidated Plans assumed by the company have been converted into options to purchase our ordinary shares on the terms specified in the applicable acquisition agreement, but are otherwise administered in accordance with terms of the assumed plans.

 

       Summary of the SLR Plan

 

In connection with the acquisition of Solectron Corporation on October 1, 2007, we assumed the SLR Plan, including all outstanding options to purchase Solectron Corporation common stock with exercise prices equal to, or less than, $5.00 per share. Each assumed option was converted into an option to acquire our ordinary shares at the applicable exchange rate of 0.345. As a result, we assumed approximately 7.4 million vested and unvested options outstanding under the plan at the time of the acquisition. In addition, all shares of Solectron Corporation common stock reserved and available for future grant under the SLR Plan at the time of the acquisition were converted into a share reserve of our ordinary shares at the applicable exchange rate. Following the assumption of the SLR Plan, we had reserved approximately 19.4 million ordinary shares for future grant under the plan, plus any ordinary shares that might be returned to the plan as the result of the forfeiture, expiration or termination of outstanding awards under the plan. We will cancel 5 million ordinary shares available for future grant under the SLR plan in connection with the option exchange program.

 

Unless terminated earlier, the SLR Plan will continue until November 2011, 10 years after the date the SLR Plan was adopted by the Solectron Corporation Board of Directors. During the remaining term of the SLR Plan, we may use the plan to grant incentive stock options and nonqualified stock options to any employees who were not employed by us at the time the Solectron acquisition was consummated. Options granted under the SLR Plan generally have an exercise price of not less than the fair value of the underlying ordinary shares on the date of grant. Such options generally vest over four years and generally expire 10 years from the date of grant. In addition, options granted under the SLR Plan generally may not be transferred in any manner other than by will or by the laws of descent and distribution. Under the SLR Plan, no individual may receive options to purchase more than 258,750 of our ordinary shares in any fiscal year. The other material terms of the SLR Plan are substantially the same as the terms of the 2001 Plan, except with respect to certain differences in the treatment of options following a termination of service or a fundamental corporate transaction.

 

Unvested options outstanding under the SLR Plan are generally forfeited following an employee’s termination of service with the company, unless otherwise provided in the option agreement. Vested options may be exercised following termination of service for such period designated in the option agreement, or six months (in the case of a disability, as defined in the plan), nine months (in the case of the holder’s death) or 60 days (if the termination is for any other reason). In the event of a dissolution or liquidation of the company, the vesting of options may be accelerated by the plan administrator and vested options may be exercised until ten days prior to the transaction. In addition, if we are acquired by merger or asset sale or in certain other events involving a change of control of the company, the vesting of each outstanding option shall automatically accelerate immediately prior to the effective date of such transaction with respect to the total number of shares then subject to such option. However, vesting shall not so accelerate if such award is assumed or replaced with an equivalent option or right substituted by the successor corporation or parent or

subsidiary thereof, including a right to receive the consideration received by our shareholders in the transaction.

 

This proposal to amend certain of our equity incentive plans to allow for a one-time option exchange program will be approved if the votes cast in favor of the proposal exceed the votes cast against the proposal. If our shareholders approve this proposal, we intend to commence the option exchange program as soon as practicable after the extraordinary general meeting, but in no event later than twelve months after the date our shareholders approve the proposal. If our shareholders do not approve the proposal, the option exchange program will not take place.

 

Our Board recommends a vote “FOR”
the proposal to approve amendments to certain of our existing equity incentive plans to
allow for a one-time stock option exchange program.

 

As of March 31, 2009, we maintained the 2001 Plan, the 2002 Plan, the 2004 Plan and the SLR Plan. None of the 2004 Plan, the 2002 Plan or the SLR Plan have been approved by our shareholders. The following table provides information about equity awards under all of these equity incentive plans as of March 31, 2009.

 

 

 

The information contained under this “Compensation Committee Report” shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filings under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or be subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate this information by reference into any such filing.

 

The Compensation Committee of the Board of Directors of the company has reviewed and discussed with management the Compensation Discussion and Analysis beginning on page 20 of this proxy statement. Based on this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the company’s proxy statement for the July 13, 2009 extraordinary general meeting of shareholders.

 

Submitted by the Compensation Committee of the Board of Directors:

 

 

James A. Davidson

Rockwell A. Schnabel

 

In this section, we discuss the material elements of our compensation programs and policies, including the objectives of our compensation programs and the reasons why we pay each element of our executives’ compensation. Following this discussion, you will find a series of tables containing more specific details about the compensation earned by, or awarded to the following individuals, whom we refer to as the named executive officers or NEOs. This discussion focuses on compensation and practices relating to the named executive officers for our 2009 fiscal year:

 

 

 

 

The Compensation Committee of our Board of Directors (referred to in this discussion as the Committee) seeks to align our compensation philosophy and objectives with our business strategy. On an annual basis, the Committee conducts a comprehensive review of our overall compensation strategy and competitive positioning, and recommends to our Board the compensation of our Chief Executive Officer and all other executive officers. The Committee also oversees management’s decisions concerning the compensation of other company officers, administers our equity compensation plans, and evaluates the effectiveness of our overall executive compensation programs.

 

The Committee has the authority to retain and terminate any independent, third-party compensation consultants and to obtain advice and assistance from internal and external legal, accounting and other advisors. During our 2009 fiscal year, the Committee engaged Frederic W. Cook & Co., Inc. (referred to in this discussion as F.W. Cook) as its independent adviser for certain executive compensation matters. F.W. Cook was retained by the Committee to provide an independent review of the company’s executive compensation programs, including an analysis of both the competitive market and the design of the programs. As part of its report to the Committee, F.W. Cook selected peer companies, and provided competitive compensation data, benchmarking and analysis relating to the compensation of our Chief Executive Officer and our other executives and senior officers. The Committee relied on input from F.W. Cook in evaluating management’s recommendations and arriving at the Committee’s recommendations to the Board with respect to the elements of compensation discussed below in this discussion and analysis. However, in December 2008, the Committee recommended and our Board approved modifications to our annual incentive bonus plan and additional equity grants for our employees, including our executives, and in March 2009, the Committee recommended and our Board approved additional equity grants for our Chief Executive Officer. The Committee and our Board took these additional actions in order to better align our annual incentive bonus plan with our business strategy and to retain and incentivize our employees, including our executives. These actions were not part of the more formal annual compensation review and, accordingly, were not based on input from F.W. Cook. For further discussion, please see below under “—Fiscal Year 2009 Executive Compensation—Summary of Fiscal Year

2009 Compensation Decisions,” “—Annual Incentive Bonus Plan—Modification of Performance Metrics During Fiscal 2009” and “—Stock-based Compensation — Grants During Fiscal Year 2009.”

 

F.W. Cook has not provided any other services to the company and has received no compensation other than with respect to the services provided to the Committee. The Committee expects that it will continue to retain an independent compensation consultant on future executive compensation matters.

 

We believe that the quality, skills and dedication of our executive officers are critical factors affecting the company’s performance and shareholder value. Accordingly, the key objective of our compensation programs is to attract, retain and motivate superior executive talent while maintaining an appropriate cost structure. In addition, our compensation programs are designed to link a substantial component of our executives’ compensation to the achievement of performance goals that directly correlate to the enhancement of shareholder value. Finally, our compensation programs are designed to align our executives’ interests with those of our shareholders.

 

To accomplish these objectives, the Committee has structured our compensation programs to include the following key features and compensation elements:

 

 

The Committee does not maintain policies for allocating among current and long-term compensation or among cash and non-cash compensation. Instead, the Committee maintains flexibility and adjusts different elements of compensation based upon its evaluation of the key compensation goals set forth above. However, as a general matter, the Committee seeks to allocate a substantial majority of the named executive officers’ compensation to components that are performance-based and at-risk.

 

While compensation levels may differ among NEOs based on competitive factors, and the role, responsibilities and performance of each specific NEO, there are no material differences in the compensation philosophies, objectives or policies for our NEOs. We do not maintain a policy regarding internal pay equity.

 

None of the named executive officers serves pursuant to an employment agreement, and each serves at the will of the company’s Board of Directors. Similarly, we generally do not enter into severance agreements with, nor have we established severance arrangements for, our executive officers as part of the terms of their employment. This enables our Board to remove an executive officer, if necessary, prior to retirement or resignation whenever it is in our best interests. When an executive officer retires, resigns or is terminated, our Board exercises its business judgment in approving an appropriate separation or severance arrangement in light of all relevant circumstances, including the individual’s term of employment, past accomplishments and reasons for separation from the company.

 

The Committee makes recommendations to our Board on all compensation actions relating to our executive officers. As part of its process, the Committee meets with our Chief Executive Officer and Chief Financial Officer to obtain recommendations with respect to the structure of our compensation programs, as well as an assessment of the performance of individual executives and recommendations on compensation for individual executives. Our Chief Executive Officer and Chief Financial Officer meet with our Executive Vice President, Worldwide Human Resources and Management Systems and our Vice President, Global Compensation and Benefits to obtain additional input on these matters.

 

In connection with the formal compensation review process for fiscal year 2009, our Chief Executive Officer and Chief Financial Officer developed their recommendations based on the competitive data prepared by F.W. Cook. In addition, our Executive Vice President, Worldwide Human Resources and Management Systems and our Vice President, Global Compensation and Benefits relied on similar data prepared by Radford Consulting and Pearl Meyer & Partners, which were used to validate the data developed by F.W. Cook.

 

To assist the Committee in arriving at its recommendations to our Board on the amounts and components of fiscal year 2009 compensation for our Chief Executive Officer and other executive officers, F.W. Cook prepared for the Committee’s review competitive compensation data as follows:

 

 

 

F.W. Cook selected all of the companies included in the CEO/CFO peer group. The peer group consisted of the following companies:

 

 

The companies included in the Radford survey data used by F.W. Cook for their competitive analysis of our other executives and senior officers, including our NEOs (other than our CEO and CFO) are as follows:

 

 

For fiscal years 2008 and 2007, the Committee reviewed competitive data compiled by Pearl Meyer & Partners in determining CEO and CFO compensation. Pearl Meyer selected six companies in an industry peer

group (one of which was Solectron Corporation, which we acquired in October 2007) and six companies in a high technology company peer group. Pearl Meyer also used data from a high technology company survey and an industry survey, both selected on the basis of revenue comparability.

 

For fiscal years 2008 and 2007, the Committee based its compensation recommendations for executives and senior officers, other than our CEO and CFO, on the nature and scope of these officers’ responsibilities and leadership roles in relation to the Chief Executive Officer and Chief Financial Officer, and on the recommendations of our Chief Executive Officer. In these years, our Chief Executive Officer based his recommendations on competitive data compiled by Hay Group from executive compensation survey reports prepared by Hay Group and Radford Consulting.

 

The Committee believes that the competitive data compiled by F.W. Cook provides a more appropriate set of benchmarking data than the data used in previous years, given the company’s revenue growth and the consolidation in the EMS industry. Due to these changes, F.W. Cook determined that it was appropriate to select peer technology companies in businesses that compete for similar executive talent and with a range of financial metric and market capitalization comparability. The Committee also believes that the Radford survey data used by F.W. Cook provided benchmarking data that was consistent with the CEO/CFO peer group and a better data match for our other NEOs.

 

The Committee seeks to set total target direct compensation for the company’s executives at or above the 75^th percentile of that provided by peer companies. Total target direct compensation is the sum of base salary, target annual incentive compensation and target long-term incentive awards. The Committee also seeks to target each component of total target direct compensation at these levels. However, total target direct compensation, as well as individual components, may vary by executive based on the executive’s experience, level of responsibility and performance, as well as competitive market conditions. The compensation decisions discussed below under the section captioned “Fiscal Year 2009 Executive Compensation” reflect the Committee’s objective of generally targeting the 75^th percentile of peer company compensation. However, the compensation decisions made in December 2008 and March 2009, as summarized below under “Fiscal Year 2009 Executive Compensation—Summary of Fiscal Year 2009 Compensation Decisions” and as discussed more fully in the sections captioned “—Annual Incentive Bonus Plan – Modification of Performance Metrics During Fiscal 2009” and “—Stock-based Compensation – Grants During Fiscal Year 2009” were taken in response to the global economic crisis in order to better align our annual incentive bonus plan with our business strategy and to retain and incentivize our employees, including our executives. Accordingly, these elements of compensation were not part of the more formal annual compensation review, including the benchmarking process.

 

Summary of Fiscal Year 2009 Compensation Decisions

 

The Committee believes that management executed effectively on the company’s business strategy in the current economic environment and performed exceptionally well in managing the controllable aspects of our business. For our first two fiscal quarters, we had record revenues and adjusted operating profits (which in the second fiscal quarter excluded approximately $129 million in charges primarily for provisions for doubtful accounts receivable, the write-down of inventory and recognition of associated contractual obligations for financially distressed customers). Beginning with our third fiscal quarter and accelerating through our fourth fiscal quarter, the global economic crisis had a significant impact on our business, with almost every product category and every geographic region in which we operate experiencing a substantial reduction in customer demand. In response to the deteriorating economic environment, our Board upon the recommendation of the Committee modified certain elements of our fiscal 2009 compensation programs in order to better align our annual incentive bonus plan with our business strategy, and to assure retention of and to incentivize our employees, including our management team. To this end, we modified the performance metrics of our annual incentive bonus plan to focus our executives and senior officers on the following goals: controlling costs; improving internal efficiencies; reducing inventory levels; managing working capital; and

generating cash flow. In addition, we made additional equity grants to our employees, including our executives and senior officers.

 

Our CEO’s base salary was not adjusted in fiscal 2009. In connection with the appointment of Mr. Read as our Chief Financial Officer, his base salary was adjusted to a level that was between the median and 75^th percentile of our peer companies. Our three other NEOs’ base salaries were adjusted to levels approaching the 75^th percentile of our peer companies, with the exception of Ms. Schiff, whose base salary remains below the median level. Annual incentive awards were 110.0% of target for Mr. McNamara; 117.14% of target for Mr. Read; 116.23% of target for Mr. Clarke; 77.15% of target for Mr. Burke; and 146.41% of target for Ms. Schiff. Aggregate cash compensation in the form of base salary and incentive bonuses paid to the NEOs (other than Mr. Smach) for fiscal year 2009 was lower than fiscal year 2008 by the following percentages: Mr. McNamara—46.57%; Mr. Read—0.85%; Mr. Clarke—16.62%; Mr. Burke—19.20%; and Ms. Schiff—27.63%. Due to the equity awards made in December 2008 and March 2009 to address the impact of the global economic crisis on our compensation programs for our employees, including our executives, we do not believe that it is meaningful to compare fiscal 2009 total direct compensation levels with fiscal 2008 levels. However, given the substantial decline in our share price following the global economic crisis, the carried equity value of the NEOs’ equity in the company (comprised of unvested share bonus awards and the “in-the-money” value of options) declined substantially from fiscal year end 2008 to 2009. The deteriorating macroeconomic environment also impacted long-term cash and stock incentive awards made in fiscal year 2009, and we do not expect that these awards will vest or be paid. Based on company performance, the Committee believes that compensation levels and long-term award opportunities for fiscal year 2009 were appropriate and consistent with the philosophy and objectives of the company’s compensation programs.

 

In fiscal year 2009, the Committee also recommended and the Board approved a shift from the granting of share bonus awards and no options in fiscal year 2008 to granting both share bonus awards and options in fiscal year 2009, with a greater weighting to options. This shift was designed to create greater alignment of interests with shareholders and to reward the company’s employees for the successful integration of the Solectron acquisition.

 

Elements of Compensation

 

We allocate compensation among the following components for our named executive officers:

 

 

Base Salary

 

We seek to set our executives’ base salaries at levels which are competitive with our peer companies based on each individual executive’s role and the scope of his or her responsibilities, also taking into account the executive’s experience and the base salary levels of other executives within the company. The Committee typically reviews base salaries every fiscal year and adjusts base salaries to take into account competitive market data, individual performance and promotions or changes in responsibilities.

 

Mr. McNamara’s base salary was maintained at $1,250,000 based on the F.W. Cook peer company data which indicated that this level approximated the 75^th percentile.

Prior to his appointment as Chief Financial Officer effective June 30, 2008, Mr. Read served as Executive Vice President of Finance for Worldwide Operations. As part of the Committee’s annual review of base salaries, the Committee recommended and the Board approved an increase in Mr. Read’s base salary from $400,000 to $475,000. This increase was made to approximate the 75^th percentile of the Radford survey data for the second most senior finance executive, after applying a premium of 10% to take into account that Mr. Read reported directly to the CEO. On May 14, 2008, Mr. Read was appointed Chief Financial Officer effective June 30, 2008. In recognition of Mr. Read’s appointment, Mr. Read’s base salary was increased to $600,000 effective May 15, 2008 and was set at between the median and 75^th percentile of the peer company data for his position.

 

Base salary levels for the other named executive officers (other than Mr. Smach) were increased as follows: Mr. Clarke’s base salary was increased from $490,000 to $550,000 (paid in Canadian dollars), in order to pay a level of base salary closer to the 75^th percentile; Mr. Burke’s base salary was increased from $375,000 to $450,000, also to pay a level of base salary closer to the 75^th percentile; and Ms. Schiff’s base salary was increased from $350,000 to $425,000, which represented the largest percentage increase for our named executive officers other than Mr. Read, but reflected a level below the median of the peer company data.

 

Annual Incentive Bonus Plan

 

Through our annual incentive bonus plan, we seek to provide pay for performance by linking incentive awards to company and business unit performance.

 

Key features of the bonus plan in fiscal 2009 were as follows:

 

 

 

 

The Committee recommended and our Board approved different performance metrics for our Chief Executive Officer and Chief Financial Officer as compared with other executives, and different performance metrics for corporate officers as compared with business unit executives. In addition, we varied the weightings for certain performance metrics among different executives, in order to better align individual awards with our business strategy. For example, we placed a greater emphasis on revenue growth for our Computing sector than for our Infrastructure sector, but placed a greater emphasis on profit after interest growth for our Infrastructure sector than for our Computing sector.

 

Modification of Performance Metrics during Fiscal 2009

 

We modified the performance metrics used in our annual incentive plan on December 1, 2008 as a result of the deteriorating macroeconomic conditions and its effects on the company’s performance. The performance metrics initially approved and which remained in effect for the first two fiscal quarters were as follows:

 

 

On December 1, 2008, the Committee recommended and our Board approved modifications to the performance metrics for the third and fourth fiscal quarters, as follows:

 

 

Under the modified plan, Messrs. Clarke and Burke also were eligible for an additional bonus of up to 10% and 8.75% of their respective annual base salaries for each of the third and fourth fiscal quarters based upon achievement of inventory reduction targets at their business units. The modified plan also provided for a minimum payout for the third and fourth fiscal quarters of 50% of the target company metric.

 

Prior to the plan modifications, the plan allocated 50% of the bonus opportunity to annual targets and 50% to achievement of quarterly targets. As part of the modification, the annual targets were eliminated so that 100% of the bonus opportunity was allocated to the achievement of quarterly performance targets (other than with respect to the six-month free cash flow target discussed above).

 

With the deteriorating macroeconomic environment accelerating in our third fiscal quarter, we increased our business focus on controlling costs and managing our working capital to improve cash flow. As a result of this shift in our business focus, and projected decreases in revenue, the Committee recommended

and our Board approved the above-described modifications in the annual incentive plan performance metrics for our third and fourth fiscal quarters. We believe that these changes were appropriately designed to motivate our executives to execute the operational strategies necessitated by the unprecedented economic environment.

 

Annual Incentive Awards for the CEO and CFO

 

Mr. McNamara was eligible for a bonus award based on year-over-year quarterly EPS growth in the first and second fiscal quarters, and achievement of quarterly EPS and inventory reduction targets and six-month free cash flow targets for the third and fourth fiscal quarters. Mr. McNamara’s annual target bonus was 150% of base salary.

 

For the first fiscal quarter, Mr. Read was eligible for a bonus award based on year-over-year quarterly EPS growth, revenue growth and profit after interest growth. Mr. Read’s target bonus for the first fiscal quarter was based on an annual target of 70% of base salary. For the second through fourth fiscal quarters, Mr. Read’s bonus eligibility was based on the same performance measures as Mr. McNamara. Mr. Read’s target bonus for the second through fourth fiscal quarters was based on an annual target of 100% of base salary.

 

The following table sets forth the payout level opportunities that were available for Messrs. McNamara and Read as a percentage of their target awards for the first and second fiscal quarters (second quarter only in the case of Mr. Read) based on different levels of performance. The quarterly target bonus was 37.5% of base salary for Mr. McNamara and 25.0% of base salary for Mr. Read. For performance levels between the levels presented in the table below, straight line interpolation was used to arrive at the payout level:

 

Annual Incentive Bonus Payout Levels (Q1 and Q2)

 

 

 

 

Mr. Read’s payout level opportunities as a percentage of the target award for each performance measure for the first fiscal quarter based on different levels of performance are set forth below. Mr. Read’s quarterly target bonus was 17.5% of base salary, with a weighting of 20% for the EPS growth metric, 40% for the revenue growth metric and 40% for the profit after interest growth metric. For performance levels between the levels presented in the table below, straight line interpolation was used to arrive at the payout level:

 

The following table sets forth the payout level opportunities that were available for Messrs. McNamara and Read as a percentage of the target award for each performance measure for the third and fourth fiscal quarters based on different levels of performance. The quarterly target bonus was 37.5% of base salary for Mr. McNamara and 25.0% of base salary for Mr. Read, with a weighting of 20% for the EPS metric, 40% for the inventory reduction metric and 40% for the free cash flow metric. For performance levels between the levels presented in the table below, straight line interpolation was used to arrive at the payout level:

 

Annual Incentive Bonus Payout Levels (Q3 and Q4)

 

 

For the inventory reduction metric, the incentive plan allowed for recoupment of bonus opportunities based on aggregate third and fourth quarter performance.

 

The adjusted EPS growth performance metric (and in Mr. Read’s case, the profit after interest performance metric for the first fiscal quarter) applicable for the first two fiscal quarters and the adjusted EPS and cash flow targets applicable for the third and fourth fiscal quarters were calculated on an adjusted basis to exclude after-tax intangible amortization, stock-based compensation expense, gains and losses from divestitures, and certain restructuring and other charges, subject to approval by the Committee.

 

The following table sets forth the actual quarterly and total payout levels, both as a percentage of target and of base salary, for Messrs. McNamara and Read:

 

 

 

 

First quarter year-over-year adjusted EPS growth exceeded the maximum performance level, resulting in a payout of 200% of target. Second quarter year-over-year adjusted EPS growth was a negative 50% (without making adjustment for charges of $129 million primarily relating to financially distressed customers), resulting in no payout. For the third quarter, the threshold adjusted EPS target was not achieved, but inventory reduction was achieved at a 200% payout level. For the fourth quarter, the threshold adjusted EPS target was not achieved and inventory reduction was achieved at a 200% payout level. For the fourth quarter, free cash flow was achieved at a 200% payout level. On an aggregate basis, bonus payouts were 110% of target for Mr. McNamara and 117.14% of target for Mr. Read.

 

Annual Incentive Awards for NEOs other than the CEO and CFO

 

For the first two fiscal quarters, Messrs. Clarke and Burke were eligible for bonus awards based on year-over-year EPS growth and year-over-year revenue and profit after interest growth at their respective business units. Mr. Clarke’s annual target bonus was 80% of base salary and Mr. Burke’s annual target bonus was 70% of base salary. Actual payout level opportunities ranged from 50% to 300% of target. The weightings of the performance metrics for Mr. Clarke were 20% for EPS growth, 25% for business unit revenue growth and 55% for business unit profit after interest growth. Business unit profit after interest was calculated on an adjusted non-GAAP basis to exclude after-tax intangible amortization, stock-based compensation expense, gains and losses from divestitures, and certain restructuring and other charges, and to include a 12% cost of capital charge based on the average three month working capital balances. The weightings of the performance metrics for Mr. Burke were 20% for EPS growth, 40% for business unit revenue growth and 40% for business unit profit after interest growth. We treat the business unit profit after interest performance measure as confidential. We set these measures at levels designed to motivate Messrs. Clarke and Burke to achieve operating results at their respective business units in alignment with our business strategy with payout opportunities at levels of difficulty consistent with the corresponding corporate level metric.

 

For the first two fiscal quarters, Ms. Schiff was eligible for a bonus award based on year-over-year EPS growth, revenue growth, profit after interest growth and SG&A reduction, all calculated at the corporate level. Ms. Schiff’s annual target bonus was 60% of base salary. Actual payout levels ranged from 50% to 300% of target. The weightings of the performance metrics for Ms. Schiff were 20% for EPS growth, 30% for revenue growth, 30% for profit after interest growth and 20% for SG&A reduction. The SG&A reduction measure was calculated on an adjusted, non-GAAP basis consistent with the basis utilized for other non-GAAP measures.

 

For the third and fourth fiscal quarters, Messrs. Clarke’s and Burke’s bonus eligibility was modified to replace the EPS growth metric with the company metric (the same metric used for Messrs. McNamara and Read). Actual payout level opportunities were modified slightly to cap the payout opportunity for the company metric at 200% versus a maximum payout opportunity of 300% for the EPS growth metric that applied in the first two fiscal quarters. In addition, Messrs. Clarke and Burke also were eligible for an additional bonus of up to 10% and 8.75% of their respective annual base salaries for each of the third and fourth fiscal quarters based upon achievement of inventory reduction targets at their business units. We treat the business unit inventory reduction measure as confidential. We set these measures at levels designed to motivate Messrs. Clarke and Burke to achieve inventory reduction levels at their respective business units in alignment with our business strategy with payout opportunities at levels of difficulty consistent with the corresponding corporate level metric.

 

For the third and fourth fiscal quarters, Ms. Schiff was eligible for a bonus award based on achievement of quarterly EPS, inventory reduction, and SG&A reduction targets and six-month free cash flow targets. Actual payout level opportunities were modified slightly to cap the payout opportunity for all of the metrics, other than SG&A reduction, to 200% versus a maximum payout opportunity of 300% that applied in the first two fiscal quarters. The weightings of the performance metrics for Ms. Schiff were 25% for each metric.

The following table sets forth the payout level opportunities that were available for Messrs. Clarke and Burke as a percentage of the target award for EPS growth (calculated at the corporate level) and revenue growth (calculated at the business unit level) for the first and second fiscal quarters based on different levels of performance. The quarterly target bonus was 20.0% of base salary for Mr. Clarke and 17.5% of base salary for Mr. Burke. For performance levels between the levels presented in the table below, straight line interpolation was used to arrive at the payout level:

 

 

 

 

The weightings given to the performance metrics for Messrs. Clarke and Burke were as follows:

 

Ms. Schiff’s payout level opportunities as a percentage of the target award for each performance measure for the first and second fiscal quarters based on different levels of performance are set forth below. Ms. Schiff’s quarterly target bonus was 15.0% of base salary, with a weighting of 20% for the EPS growth metric, 30% for the revenue growth metric, 30% for the profit after interest growth metric, and 20% for the SG&A reduction metric. For performance levels between the levels presented in the table below, straight line interpolation was used to arrive at the payout level:

 

 

The following table sets forth the payout level opportunities that were available for Ms. Schiff as a percentage of the target award for each performance measure for the third and fourth fiscal quarters based on different levels of performance. The weightings for the performance measures were 25% for each metric. For performance levels between the levels presented in the table below, straight line interpolation was used to arrive at the payout level:

 

 

For the inventory reduction metric, the incentive plan allowed for recoupment of bonus opportunities based on aggregate third and fourth quarter performance.

The following table sets forth the actual quarterly and total payout levels, both as a percentage of target and of base salary, for Messrs. Clarke and Burke and Ms. Schiff:

 

 

Long-Term Incentive Programs

 

Three-Year Performance Plan (fiscal 2007 through fiscal 2009)

 

In fiscal year 2007, the Committee recommended and the Board approved a three-year cash incentive bonus plan. The three-year performance plan was designed to reward the named executive officers and certain other senior officers based upon the achievement by the company of a three-year compounded annual revenue growth rate and a three-year compounded annual EPS growth rate, provided that the individual receiving the bonus continued to remain employed by the company. Under this plan, each of the named executive officers (other than Mr. Smach, who retired effective June 30, 2008) was eligible for a bonus of up to $1,000,000 following the close of the 2009 fiscal year if certain pre-established targets were achieved. For purposes of determining achievement of these targets, the plan used non-GAAP measures on the basis discussed above under “— Annual Incentive Bonus Plan.” The Board established the three-year cash incentive bonus plan to focus senior management on achievement of sustained EPS and revenue growth at levels which would have resulted in payment of the $1,000,000 maximum bonus only if the company performed significantly better than internal targets, with a lesser bonus opportunity if the company achieved its internal targets. The three-year bonus plan provided for a bonus of $1,000,000 if the company achieved both a three-year compounded annual revenue growth rate of at least 15% and a three-year compounded annual EPS growth rate of at least 20%, and also provided for a bonus of $750,000 if the company achieved both a three-year compounded annual revenue growth rate of at least 10% and a three-year compounded annual EPS growth rate of at least 15%. No bonus would be awarded if the company failed to achieve the target performance level required for the lesser bonus. Although the company achieved a three-year compounded annual revenue growth rate of 26.5%, the company’s three-year compounded annual EPS growth rate was 2.4%. Accordingly, no bonuses were awarded under this plan.

 

Three-Year Performance Plan (fiscal 2009 through fiscal 2011)

 

In fiscal year 2009, the Committee recommended and the Board approved a three-year incentive bonus plan. The three-year performance plan is designed to reward the named executive officers and certain other senior officers based upon the achievement by the company of three-year compounded annual EPS growth rates, provided that the individual receiving the bonus remains employed by us at the time the bonus is paid. Under this plan, maximum cash bonuses that may be earned based on performance are as follows: Mr. McNamara -- $4,000,000; Mr. Read -- $1,250,000; Mr. Clarke -- $625,000; Mr. Burke -- $625,000; and Ms. Schiff -- $500,000. For purposes of determining achievement of performance levels, the plan uses non-GAAP measures on the basis discussed above under “—Annual Incentive Bonus Plan.” The Board established the three-year cash incentive bonus plan to focus senior management on achievement of sustained EPS growth at levels which result in payment of the maximum bonus only if the company performs

significantly better than internal targets, with a lesser bonus opportunity if the company achieves its internal targets. If the company fails to achieve the threshold performance level, no bonus will be awarded. As a result of the dramatically deteriorating macroeconomic climate, which has slowed demand for our customers’ products, and the resulting decrease in our expected operating results, management of the company believes that achievement of the performance measures for the three-year performance plan is no longer probable and these bonuses are not expected to be paid.

 

For additional information about the three-year incentive bonus plan, please refer to the Grants of Plan-Based Awards in Fiscal Year 2009 table, which shows the threshold, target and maximum amounts payable under the plan.

 

As discussed under “Competitive Positioning,” the Committee and the Board seek to set total target direct compensation at the 75^th percentile of our peer companies, subject to individual variances. In structuring the three-year incentive bonus plan, the Committee and the Board assigned a value to the awards equal to one-third of the threshold payout level for purposes of competitive benchmarking.

 

Stock-based Compensation

 

Stock Options and Share Bonus Awards

 

The Committee grants stock options and share bonus awards (the equivalent of restricted stock units), which are designed to align the interests of the named executive officers with those of our shareholders 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. These awards are also intended to promote executive retention, as unvested stock options and share bonus awards generally are forfeited if the executive voluntarily leaves the company. Each stock option allows the executive officer to acquire our ordinary shares at a fixed price per share (the market price on the grant date) over a period of seven to ten years, thus providing a return to the officer only if the market price of the shares appreciates over the option term. Share bonus awards are structured as either service-based awards, which vest if the executive remains employed through the vesting period, or performance-based awards, which vest only if pre-established performance measures are achieved. Before the share bonus award vests, the executive has no ownership rights in our ordinary shares.

 

The size of the option grant or share bonus award to each executive officer generally is set at a level that is intended to create a meaningful opportunity for share ownership based upon the individual’s current position with the company, but the Committee and Board also take into account (i) the individual’s potential for future responsibility and promotion over the term of the award, (ii) the individual’s performance in recent periods, and (iii) the number of options and share bonus awards held by the individual at the time of grant. In addition, the Committee and Board consider competitive equity award data, and determine award size consistent with the Committee’s and our Board’s objective of setting long-term incentive compensation at the 75^th percentile of our peer companies, subject to individual variances.

 

As part of the annual compensation review process, the Committee recommended and the Board approved a shift from the granting of share bonus awards and no options in fiscal year 2008 to granting both share bonus awards and options in fiscal year 2009, with a greater weighting to options. This shift was designed to create greater alignment of interests with shareholders and to reward the company’s employees for the successful integration of the Solectron acquisition. The equity grant strategy in fiscal year 2008 had been focused on retention of senior management by awarding share bonus awards with three-and four-year vesting schedules, with the vesting of 50% of the share bonus awards contingent upon achievement of certain performance measures. The Committee and Board also determined to limit option grants to seven-year terms to reduce the compensation expense and long-term overhang.

Administration of Equity Award Grants

 

The Committee grants options with exercise prices set at the market price on the date of grant, based on the closing market price. Our current policy is that options and share bonus awards granted to executive officers are only made during open trading windows. Awards are not timed in relation to the release of material information. Our current policy provides that grants to non-executive new hires and follow on grants to non-executives are made on pre-determined dates in each fiscal quarter.

 

Grants During Fiscal Year 2009

 

The number of stock options and share bonus awards granted to the named executive officers in fiscal year 2009, and the grant-date fair value of these awards determined in accordance with SFAS 123(R), are shown in the Grants of Plan-Based Awards in Fiscal Year 2009 table.

 

As part of the annual compensation review process, the Committee recommended and the Board approved the following options grants for our named executive officers: Mr. McNamara – 4 million options; Mr. Read – 1.4 million options; Mr. Clarke – 600,000 options; Mr. Burke – 400,000 options; and Ms. Schiff – 300,000 options. The options have seven-year terms and vest 25% on the first anniversary of the grant and in 36 monthly installments thereafter. One-half of the options granted to Mr. McNamara and Mr. Read provide that the options may not be exercised unless the market price of the company’s shares at the time of exercise is at least $12.50.

 

The Committee also recommended and the Board approved performance-based share bonus awards based on the same performance measures as under the three-year performance plan discussed under “— Long-Term Incentive Programs -- Three-Year Performance Plan (fiscal 2009 through fiscal 2011).” Under these awards, the maximum number of shares that the named executive officers may earn based on performance is as follows: Mr. McNamara – 500,000 shares; Mr. Read – 200,000 shares; Mr. Clarke – 90,000 shares; Mr. Burke – 90,000 shares; and Ms. Schiff – 60,000 shares. If the company fails to achieve the threshold performance level, no shares will vest. As a result of the dramatically deteriorating macroeconomic climate, which has slowed demand for our customers’ products, and the resulting decrease in our expected operating results, management of the company believes that achievement of the performance measures for the three-year performance plan is no longer probable and these share bonus awards are not expected to vest.

 

Mr. Burke also received a special share bonus award for 50,000 shares which will vest on the third anniversary of the grant date if Mr. Burke continues to remain an employee.

 

As discussed under “Competitive Positioning,” the Committee and the Board seek to set total target direct compensation at the 75^th percentile of our peer companies, subject to individual variances. In structuring the annual awards of options and share bonus awards, for purposes of competitive benchmarking, the Committee and the Board assigned a value to the performance-based share bonus awards equal to one-third of the threshold payout level. In addition, the Committee and the Board considered the CEO and CFO option grants as two-year awards and therefore considered the value of one-half of such grants for competitive benchmarking purposes.

 

In December 2008 and March 2009, the Committee recommended and the Board approved additional equity grants. These grants were made in response to the global economic crisis in order to retain and incentivize our employees, including our executives. Option grants made to the named executive officers in December 2008 were as follows: Mr. McNamara – 2 million options; Mr. Read – 2 million options; Mr. Clarke – 600,000 options; Mr. Burke – 400,000 options; and Ms. Schiff – 300,000 options. These options have seven-year terms and vest 25% on June 2, 2009 and 25% annually thereafter. In March 2009, the Committee recommended and the Board approved an additional option grant to Mr. McNamara for 2,000,000 shares and a service-based share bonus award for 500,000 shares. The options vest 25% on June 2, 2009 and 25% annually thereafter, and the share bonus award vests in three equal annual installments beginning March 2, 2010. In making these grants to the named executive officers, the Committee and the Board considered the impact of the company’s share price on the carried interest value of the executives’

equity holdings (including the effects of the global economy on the attainability of outstanding performance-based awards) and the desirability of making additional equity awards to provide for adequate retention.

 

For purposes of determining achievement of performance targets for performance-based share bonus awards, the Committee uses non-GAAP measures on the basis discussed above under “— Annual Incentive Bonus Plan.”

 

Deferred Compensation

 

Each of the named executive officers participates in a deferred compensation plan or arrangement. These plans and arrangements are intended to promote retention by providing a long-term savings opportunity on a tax-efficient basis. Mr. McNamara participates in the company’s senior executive deferred compensation plan (referred to as the senior executive plan). Following his appointment as Chief Financial Officer, Mr. Read also became a participant in the senior executive plan effective January 1, 2009. Mr. Read participated in the company’s senior management deferred compensation plan (referred to as the senior management plan) prior to his appointment as Chief Financial Officer. Messrs. Clarke and Burke and Ms. Schiff participate in the senior management plan. As discussed below, we have made deferred long-term incentive bonuses so that a significant component of the named executive officers’ compensation serves a retentive purpose, as the bonuses only will vest if the executive remains in the company’s active employment. In structuring the executive deferred compensation arrangements, the Committee and the Board also sought to provide an additional long-term savings plan for the executives in recognition that we do not otherwise provide these executives with a pension plan or any supplemental executive retirement benefits.

 

Deferred Compensation for Messrs. McNamara and Read. Under the senior executive plan, a participant may defer up to 50% of his salary and up to 100% of his cash bonuses. In addition, at the Committee’s and the Board’s discretion, awards for deferred long-term incentive bonuses may be awarded in return for services to be performed in the future. During fiscal year 2006, the Committee recommended and the Board approved a deferred bonus for Mr. McNamara of $5,000,000. The deferred bonus (together with earnings) for Mr. McNamara vests as follows: (i) 10% vested on April 1, 2006; (ii) 15% vested on April 1, 2007; (iii) 20% vested on April 1, 2008; (iv) 25% vested on April 1, 2009; and (v) 30% will vest on April 1, 2010.

 

During fiscal year 2009, in recognition of his appointment as Chief Financial Officer, the Committee recommended and the Board approved an initial one-time funding payment of $2,000,000 for Mr. Read in the senior executive plan. The deferred bonus (together with earnings) for Mr. Read will vest as follows: (i) 10% will vest on January 1, 2010; (ii) 15% will vest on January 1, 2011; (iii) 20% will vest on January 1, 2012; (iv) 25% will vest on January 1, 2013; and (v) 30% will vest on January 1, 2014. Prior to his appointment as Chief Financial Officer, Mr. Read was a participant in the senior management plan. As part of the annual contribution, Mr. Read was eligible to receive a contribution equal to 30% of his base salary. During fiscal year 2009, the Committee recommended and the Board approved a contribution of $180,000 (equal to 30% of his base salary). These contributions (together with earnings) will vest as follows: (i) one-third will vest on July 1, 2012; (ii) one-half of the remaining balance will vest on July 1, 2013; and (iii) the remaining balance will vest on July 1, 2014.

 

Any unvested portions of the deferred bonuses for Mr. McNamara and Mr. Read (with respect to his senior executive plan account) will become 100% vested upon a change of control (as defined in the senior executive plan) if they are employed at that time or if their employment is terminated as a result of death or disability. Other than in cases of death or disability or a change of control, any unvested amounts will be forfeited if the executive’s employment is terminated, unless otherwise provided in a separation agreement. With respect to Mr. Read’s senior management plan account, 100% will become vested in the case of his death and a percentage of the unvested portion of Mr. Read’s senior management account will become vested in the event of a change of control (as defined in the senior management plan), in an amount equal to the number of months from July 1, 2005 through July 1, 2014, divided by 108. Any portion of his senior management plan

account that remains unvested after a change of control shall continue to vest in accordance with the original vesting schedule.

 

Deferred Compensation for Mr. Clarke. During fiscal year 2008, the Committee recommended and the Board approved an initial one-time funding payment of $366,355 for Mr. Clarke in the senior management plan. Beginning with fiscal year 2009, Mr. Clarke received and may continue to receive a contribution equal to 15% of his base salary. The percentage of deferred compensation for Mr. Clarke has been revised to reflect his participation in the company’s Canadian defined contribution pension program as well as other benefits provided to him as part of his expatriate assignment package. During fiscal year 2009, the Committee recommended and the Board approved a contribution of $82,500 (equal to 15% of his base salary). These contributions (together with earnings) will vest as follows: (i) one-third will vest on July 1, 2012; (ii) one-half of the remaining balance will vest on July 1, 2013; and (iii) the remaining balance will vest on July 1, 2014.

 

Deferred Compensation for Mr. Burke. During fiscal year 2007, the Committee recommended and the Board approved an initial one-time funding payment of $400,000 for Mr. Burke in the senior management plan. Beginning with 2008, Mr. Burke has received and may continue to receive a contribution equal to 30% of his base salary. During fiscal year 2009, the Committee recommended and the Board approved a contribution of $135,000 (equal to 30% of his base salary). These contributions (together with earnings) will vest as follows: (i) one-third will vest on July 1, 2015; (ii) one-half of the remaining balance will vest on July 1, 2016; and (iii) the remaining balance will vest on July 1, 2017.

 

Deferred Compensation for Ms. Schiff. Beginning with 2005, Ms. Schiff has received and may continue to receive a contribution equal to 30% of her base salary under the senior management plan. In addition, during fiscal year 2007, the Committee recommended and the Board approved a special discretionary deferred bonus for Ms. Schiff of $250,000. During fiscal year 2009, the Committee recommended and the Board approved a contribution for Ms. Schiff of $127,500 (equal to 30% of her base salary). These contributions (together with earnings) will vest as follows: (i) one-third will vest on the first July 1st that occurs at least one year after the day that the sum of her age and years of service with the company equals or exceeds 60; (ii) one-third will vest one year after the first vesting date; and (iii) one-third will vest two years after the first vesting date.

 

Any unvested portions of the deferral accounts of Messrs. Clarke and Burke and Ms. Schiff will become 100% vested if their employment is terminated as a result of his or her death. In the event of a change of control (as defined in the senior management plan), a portion of the deferral account will vest, calculated as a percentage equal to the number of months of service from November 10, 2006 to July 1, 2017, divided by 128 for Mr. Burke, the number of service months from July 1, 2007 to July 1, 2014, divided by 84 for Mr. Clarke, and the number of months from July 1, 2005 to July 1, 2014, divided by 144 for Ms. Schiff. Any portion of their deferral accounts that remains unvested after a change of control shall continue to vest in accordance with the original vesting schedule. Other than in cases of death or a change of control, any unvested amounts will be forfeited if the executive’s employment is terminated, unless otherwise provided in a separation agreement.

 

Deferred Compensation for Mr. Smach. Prior to this resignation, Mr. Smach was a participant in the senior executive plan. During fiscal year 2006, the Committee recommended and the Board approved a deferred bonus for Mr. Smach of $3,000,000. The deferred bonus (together with earnings) for Mr. Smach originally was scheduled to vest as follows: (i) 10% vested on April 1, 2006; (ii) 15% vested on April 1, 2007; (iii) 20% vested on April 1, 2008; (iv) an additional 25% was to vest on April 1, 2009; and (v) an additional 30% was to vest on April 1, 2010. As discussed below under ‘‘ — Thomas J. Smach Separation Agreement”, $841,353 of Mr. Smach’s deferral account was accelerated to vest on June 30, 2008 and $1 million of his deferral account (together with earnings) will vest on December 31, 2009, subject to compliance with the terms of his separation agreement.

 

For additional information about (i) executive contributions to the named executive officers’ deferral accounts, (ii) company contributions to the deferral accounts, (iii) earnings on the deferral accounts, and (iv) deferral account balances as of the end of fiscal year 2009, see the section entitled “Executive

Compensation — Nonqualified Deferred Compensation in Fiscal Year 2009.” The deferral accounts are unfunded and unsecured obligations of the company, receive no preferential standing, and are subject to the same risks as any of the company’s other general obligations.

 

Benefits

 

Executive Perquisites

 

Perquisites represent a small part of the overall compensation program for the named executive officers. In fiscal year 2009, we paid the premiums on long-term disability insurance for all NEOs (other than Mr. Clarke), provided tax preparation assistance to Mr. Read and reimbursed Mr. Clarke for relocation costs associated with his international assignment. In addition, we reimbursed Mr. McNamara for taxes due upon vesting of a portion of his deferred bonuses. These and certain other benefits are quantified under the “All Other Compensation” column in the Summary Compensation Table.

 

While company aircraft are generally used for company business only, certain executives, including our Chief Executive Officer and Chief Financial Officer and their spouses and guests may be permitted to use company aircraft for personal travel. We calculate the incremental cost to the company for use of the company aircraft by using an hourly rate for each flight hour. The hourly rate is based on the variable operational costs of each flight, including fuel, maintenance, flight crew travel expense, catering, communications and fees, including flight planning, ground handling and landing permits. To the extent any travel on company aircraft resulted in imputed income to the executive officer in fiscal year 2009, the company provided gross-up payments to cover the executive officer’s personal income tax due on such imputed income. These benefits are quantified under the “All Other Compensation” column in the Summary Compensation Table.

 

401(k) Plan; Canada Defined Contribution Pension Plan

 

Under our 401(k) Plan, all of our employees are eligible to receive matching contributions. The matching contribution for fiscal year 2009 was dollar for dollar on the first 3% of each participant’s pre-tax contributions, plus $0.50 for each dollar on the next 2% of each participant’s pre-tax contributions, subject to maximum limits under the Internal Revenue Code. We do not provide an excess 401(k) plan for our executive officers. Messrs. McNamara, Read and Burke and Ms. Schiff participate in the program.

 

In response to the global economic downturn we reviewed all employee-related expenses and explored ways to control these expenses. Effective March 15, 2009, the company suspended the matching pre-tax 401(k) contributions made to the 401(k) Plan for all employees classified by the company as salaried (exempt) employees. The match was not suspended for employees participating in the plan who are classified by the company as hourly (non-exempt) employees. The matches for Messrs. McNamara, Read and Burke and Ms. Schiff were suspended as a result of this action.

 

Mr. Clarke participates in the company’s Canadian Defined Contribution pension plan. The Canadian plan is made up of three components, as follows: (i) the Defined Contribution (DC) Pension Plan, where Flextronics makes monthly contributions equal to 2% of an employee’s earnings; (ii) a Group Registered Retirement Savings Plan (RRSP)/After Tax Savings Vehicle (ATSV), where employees can make optional contributions to a Group RRSP/ATSV; and (iii) a Deferred Profit Sharing Plan (DPSP), where Flextronics will match any contributions made to the Group RRSP/ATSV. The company will match 50% of the first 6% of the earnings contributed by an employee.

 

Other Benefits

 

Executive officers are eligible to participate in all of the company’s employee benefit plans, such as medical, dental, vision, group life, disability, and accidental death and dismemberment insurance, in each case on the same basis as other employees, subject to applicable law.

Termination and Change of Control Arrangements

 

The named executive officers are entitled to certain termination and change of control benefits under their deferred compensation plans and under certain of their equity awards. These benefits are described and quantified under the section entitled “Executive Compensation — Potential Payments Upon Termination or Change of Control.” As described in that section, if there is a change of control of the company, the entire unvested portion of the deferred compensation accounts of Mr. McNamara and Mr. Read under the senior executive plan will accelerate, and a percentage of the unvested portion of Messrs. Read’s, Clarke’s and Burke’s and Ms. Schiff’s deferred compensation accounts under the senior management plan will accelerate based on their respective periods of service. The vesting of Mr. Smach’s deferral accounts was governed by his separation agreement, which is discussed in the section entitled “— Thomas J. Smach Separation Agreement” below. Under the terms of certain of our equity incentive plans and the form of share bonus award agreement used for certain of our grants of share bonus awards to our employees (including our executives), in the event of a change of control, each outstanding stock option and each unvested share bonus award with such a provision shall automatically accelerate, provided that vesting shall not so accelerate if, and to the extent, such award is either to be assumed or replaced. In addition, certain of Mr. McNamara’s options are subject to acceleration if there is a change of control and his employment is terminated or his duties are substantially changed. These arrangements are intended to attract and retain qualified executives who could have other job alternatives that might offer greater security absent these arrangements. The Committee determined that a single trigger for acceleration of the executives’ deferred compensation accounts was appropriate in order to provide certainty of vesting for benefits that represent the executives’ primary source of retirement benefits. With respect to the acceleration provisions under the company’s stock incentive plans, the Committee believes that these provisions provide our Board with appropriate flexibility to address the treatment of options and share bonus awards in a merger or similar transaction that is approved by our Board, while providing appropriate protections to our executives and other employees in transactions which are not approved by our Board. With respect to certain of Mr. McNamara’s options, the acceleration of vesting of options only occurs if Mr. McNamara remains with the company through the change of control and is terminated or his duties are substantially changed, commonly referred to as a “double trigger.”

 

Thomas J. Smach Separation Agreement

 

Thomas J. Smach terminated his employment effective June 30, 2008. Under the terms of Mr. Smach’s separation agreement, Mr. Smach received his quarterly bonus for the first fiscal quarter of fiscal 2009, without reduction of the 50% annual holdback, and was no longer eligible for any additional annual or long-term cash incentive bonuses. He also received a severance payment of $700,000, which amount was grossed up for income taxes. In addition, the vesting of $841,353 of Mr. Smach’s deferred compensation account was accelerated and vested on June 30, 2008, while the remaining unvested balance of $1 million of the deferral account (together with earnings) will vest on December 31, 2009, subject to Mr. Smach’s compliance with certain non-solicitation and non-competition covenants. The separation agreement also provided for accelerated vesting of an aggregate of 216,666 shares (and the cancellation of 75,000 shares) subject to share bonus awards granted in 2006 and 2007, and extended the exercisability of an aggregate of 670,000 options until December 31, 2008. Mr. Smach also will receive continued health coverage in accordance with the terms of his senior executive severance agreement with The Dii Group, which was acquired by the company in 2000.

 

The following table sets forth the fiscal year 2007, 2008 and 2009 compensation for:

 

 

 

The executive officers included in the Summary Compensation Table are referred to in this proxy statement as our named executive officers. A detailed description of the plans and programs under which our named executive officers received the following compensation can be found in the section entitled “Compensation Discussion and Analysis” beginning on page 20 of this proxy statement. Additional information about these plans and programs is included in the additional tables and discussions which follow the Summary Compensation Table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents information about equity and non-equity awards we granted in our 2009 fiscal year to our named executive officers. The awards included in this table consist of: