SCHEDULE 14A INFORMATION

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

Exchange Act of 1934 (Amendment No. )

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NII HOLDINGS, INC.

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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ANNUAL MEETING OF STOCKHOLDERS

 

April 2, 2009

 

Dear Stockholder:

 

You are cordially invited to attend the 2009 Annual Meeting of Stockholders of NII Holdings, Inc., which is to be held on May 12, 2009 at 10:00 a.m. local time at the Hyatt Regency Reston, located at 1800 Presidents Street, Reston, VA 20190 (703-709-1234). At the Annual Meeting, you will be asked to elect three directors to serve three-year terms and to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for fiscal year 2009.

 

Whether or not you plan to attend, it is important that your shares be represented and voted at the Annual Meeting. You can vote by signing, dating, and returning the enclosed proxy card. Also, eligible stockholders may vote by telephone or over the Internet. Instructions for using these convenient services are set forth in the instructions for voting that are attached to the enclosed proxy card or voting instruction. Beneficial owners of shares of our common stock held in street name should follow the enclosed instructions for voting their shares. I hope you will be able to attend the Annual Meeting, but even if you cannot, please vote your shares as promptly as possible.

 

Sincerely,

 

Steven M. Shindler

Chairman of the Board of Directors

 

NII Holdings, Inc.
1875 Explorer Street, 10th Floor
Reston, VA 20190
www.nii.com

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 12, 2009

 

We will hold the Annual Meeting of Stockholders of NII Holdings, Inc. (the “Company” or “NII Holdings”) on May 12, 2009, at 10:00 a.m. local time at the Hyatt Regency Reston, located at 1800 Presidents Street, Reston, VA 20190 (703-709-1234).

 

The purpose of the Annual Meeting is to consider and take action on the following:

 

1. Election of three directors, George A. Cope, Raymond P. Dolan and Carolyn Katz, each for a three-year term ending 2012;

 

2. Ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for fiscal year 2009; and

 

3. Any other business that properly comes before the Annual Meeting and any adjournments thereof.

 

The Board of Directors recommends that you vote FOR the three nominees for director and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm.

 

Only stockholders of record as of March 20, 2009 can vote at the Annual Meeting.

 

By Order of the Board of Directors,

 

Steven M. Shindler

Chairman of the Board of Directors

 

April 2, 2009

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 12, 2009.

 

The proxy statement and the Company’s 2008 annual report on Form 10-K are available at www.edocumentview.com/nihd.

TABLE OF CONTENTS

 

 

Date, Time and Place

 

These proxy materials are delivered in connection with the solicitation by our board of directors of proxies to be voted at our annual meeting, which is to be held at the Hyatt Regency Reston, located at 1800 Presidents Street, Reston, VA 20190 at 10:00 a.m. local time on Wednesday May 12, 2009 (the “Annual Meeting”). On or about April 2, 2009, we commenced mailing this proxy statement and the enclosed form of proxy to our stockholders entitled to vote at the meeting.

 

Purpose of the Annual Meeting

 

At the annual meeting, stockholders will be asked to:

 

 

Solicitation, Use and Revocation of Proxies

 

Our Board of Directors solicits the accompanying proxy for use at the Annual Meeting. Giving your proxy means that you authorize the persons indicated on the proxy card to vote your shares at the Annual Meeting in the manner you direct. If you sign, date and return the enclosed proxy card but do not specify how to vote, your shares will be voted (1) for the election of the nominees designated below to serve for three-year terms ending 2012, (2) for ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for fiscal year 2009 and (3) at the discretion of the persons indicated on the proxy card, on all other matters that may properly come before the Annual Meeting or any adjournments thereof. A stockholder has the power to revoke his or her proxy or change his or her vote at any time before the proxy is voted at the Annual Meeting. You can revoke your proxy or change your vote in one of four ways:

 

 

If you choose any of the first two methods, you must take the described action no later than the beginning of the Annual Meeting. If you choose the third or fourth methods, you may be asked to present documents for the purpose of establishing your identity as a NII Holdings stockholder. Before the Annual Meeting, any written notice of revocation should be sent to NII Holdings, Inc., 1875 Explorer Street, 10th Floor, Reston, Virginia 20190, Attention: Vice President, General Counsel and Secretary. Any notice of revocation that is delivered at the Annual Meeting should be hand delivered to our Vice President, General Counsel and Secretary before a vote is taken. Once voting on a particular matter is completed at the Annual Meeting, you will not be able to revoke your proxy or change your vote as to that matter. If your shares are held in street name by a broker, bank or other financial institution, you must contact that institution to change your vote.

 

Stockholders whose shares are registered in the name of a bank or brokerage firm may be eligible to vote through the Internet or by telephone. The enclosed proxy card provides instructions for eligible stockholders. Stockholders who do not own shares through a broker and stockholders who own shares through a broker, but whose

proxy card does not mention information about Internet or telephone voting, should complete the enclosed paper proxy card and return it in the enclosed postage-paid envelope. Signing and returning the proxy card or submitting the proxy via the Internet or by telephone does not affect your right to revoke your proxy or to vote in person at the Annual Meeting.

 

The cost of soliciting proxies for the Annual Meeting will be borne by us. We have hired Georgeson Inc. to help us send out the proxy materials and solicit proxies on behalf of the Board of Directors. Georgeson’s fee for this service is $7,000 plus expenses. In addition, certain of our officers and regular employees, without additional compensation, may use their personal efforts, by telephone or otherwise, to obtain proxies. We may also reimburse banks, brokerage firms and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses in forwarding proxy materials to the beneficial owners of shares of common stock.

 

Every stockholder’s vote is important. Accordingly, you should sign, date and return the enclosed proxy card, vote via the Internet or by telephone, or provide instructions to your broker or other nominee whether or not you plan to attend the Annual Meeting in person.

 

Record Date, Voting Rights and Outstanding Shares

 

Our Board of Directors has established the close of business on March 20, 2009, as the record date for determining stockholders entitled to receive notice of and to vote on proposals at the Annual Meeting or any adjournment or postponement of the Annual Meeting. Only holders of record of our common stock on the record date are entitled to vote at the Annual Meeting. Holders of common stock on the record date are entitled to one vote per share on each matter voted upon at the Annual Meeting. As of the record date, there were 165,781,995 shares of common stock outstanding. A complete list of stockholders entitled to vote at the Annual Meeting will be available for examination at the time and place of the Annual Meeting.

 

Quorum, Voting Requirements and Effect of Abstentions and Broker Non-Votes

 

A quorum is necessary for the transaction of business at the Annual Meeting. A quorum exists when holders of a majority of the total number of issued and outstanding shares of common stock that are entitled to vote at the Annual Meeting are present in person or by proxy. At the Annual Meeting, inspectors of election will determine the presence of a quorum and tabulate the results of the voting by stockholders. The inspectors will treat valid proxies marked “abstain” or proxies required to be treated as broker “non-votes” as present for purposes of determining whether there is a quorum at the Annual Meeting. A broker “non-vote” occurs when a broker or nominee holding shares for a beneficial owner votes on one proposal, but does not vote on another proposal because the broker or nominee does not have discretionary voting power and has not received instructions from the beneficial owner of the shares. Abstentions with respect to any matter will have the same effect as a vote against that proposal.

 

A plurality of the votes of the holders of the common stock present at the Annual Meeting, in person or represented by proxy, and entitled to vote on the election of directors, is required for the election of directors. This means that the nominees for director who receive the greatest number of votes cast will be elected. All other matters will require the approval of a majority of the votes of the record holders present at the meeting, in person or represented by proxy, and entitled to vote on such matters.

 

Management and the Board of Directors are not aware of any matters to be presented for action at the Annual Meeting other than the matters stated in the Notice of Annual Meeting of Stockholders. If any such matter requiring a vote of the stockholders should properly come before the Annual Meeting, unless otherwise instructed, it is the intention of the persons named in the proxy card to vote such proxy in accordance with their best judgment.

 

General

 

Our Second Amended and Restated Bylaws set our Board of Directors at nine members divided into three classes in accordance with our Certificate of Incorporation, with each class having three directors. Our Board currently consists of nine members. The three-year terms of each class are staggered so that the term of one class expires at each Annual Meeting. The Board of Directors, upon the recommendation of the Nominating Committee, has nominated George A. Cope, Raymond P. Dolan and Carolyn Katz, each of whom is an incumbent director, for reelection to the board for three-year terms ending 2012.

 

If any nominee is unable to serve as a director, the persons named in the enclosed proxy reserve the right to vote for a lesser number of directors or for a substitute nominee designated by our Board of Directors, to the extent consistent with our Restated Certificate of Incorporation and our Second Amended and Restated Bylaws. All of the nominees listed above have consented to be nominated and to serve if elected. We do not expect that any nominee will be unable to serve.

 

Directors Standing for Reelection — To Hold Office Until 2012

 

George A. Cope, (47), has served as a director on the board of NII Holdings since 2004. A Canadian citizen, Mr. Cope currently serves as President and Chief Executive Officer of Bell Canada Corporation. He was President and Chief Operating officer of Bell Canada Corporation from 2005 to July 2008. From 2000 to 2005, he was executive vice president of TELUS Corp. and president and chief executive officer of TELUS Mobility. From 1987 to 2000, he served as president and chief executive officer of Clearnet Communications. Prior to joining Clearnet, Mr. Cope served as vice president, Corporate Development at Lenbrook, Inc., a distributor of electronic components, audio and two-way radio products. Mr. Cope is on the board of directors of Bank of Montreal.

 

Raymond P. Dolan, (51), has served as a director on the board of NII Holdings since July 2008. Mr. Dolan most recently served as Chief Executive Officer of QUALCOMM Flarion Technologies and Senior Vice President at QUALCOMM until January 2008. Mr. Dolan had been Chairman and Chief Executive Officer of Flarion Technologies, Inc., a provider of mobile broadband communications systems, since May 2000, until its acquisition by QUALCOMM in January 2006. From 1996 until May 2000, Mr. Dolan was Chief Operating Officer of NextWave Telecom. Prior to joining NextWave, he was Executive Vice President of Marketing for Bell Atlantic/NYNEX Mobile. Mr. Dolan is on the board of directors of American Tower Corporation, a provider of wireless and broadcast communications infrastructure.

 

Carolyn Katz, (47), has served as a director on the board of NII Holdings since 2002 and is our lead independent director. Ms. Katz was a principal at Providence Equity Partners, a private equity firm specializing in media and telecommunications, from 2000 to 2001. From 1984 to 2000, Ms. Katz worked for Goldman Sachs, an investment bank, most recently as managing director. Ms. Katz is on the board of directors of American Tower Corporation.

 

Our Board of Directors recommends that the holders of common stock vote “FOR” incumbent directors George A. Cope, Raymond P. Dolan and Carolyn Katz.

 

Directors Not Standing for Reelection — To Hold Office Until 2011

 

Charles M. Herington, (49), has served as a director on the board of NII Holdings since 2003. He has been Executive Vice President, Latin America of Avon Products, Inc., a global beauty company, since March 2008 and was Senior Vice President, Latin America of Avon Products, Inc. from March 2006 until March 2008. From 1999 to February 2006, he was the president and chief executive officer of AOL Latin America. From 1997 until 1999, he served as president of Revlon America Latina. From 1990 through 1997, he held a variety of executive positions with PepsiCo Restaurants International. Mr. Herington is on the board of directors of Molson Coors Brewing Company (formerly Adolph Coors Company).

Rosendo G. Parra, (49), has served as a director on the board of NII Holdings since October 2008. Mr. Parra is a founder of Daylight Partners where he has been a partner since December 2007. Previously, Mr. Parra served as Senior Vice President for the Home and Small Business Group of Dell, Inc. from June 2006 to April 2007, as Senior Vice President and General Manager, Dell Americas from April 2002 until June 2006, Senior Vice President and Co-General Manager, Worldwide Home and Small Business Group from April 2001 until April 2002, Senior Vice President, Americas Public and Americas International from September 1998 until April 2001, Vice President, Public and Americas International, from February 1997 until September 1998, Group Vice President, Sales, Marketing and Service, from June 1994 until February 1997, and Vice President, Dell USA from August 1993 until June 1994. Mr. Parra is on the board of directors of Brinker International, Inc. and YMAX/MagicJack.

 

John W. Risner, (49), has served as a director on the board of NII Holdings since 2002. He is currently the President of The Children’s Tumor Foundation, which he joined in 2002. From 1997 to 2002, he served as senior vice president — portfolio manager at AIG/SunAmerica Asset Management, a money management firm. Prior to that, Mr. Risner was vice president-senior portfolio manager at Value Line Asset Management, a money management firm, where he worked from 1992 to 1997.

 

Directors Not Standing for Reelection — To Hold Office Until 2010

 

Steven P. Dussek, (52), has been a director on the board of NII Holdings since 1999 and our chief executive officer since February 2008. Mr. Dussek served as president and chief executive officer of Dobson Communications Corporation, a publicly traded wireless telecommunication company, from April 2005 until AT&T acquired Dobson in November 2007. While NII Holdings was a subsidiary of Nextel Communications, Inc., Mr. Dussek served as its chief executive officer and chief operating officer from 1999 until 2000 and as president and chief operating officer from March 1999 until September 1999. From 1996 until 2002, Mr. Dussek also served in various senior management positions with Nextel Communications, including as executive vice president and chief operating officer. From 1995 to 1996, Mr. Dussek served as vice president and general manager of the northeast region for the PCS division of AT&T Wireless Services. From 1993 to 1995, Mr. Dussek served as a senior vice president and chief operating officer of Paging Networks, Inc., a paging company.

 

Donald Guthrie, (53), has been a director on the board of NII Holdings since May 2008. Since February 2006, Mr. Guthrie has served as a Managing Director of Trilogy Equity Partners, a private investment firm. From 1995 to 2005, he served as Vice Chairman of the Western Wireless Corporation, a wireless communications company, where he also served as Chief Financial Officer from February 1997 to May 1999. From 1995 to 2002, Mr. Guthrie served as Vice Chairman of VoiceStream Wireless, a wireless communications company, now T-Mobile USA, subsequent to its acquisition by Deutsche Telekom AG. From 1986 to 1995, Mr. Guthrie served as Senior Vice President and Treasurer of McCaw Cellular and, from 1990 to 1995, as Senior Vice President — Finance for LIN Broadcasting.

 

Steven M. Shindler, (46), has been a director on the board of NII Holdings since 1997, chairman of the board since 2002 and executive chairman since February 2008. Mr. Shindler served as our chief executive officer from 2000 until February 2008. Mr. Shindler also served as executive vice president and chief financial officer of Nextel Communications from 1996 until 2000. From 1987 to 1996, Mr. Shindler was an officer with Toronto Dominion Bank, a bank where he was a managing director in its communications finance group.

 

Our business and affairs are managed under the direction of the Board of Directors in accordance with the Delaware General Corporation Law and our Restated Certificate of Incorporation and Second Amended and Restated Bylaws. Members of the Board of Directors are kept informed of our business through discussions with management, by reviewing materials provided to them, and by participating in meetings of the Board of Directors and its committees. The corporate governance practices that we follow are summarized below.

Independence

 

The Board of Directors has determined that seven of its nine current members are independent as defined by The Nasdaq Stock Market (“Nasdaq”) listing standards, including the following: George A. Cope, Raymond P. Dolan, Donald Guthrie, Charles M. Herington, Carolyn Katz, Rosendo G. Parra and John W. Risner. In making that determination, the Board of Directors did not consider any relationships other than those described below in “Certain Relationships and Related Transactions.” The Audit Committee, Compensation Committee and Nominating Committee are composed entirely of independent directors.

 

Lead Independent Director

 

Our Board of Directors has adopted a policy to provide for a lead director who must be independent, as defined by Nasdaq listing standards. The policy provides that the lead independent director will be selected annually by all of the non-management directors. Currently, the lead independent director selected by the non-management members of the Board is Carolyn Katz. The responsibilities of the lead independent director are to promote strong, independent oversight of our management and affairs. As part of these responsibilities, the duties of the lead independent director include:

 

 

Code of Ethics

 

The Board of Directors has approved a Code of Business Conduct and Ethics for our directors, chief executive officer, chief financial officer, principal financial and accounting officers, officers and employees, and each of our subsidiaries and controlled affiliates. The Code of Business Conduct and Ethics addresses such topics as protection and proper use of our assets, compliance with applicable laws and regulations, accuracy and preservation of records, accounting and financial reporting, conflicts of interest and insider trading. A current copy of our Code of Business Conduct and Ethics may be viewed free of charge on the Investor Relations link of our website at the following address: www.nii.com and may also be obtained by writing to us at NII Holdings, Inc., 1875 Explorer Street, 10th Floor, Reston, Virginia 20190, Attention: Investor Relations.

 

Only the Board of Directors or the Audit Committee may consider a waiver of the Code of Business Conduct and Ethics for an executive officer or director. If a provision of the Code of Business Conduct and Ethics is materially modified, or if a waiver of the Code of Business Conduct and Ethics is granted to a director or executive officer, we will post a notice of such action on the Investor Relations link of our website at the following address: www.nii.com.

Meeting Attendance

 

Board and Committee Meetings

 

During 2008, each member of the Board of Directors attended at least 75% of the aggregate meetings (during the periods for which they served) of the Board of Directors and the committees on which they served. In addition to attending meetings, directors also fulfill their responsibilities by meeting or communicating informally with one another regarding matters of interest or concern to us, by attending, in person or telephonically, sessions at which they are briefed about the status of particular matters, by review of our reports to directors, by visits to our facilities, and by correspondence and telephone conferences with our executive officers and others regarding matters of interest and concern to us.

 

Annual Meeting of Stockholders

 

We encourage members of the Board of Directors to attend the Annual Meeting. Each of the directors then serving on the Board of Directors attended the 2008 Annual Meeting of Stockholders.

 

Executive Sessions of the Board

 

It is the practice of our Board of Directors to have executive sessions where non-employee directors meet in conjunction with each regularly scheduled meeting of the Board of Directors. During these executive sessions, directors can discuss matters of interest and concern and meet with and question our employees outside the presence of employee directors and other members of management.

 

Committees of the Board

 

The standing committees of the Board of Directors are the Audit Committee, the Compensation Committee, the Finance Committee and the Nominating Committee. Membership on the Board of Directors and each standing committee, as of April 2, 2009, was as follows:

 

 

 

 

Audit Committee

 

The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of our financial statements and related disclosures and our accounting, auditing, and reporting practices. The Audit Committee’s role includes discussing with management our processes to manage business and financial risk, and for compliance

with significant applicable legal, ethical, and regulatory requirements. The Audit Committee is responsible for the appointment, replacement, compensation, and oversight of the independent registered public accounting firm engaged to prepare or issue audit reports on our financial statements and for the oversight of our internal audit function. The Audit Committee relies on the expertise and knowledge of management and the internal auditors in carrying out its oversight responsibilities. The specific responsibilities in carrying out the Audit Committee’s oversight role are delineated in the written charter adopted by the Board. A current copy of the Audit Committee Charter may be viewed free of charge on the Investor Relations link of our website at the following address: www.nii.com and may also be obtained by writing to us at NII Holdings, Inc., 1875 Explorer Street, 10th Floor, Reston, Virginia 20190, Attention: Investor Relations.

 

The Board of Directors, in its business judgment, has determined that all of the members of the Audit Committee are independent as defined by regulations of the Securities and Exchange Commission and the Nasdaq listing standards. The Board of Directors has also determined that all of the members of the Audit Committee have sufficient knowledge in financial and auditing matters to serve on the Audit Committee and that Carolyn Katz, Donald Guthrie and John W. Risner each qualifies as an “audit committee financial expert” as defined by regulations of the Securities and Exchange Commission.

 

The Audit Committee is authorized to engage or consult from time to time, as appropriate, at our expense, independent legal counsel and other experts and advisors it considers necessary, appropriate or advisable in the discharge of its responsibilities.

 

Compensation Committee

 

The primary responsibilities of the Compensation Committee are to:

 

 

The Compensation Committee is authorized to engage or consult from time to time, as appropriate, at our expense, consultants, independent legal counsel and other experts and advisors it considers necessary, appropriate or advisable in the discharge of its responsibilities. The Compensation Committee operates under a written charter adopted by the Board. A current copy of the Compensation Committee Charter may be viewed free of charge on the Investor Relations link of our website at the following address: www.nii.com and may also be obtained by writing to us at NII Holdings, Inc., 1875 Explorer Street, 10th Floor, Reston, Virginia 20190, Attention: Investor Relations. The Board of Directors, in its business judgment, has determined that all of the members of our Compensation Committee are independent, as defined in the Nasdaq listing standards.

 

Nominating Committee

 

The Nominating Committee develops qualifications for director candidates and recommends to the Board of Directors persons to serve as our directors. The Nominating Committee operates under a written charter adopted by the Board. A current copy of the Nominating Committee Charter may be viewed free of charge on the Investor

Relations link of our website at the following address: www.nii.com and may also be obtained by writing to us at NII Holdings, Inc., 1875 Explorer Street, 10th Floor, Reston, Virginia 20190, Attention: Investor Relations. The Board of Directors, in its business judgment, has determined that all of the members of the Nominating Committee are independent, as defined in the Nasdaq listing standards.

 

The Nominating Committee has set forth guidelines for the evaluation of potential nominees. These guidelines set forth standards by which potential nominees are to be evaluated, including the following:

 

 

It is the policy of the Nominating Committee to consider candidates recommended by stockholders. Stockholders entitled to vote for the election of directors may submit candidates for consideration if we receive written notice, in proper form, for each such recommended nominee. If the notice is not written and in proper form, then the Nominating Committee cannot consider the nominee. To be in proper form, the notice must include (1) each nominee’s written consent to be named as a nominee and to serve, if elected, (2) the name and address of the stockholder making the nomination and evidence of share ownership pursuant to the requirements of Rule 14a-8 of the Securities and Exchange Commission relating to stockholder proposals, and (3) information about the person nominated for election conforming with the Securities and Exchange Commission’s biographical requirements for directors. All stockholder nominations should be sent to:

 

Vice President, General Counsel and Secretary

NII Holdings, Inc.

1875 Explorer Street, 10th Floor

Reston, Virginia 20190

 

Finance Committee

 

The primary responsibilities of the Finance Committee are to consult with and provide guidance to management with respect to our capital requirements and financing efforts. The Board of Directors may also delegate its power to the Finance Committee to approve the pricing and other terms of various financing transactions.

 

Communications with the Board of Directors

 

Stockholders may communicate directly with the Board of Directors. All communications should be directed to our Vice President, General Counsel and Secretary at the address below and should prominently indicate on the outside of the envelope that it is intended for the Board of Directors, or for non-management directors. If no party is specified, the communication will be forwarded to the entire Board of Directors. Each communication intended for the Board of Directors and received by the Vice President, General Counsel and Secretary will be forwarded to the specified party following its clearance through normal security procedures used for regular mail. The communication will not be opened, but rather will be forwarded unopened to the intended recipient. Stockholder communications to the Board of Directors should be sent to:

 

Vice President, General Counsel and Secretary

NII Holdings, Inc.

1875 Explorer Street, 10th Floor

Reston, Virginia 20190

 

Compensation Committee Report

 

The Compensation Committee of the Board of Directors is responsible for the development, oversight and implementation of our compensation program for executive officers, including our executive chairman, chief executive officer, our chief financial officer and each of our three other most highly compensated executive officers who earned more than $100,000 in total compensation for services, who we refer to as the named executive officers, and in that role annually reviews and establishes the compensation of our executive officers. The Compensation Committee is committed to a philosophy that links a significant portion of each executive’s compensation to corporate performance. That philosophy guides the Compensation Committee’s discussions and determinations with respect to executive compensation.

 

The Compensation Committee’s primary goals in structuring compensation for executives are to attract, motivate and retain qualified and experienced executives and to provide executives with meaningful and competitive financial rewards for superior performance. To achieve these goals, the Compensation Committee seeks to provide a mix of annual and long-term compensation that will align the short- and long-term interests of our executives with those of the company and our stockholders. In 2008, the Compensation Committee approved an executive compensation program that consisted of base salaries, an annual cash bonus plan with payouts based on performance against defined targets and long-term equity incentive awards of stock options and restricted stock.

 

A discussion of the principles, objectives, components, analyses and determinations of the Compensation Committee with respect to executive compensation are included in the Compensation Discussion and Analysis that follows this Committee report. The specific decisions of the Compensation Committee regarding the compensation of named executive officers are reflected in the compensation tables and narrative that follow the Compensation Discussion and Analysis.

 

The Compensation Committee has reviewed the Compensation Discussion and Analysis included in this report and discussed it with our management. Based on this review and discussion, the Compensation Committee recommended that the Compensation Discussion and Analysis be included in our 2008 annual report on Form 10-K or proxy statement for the 2009 annual meeting of stockholders.

 

Compensation Committee

 

Charles M. Herington, Chairman

George A. Cope

Raymond P. Dolan

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation Committee is a current or former officer of us or any of our subsidiaries. In addition, there are no compensation committee interlocks with other entities with respect to any such member.

 

Compensation Discussion and Analysis

 

The Compensation Committee of our Board of Directors annually, or more frequently, reviews and establishes the salary and other compensation of our executive officers, including the named executive officers, and provides oversight of our equity based compensation programs for other employees.

 

Compensation Objectives and Philosophy

 

In making its determinations relating to executive compensation, the Compensation Committee’s principal compensation objectives are to:

 

 

 

To achieve these objectives the Compensation Committee has followed a philosophy that focuses on an executive’s total compensation, including cash and non-cash compensation, from all sources and that links a significant portion of each executive’s compensation to corporate performance.

 

In particular, the Compensation Committee believes that total compensation for each executive should generally be set at a level commensurate with the executive’s and our performance and comparable to the total compensation paid by a peer group of companies to executives in similar positions and with similar levels of experience. The Compensation Committee also believes that the greater portion of our executives’ compensation should be at risk. Consistent with this belief, the base salary and annual bonus components are generally a relatively smaller portion, and the long-term equity incentives are a relatively larger portion, of total compensation than is the case for the executives employed by the peer companies.

 

The Compensation Committee generally does not take into account the potential payments to executives under our severance plans, including payments that may be made in connection with an executive’s termination, in connection with a change of control or in other circumstances as described below in “— Severance Plans” when determining total compensation. The Compensation Committee believes that the terms of these arrangements are generally consistent with those offered by similarly situated companies including those in the peer group companies.

 

Our current compensation program does not provide for the reduction or recovery of payments and awards made to our executives in the event that our financial statements were to be restated in the future in a manner that would have impacted the size or payment of the award at the time of payment. Under our current executive compensation program a significant portion of the executives’ overall compensation is in the form of equity that vests over multiple years. When combined with our ownership guidelines, our executives have a very large component of their compensation at risk should there be a material restatement of our financial statements. By using a combination of options and restricted stock on a year over year basis, we have further linked the executives to the long term success of the shareholders.

 

Setting Executive Compensation

 

When determining each executive’s total compensation and mix of compensation components, the Compensation Committee looks to a number of factors to be sure it is effectively implementing our executive compensation philosophy. Those factors include the following:

 

 

The Compensation Committee also takes into consideration, among other things, the recommendations made by the executive chairman and chief executive officer (with respect to the compensation of executives other than their own), recommendations of our human resources professionals and the advice and recommendations of the Compensation Committee’s executive compensation consultant.

Role of the Compensation Consultant

 

The Compensation Committee has engaged Mercer Consulting, an outside global human resources consulting firm, to conduct an annual review of the Company’s executive compensation program. In connection with its review, Mercer Consulting advises the Compensation Committee as to the competitiveness of executive compensation packages and provides the Compensation Committee with data relating to the total compensation levels and relative amounts of cash and equity compensation earned by executives in comparable positions within the peer group of companies described below as well as information regarding industry trends relevant to executive compensation. Specifically, Mercer Consulting provides the Compensation Committee with, among other things, the following analyses that assess the competitiveness of our senior executives’ compensation:

 

 

In making these comparisons, Mercer Consulting utilizes the reported information included in the peer group companies’ public filings with certain adjustments that are designed to normalize the information to take into account differences in valuation techniques we use compared to those used by the peer group companies and differences in the terms of the compensation arrangements used by the peer group companies. These adjustments are designed to improve the comparability of our compensation components with those utilized by the peer group companies.

 

Use of Comparative Industry Data

 

With respect to comparative industry data, the Compensation Committee reviews executive salaries and evaluates the compensation structures and the financial performance of comparable companies in a designated peer group established by the Compensation Committee with assistance from its executive compensation consultants. The peer group is focused principally on high performing public companies selected from the NASDAQ 100 and includes those in the telecommunications or related industries and companies that are similar to us in size in terms of revenues, assets or other characteristics and complexity or companies with similar market capitalizations and other characteristics. In 2008, the following companies were selected as the peer group for purposes of collecting comparative industry market data:

 

 

The financial performance measures used by the Compensation Committee to evaluate our performance in comparison to the performance of the peer group companies include revenue growth, return on invested capital, and return on assets, return on equity and total stockholder return.

 

Determination of Total Compensation and Compensation Components

 

The Compensation Committee sets total compensation ranges for our executive officers based on factors such as the competitive environment, historic compensation levels of the executive and similarly situated executives, individual performance, and the compensation levels contemplated by the Company’s annual budget. Based on these criteria and the financial performance measures used to evaluate our performance in comparison to the peer group of companies, the Compensation Committee establishes the total compensation ranges for each executive based on the ranking of the company’s performance within, and the comparable compensation amounts for

similarly situated executives within, the peer group. In some instances, adjustments are made to the total compensation ranges to take into account the executive’s tenure, experience, responsibilities of the position and other contributions.

 

Once total compensation ranges are set for executive officers, the Compensation Committee determines how that compensation will be allocated among the principal components of our compensation program, which include:

 

 

The Compensation Committee allocates the executives’ total compensation among components of executive compensation to strike an appropriate balance between cash and stock compensation and between short-term and long-term incentives consistent with our overall philosophy on executive compensation. This allocation is designed to ensure that a significant portion of each executive’s total compensation is tied to our performance and to the creation of stockholder value. We differentiate the composition of compensation among the members of the executive team based on each executive’s position and responsibility, with executives at higher compensation levels having a greater percentage of both their total compensation and cash compensation tied to corporate performance. Accordingly, executives with greater roles and responsibilities associated with achieving our performance targets bear a greater proportion of the risk that those goals are not achieved and receive a greater proportion of the reward if our performance targets are met or surpassed. In addition, as an executive’s position and responsibility increases, the long-term incentive compensation component of the executive’s compensation becomes more significant because our most senior executives have the greatest influence on our strategic performance over time.

 

As a matter of process, the Compensation Committee begins the allocation of the executive’s total compensation among the components of executive compensation by setting base salary and annual target bonus amounts for each executive. Base salary is based primarily on historic base salary levels with adjustments to reflect customary annual increases consistent with our annual budget for base salary increases; to recognize outstanding individual performance or expanded duties; or to address changes in the competitive marketplace. Incremental amounts paid to executives who work outside the United States to compensate them for the additional costs and other obligations relating to those assignments — such as amounts paid for security services, housing costs, travel costs and certain related tax obligations — are not taken into consideration in determining base salary and are not used in calculating the annual target bonus amounts as described below.

 

The annual target bonus amount for each executive officer is determined by multiplying his or her base salary by the target bonus percentage applicable to that position. The Compensation Committee, in consultation with our senior executives, designs the annual bonus program to provide incentives to achieve the corporate performance goals established by our Board of Directors. As described in more detail below, the target bonus percentages for the named executive officers range from 50% to 100% of base salary based on position.

 

Consistent with the Compensation Committee’s view that the greater portion of executive compensation should be at risk, the base salary and annual bonus components are generally a smaller portion of total compensation than is the case for executives within the peer group of companies. As a result, a relatively greater proportion of our executives’ total compensation is allocated to long-term equity incentives. The resulting increased emphasis on stock option grants is consistent with our compensation philosophy because stock options require stock price appreciation in order for executives to realize any benefit, thus directly aligning executive and stockholder interests. Restricted stock awards provide a similar alignment of interests while providing a substantial retention incentive through their vesting terms.

 

To determine the amount of the long-term equity incentives for each executive officer, including grants of restricted stock and nonqualified stock options, the equity compensation target amount is calculated by subtracting the cash components of compensation (i.e., base salary and the target annual bonus amount) for each executive officer from the total direct compensation target range for that executive officer.

 

The value of the outstanding restricted stock grants made to each executive and allocated to the current year is then determined. This amount is calculated by allocating the value of each restricted stock grant made to the

executive, which is determined based on the aggregate value of the underlying common stock on the date of grant, ratably over the applicable vesting period of the restricted stock grant. The amount includes a portion of value of grants of restricted stock made in prior years that is attributable to the current year based on the vesting schedule of the relevant restricted stock grants. That allocated amount is then subtracted from the equity compensation target amount for the executive.

 

The number of shares subject to grants of nonqualified stock options to each executive officer is then determined by dividing the remaining equity compensation target amount by the fair market value per option. As described in more detail below, the fair market value per option is determined using the Black-Scholes-Merton option pricing model. The number of options determined under this formula is then compared to the annual grants made to that executive officer in prior years and to the grants proposed to be made to other executive officers to ensure equity/parity among similarly situated executives. In the case of executive officers other than the chief executive officer, the amount of the proposed grant is also reviewed in light of the recommendations of the chief executive officer and the executive chairman with respect to the proposed grants. The recommendations made by the chief executive officer and the executive chairman take into account a number of factors including the executive’s position and responsibility, the assessment by the chief executive officer and executive chairman of the executive’s performance, the historic grant levels with adjustments to recognize outstanding individual performance or expanded duties, the competitive environment and the compensation paid to executives with similar duties at comparable companies, and the budgeted amounts for non-cash equity compensation under SFAS 123R. In 2008 those recommendations also took into account the relative recoveries of the executives from past grants and the fact that several executives who had joined the Company during 2006 and 2007 had received grants of nonqualified options with exercise prices that were substantially above current market prices, resulting in recommendations by the chief executive officer and executive chairman that reflected a relatively higher number of options being granted to those executives.

 

As a result of this process, the sum of the values of the base salary, the target bonus amount, the value of the restricted stock grants allocable to the year and the fair market value of the option grant are generally within the total compensation target range for the executive officer for that year.

 

2008 Executive Compensation

 

Total Compensation

 

In 2008, the Compensation Committee established the total compensation ranges for the executives who were named executive officers in our proxy statement relating to the 2008 annual meeting of stockholders, who we refer to as our 2008 named executive officers, targeting those total compensation ranges to be consistent with our performance relative to the peer group of companies. The goal is to generally align our compensation with that of the comparable compensation amounts for similarly situated executives within the peer group of companies with adjustments based on company performance and the executive’s tenure, position, skills, experience, attainment of goals and other contributions. The 2008 named executive officers for whom the Compensation Committee made these comparisons included Messrs. Shindler, Hemmady and Foyo, but did not include Messrs. Dussek, who joined the Company in February 2008, or Messrs. Santoro or McMahon. In setting the total compensation ranges, the Compensation Committee evaluated our performance in comparison to the performance of peer group companies over one and three year periods with respect to revenue growth, return on invested capital, return on assets, return on equity and total stockholder return. In particular, in making the comparisons with the peer group, the Committee considered our ranking in comparison to the peer group in relation to each of these performance measures individually and in the aggregate. In making the comparisons of the individual 2008 named executives’ compensation to that of the executives at the peer group companies, the Compensation Committee took into account both the overall level of compensation paid to the named executive officers within the peer group companies and the nature of the positions held by the executives at the peer group companies in comparison to the positions held by our named executive officers. The comparable compensation amounts for the peer group executives were determined using information reported by the peer group companies as adjusted and normalized to take into account differences in valuation techniques we use compared to those used by the peer group companies and differences in the terms of the compensation arrangements used by the peer group companies.

In making the 2008 executive compensation decisions, the Compensation Committee relied primarily on the relative ranking of our performance compared to the peer group companies using the performance measures described above. Based on that comparison, the Compensation Committee set the target for the total compensation for each of the individuals who were our 2008 named executive officers taking into consideration the Compensation Committee’s assessment of the individual performance of each of our named executive officers during 2007. Due to the transition in his position from chairman and chief executive officer to executive chairman in February 2008, and in light of his related surrender, without consideration, of options to purchase 50,000 shares of common stock that were granted to him on April 25, 2007, the Compensation Committee elected to make no adjustments to Mr. Shindler’s salary and bonus targets for 2008, and made no stock option or other equity grants to him during the year. Mr. Dussek’s total compensation level for 2008, which was negotiated in conjunction with his hiring as our chief executive officer in February of 2008, was generally consistent with the range of compensation levels in comparison to the similarly situated executives at the peer group companies that was used for our other named executive officers, but fell slightly below the targeted range. The total compensation levels set by the Compensation Committee for Messrs. Hemmady and Foyo and the other individuals who were our 2008 named executive officers ranged from the 51^st percentile to the 92^nd percentile of the comparable compensation amounts of similarly situated executives at the peer group companies with those adjustments.

 

The primary component affecting the total compensation of the 2008 named executive officers, and their relative ranking compared to the similarly situated executives at the peer group companies, was the number of shares subject to nonqualified stock options granted to each executive. In 2008, the level of nonqualified option grants that were recommended by our chief executive officer and executive chairman based on the factors described above reflected relatively larger grants being made to executives who had joined the company in recent years. These recommendations were taken into account by the Compensation Committee when determining the total compensation levels for the executives. The total compensation levels set by the Compensation Committee for Messrs. Santoro and McMahon, who were not included in our 2008 named executive officers, was based primarily on the recommendations of our executive chairman and chief executive officer as described above.

 

The annual total compensation levels for 2008 for each of our named executive officers (effective from April 1, 2008 through March 31, 2009, except as noted below) and the percentage change from 2007 total compensation levels are as follows:

 

 

 

 

The decline in Mr. Shindler’s total compensation in 2008 in comparison to 2007 was primarily the result of the change in his position from chairman and chief executive officer to executive chairman in February 2008, and the related decision by the Compensation Committee to make no adjustments to Mr. Shindler’s salary and bonus targets for 2008 and no stock option or other equity grants to him during the year. The decline in total compensation in 2008 for Messrs. Foyo and McMahon was primarily related to the relatively lower value of the nonqualified stock options granted to them based on the fair market value per option determined using the Black-Scholes-Merton option pricing model. The increase in total compensation for Messrs. Hemmady and Santoro was primarily related to the relatively higher number of nonqualified options granted to them.

 

On July 14, 2008, the Compensation Committee approved changes to Mr. Foyo’s compensation arrangements in order to address changes in his reporting relationships and responsibilities during 2008, to address certain disparities between his compensation and that of other similarly situated executives, to provide him with a more significant retention incentive to continue as President of our operations in Mexico, our largest market and to recognize the success and contributions of our operations in Mexico. Those changes included an increase in Mr. Foyo’s base salary from $385,875 to $450,000 and the grant of 50,000 shares of restricted common stock that vest on the third anniversary of the date of grant. Because these amounts were not taken into account in connection with the annual compensation decisions made in April 2008, they are not reflected in the table above or in the more detailed analysis of each of the components of compensation included below.

 

As noted above, the 2008 Total Compensation Level includes the value of the portion of each restricted stock grant made to the executive in the current or prior year that is allocable to the applicable year, and the fair market value of the option awards made during the applicable year determined on the date of grant using the Black-Scholes method under Statement of Financial Accounting Standards No. 123R. The compensation amounts actually realized by the named executive officers with respect to the stock awards and option awards made to them could vary significantly from the values reflected in the table above as a result of, among other things, significant fluctuations in the market value of our common stock from the values at the date of grant. Based on the $18.18 closing price of a share of our common stock, as reported on the Nasdaq Global Select Market on December 31, 2008, the compensation amounts that would be realized by the named executive officers with respect to the grants made in prior periods would be substantially less than the values attributable to the stock awards and option awards in the table above.

 

Base Salary

 

In 2008, the Compensation Committee determined that executive base salaries for executive officers should be targeted at levels consistent with the historic compensation levels adjusted to reflect customary annual increases that were consistent with our budget for base salary increases.

The annual base salaries in 2008 (effective from April 1, 2008 through March 31, 2009) for our named executive officers, the percentage change from 2007 and the percentage of total compensation base salaries represented are as follows:

 

 

 

 

Annual Bonus

 

In 2009, cash bonuses were paid to our executive officers for the achievement of certain corporate financial and operating targets relating to our 2008 fiscal year (the “2008 Bonus Plan”). In February 2008, the Compensation Committee determined that the criteria relating to our performance that were used to determine the amounts paid under our 2008 Bonus Plan to executive officers located at our headquarters. These criteria were consolidated operating income before depreciation and amortization, or consolidated OIBDA, consolidated net subscriber additions, consolidated free cash flow, which is the amount equal to the consolidated OIBDA minus capital expenditures for the year, and headquarters operating expenses. Up to 10% of the target bonus amount is determined based on management’s discretion subject to the approval of the Compensation Committee. For executive officers who are responsible for operations in one or more countries, the criteria relating to our performance that were used to determine the amounts paid under the 2008 Bonus Plan were OIBDA, net subscriber additions and free cash flow margin for the applicable country as well as consolidated OIBDA, consolidated net subscriber additions, and consolidated free cash flow, with up to 10% of the target bonus amount determined based on management’s discretion subject to the approval of the Compensation Committee. The bonus criteria, each of which is weighted, also include a component based on our ongoing management succession planning activities. The targeted amounts for each of Messrs Dussek, Shindler, Hemmady, Santoro and McMahon, the named executive officers located at headquarters who received bonus payments, were as follows (dollar amounts in millions):

 

 

The targeted amounts for Mr. Foyo, who was the named executive officer responsible for our operation in Mexico, were as follows (dollar amounts in millions):

 

 

Each of the performance measures outlined above were based on the performance of the Company’s existing business and did not take into account the impact of the costs associated with the development and deployment of next generation technologies. Accordingly, the 2008 Bonus Plan provided that the Compensation Committee could

reduce the payments by up to 25% if the Company failed to meet the financial targets relating to the deployment of the new technologies. Those targets, which were approved subsequent to the adoption of the 2008 Bonus Plan, were tied to the Company not exceeding specified operating expense and capital expenditure targets for the year in connection with the deployment of the new technologies.

 

The 2008 Bonus Plan was designed to provide incentive bonuses that would reward executives for superior achievement and be competitive as compared to bonuses paid by the peer group of companies established by the Compensation Committee, while being consistent with the Compensation Committee’s views on the appropriate levels of total compensation. The performance measures and the target amounts used for the 2008 Bonus Plan were initially developed and recommended by our senior executives based on their assessment of our 2008 operating and financial goals that were included in our operating budget for 2008. The free cash flow targets that were initially approved as part of the 2008 Bonus Plan were subsequently adjusted to reflect the impact of incremental capital expenditures that were approved by the Board of Directors. These adjustments were approved by the Compensation Committee.

 

The terms of the 2008 Bonus Plan were evaluated by the Compensation Committee, with the input of its outside compensation consultants, in light of the Compensation Committee’s overall compensation philosophy of placing greater weight on the “at risk” components of compensation and our short and long term strategies and goals. This review resulted in the Compensation Committee’s determination that 2008 incentive bonuses for the named executive officers should be targeted at the following percentages of base salary for each of the named executive officers: Mr. Shindler — 80%; Mr. Hemmady — 60%; Mr. Foyo — 50% Mr. Santoro — 50%; Mr. McMahon — 50%. Mr. Dussek’s target annual bonus was set at 100% of his base salary in conjunction with his hiring as our chief executive officer in February 2008. Under the terms of the 2008 Bonus Plan the payout could range from 80% to 120% of the target bonus amounts based on the percentage of the specific target performance goals achieved. The minimum achievement required to qualify for any bonus payment was 80% of the specified target performance goals under the 2008 Bonus Plan. The maximum payout of a bonus was 120% of the target bonus amounts which required achievement of at least 120% of the specified target performance goals under the 2008 Bonus Plan.

 

To determine bonus amounts earned by our executive officers during the plan year, the Compensation Committee meets following the fiscal year end to review our financial and operating performance as compared to the applicable performance measures and to discuss performance factors and other criteria related to the award of bonuses. In some instances, the Compensation Committee, upon the recommendation of management, makes adjustments to the bonus payments based on, among other things, changes in our corporate goals and business conditions during the course of the bonus plan year if it concludes that such adjustments are appropriate and are consistent with our overall goals and strategy. The Compensation Committee considers, but is not bound by, the recommendations of executive officers, including the chief executive officer, with respect to the payment or amounts of bonuses to executive officers.

 

In 2008, the company achieved on a consolidated basis 99% of the performance target for OIBDA, 100% of the performance target for net subscriber additions, 101% of the performance target for Consolidated Free Cash Flow, and 109% of the performance targets relating to headquarters operating expenses. Nextel Mexico achieved 90% of its performance target for OIBDA, 92% of its performance target for net subscriber additions, and 90% of its performance target for country free cash flow. Based on these results, and giving effect to certain adjustments approved by the Compensation Committee to reflect changes in corporate goals and business conditions during 2008, the named executive officers’ bonus payouts under the 2008 Bonus Plan ranged from 97% to 101% of the target bonus amounts, which were based on predetermined percentages of base salary as described above. The Compensation Committee also determined that the Company had not exceeded its targeted operating expenses and capital expenditures associated with the development and deployment of next generation technologies and, accordingly, did not make any reduction in the bonus payments relating to those goals. Based on the foregoing,

the bonuses awarded to the named executive officers with respect to our performance in 2008, the percentage changes from 2007 and the percentage of total compensation the bonuses represented were as follows:

 

 

 

 

The percentages of annual base salary used to determine the 2008 annual bonus targets were consistent with those used in 2007. Accordingly, the change in the bonus amounts paid in 2008 relative to 2007 was primarily due to a combination of the increases in the executive officers’ base salaries and our performance in 2008 in comparison to the 2008 operating targets.

 

Long-Term Equity Incentives

 

The Compensation Committee provides equity-based incentives to executive officers through the 2004 Incentive Compensation Plan, which permits the grant of stock options, stock appreciation rights, stock awards, performance stock awards, incentive awards and stock units. The Compensation Committee assigns a value to the grant of stock options based on the Black-Scholes-Merton option-pricing model using the same assumptions that we use in calculating the compensation expense attributable to such grants under Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” or SFAS 123R, except that for purposes of this analysis, we disregard estimated forfeitures related to service-based vesting conditions and use the full 10 year term as the expected life of the option so our calculations generate an assumed value that is higher than the value that is used to calculate the expense pursuant to SFAS 123R.

 

In keeping with the Compensation Committee’s general practice regarding long-term equity incentives discussed above, the relative amounts of executive compensation allocated to long-term equity in 2008 were determined by subtracting base salary and bonus potential from the total compensation set for each executive officer by the Compensation Committee. The remaining amount of compensation was allocated to long-term equity based on the recommendations of our executive chairman and chief executive officer, which take into account a number of factors including the executive’s position and responsibility, the assessment by the chief executive officer and executive chairman of the executive’s performance, the historic grant levels with adjustments to recognize outstanding individual performance or expanded duties, and the budgeted amounts for non-cash equity compensation under SFAS 123R. In 2008 those recommendations also took into account the relative recoveries of the executives from past grants and the fact that several executives who had joined the Company during 2006 and 2007 had received grants of nonqualified options with exercise prices that were substantially above current market prices, resulting in recommendations by the chief executive officer and executive chairman that reflected a relatively higher number of options being granted to those executives. The Compensation Committee considered the long-term equity incentives available under the 2004 Incentive Compensation Plan and granted non-qualified stock options to our executive officers.

The Compensation Committee uses grants of restricted stock as a long term retention incentive that is attributable to a number of years rather than a component of annual compensation for the particular year of grant, although, as described above, the portion of the value of current or previous grants of restricted stock allocable to the year is taken into account in determining annual compensation for that year. Grants of restricted stock were made during 2008 to Mr. Dussek in connection with the commencement of his employment as the chief executive officer of the Company. On July 14, 2008, the Compensation Committee approved a grant of restricted stock to Mr. Foyo in order to address changes in his reporting relationships and responsibilities during 2008, to address certain disparities between his compensation and that of other similarly situated executives, to provide him with a more significant retention incentive to continue as President of our operations in Mexico, our largest market, and to recognize the success and contributions of our operations in Mexico. The shares of restricted stock granted to Messrs. Dussek and Foyo vest on the third anniversary of the date of grant. No other grants of restricted stock were made during 2008.

 

The 2008 stock option awards to executive officers vest 25% per year for four years on each anniversary of the date of grant. The stock options were granted at the closing market price on the date of grant and expire after ten years. Consistent with prior grants, the restricted stock awards to Messrs. Dussek and Foyo will vest on the third anniversary of the date of the award. Mr. Dussek’s restricted stock award was made on February 11, 2008, which was the date of the commencement of his employment with the Company, and Mr. Foyo’s restricted stock award was made on July 14, 2008. The vesting of the stock options and restricted stock is not conditioned on any individual performance of the executive or on our financial or operating performance.

 

Timing of Long-Term Incentive Awards

 

Our practice with respect to the timing of long-term incentive awards that we have followed since the approval of the 2004 Equity Plan in April 2004 has been to make grants of nonqualified stock options and/or awards of restricted stock to executive officers once each year in late April, which had historically coincided with scheduled meetings of the Board of Directors and various committees, including the Compensation Committee. Non-employee directors also typically received annual grants of stock options in connection with the April board meetings. In the future, we expect to continue the practice of making grants of options and/or awards of restricted stock at our regular Board of Directors and committee meetings scheduled in April of each year. Awards of stock options or other equity incentives to new executive officers and directors occur at the time of the person’s appointment or election as an executive officer or director. In addition, our chief executive officer may grant, under authority delegated to him by the Compensation Committee, a limited number of stock options (not to exceed 10,000 shares in any single grant and 100,000 shares in the aggregate, with such aggregate amount subject to renewal by the Compensation Committee from time to time) to employees who are not executive officers. Pursuant to the 2004 Equity Plan, the exercise price of all stock options is not lower than the closing market price of our stock on the date of grant.

 

In 2008, the Board and committee meeting at which the equity grants were made occurred on April 23, 2008. With the exception of Mr. Dussek, who received grants of stock options and restricted stock upon the commencement of his employment on February 11, 2008, grants of nonqualified stock options to executive officers and directors for 2008 were made by the Compensation Committee on April 23, 2008. Non-employee directors serving on the Board of Directors also received grants of stock options on April 23, 2008. The exercise price of these stock options for each grant was the closing market price on the date of grant.

 

We also follow a practice of disclosing our financial results for the first quarter of the fiscal year following the April Board of Directors meeting at which time those results are discussed. The 2008 first quarter earnings release was made publicly available on April 24, 2008. Although the members of the Compensation Committee were aware of the impending release of information relating to first quarter results at the time grants of stock options were made, the Compensation Committee did not use such information in determining the amount of the awards to be made to executive officers and directors for that fiscal year nor did the Compensation Committee withhold the making of grants to confer a benefit on the recipient of a grant or avoid a loss in value of a grant.

 

We are aware that the release of our quarterly financial results may have an impact on the market price of our common stock, and therefore the value of the option grant, depending on whether the information is favorable or

unfavorable. However, we believe that the April Board of Directors meeting is an appropriate time during the year to make option grants and that a consistent application of our option granting practices from year to year regardless of the content of the first quarter earnings release is also appropriate. As noted above, we have followed this consistent practice since the 2004 Equity Plan was adopted. The stock options granted by the Compensation Committee are designed to create incentives for the creation of long-term stockholder value and contain delayed vesting provisions that prevent recipients of stock options from taking advantage of short-term fluctuations in the market price of our common stock.

 

We have not planned in the past, nor do we plan in the future, to time the release of material non-public information for the purpose of affecting the value of executive compensation. We do not have a practice of setting the exercise price of options based on the stock price on any date other than the grant date, nor do we use a formula or any other method to select a price based on a period before, after or surrounding the grant date. Nonqualified stock options are always granted at the closing price of our common stock on the date of grant.

 

Executive Stock Ownership Guidelines

 

In 2004, we adopted an executive target stock ownership program that requires our executive officers to attain designated stock ownership levels, and therefore maintain a vested interest in our equity performance. Over a five-year period, which commenced in 2004 for the individuals who were executive officers at the time the policy was adopted and which commences upon the appointment of the individual as an executive officer for those appointed to those positions after 2004, the executive officers covered by the program are expected to reach the targeted ownership levels based on specific share value targets per executive officer level. The types of stock ownership that qualify toward the ownership requirement under our policy include direct stock ownership and vested options where the exercise price is lower than the fair market value of our common stock and the value of any deferred stock units held by the executive officer under the Executive Deferral Plan described below. The penalty for non-compliance of our policy may include a discontinuation of future equity grants until compliance is achieved.

 

The executive stock ownership guidelines required that Mr. Shindler reach a targeted stock ownership level with a value equal to two times his base salary by December 31, 2005, a value equal to four times his base salary by December 31, 2007 and a value equal to five times his base salary by December 31, 2009. The ownership guidelines required Messrs. Foyo and McMahon to reach a targeted stock ownership level with a value equal to his base salary by December 31, 2005, a value equal to two times his base salary by December 31, 2007 and a value equal to three times his base salary by December 31, 2009. For the remaining named executive officers, the ownership guidelines require the executive officer to reach a targeted stock ownership level with a value equal to his base salary by the third anniversary of his election as an executive officer, a value equal to two times his base salary by the fourth anniversary of his election as an executive officer and a value equal to three times his base salary by the fifth anniversary of his election as an executive officer.

 

The share targets for the named executive officers who are currently employed by the Company and the percentage of the target attained at December 31, 2008, based on the base salary levels paid in 2008 and the closing price of our common stock on the Nasdaq Global Select Market on December 31, 2008 of $18.18 are as follows:

 

 

In light of the significant declines in the market value of our stock in the latter half of 2008, the Compensation Committee elected to grant a waiver of the share ownership guidelines for executive officers who did not meet the requirements as of December 31, 2008. Executive officers who are subject to the waiver are not allowed to sell shares of our common stock during 2009 without the approval of the Compensation Committee unless, after giving

effect to any sale, the executive officer meets the stock ownership requirement that will apply to them at December 31, 2009.

 

Our corporate policy that applies to trading in our stock by executive officers restricts the hedging by the named executive officers of the economic risk of ownership of our common stock.

 

Tax Deductibility Under Section 162(m)

 

Section 162(m) of the Internal Revenue Code imposes a limitation on the deductibility of nonperformance-based compensation in excess of $1 million paid to named executive officers of public companies. As noted above, the Compensation Committee has implemented a compensation program that links a substantial portion of each executive’s compensation to performance. We intend to qualify executive compensation for deductibility under Section 162(m) if doing so is consistent with our best interests and the interests of our stockholders. Since our corporate objectives may not always be consistent with the requirements of full deductibility, it is conceivable that we may enter into compensation arrangements in the future under which payments are not deductible under Section 162(m). We currently believe that we should be able to continue to manage our executive compensation program for the named executive officers to preserve the related federal income tax deductions, although individual exceptions may occur.

 

Retirement, Deferred Compensation and Pension Plans

 

Our executive officers who are eligible may participate at their election in our 401(k) retirement savings plan that provides employees with an opportunity to contribute a portion of their cash compensation to the plan on a tax-deferred basis to be invested in specified investment options and distributed upon their retirement. Consistent with the 401(k) plan, we match 100% of each employee’s contributions to the 401(k) plan up to a maximum of 4% of the employee’s base salary. The employer matching contribution vests based on the employee’s years of service. Our matching contribution for 2008 for named executive officers was $46,000 in the aggregate.

 

We do not have any pension plans. In addition, we have not adopted a supplemental executive retirement plan or other “excess plan” that pays benefits to highly compensated executives whose salaries exceed the Internal Revenue Service’s maximum allowable salary for qualified plans. In December 2008, the Compensation Committee approved the adoption of an Executive Deferral Plan, which became effective January 1, 2009. Under the Executive Deferral Plan, executives will be allowed to defer a portion of their compensation with the amount deferred by a participating executive attributed to a hypothetical account and treated as if it is invested in deferred stock units with the value of those units linked to the value of our common stock. Because the Executive Deferral Plan did not become effective until January 1, 2009, no compensation was deferred under the plan in 2008. We do not have any other nonqualified deferred compensation plans.

 

Severance Plans

 

We previously adopted two severance plans that provide for the payment of severance benefits to employees, including our executive officers, if their employment is terminated in specified circumstances. One plan provides for the payment of severance benefits if the executive officer’s employment is terminated without cause for certain reasons and the other plan provides for the payment of severance benefits if the executive officer’s employment is terminated without cause, or if the executive officer terminates his or her employment with good reason, in connection with a change of control. The two severance plans are mutually exclusive. These arrangements have been in place for several years and were not modified in 2008 other than as necessary to comply with the requirements of section 409A of the Internal Revenue Code. While the Compensation Committee generally does not take into account the potential payments to executives under our severance plans, including termination and change of control arrangements, in performing its annual evaluation of the total compensation that may be realized by our executive officers, the Compensation Committee believes that the terms of these arrangements are generally consistent with those offered by similarly situated companies including those in the peer group. A description of the terms of our severance plans, the specific circumstances that trigger payment of benefits, an estimate of benefits payable upon the occurrence of those triggering events and other information relating to such plans can be found below under the caption “Executive Compensation — Potential Payments under Severance Plans.”

Annual Compensation of Executive Officers

 

Summary Compensation Table

 

In the table below and discussion that follows it, we summarize the compensation earned during 2008 by each of the individuals who served as our chief executive officer during the year, our chief financial officer, and each of our three other most highly compensated executive officers who earned more than $100,000 in total compensation for services rendered in all capacities during 2008. We refer to these individuals in this proxy statement as the “named executive officers.” Messrs. Dussek, Santoro and McMahon were not named executive officers prior to 2008.

 

Summary Compensation Table

 

 

 

 

 

 

 

Supplemental Discussion of Compensation

 

All compensation that we pay to our named executive officers, other than the foreign service differential and related payments which is set pursuant to a letter agreement with Mr. Foyo, is determined as described above in our “Compensation Discussion and Analysis” section.

 

We made the awards of restricted stock and grants of stock options under our 2004 Incentive Compensation Plan.

 

The table above presents the fair value of option grants under SFAS 123R, as determined based on the Black-Scholes-Merton option-pricing model and the stated assumptions. The Black-Scholes-Merton option-pricing model, however, was developed for use in estimating the fair value of traded options that have no vesting

restrictions and are fully transferable. In addition, option-pricing models such as the Black-Scholes-Merton model require the input of highly subjective assumptions, including the expected stock price volatility. We hired an independent consulting firm with expertise in this area to review our assumptions, methodology and calculations. The assumptions represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Consequently, there is a risk that our estimates of the fair values of our stock option awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock option awards in the future. Certain stock option awards may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from the stock option award that is significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Additionally, application of alternative assumptions could produce significantly different estimates of the fair value of stock option awards and consequently, the related amounts recognized in the consolidated statements of operations. Currently, there is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates from option-pricing valuation models, such as Black-Scholes-Merton, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of stock option awards is determined in accordance with SFAS 123R and Staff Accounting Bulletin Topic 14 (SAB 107) using the Black-Scholes-Merton option-pricing model, the fair value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, we believe that the existing models do not necessarily provide a reliable single measure of the fair value of the stock options granted to the named executive officers.

 

As a result of the factors described in the preceding paragraph, as well as fluctuations in the market value of our common stock, the compensation amounts actually realized by the named executive officers with respect to the stock awards and option awards made to them could vary significantly from the values reflected in the summary compensation table above. Based on the $18.18 closing price of a share of our common stock, as reported on the Nasdaq Global Select Market on December 31, 2008, the compensation amounts that would be realized by the named executive officers with respect to the grants made in prior periods would be substantially less than the values attributable to the stock awards and option awards in the summary compensation table.

 

We do not have any pension plans. In December 2008, the Compensation Committee approved the adoption of the Executive Deferral Plan, which became effective January 1, 2009. Because the Executive Deferral Plan did not become effective until January 1, 2009, no compensation was deferred under the plan in 2008. We do not have any other nonqualified deferred compensation plans.

Grants of Plan-Based Awards Table

 

In the table below and discussion that follows it, we summarize the grants of stock options and stock awards to each of the named executive officers during 2008. Our non-equity incentive bonus plan adopted for 2008 does not provide for payouts in fiscal years after 2008, and we historically have not issued any performance-based equity incentive plan awards.

 

Grants of Plan-Based Awards
Fiscal Year 2008

 

 

 

 

Supplemental Discussion of Awards

 

As disclosed in the table above, on April 23, 2008 we granted options to acquire shares of our common stock to each of the named executive officers other than Mr. Dussek. On February 11, 2008 we granted options to acquire shares of our common stock to Mr. Dussek in connection with the commencement of his employment with the Company. The exercise price for the options listed was the closing price of a share of our common stock, as reported on the Nasdaq Global Select Market, on the date of grant. The exercise price may be paid in cash, in shares of our common stock valued at fair market value on the date of exercise or pursuant to a cashless exercise procedure under which the optionee provides irrevocable instructions to a brokerage firm to sell the purchased shares and to remit to us, out of the sale proceeds, an amount equal to the exercise price plus all required tax withholding and other deductions. The right to exercise the options granted will vest at a rate of 25% of the aggregate number of shares of our common stock covered by such options on each of the first four successive anniversary dates of the date of grant.

The options expire ten years from the date of grant. An earlier expiration date may apply in the event of the optionee’s termination of employment, retirement, death or disability.

 

In addition, on February 11, 2008 we granted an award of restricted common stock to Mr. Dussek that will vest in its entirety on February 11, 2011 and on July 14, 2008 we granted an award of restricted common stock to Mr. Foyo that will vest in its entirety on July 14, 2011.

 

For information on how we determined the number of restricted stock awards and stock option grants for 2008, see the “Compensation Discussion and Analysis” section above.

 

Outstanding Equity Awards at Fiscal Year-End Table

 

The equity awards reflected in the table below include the number and value of stock options and shares of restricted stock that remain outstanding as of December 31, 2008.

 

Outstanding Equity Awards at Fiscal Year-End 2008

 

 

 

 

 

Option Exercises and Stock Vested Table

 

In the table below, we list information on the exercise of options and the vesting of restricted stock during the year ended December 31, 2008.

 

Option Exercises and Stock Vested
Fiscal Year 2008

 

 

 

 

Equity Compensation Plan Information

 

The following table sets forth information as of December 31, 2008, with respect to compensation plans under which shares of our common stock are authorized for issuance.

 

 

 

Potential Payments under Severance Plans

 

We have arrangements with each of our named executive officers under our Change of Control Severance Plan that provide for payments and benefits if an executive officer’s employment is terminated in connection with the occurrence of certain events involving a change in control. In addition, we have an obligation to make payments and provide certain benefits to our named executive officers under our Severance Plan and 2004 Incentive Compensation Plan resulting from termination of employment upon the occurrence of certain events. The following is a summary of the payments that we or our successor may make under each of these arrangements.

 

Payments upon Termination of Employment

 

Each of our named executive officers is covered by our Change of Control Severance Plan and our Severance Plan. The Change of Control Severance Plan provides for the payment of certain benefits if an executive officer’s employment is terminated by the company without cause or by the executive officer for good reason in connection with a change of control. No benefits are required to be paid unless the executive officer’s employment is terminated. The named executive officers are also entitled to severance benefits if their employment is terminated by the company in specified circumstances under the Severance Plan. Although the benefits under the Severance Plan apply without regard to whether any change of control has occurred or is pending, the Change of Control Severance Plan provides that employees entitled to receive amounts paid under the Change in Control Severance Plan will not be entitled to cash severance under any other severance plan, including the Severance Plan. Each of the named executive officers has also received awards of stock options and restricted stock under the 2004 Incentive Compensation Plan, which contains provisions that may accelerate the vesting of awards made to a named executive officer if we terminate the executive officer’s employment with us or if the executive officer terminates his or her employment with us for good reason in connection with a change of control.

 

Except as noted below, we otherwise have not entered into any employment agreements or other arrangements that provide for benefits in connection with a termination of employment of our named executive officers.

The following table shows the estimated amount of the payments to be made to each of the named executive officers who continued to be employed by us as of December 31, 2008 upon termination of their employment in connection with a change of control under the Change of Control Severance Plan, their involuntary termination under the Severance Plan or upon their termination in connection with their death or disability. For purposes of calculating the value of the benefits, we have assumed that the triggering event for payment occurred under each of the arrangements as of December 31, 2008. The footnotes to the table contain an explanation of the assumptions made by us to calculate the payments, and the discussion that follows the table provides additional details on these arrangements.

 

Potential Payments upon Termination of Employment

 

 

 

 

 

Change of Control Severance Plan

 

The Change of Control Severance Plan provides that each named executive officer will receive a payment if a change of control, as defined below, occurs and he either is terminated without cause or resigns for good reason. Messrs. Dussek, Shindler and Hemmady will be entitled to receive 250% of their annual base salary and target bonus at the date of his termination upon such an event, and Messrs. Foyo, Santoro and McMahon will be entitled to receive 200% of such amounts, all as provided in the plan. Each named executive officer will be entitled to receive his payment under the plan in a lump sum within thirty days following his termination of employment.

 

We or the surviving entity will also pay the full premium cost of continued health care coverage for each named executive officer under the federal “COBRA” law in such a termination. We will make the COBRA payments up to the lesser of 18 months or the time at which the named executive officer is reemployed and is eligible to receive group health coverage benefits under another employer-provided plan. The payments may also cease for any of the reasons provided in the COBRA law.

 

In addition, in the event that any of the named executive officers incur any legal, accounting or other fees and expenses in a good faith effort to obtain benefits under the Change of Control Severance Plan, we or the surviving entity will reimburse the named executive officer for such reasonable expenses. The named executive officer will be entitled to receive a tax gross-up payment in the event that any payments made under the plan is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code. Such reimbursement and gross-up payments will be subject to Section 409A of the Internal Revenue Code and will be paid within the timeframe prescribed by the regulations thereunder.

 

A change of control will be deemed to occur under the plan when:

 

 

A named executive officer will receive compensation under the plan if:

 

 

 

 

Severance Plan

 

The Severance Plan provides payments to a named executive officer in the event of an involuntary termination of employment, which includes termination due to job elimination, work force reductions, lack of work, a determination by us that the executive officer’s contributions no longer meet the needs of the business and any other reason determined by us. Under the Severance Plan, each of the named executive officers will be entitled to a payment equal to 12 months of his annualized base salary, not including any bonus, incentive payments or commission payments. Each named executive officer will also receive a pro rata payment of his bonus based on the portion of the year that he was employed by us. We will pay the bonus to the named executive officer when we pay bonuses to employees at the same position level for the bonus plan year in the following year, and such bonus will be based on the achievement level of the named executive officer’s business unit for the applicable year.

 

We will make a lump sum payment of the amount due under the Severance Plan to each named executive officer. We reserve the right to make the payments periodically for a period not to exceed 24 months. In order to receive payments under the Severance Plan, each named executive officer must return all of our property and execute a release agreement:

 

 

The release agreement will also require the executive officer to comply with specified confidentiality, non-disparagement and non-solicitation obligations. Our obligation to make or continue severance payments to the executive officer will cease if the executive officer does not comply with those obligations.

 

2004 Incentive Compensation Plan

 

The 2004 Incentive Compensation Plan covers the grant of certain incentives and awards, including stock options, stock appreciation rights, stock, performance shares, incentive awards, stock units and dividend equivalent rights, to our employees, including the named executive officers. Under the 2004 Plan, if a change of control occurs and the incentives and awards granted under the plan are not assumed by the surviving entity, or the employee is terminated within a certain period following a change of control, each outstanding award is treated as explained below. A change of control under the 2004 Plan is defined the same as in the Change of Control Severance Plan and the same events that trigger payments to the executive officer under the Change of Control Severance Plan trigger payments under the 2004 Plan, both as described above.

 

 

 

The 2004 Plan provides that the administrator of the plan shall determine what amounts will be payable to the named executive officer upon death, disability or retirement in the agreement under which awards are made under the plan.

 

Director Compensation Table

 

In the table and discussion below, we summarize the compensation paid to our non-employee directors in 2008.

 

Director Compensation
Fiscal Year 2008