BBND Bigband Networks (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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BigBand Networks, Inc.

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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on October 18, 2010

 

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of BigBand Networks, Inc., a Delaware corporation (“BigBand Networks” or the “Company”), will be held on October 18, 2010 at 11:00 a.m., Pacific Time, at the offices of Wilson Sonsini Goodrich & Rosati, P.C., located at 650 Page Mill Road, Palo Alto, California 94304. At the meeting, you will be asked to consider and vote upon a proposal to approve a one-time stock option exchange program. This proposal may be considered at the Special Meeting at the time and on the date specified above or at any time and date to which the Special Meeting may be properly adjourned or postponed.

 

After careful consideration, our Board of Directors has approved the proposal and recommends that you vote FOR the proposal. Details of the proposal and business to be conducted at the meeting can be found in the enclosed proxy statement. Equity awards are an important incentive to retaining and motivating key employees who we view as our most valuable assets. Your support of this proposal is key to our success. Please bear in mind that the proposal specified above is not considered a routine matter, and, consequently, if your shares are held by your broker in “street name” and you do not instruct your broker how to vote your shares, your broker will not be able to vote your shares at this meeting. Thank you for your consideration and support.

 

You are entitled to attend the Special Meeting only if you were a BigBand Networks stockholder as of the close of business on September 1, 2010 or hold a valid proxy to vote shares at the Special Meeting.

 

All stockholders are cordially invited to attend the Special Meeting in person. However, to ensure your representation at the meeting, you are urged to submit your proxy or voting instructions for the Special Meeting by completing, signing, dating and returning your proxy or voting instruction card in the pre-addressed envelope provided, or by using the telephone or the Internet. For specific instructions on how to vote your shares, please refer to the section entitled Questions and Answers beginning on page 1 of this proxy statement and the instructions on the proxy or voting instruction card. Any stockholder attending the Special Meeting may vote in person even if such stockholder has returned a proxy card.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

Robert E. Horton

Senior Vice President, General Counsel and

Corporate Secretary

 

Redwood City, California

September   , 2010

 

 

 

 

SPECIAL MEETING OF STOCKHOLDERS

 

NOTICE OF SPECIAL MEETING AND PROXY STATEMENT

 

TABLE OF CONTENTS

 

BIGBAND NETWORKS, INC.

 

 

 

 

PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS

 

 

 

 

 

Attn: Investor Relations

475 Broadway Street

Redwood City, CA 94063

(650) 995-5000

 

 

Attn: Investor Relations

475 Broadway Street

Redwood City, CA 94063

(650) 995-5000

 

Attn: Corporate Secretary

475 Broadway Street

Redwood City, CA 94063

 

 

(1) the name and record address of the stockholder who intends to propose the business and the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by such stockholder;

 

(2) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to introduce the business specified in the notice;

 

(3) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting;

 

(4) any material interest of the stockholder in such business; and

 

(5) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Exchange Act.

 

Copy of Bylaws:   You may contact our Corporate Secretary at our principal executive offices, located at 475 Broadway Street, Redwood City, California 94063, for a copy of the relevant bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates.

 

Introduction

 

On August 11, 2010, our Board approved (with the employee members abstaining), subject to stockholder approval, a stock option exchange program (the “exchange program”) that will permit our eligible employees to exchange certain outstanding stock options (the stock options eligible for the exchange program are referred to herein as “eligible options”) for a lesser number of restricted stock units (“RSUs”) to be granted under our 2007 Equity Incentive Plan (the “2007 Plan”) with an adjusted vesting schedule.

 

Eligible options refers to options to purchase shares of our common stock that are outstanding and unexercised as of the expiration date of the exchange program and that have an exercise price equal to or exceeding $3.50, which shall be confirmed by the Compensation Committee at the time the exchange program commences under the following plans (collectively, the “Plans”):

 

 

Our intent in using a price within a range above the current price of our common stock as a threshold is to ensure that only outstanding stock options that are appropriately “out-of-the-money” or “underwater” (i.e., that have an exercise price above the current price of our underlying shares) are eligible for the exchange program.

 

If approved by the stockholders, we intend to offer the exchange program to all employees (including our executive officers subject to the provisions of Section 16 of the Exchange Act) based in our U.S. and overseas locations who are employed by us or our subsidiaries for the duration of the exchange program (the employees eligible for the exchange program are referred to herein as “eligible employees”). However, we may exclude employees in certain non-U.S. jurisdictions from the exchange program if local law or other constraints would make their participation infeasible or impractical, in which case we would explore alternative incentive arrangements to address the issues with their underwater options. Non-employee members of our Board are not eligible to participate in the exchange program. If approved by the stockholders, it is anticipated that the exchange program would begin within one week of the date the stockholders approve the exchange program at a time determined by the Company.

 

The material terms of the exchange program, including eligibility, the exchange ratios to be applied to eligible options, the vesting schedule and the terms of the RSUs granted pursuant to the exchange program are summarized below under “Summary of the Exchange Program.”

 

Reasons for Implementing an Exchange Program

 

Over the past several quarters, our stock price has dropped substantially due to declining conditions in the industry as well as the uncertainty of the global economy and international markets. As a result, a large number of our employees hold options with exercise prices significantly higher than the current market price of our common stock. The weighted average exercise price of our outstanding options is $4.32 per share, compared to a closing price of our common stock of $2.79 per share on September 1, 2010. As of September 1, 2010, approximately 79% of our 12,619,412 outstanding options are underwater. The weighted average exercise price of such underwater options is $5.85 per share.

 

We believe the exchange program is an important component in our strategy to align employee and stockholder interests through our equity compensation practices and it will permit us to:

 

 

 

The exchange program may take place only if the exchange program is approved by our stockholders. If our stockholders do not approve the exchange program, eligible options will remain outstanding and in effect in accordance with their existing terms. We will continue to recognize compensation expense for these eligible options, even though the eligible options may have little or no retention or incentive value.

 

Why the Exchange Program is the Best Alternative

 

In considering how best to continue to motivate, retain and reward our employees who have stock options that are underwater, we evaluated several alternatives, including the following:

 

 

We determined that a program under which employees could exchange eligible options for a lesser number of RSUs was most attractive for a number of reasons, including the following:

 

 

 

SUMMARY OF THE EXCHANGE PROGRAM

 

Mechanics of the Exchange Program

 

The non-employee members of our Board authorized the exchange program on August 11, 2010, subject to stockholder approval. We have not implemented the exchange program to date and, if our stockholders do not approve this proposal, we will reconsider our decision to implement the option exchange program. If we receive stockholder approval of the proposal, it is anticipated that the exchange program would begin within one week of the date the stockholders approve the exchange program at a time determined by us.

 

Upon the start of the exchange program, eligible employees holding eligible options will receive a written offer that will set forth the precise terms and timing of the exchange program. Eligible employees will be given at least 20 business days to elect to surrender their eligible options in exchange for new grants of RSUs. On the exchange offer’s expiration date, surrendered eligible options will be cancelled (the “cancellation date”) and the RSUs will be granted in exchange for such cancelled stock options.

 

At the start of the exchange program, we will file the offer to exchange with the SEC as part of a tender offer statement on Schedule TO. Eligible employees, as well as stockholders and members of the public, will be able to obtain the offer to exchange and other documents filed by us with the SEC free of charge from the SEC’s website at www.sec.gov .

 

Eligible Options

 

Eligible options will include outstanding options (excluding non-employee director options) with an exercise price equal to or exceeding $3.50 per share, as determined by the Compensation Committee and granted under the Plans. As of September 1, 2010, options to purchase approximately 11,741,946 shares of our common stock are

outstanding under the Plans (excluding non-employee director options). Of these, there are options for approximately 6,963,140 shares with an exercise price equal to or greater than $3.50 per share.

 

Eligible Employees

 

The exchange program will be open to all employees (including our executive officers) in our U.S. and overseas locations who are employed by us or our subsidiaries at the start of the exchange program. Although we intend to offer the exchange program to all or substantially all employees, we may exclude employees in certain non-U.S. jurisdictions from the exchange program if local law or other constraints would make their participation infeasible or impractical, in which case we would explore alternative incentive arrangements to address the issues with their underwater options. Notwithstanding the foregoing, non-employee members of our Board will not be eligible to participate. In addition to being employed as of the start of the exchange program, an employee will only be eligible to participate if he or she remains employed by us through the date new RSUs are granted under the exchange program. Any employee holding eligible options who elects to participate in the exchange program but whose employment terminates for any reason prior to the grant of the new RSUs will retain his or her eligible options subject to their existing terms and will not be eligible to participate in the exchange program.

 

Exchange Ratios

 

Participants in the exchange program will receive RSUs covering a fewer number of shares than the eligible options for which they are exchanged determined on the basis of an exchange ratio applied to exchanged options. The exchange ratios of eligible options to new RSUs are established by grouping together eligible options with similar exercise prices and assigning an appropriate exchange ratio to each grouping. These exchange ratios are determined relative to the fair value of the eligible options (calculated using a Binomial Lattice model) within the relevant grouping. The calculation of fair value using this Binomial Lattice model takes into account many variables, such as the volatility of our common stock and the expected cancellation rate of the eligible options. Setting the exchange ratios in this manner is intended to result in the issuance of RSUs that have a fair value approximately equal to or less than the fair value of the surrendered eligible options they replace. This will eliminate any additional compensation cost that we must recognize on the eligible options, other than immaterial compensation expense that might result from fluctuations in our stock price after the exchange ratios have been set but before the exchange actually occurs. Unless our Compensation Committee adopts another exchange ratio prior to the date eligible options are exchanged for RSUs, the following exchange ratios would apply:

 

 

The total number of RSUs a participating employee will receive with respect to surrendered eligible options will be determined by dividing (a) the number of outstanding shares of our common stock underlying the exchanged options, (b) by the exchange ratio. Any fractional shares will be rounded up to the nearest whole RSU if such fraction is greater than or equal to 0.5, or rounded down to the nearest whole RSU if such fraction is less than 0.5. The exchange ratios will be applied on a grant-by-grant basis.

 

The foregoing exchange ratios are intended to result in the issuance of RSUs that have a fair value for financial accounting purposes approximately less than or equal to the fair value of the exchanged options they replace. To this end, should the value of our common stock change in any material respect after the date of this proxy statement, the Compensation Committee will have the discretion to adjust the exchange ratios in order to achieve a value-for-value exchange.

 

Participation in the Exchange Program

 

Participation in the exchange program is voluntary. Eligible employees will have an election period of at least 20 business days from the start of the exchange program in which to determine whether they wish to participate.

Because the decision whether to participate in the exchange program is voluntary, we are not able to predict which or how many employees will elect to participate, how many eligible options will be surrendered for exchange, and therefore how many RSUs may be issued. However, if all eligible options were tendered for exchange, assuming eligible options were those options with an exercise price greater than or equal to $3.50, 2,240,162 RSUs would be granted in the exchange program. As indicated above, the non-employee members of our Board are not eligible to participate in the exchange program.

 

Election to Exchange Eligible Options

 

Eligible employees will be able to decide whether to participate in the exchange program on a grant-by-grant basis. This means that eligible employees will be able to elect to tender any or all of their grants of eligible options. However, an eligible employee will be required to tender all shares subject to any grant of eligible options they wish to surrender under the exchange program.

 

Vesting of New RSUs

 

RSUs will have an adjusted vesting schedule based on the vested status of the surrendered options. None of the RSUs will be vested on the grant date (which will be the same calendar day as the exchange program’s expiration date).

 

If an eligible employee’s eligible options are fully vested as of the cancellation date, the RSUs will be scheduled to vest in three equal installments of 9 months, 18 months and 27 months following the RSU grant date, subject to the eligible employee’s continued service with BigBand or our subsidiaries through each respective vesting date.

 

If an eligible employee’s eligible options are unvested on the cancellation date, the RSUs will be scheduled to vest in 12 equal installments on a quarterly basis following the RSU grant date over a period of 36 months (i.e., 3 years), subject to the eligible employee’s continued service with BigBand or its subsidiaries through each respective vesting date.

 

If an eligible employee’s eligible options are partially vested as of the cancellation date, a portion of the RSUs (in an amount proportionate to the number of vested eligible options) will be scheduled to vest in three equal installments 9 months, 18 months and 27 months following the RSU grant date and a portion of the RSUs (in an amount proportionate to the number of unvested eligible options) will be scheduled to vest in 12 equal installments on a quarterly basis following the RSU grant date over a period of 36 months.

 

Terms and Conditions of the New Options

 

RSUs granted in the exchange program will be granted under our 2007 Plan. RSUs are a different type of equity award from options, and so the terms and conditions of the RSUs necessarily will be different from the exchanged options; provided, however, that if any exchanged options contained special vesting provisions on or in connection with a change of control, RSUs granted in exchange for such options will contain identical change of control vesting provisions.

 

Terms of the Exchange Program

 

While the terms of the exchange program are expected to be materially similar to the terms described in this proposal, we may find it necessary or appropriate to change the terms of the exchange program to take into account our administrative needs, local law requirements, accounting rules, our policy decisions that make it appropriate to change the exchange program and the like. For example, we may alter the method of determining exchange ratios if we decide that there is a more efficient and appropriate way to set the ratios while still continuing to limit incremental compensation expense. We also may exclude employees in certain non-U.S. jurisdictions from the exchange program if local law or other constraints would make their participation infeasible or impractical, in which case we would explore alternative incentive arrangements to address the issues with their underwater options.

 

Additionally, we may decide not to implement the exchange program even if stockholder approval of the exchange program is obtained or may amend or terminate the exchange program once it is in progress. The final

terms of the exchange program will be described in an offer to exchange that will be filed with the SEC. Although we do not anticipate that the staff of the SEC will require us to materially modify the terms of the exchange program, it is possible that we may need to alter the terms of the exchange program to comply with comments from the staff of the SEC.

 

Tax Consequences of Participation

 

The following is a summary of the anticipated material U.S. federal income tax consequences of participating in the exchange program. A more detailed summary of the applicable tax considerations to participants will be provided in the exchange program documents. The law and regulations themselves are subject to change, and the Internal Revenue Service is not precluded from adopting a contrary position. The exchange of eligible options for RSUs should be treated as a non-taxable exchange, and neither we nor any of our employees should recognize any income for U.S. federal income tax purposes. The tax consequences for participating non-U.S. employees may differ from the U.S. federal tax consequences described in the preceding sentence.

 

Accounting Treatment of New Equity Awards

 

As of January 1, 2006, we adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation (“Topic 718”). Under Topic 718, we will recognize incremental compensation expense, if any, resulting from the RSUs granted in the exchange program. The incremental compensation cost will be measured as the excess of the fair value of each RSU granted to employees in exchange for surrendered eligible options, measured as of the date the RSUs are granted, over the fair value of the eligible options surrendered in exchange for the RSUs, measured immediately prior to the exchange. In the event that any of the RSUs are forfeited prior to their vesting due to termination of employment, any incremental compensation expense of the forfeited RSUs will not be recognized. As discussed above, we intend to set the exchange ratio so the fair value of the RSUs granted will be approximately equal to or less than the surrendered options they replace.

 

Impact of the Exchange Program on the Company’s Stockholders

 

We are unable to predict the precise impact of the exchange program on our stockholders because we are unable to predict how many or which employees will exchange their eligible options. The exchange program is intended to restore competitive and appropriate equity incentives for our employees, reduce our existing overhang and recapture value for compensation expense already being incurred.

 

Vote Required to Approve this Proposal

 

The approval of the proposal to approve a one time stock option exchange program required the affirmative vote of a majority of the shares of BigBand Networks’ common stock present in person or represented by proxy and entitled to be voted at the meeting.

 

The Board of Directors Unanimously Recommends

That Stockholders Vote “For” this Proposal.

 

The following table sets forth information, as of September 1, 2010, concerning beneficial ownership of BigBand Networks’ common stock by:

 

 

The information provided in the table is based on our records, information filed with the SEC and information provided to BigBand Networks, except where otherwise noted.

 

The number of shares beneficially owned by each entity, person, director or executive officer is determined under rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power and also any shares that the individual has the right to acquire as of October 30, 2010 (60 days after the Record Date) through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole voting and investment power (or shares such powers with his spouse) with respect to the shares set forth in the following table. In addition, unless otherwise indicated, all persons named below can be reached at BigBand Networks, Inc., 475 Broadway Street, Redwood City, California 94063.

BENEFICIAL OWNERSHIP TABLE

 

 

 

 

 

The following discussion and analysis of the compensation arrangements of our named executive officers for 2009 should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we employ in the future may differ materially from the currently-planned programs summarized in this discussion.

 

Overview

 

BigBand operates in a competitive global labor market, and our competitive position derives from our ability to attract and retain talented people. We therefore devote considerable efforts and resources to hiring talented individuals, motivating strong performance, and retaining those who deliver positive results. Our rewards programs, which are comprised of employee benefits, cash compensation, and equity awards, are designed to serve such goals. In particular, we design our compensation programs to:

 

 

In addition, we administer our rewards programs to attempt to:

 

 

For 2009, our business results fell short of our performance targets in significant ways. Our 2009 executive compensation rewards were concomitantly reduced to reflect this performance.

 

Compensation Framework

 

Market Analysis

 

In 2009, the compensation committee of our Board engaged executive compensation experts Compensia, Inc. to conduct a competitive analysis of the compensation of our executives. The analysis included a review of competitive market data, derived from both third-party compensation surveys conducted by Radford Surveys + Consulting, and a review of annual reports and proxy statements of peer companies (i.e., the 14 technology companies listed in Appendix A attached hereto). Compensia, Inc. and members of our Human Resources Department evaluated the peer group data for each component of our executive compensation program, including base salary, variable cash, and equity.

This analysis confirmed that our executives’ overall compensation levels (base pay, variable pay and equity-based pay) were generally near the target stated in our compensation philosophy, as approved by the compensation committee of our Board. Specifically, we targeted our executives’ compensation at the following competitive levels:

 

 

 

 

Determining the Amount of Each Element of Compensation.   We design each element of our rewards program to be competitive in the labor market. We monitor the market throughout the year and adjust each element when appropriate. In addition, from time to time, the compensation committee of the Board considers whether to provide our executives with additional compensation, such as discretionary cash or equity awards, as circumstances may warrant. Such circumstances may include, without limitation, recognition of outstanding performance or retention of key executives.

 

Base Pay.   In general, we believe an employee’s base pay level should reflect the market base salary of the job the employee performs, the employee’s overall sustained performance level, and the employee’s contribution to BigBand over time. The base pay for our top performers may be higher than our target level. In the aggregate, Compensia, Inc. found our named executive officers’ base salaries to be near, but below, our competitive base pay target as of December 31, 2009, which was our 2009 fiscal year end, and in no case was any named executive officer’s base salary greater than our target.

 

For our executives, we consider the individual’s scope of responsibilities, qualifications, experience, past performance, the goals and objectives established for the executive and competitive salary practices of peer companies when determining base salary. Since all of our executive officers were paid competitive base salaries in 2008, and since we expected market base salaries to remain relatively flat through 2009, no executive officer’s base salary was increased during 2009 compared to 2008. Effective June 1, 2010, Mr. Bassan-Eskenazi’s base salary was increased to $412,000 in order to close in part the gap between his salary and market CEO salaries.

 

Variable Pay.   Our variable pay programs are intended to motivate employees to achieve overall company goals by aligning the employees’ individual objectives with those of the company. Our programs are designed to reflect the actual results achieved in employees’ payouts, to provide competitive and motivational awards, to avoid entitlements, and to be easy to understand and administer.

 

As with base pay, we determine the targeted level of variable compensation from third-party salary surveys. After developing a competitive framework, we determine an employee’s actual level of variable compensation by assessing the employee’s actual results against pre-established goals and objectives, and rewarding the employee in accordance with the terms of the variable pay program. In developing the competitive framework, we seek to set aggregate “total cash compensation” (base salary plus variable pay) at the 75 ^th percentile of the surveyed market to meet our goal of ensuring that our cash compensation levels are competitive, and to enable us to attract and retain exceptional talent.

 

In 2009, we had two primary variable pay programs: our Incentive Compensation Plan, or ICP, and our 2009 Sales Compensation Plan. Each employee participates in either the ICP or the Sales Compensation Plan, but no employee participates in both simultaneously. Our named executive officers participated only in the ICP during 2009.

 

The ICP for 2009 featured three performance periods each year: one for each half of the year (performance during each of which determined payment of 30% of the target annual ICP payment), and the third for the full year (performance during which determined payment of the remaining 40% of the potential annual ICP payment).

 

An ICP participant’s payment, if any, for each performance period was determined as the product of (A) each employee’s period-end base salary, (B) his or her period-end ICP target, (C) his or her individual performance score for the period, and (D) the company’s performance score for the period. Under some circumstances, a participant’s score may also have been subject to proration.

Ninety percent of the Company’s performance score for each period was objectively determined by its overall objective score (i.e., the performance achieved against predetermined business goals — specifically, Revenue and Operating Contribution were used in 2009, though the ICP allows for the compensation committee to use other measures). The remaining ten percent of the Company’s performance score was a discretionary score assigned by our Board.

 

We do not disclose our objective targets for our overall business prospectively, as we deem them confidential and believe that their disclosure would result in competitive harm to us. We establish the funding targets such that realization of 100% payout would require a very high level of company performance.

 

The following table sets forth the 2009 business goals, BigBand Networks’ actual performance against those goals, the overall objective score, and the 2009 funding levels for each of the target periods.

 

 

As the table reflects, our 2009 revenues fell significantly short of our goals in each of the three performance periods, and our operating margins that fell short in two of the three periods. As a result, the weighted total ICP funding for 2009 was 31.1% of target.

 

The individual performance score of an ICP participant for 2009 was determined as the percent of his or her pre-set objectives he or she achieved in any performance period.. Employee goals for each half-year were set at the beginning of the half, and employee achievement for the half was measured against those goals after the half ends. Employee achievement for the full year was an average of the performance evaluations for each half.

 

The following table details the final computations of ICP earned by our named executive officers for 2009. The final payment amounts for each executive officer under the ICP are included in the Summary Compensation Table on page 22.

 

We do not have any named executive officer whose 2009 total cash compensation exceeded our guidelines, and our named executive officers’ aggregate target total cash compensation fell short of our guidelines by 14%. To address this shortfall, the compensation committee revised the named executive officers’ variable pay targets for 2010. The new targets, which are effective for performance periods starting on or after January 1, 2010, appear below.

 

 

Effective for the 2010 plan year, our ICP has been revised with respect to the timing, calculation, and form of payment of awards. Under the modified ICP, Company performance measures are now based on annual objectives, and payments (if any are earned) are only calculated and made after the close of the plan year. In addition, a portion (100% in the cases of our named executive officers) of any earned award will be paid in the form of RSUs. Individual performance objectives continue to be set on a semi-annual basis, but each semi-annual performance period now determines 50% of the individual’s ICP award (if any) for the year.

 

Company performance for the first half of 2010 was below target, and as such, we do not expect to make payments under the ICP for that period. We revised our business plan for the second half of 2010, and changed our Company performance objectives under the ICP in order to reflect this change. Therefore, payments may be earned for the second half of 2010.

 

Equity-Based Pay.   Our goal is to maintain a competitive equity rewards program, and we monitor the competitive market, and applicable accounting, corporate, securities and tax laws and regulations, so that we may adjust our equity programs as needed. Awards of stock options, RSUs and other forms of equity compensation are intended to reflect and reward high levels of individual performance over time. We grant stock options and RSUs to provide a long-term incentive for executives and to align their financial interests with those of our stockholders.

 

Our compensation committee does not apply rigid formulas in allocating equity awards to executives as a group or to any particular executive. Instead, it exercises its judgment and discretion and considers, among other things, the role and responsibilities of the executive, competitive factors, the amount of stock-based equity compensation already held by the executive, the non-equity compensation received by the executive and the total number of options and RSUs to be granted to all participants during the year. The compensation committee and the management team regularly review the amount of equity compensation outstanding to help ensure that appropriate dilution levels are maintained while still providing competitive rewards that are commensurate with results delivered. The number of stock options granted to each executive is set forth in the table under the heading “Grants of Plan-Based Awards For Fiscal 2009” on page 23. The value of such grants, as determined in accordance with SFAS ASC Topic 718 for each individual named executive officer is set forth in the column “Stock Awards” in the “Summary Compensation Table” on page 22.

 

Allocation of Equity Compensation Awards

 

In 2009, we granted a total of 3,939,401 option shares and RSUs, of which a total of 915,000 option shares and RSUs were granted to our named executives, representing 23.2% of all option shares and RSUs granted in 2009. Options granted to executives and other employees vest over a period of four years.

 

In the first half of 2010, we granted a total of 5,032,477 option shares and RSUs, of which a total of 691,769 option shares and RSUs were granted to our named executives, representing approximately 14% of all option shares and RSUs granted in the first half of 2010.

 

Timing of Equity Awards

 

Prior to 2008, our compensation committee generally granted equity awards to executives and current employees once per year, typically at a meeting of the compensation committee held in the fourth quarter of the

year. In 2008, however, the grant date of options was advanced to the third quarter, and in 2009, to the second quarter. In 2010 general employee grants were made in the first quarter, and grants to executives took place in the second quarter following executive changes early in the year. We anticipate that all performance-related grants to current executives and employees in 2011 will take place in the first quarter. This timing change is intended to align the grant of equity awards with the delivery of other performance awards (specifically, merit adjustments to base pay and payouts of second-half and full-year portions of ICP awards) that generally take place as part of our annual performance review process during the first quarter. The compensation committee believes that granting these awards contemporaneously will allow for more effective performance management of employees.

 

With respect to newly hired executives, we generally grant options at the first meeting of the compensation committee following such executive’s hire date; provided that the compensation committee makes these option grants only during our open trading window (as defined in our insider trading policy). We do not have any program, plan or practice to time either the release of material non-public information or the grant of stock options or RSUs for the purposes of affecting the value of executive compensation. The exercise price of any newly-granted option is the closing price of our common stock on the NASDAQ Global Market on the date of grant.

 

Executive Equity Ownership

 

We expect and encourage our executives to hold a significant equity stake in BigBand Networks. However, we do not have specific share retention or ownership guidelines. We have a policy that prohibits our executives from short-selling our stock, prohibits our executives from holding our stock in a margin account, and discourages the purchase and sale of exchange-traded options on our stock by our executives. Several of our executives have established trading plans pursuant to Rule 10b-5(1) of the Exchange Act to manage their sales of our securities.

 

Types of Equity Awards

 

We grant both non-qualified stock options and RSUs, and have granted a limited number of restricted stock awards in the past. Future grants may take any of these forms, or incentive stock options, performance shares or units, or any other of the forms permitted under our 2007 Equity Incentive Plan. The decision on the form of any specific award is undertaken with consideration of factors including, but not limited to, the dilutive, motivational, and retentive impact of the award.

 

During 2009, the compensation committee granted no option shares and 915,000 RSUs to our named executive officers. On May 19, 2009, our compensation committee granted a total of 320,000 RSUs to Mr. Bassan-Eskenazi; 110,000 to Mr. Castonguay; 200,000 to Mr. Heard; 85,000 to Mr. Horton; and 200,000 to Mr. Oz. All of these awards were intended primarily to reward these executives for their performance during the preceding year.

 

During the first half of 2010, the compensation committee granted 216,000 option shares and 475,769 RSUs to our named executive officers. On June 11, 2010, our compensation committee granted a total of 216,000 options and 291,491 RSUs to Mr. Bassan-Eskenazi; 24,568 RSUs to Mr. Horton; and 22,112 RSUs to Mr. Oz. On June 14, 2010, our compensation committee granted a total of 68,799 RSUs to Mr. Horton, and 68,799 RSUs to Mr. Oz. Of these awards 104,171 RSUs are performance-based vesting awards in connection with our ICP, and the remainder were intended primarily to reward these executives for their performance during the preceding year.

 

All of our employees (including our executives), except those located in the People’s Republic of China, are eligible to participate in our Employee Stock Purchase Plan, or ESPP, if they are employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. Our ESPP is intended to qualify under Section 423 of the Internal Revenue Code, and provides for consecutive, non-overlapping, six-month offering periods. Our ESPP permits participants to purchase common stock through payroll deductions. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six-month offering period. The purchase price is 85% of the fair market value of our common stock on either the first day or the last day of the period, whichever is lower.

Performance-Based Compensation and Financial Restatement

 

We have not considered or implemented a policy regarding retroactive adjustments to any cash or equity-based incentive compensation paid to our executives and other employees where such payments were predicated upon the achievement of certain financial results that were subsequently the subject of a financial restatement.

 

Severance and Change in Control Arrangements

 

All of our executives have employment and other agreements that provide for severance payments and/or acceleration of stock option and RSU vesting that would be triggered by an acquisition or other change in control of BigBand Networks. Generally, our executive officers are entitled to severance in an amount equal to six months’ base salary and health benefits if terminated or constructively terminated other than for cause; however, if an executive officer is terminated or constructively terminated within six months of a change in control, the executive is entitled to severance in an amount equal to twelve months’ salary and health benefits.

 

In addition, the equity awards to all of our executives provide for a potential acceleration of outstanding awards in the event that the executive is terminated or constructively terminated within six (6) months of us undergoing a change in control, as defined in such plans. See “Employee Benefit Plans” for a description of the change in control provisions contained in our equity incentive plans. The following table reflects the acceleration to which each executive officer would be entitled as of December 31, 2009:

 

 

 

 

The table below sets forth the approximate value of salary, bonus and accelerated equity payable to each of our executive officers, assuming a change in control or termination event had occurred on December 31, 2009:

 

Termination Benefit Table

 

 

 

 

 

Effect of Accounting and Tax Treatment on Compensation Decisions

 

In the review and establishment of our compensation programs, we consider the anticipated accounting and tax implications to us and our executives. While we consider the applicable accounting and tax treatment, these factors alone are not dispositive, and we also consider the cash and non-cash impact of the programs and whether a program is consistent with our overall compensation philosophy and objectives.

 

Section 162(m) of the Internal Revenue Code imposes a $1.0 million limit on the amount of compensation that we may deduct in any one year with respect to our chief executive officer and each of our next four most highly compensated executive officers, unless certain specific and detailed criteria are satisfied. Performance-based compensation, as defined in the Internal Revenue Code, is fully deductible if the programs are approved by stockholders and meet other requirements. We believe that grants of equity awards under our existing stock plans (other than time-based vesting RSUs) qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to receive a federal income tax deduction in connection with such awards. We believe that RSUs that vest solely based on the passage of time do not qualify as performance-based under Section 162(m). In general, we have determined that we will not seek to limit executive compensation so that it is deductible under Section 162(m). However, from time to time, we monitor whether it might be in our interests to structure our compensation programs to satisfy the requirements of Section 162(m). We seek to maintain flexibility in compensating our executives in a manner designed to promote our corporate goals and accordingly the compensation committee of our Board has not adopted a policy requiring all compensation to be deductible. Our compensation committee will continue to assess the impact of Section 162(m) on our compensation practices and determine what further action, if any, is appropriate.

 

Role of Executives in Executive Compensation Decisions

 

Our compensation committee generally seeks input from our President and Chief Executive Officer, Amir Bassan-Eskenazi, when discussing the performance of, and compensation levels for executives other than himself. The compensation committee also works with Mr. Bassan-Eskenazi in evaluating the financial, accounting, tax and retention implications of our various compensation programs. Neither Mr. Bassan-Eskenazi nor any of our other executives participates in deliberations relating to his own compensation.

Compensation Committee Report

 

Our compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the compensation committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

 

THE COMPENSATION COMMITTEE

 

Geoffrey Y. Yang (Chairman)

Harald Braun

Michael J. Pohl

 

The foregoing compensation committee report shall not be deemed to be “soliciting material,” to be “filed” with the SEC or to be subject to Regulation 14A or Regulation 14C (other than as provided in Item 407 of Regulation S-K) or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in future filings with the SEC except to the extent that BigBand Networks specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

The members of the compensation committee during 2009 were Harald Braun, Michael J. Pohl, Geoffrey Y. Yang and Bruce I. Sachs (who resigned from the committee effective June 8, 2009). No compensation committee member was at any time during 2009, or at any other time, an officer or employee of BigBand Networks or any of our subsidiaries. None of our executives serves as a member of the Board or compensation committee of any entity that has one or more executive officers serving as a member of our Board or compensation committee.

 

COMPENSATION OF EXECUTIVE OFFICERS

 

The following table provides information regarding the compensation of our chief executive officer, chief financial officer and each of our other three most highly compensated executive officers during 2007, 2008 and 2009. We refer to these executive officers as our named executive officers.

 

 

 

 

Grants of Plan-Based Awards for Fiscal 2009

 

The following table shows all plan-based awards granted to our named executive officers during 2009. The option awards identified in the table below are also reported in the Outstanding Equity Awards at 2009 Fiscal Year-End table below.

 

 

 

Outstanding Equity Awards at 2009 Fiscal Year-End

 

The following table lists all outstanding equity awards held by our named executive officers as of December 31, 2009.

 

 

Option Exercises and Stock Vested For Fiscal 2009

 

The following table shows all stock options exercised and value realized upon exercise, and all stock awards vested and value realized upon vesting, by our named executive officers during 2009.

 

 

Pension Benefits

 

None of our named executive officers participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.

 

Nonqualified Deferred Compensation

 

None of our named executive officers participates in or has a balance in a non-qualified defined contribution plan or other deferred compensation plan maintained by us.

 

Employment Contracts and Change in Control Arrangements

 

Amir Bassan-Eskenazi.   We have entered into an employment agreement, dated January 1, 2000, with Mr. Bassan-Eskenazi, our President and Chief Executive Officer. Mr. Bassan-Eskenazi’s current annual salary is $412,000. Mr. Bassan-Eskenazi’s current annual additional variable compensation potential is $412,000. The level of Mr. Bassan-Eskenazi’s additional variable compensation is determined based on participation in our performance bonus program on the same basis as other members of our senior management. Mr. Bassan-Eskenazi’s employment agreement provides that, if Mr. Bassan-Eskenazi’s employment is terminated without cause and not due to death or disability, Mr. Bassan-Eskenazi would be entitled to a severance payment in an amount equal to twelve months of his then-current base salary and our company’s contribution to his health insurance premiums. This payment is conditioned on Mr. Bassan-Eskenazi’s execution of a comprehensive release of claims. Pursuant to Mr. Bassan-Eskenazi’s agreement, termination within one year following a sale of all or substantially all of our assets, technology or stock, a merger, consolidation or any other change in share ownership resulting in a change in control of BigBand is deemed to be termination without cause if one of the following has occurred (i) a reduction in salary or a material reduction in the level of benefits in effect immediately prior to the change in control, (ii) a

diminution in the nature or scope of authority, duties or responsibility in effect immediately prior to the change in control or (iii) a required change in location of more than 50 miles of the principal office to which Mr. Bassan-Eskenazi would report. Pursuant to his employment agreement, Mr. Bassan-Eskenazi may terminate the agreement at any time with at least six months’ written notice. Mr. Bassan-Eskenazi’s employment agreement further provides that upon the termination of Mr. Bassan-Eskenazi’s employment with us, we will reimburse Mr. Bassan-Eskenazi for moving and relocation expenses to Israel for Mr. Bassan-Eskenazi and his family. If such relocation reimbursements are considered compensation includible in gross income, we have agreed under Mr. Bassan-Eskenazi’s employment agreement to make a gross up payment in order to put him in the same financial position after the payment of taxes with respect to such includible amounts as he would have been if none of the reimbursement amounts had been includible in gross income.

 

We also entered into stock option agreements with Mr. Bassan-Eskenazi, pursuant to which, Mr. Bassan-Eskenazi may be eligible for vesting acceleration of the stock options in certain events as follows:

 

 

 

 

The term “cause” is defined in the option agreements to mean a refusal to render services to us pursuant to any employment agreement to which Mr. Bassan-Eskenazi has entered with us; a repeated refusal to follow our company rules or policies; the commission of any act of disloyalty, gross negligence, dishonesty or breach of fiduciary duty toward our company or our customers; a material breach of any employment agreement, non-disclosure or non-competition agreement that he has entered with us; a commission of a felony or an act of fraud or embezzlement or the misappropriation of money or other assets of the company; or unfairly competing with the company.

 

Please refer to the tables provided under the heading “Severance and Change in Control Arrangements” on page 19 of this proxy statement for information on the value of these benefits that would have been paid had a triggering event occurred on December 31, 2009.

 

Maurice Castonguay.   Mr. Castonguay resigned from his position as our Chief Financial Officer effective May 1, 2010. In exchange for a release of all claims, our Board approved and Mr. Castonguay was provided with a severance payment of $120,000, and continued health insurance payments through April 30, 2011 worth $15,009. In addition, concurrent with the execution of a general release of claims, we and Mr. Castonguay agreed to a

Transition Services Agreement, pursuant to which Mr. Castonguay provided consulting services through August 31, 2010 at the rate of $5,000 per month.

 

David Heard.   Mr. Heard resigned from his position as our Chief Operating Officer effective March 4, 2010. In exchange for a release of all claims, our Board approved and Mr. Heard was provided with a severance payment of $142,500, and continued health insurance payments through March 31, 2011 worth $15,830. In addition, concurrent with the execution of a general release of claims, we and Mr. Heard agreed to a Transition Services Agreement, pursuant to which Mr. Heard provided consulting services through June 30, 2010 at the rate of $5,000 per month.

 

Robert Horton.   We have entered into an offer letter agreement dated January 4, 2005, as amended on December 9, 2007 and December 31, 2008, with Mr. Horton, our Senior Vice President and General Counsel. Mr. Horton’s current annual salary is $250,000. Mr. Horton’s current annual additional variable compensation potential is $150,000. The offer letter provides that if we terminate Mr. Horton without cause, or if the principal place of Mr. Horton’s employment is relocated more than 50 miles from Redwood City, California without his express written consent, he will receive a severance payment equal to six months of his then-current annual salary, and we will continue to provide Mr. Horton with any benefit plan offered to other executives for a period of six months following the date of Mr. Horton’s termination. The offer letter agreement defines “cause” to mean a serious violation of any company policy or engaging in criminal conduct. In addition, the offer letter provides that if Mr. Horton is terminated, constructively terminated or does not hold a comparable position, or if the principal place of Mr. Horton’s employment is relocated more than 50 miles from Redwood City, California without his express written consent within six months following a change in control, he will receive a severance payment equal to 12 months of his then-current annual salary, and we will continue to provide Mr. Horton with any benefit plan offered to other executives for a period of 12 months following the date of Mr. Horton’s termination, and the greater of the equivalent of twelve months accelerated vesting or 50% of the remaining unvested shares subject to Mr. Horton’s outstanding stock options would become immediately vested and exercisable. Mr. Horton has agreed not to resign as a result of constructive termination without first providing us with written notice of the acts or omissions constituting the grounds for constructive termination within 90 days of the initial existence of the grounds for constructive termination and a reasonable cure period of not less than 30 days following the date of the notice.

 

In the related option agreements we entered into with Mr. Horton, a “change in control” is defined to mean a sale of all or substantially all of our assets, technology or stock, a merger, consolidation or any other change in share ownership resulting in a change in control of our company. A termination that would trigger the option vesting acceleration event includes constructive termination by the new controlling party and Mr. Horton not holding a comparable position within six months following the change in control. The related option agreements further define a “termination event” to mean an involuntary termination without cause within six months of a change in control, or any of the following occurring within six months after a change in control: a material reduction in salary or level of benefits in effect immediately prior to the change in control, or a material diminution in the nature or scope of authority, duties or responsibility in effect immediately prior to the change in control.

 

Additionally, we entered into RSU agreements with Mr. Horton that each provide for 100% vesting acceleration of the RSU shares if Mr. Horton is terminated or constructively terminated, without cause, within six months following a change in control.

 

Please refer to the tables provided under the heading “Severance and Change in Control Arrangements” on page 19 of this proxy statement for information on the value of these benefits that would have been paid had a triggering event occurred on December 31, 2009.

 

Ravi Narula.   We have entered into an amended offer letter agreement with Ravi Narula, our Senior Vice President and Chief Financial Officer dated June 15, 2010. The offer letter provides for, effective May 1, 2010, an annual base salary of $253,100 and eligibility for up to $151,860 (60% of base salary) in variable compensation based on participation in our performance bonus program on the same basis as other members of our senior management. The offer letter also provides for the grant of an option to purchase 370,000 shares of our common stock with four year vesting and acceleration of the greater of (a) 12 months’ vesting or (b) 50% of the then outstanding shares under the grant upon Mr. Narula’s termination or constructive termination within six months of a change in control. Further, Mr. Narula will be eligible for the following severance benefits: (i) if he is terminated or constructively terminated (other than for cause), he will receive six months’ of his then-current base salary, and

(ii) if he is terminated or constructively terminated within six months of a change in control, he will receive twelve months’ of his then-current base salary.

 

Ran Oz.   Our wholly-owned Israeli subsidiary, BigBand Networks, Ltd., entered into an employment agreement dated January 2, 2000 with Mr. Oz, our Executive Vice President and Chief Technology Officer. Mr. Oz’s current annual base salary is $225,000. Mr. Oz’s current annual additional variable compensation potential is $135,000. In addition, the agreement provides for payment for a car for Mr. Oz and for social benefits, including contributions to a pension or insurance fund in an amount equal to 13.3% of Mr. Oz’s base salary, contributions to a professional advancement fund in an amount equal to 7.5% of Mr. Oz’s base salary, subject to Mr. Oz’s self-participation in the fund, and a disability insurance premium equal to 2.5% of Mr. Oz’s base salary.

 

The agreement further provides that, if the employment of Mr. Oz is terminated without good cause and not due to death or disability, Mr. Oz would be entitled to a 12-month prior notice or the payment of an amount equal to twelve months of his then-current salary and benefits. Pursuant to this agreement, termination within one year following a sale of all or substantially all of our assets, technology or stock, a merger, consolidation or any other change in share ownership resulting in a change in control of our company is deemed to be a termination without good cause. A reduction in salary or a material reduction in the level of benefits in effect immediately prior to the change in control, a diminution in the nature or scope of authority, duties or responsibility in effect immediately prior to the change in control or a required change in location of more than 50 miles of the principal office to which Mr. Oz would report, each within one year following a change in control, are deemed “termination” in the agreement. In addition, any material adverse change by the company to Mr. Oz’s scope of responsibility, position or job description may be deemed, at Mr. Oz’s option, as a termination without cause. The agreement also provides that Mr. Oz is entitled to terminate his employment with our company following a six-month prior notice and receive an amount equal to six months of his then-current salary and benefits, regardless of whether our company continues his employment following such notice.

 

We also entered into an option agreement with Mr. Oz, pursuant to which Mr. Oz may be eligible for vesting acceleration of his stock options in certain events as follows:

 

 

 

 

The term “cause” is defined in Mr. Oz’s the option agreement to mean a refusal to render services to us pursuant to any employment agreement to which Mr. Oz has entered with us; a repeated refusal to follow our company rules or policies; the commission of any act of disloyalty, gross negligence, dishonesty or breach of fiduciary duty towards our company or our customers; a material breach of any employment agreement, non-disclosure or non-competition agreement that he has entered with us; a commission of a felony or an act of fraud or embezzlement or the misappropriation of money or other assets of our company; or unfairly competing with our company.

 

Please refer to the tables provided under the heading “Severance and Change in Control Arrangements” on page 19 of this proxy statement for information on the value of these benefits that would have been paid had a triggering event occurred on December 31, 2009.

EQUITY COMPENSATION PLAN INFORMATION

 

The following table provides information as of December 31, 2009 about our common stock that may be issued under our prior and existing equity compensation plans.