If You Are a Beneficial Owner of Shares Registered in the Name of a Brokerage Firm, Bank or Other Organization:
A number of brokerage firms, banks, broker-dealers or other similar organizations participate in a program for shares held in street name that offers Internet and telephone voting options.
This program is different from the program for shares registered directly in the name of the shareholder. If your shares are held in an account at an organization participating in this program, then you may vote those shares by using the website or
calling the telephone number referenced on the instructions provided by that organization. Similarly, if you received printed copies of the proxy materials through your broker, bank or other nominee organization, then you may vote by completing and
signing the voting form and mailing it to that organization in the self- addressed envelope it provided.
Q:
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May I change my vote or revoke my proxy?
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A:
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Yes. If you change your mind after you have voted by Internet or by telephone or sent in your proxy card and wish to revote, you may do so by following these
procedures:
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Vote again via the Internet or by telephone;
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Send in another signed proxy card with a later date;
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Send a letter revoking your vote or proxy to our Corporate Secretary at our offices in Seattle, Washington; or
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Attend the Annual Meeting and vote in person.
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We will tabulate the latest valid vote or instruction that we receive from you.
Q:
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How do I vote if I hold shares in my Cray 401(k) Plan account?
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A:
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Shares of Cray common stock held in the Cray 401(k) Plan are registered in the name of the Trustee of the Cray 401(k) Plan, Fidelity Management Trust Company. Under the
Cray 401(k) Plan, participants may instruct the Trustee how to vote the shares of Cray common stock allocated to their accounts.
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The shares allocated under the Cray 401(k) Plan can be voted by submitting voting instructions via the Internet, by telephone or by mailing your proxy card. Voting of shares held in the Cray 401(k) Plan
must be completed by 11:59 p.m. Eastern Time/8:59 p.m. Pacific Time on Friday, June 3, 2016. These shares cannot be voted at the Annual Meeting and prior voting instructions cannot be revoked at the Annual Meeting. Otherwise, participants can
vote these shares in the same manner as described above for shares held directly in the name of the shareholder.
The Trustee
will cast votes for shares in the Cray 401(k) Plan according to each participants instructions. If the Trustee does not receive instructions from a participant in time for the Annual Meeting, the Trustee will vote the participants
allocated shares in the same manner and proportion as the shares with respect to which voting instructions were received.
3
Q:
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How do I vote in person?
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A:
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If you plan to attend the Annual Meeting and vote in person, we will give you a ballot when you arrive. If your shares are held in the street name of your
brokerage firm, bank or other organization, you must obtain a legal proxy from the organization that holds your shares. You should contact your account executive about obtaining a legal proxy.
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Q:
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What happens if I do not give specific voting instructions?
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A:
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Shareholders of Record.
If you are a shareholder of record and you:
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Indicate when voting via the Internet or by telephone that you wish to vote as recommended by our Board; or
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Sign and return a proxy card without giving specific voting instructions, then the proxy holders will vote your shares in the manner recommended by our
Board on all matters presented in this Proxy Statement and as the proxy holders may determine in their discretion with respect to all other matters properly presented for a vote at the Annual Meeting, including without limitation whether to postpone
or adjourn the Annual Meeting.
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Beneficial Owners of Shares Held in Street
Name
. If you are a beneficial owner of shares held in street name and do not provide the organization that holds your shares with specific voting instructions, then under the rules of various national and
regional securities exchanges, the organization that holds your shares may generally vote on discretionary matters but cannot vote on non-discretionary matters.
If the organization that holds your shares does not receive instructions from you on how to vote your shares on a non-discretionary
matter, then the organization will inform our Inspector of Elections that it does not have the authority to vote on this matter with respect to your shares. This is generally referred to as a broker non-vote.
Please provide voting instructions to the organizations that hold your shares by carefully following their instructions.
Q:
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Which ballot measures are considered discretionary or non-discretionary?
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A:
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Proposal 1 (election of eight directors), Proposal 3 (amendment and restatement of our 2013 Equity Incentive Plan to increase the number of shares of common stock
authorized for issuance thereunder and to re-approve the performance factors under our 2013 Equity Incentive Plan for purposes of Section 162(m) of the IRC) and Proposal 4 (advisory vote on the compensation of our Named Executive Officers) are
each non-discretionary items. If you do not instruct your broker how to vote with respect to these items, then your broker may not vote with respect to these proposals and those votes will be counted as broker non-votes.
Broker non-votes will have no effect on the outcome of Proposal 1, Proposal 3 or Proposal 4 since broker non-votes are not considered entitled to vote on such proposals. Proposal 2 (ratification of the appointment of our independent registered
public accounting firm) is considered a discretionary item and your broker may vote on this proposal.
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Q:
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How are abstentions treated?
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A:
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Abstentions are counted for purposes of determining whether a quorum is present. For Proposal 1 (election of eight directors), if you elect to abstain, the abstention
will not impact the election of directors since the eight directors who receive the greatest number of affirmative votes will be elected to the Board.
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For the purpose of determining whether the shareholders have approved Proposal 2 (ratification of independent registered public accounting firm), Proposal 3 (amendment and restatement of our 2013 Equity
Incentive Plan to increase the number of shares of common stock authorized for issuance thereunder and to re-approve the performance factors under our 2013 Equity Incentive Plan for purposes of Section 162(m) of the IRC) or Proposal 4 (advisory
vote on the compensation of our Named Executive Officers), each proposal will be adopted if the number of votes cast in favor of the proposal exceeds the number of votes cast against the proposal as abstentions are not treated as votes cast
affirmatively or negatively, and therefore will have no effect on the outcome of Proposal 2, Proposal 3 or Proposal 4.
4
Q:
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What is the quorum requirement for the Annual Meeting?
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A:
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The quorum requirement for holding the Annual Meeting and transacting business is a majority of the outstanding shares entitled to be voted. The shares may be present
in person or represented by proxy at the Annual Meeting. Both abstentions and broker non-votes are counted as present for the purpose of determining the presence of a quorum.
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Q:
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What vote is required to approve each proposal?
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A.
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Proposal 1: To Elect Eight Directors for One-Year Terms
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The eight nominees for director who receive the most votes for election will be elected, assuming the presence of a quorum. Accordingly, if you do not vote for a nominee, do not instruct your
broker how to vote for a nominee or if you indicate withhold authority to vote for a nominee, your vote will not count either for or against the nominee.
Proposal 2: To Ratify the Appointment of Peterson Sullivan LLP as Our Independent Registered Public Accounting Firm for the Year Ending
December 31, 2016.
To be approved, the number of votes cast in favor must exceed the number of votes cast against. If
you do not vote or if you abstain from voting, it will have no effect on this proposal, assuming the presence of a quorum.
Proposal 3: To Amend and Restate Our 2013 Equity Incentive Plan to Increase the Number of Shares of Common Stock Authorized for
Issuance Thereunder and to Re-approve the Performance Factors Under Our 2013 Equity Incentive Plan for Purposes of Section 162(m) of the IRC.
To be approved, the number of votes cast in favor must exceed the number of votes cast against. If you do not vote or if you abstain from voting, it will have no effect on this proposal as in either case
it will not count either for or against the proposal, assuming the presence of a quorum.
Proposal
4: Advisory Vote on the Compensation of Our Named Executive Officers.
To be approved, the number of votes cast in favor
must exceed the number of votes cast against. If you do not vote or if you abstain from voting, it will have no effect on this proposal as in either case it will not count either for or against the proposal, assuming the
presence of a quorum.
Q:
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Who will count the vote?
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A:
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Representatives of Broadridge will serve as the Inspector of Elections and count the votes.
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Q:
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Is voting confidential?
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A:
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We keep all the proxies, ballots and voting tabulations private as a matter of practice. We let only our Inspector of Elections examine these documents. Our Inspector
of Elections will not disclose your vote to our management unless it is necessary to meet legal requirements. Our Inspector of Elections will forward to our management, however, any written comments that you make on the proxy card or elsewhere.
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Q:
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Who pays the costs of soliciting proxies for the Annual Meeting?
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A:
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We will pay all the costs of soliciting these proxies. In addition to soliciting proxies by distributing these proxy materials, our officers and employees may also
solicit proxies by telephone, by fax, by mail, via the Internet or other electronic means of communication, or in person. No additional compensation will be paid to officers or employees for their assistance in soliciting proxies. We will reimburse
banks, brokers, nominees and other fiduciaries for the expenses they incur in forwarding the proxy materials to you.
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5
Q:
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Can I view future proxy statements, annual reports and other documents via the Internet, and not receive any paper copies through the mail?
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A:
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Yes. If you wish to elect to view future proxy statements, annual reports and other documents only via the Internet, and you are a:
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Shareholder of Record:
Please visit the Broadridge Investor E-Connect proxy delivery preferences web-page,
www.proxyvote.com
, enter your voter control number found on your Notice, and follow the instructions for obtaining your documents electronically, or telephone: 1-800-579-1639, or send an email to:
sendmaterial@proxyvote.com
.
Beneficial Owner of Shares Held in Street Name:
Please visit the Broadridge Investor E-Connect
web-page,
www.proxyvote.com
, and follow the instructions at that site, or telephone Broadridge at 1-800-579-1639, or send an email to: sendmaterial@proxyvote.com.
Please have the Notice in hand when accessing these sites or telephoning. Your election to view these documents via the Internet will remain in effect until you revoke it. If you so elect, then next year
you would receive an email with instructions containing links to those materials and to the proxy voting site. Please be aware that if you choose to access these materials via the Internet, then you may incur costs such as telephone and Internet
access charges for which you will be responsible.
Q:
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How do I receive paper copies of the proxy materials, if I so wish?
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A:
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The Notice contains instructions about how to elect to obtain paper copies of the proxy materials. Your election will remain in effect until you revoke it. All
shareholders who do not receive the Notice will receive a paper copy of the proxy materials by mail.
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Q:
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I received multiple copies of the Notice and/or proxy materials. What does that mean, and can I reduce the number of copies that I receive?
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A:
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This generally means your shares are registered differently or are held in more than one account. Please provide voting instructions for all proxy cards and Notices
that you receive.
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If your shares are registered directly in your name, you may be receiving more than one copy
of the proxy materials because our transfer agent has more than one account for you with slightly different versions of your name, such as different first names (James and Jim, for example) or with and without middle
initials. If this is the case, you can contact our transfer agent and consolidate your accounts under one name. The contact information for our transfer agent is set out below in the next Q and A.
If you own shares through a brokerage firm, bank or other organization holding your shares in street name, we have implemented
householding, a process that reduces the number of copies of the Annual Meeting materials and other correspondence you receive from us. Householding is available for shareholders who share the same last name and address and hold shares
in street name, where the shares are held through the same brokerage firm, bank or other nominee. As a result of householding, only one Notice of Internet Availability of Proxy Materials or Proxy Statement and Annual Report will be
delivered to multiple shareholders sharing an address unless you notify your broker or bank to the contrary. If you hold your shares in street name and would like to start householding, or if you participate in householding and would like to receive
a separate Notice of Internet Availability of Proxy Materials or Proxy Statement and Annual Report, please call 1-866-540-7095 from a touch-tone phone and provide the name of your broker, bank or other nominee and your account number(s), or contact
Ruby H. Alexander, Assistant Corporate Secretary, at Cray Inc., 901 Fifth Avenue, Suite 1000, Seattle, WA 98164.
Unfortunately, householding is only possible for shares held through the same brokerage firm, bank or other nominee. Thus you cannot apply
householding to reduce the number of sets of proxy materials you receive in the mail if you have accounts at different brokers, for example. In those circumstances, one way to reduce the number of sets of proxy materials you receive in the mail is
to sign up to review the materials via the Internet. See Can I view future proxy statements, annual reports and other documents via the Internet, and not receive any paper copies through the mail? above.
6
We will deliver promptly upon written or oral request a separate copy of the Annual Meeting
materials to a shareholder at a shared address to which a single copy of such materials had been delivered.
Q:
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What if I have lost or cannot find my stock certificates, need to change my account name, have moved and need to change my mailing address, or have other questions
about my Cray stock?
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A:
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You may contact our transfer agent, Computershare, by calling: 877-522-7762 (for foreign investors, 201-680-6578), 800-490-1493 (TDD for hearing-impaired in the United
States) or 781-575-2694 (TDD for foreign investors), visiting its website at:
www.computershare.com/investor
, or writing to: Computershare, Shareholder Relations, P.O. Box 30170, College Station, TX 77842-3170.
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Q:
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How can I find the voting results of the Annual Meeting?
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A:
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We will report the voting results in a Form 8-K within four business days after the end of the Annual Meeting.
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Q:
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Whom should I call if I have any questions?
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A:
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If you have any questions about the Annual Meeting or voting, or about your ownership of our common stock, please contact Ruby H. Alexander, our Assistant Corporate
Secretary, at (206) 701-2000.
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7
OUR COMMON STOCK OWNERSHIP
The following table shows, as of April 8, 2016, the number of shares of our common stock beneficially owned by the following
persons:
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all persons we know to be beneficial owners of at least 5% of our common stock;
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the executive officers named in the Summary Compensation Table on page 37; and
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all current directors and executive officers as a group.
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As of April 8, 2016, there were 40,765,644 shares of our common stock outstanding.
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Name and Address(1)
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Common
Shares
Owned
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Options
Exercisable
Within
60 Days
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Total
Beneficial
Ownership(2)
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Percentage
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5% Shareholders
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Capital Research Global Investors(3)
333 South Hope Street
Los Angeles, CA 90071
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4,651,482
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4,651,482
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11.4
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%
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T. Rowe Price Associates, Inc.(3)
100 E. Pratt Street
Baltimore, MD 21202
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3,103,507
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3,103,507
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7.6
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%
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Invesco Ltd.(3)
1555 Peachtree Street NE
Atlanta, GA 30309
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2,724,845
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2,724,845
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6.7
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%
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Mairs and Power, Inc.(3)
332 Minnesota Street, W-1520 First National Bank Building
St. Paul, MN 55101
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2,454,956
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2,454,956
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6.0
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%
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BlackRock, Inc,(3)
55 East 52nd Street
New York, NY 10055
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2,312,250
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2,312,250
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5.7
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%
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Vanguard Group, Inc.(3)
100 Vanguard Blvd.
Malvern, PA 19355
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2,149,324
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2,149,324
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5.3
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%
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Independent Directors
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Prithviraj Banerjee
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2,914
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20,000
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22,914
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*
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Martin J. Homlish
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20,000
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20,000
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*
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Stephen C. Kiely
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22,492
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22,492
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*
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Sally G. Narodick
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37,866
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37,866
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*
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Daniel C. Regis
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55,647
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55,647
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*
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Max L. Schireson
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764
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20,000
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20,764
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*
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Brian V. Turner
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20,000
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20,000
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*
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Named Executive Officers
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Peter J. Ungaro
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297,214
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552,164
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849,378
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2.1
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%
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Brian C. Henry
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76,748
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86,519
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163,267
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*
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Michael C. Piraino
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52,663
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167,901
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220,564
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*
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Steven L. Scott
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74,530
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2,979
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77,509
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*
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Margaret A. Williams
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135,529
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47,396
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182,925
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*
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All current directors and executive officers as a group (16 persons)
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977,785
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1,102,852
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2,080,637
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5.0
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%
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* Less
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than 1% of the outstanding common stock.
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(1)
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Unless otherwise indicated, all addresses are c/o Cray Inc., 901 Fifth Avenue, Suite 1000, Seattle, WA 98164.
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8
(2)
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Unless otherwise indicated in these footnotes and subject to community property laws where applicable, each of the listed shareholders has sole voting and investment
power with respect to the shares shown as beneficially owned by such shareholder. The number of shares and percentage of beneficial ownership includes shares of common stock issuable pursuant to stock options held by the person or group that may be
exercised on April 8, 2016, or within 60 days thereafter.
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(3)
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The information under the column Common Shares Owned with respect to Capital Research Global Investors is based on a Schedule 13G/A filed with the SEC on
February 16, 2016, regarding beneficial ownership as of December 31, 2015. In that Schedule 13G/A, Capital Research Global Investors reported beneficial ownership of 4,651,482 shares, with sole voting power of 4,651,482 shares, without
shared voting power, sole dispositive power of 4,651,482 shares and without shared dispositive power.
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The
information under the column Common Shares Owned with respect to T. Rowe Price Associates, Inc. is based on a Schedule 13G/A filed with the SEC on February 9, 2016, regarding beneficial ownership as of December 31, 2015. In
that Schedule 13G/A, T. Rowe Price Associates, Inc. reported beneficial ownership of 3,103,507 shares, with sole voting power of 443,910 shares, without shared voting power, sole dispositive power of 3,103,507 shares and without shared dispositive
power.
The information under the column Common Shares Owned with respect to Invesco Ltd. is based on a Schedule
13G/A filed with the SEC on February 4, 2016, regarding beneficial ownership as of December 31, 2015. In that Schedule 13G/A, Invesco Ltd. reported beneficial ownership of 2,724,845 shares, with sole voting power of 2,724,845 shares,
without shared voting power, sole dispositive power of 2,724,845 shares and without shared dispositive power.
The information
under the column Common Shares Owned with respect to Mairs and Power, Inc. is based on a Schedule 13G/A filed with the SEC on February 12, 2016, regarding beneficial ownership as of December 31, 2015. In that Schedule 13G/A,
Mairs and Power, Inc. reported beneficial ownership of 2,454,956 shares, with sole voting power of 1,951,138 shares, without shared voting power, sole dispositive power of 2,454,956 shares and without shared dispositive power.
The information under the column Common Shares Owned with respect to BlackRock, Inc. is based on a Schedule 13G/A filed with
the SEC on January 26, 2016, regarding beneficial ownership as of December 31, 2015. In that Schedule 13G/A, BlackRock, Inc. reported beneficial ownership of 2,312,250 shares, with sole voting power of 2,225,284 shares, without shared
voting power, sole dispositive power of 2,312,250 shares and without shared dispositive power.
The information under the
column Common Shares Owned with respect to Vanguard Group, Inc. is based on a Schedule 13G filed with the SEC on February 10, 2016, regarding beneficial ownership as of December 31, 2015. In that Schedule 13G, Vanguard Group,
Inc. reported beneficial ownership of 2,149,324 shares, with sole voting power of 89,754 shares, with shared voting power of 3,600 shares, sole dispositive power of 2,058,470 shares and with shared dispositive power of 90,854 shares.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
Exchange Act
) requires that our
directors, executive and other specified officers and greater-than-10% shareholders file reports with the SEC on their initial beneficial ownership of our common stock and any subsequent changes. They must also provide us with copies of the reports.
We are required to tell you in this Proxy Statement if we know about any failure to report as required. We reviewed copies of
all reports furnished to us and obtained written representations that no other reports were required. Based solely on this review, we believe that all of the reporting persons complied with their filing requirements for 2015, except as follows:
Daniel C. Regis filed one late Form 4 transaction to correctly distinguish between total shares held directly and indirectly on the original Form 4 filed with the SEC on May 2, 2013; and Barry C. Bolding filed one late Form 4 transaction to
correctly report that 261 ESPP-related shares were inadvertently included twice on the original Form 4 filed with the SEC on May 19, 2011.
9
THE BOARD OF DIRECTORS
The Board of Directors oversees our business and affairs and monitors the performance of our management. In accordance with corporate
governance principles, the Board does not involve itself in day-to-day operations. The directors keep themselves informed through discussions with the Chief Executive Officer, other key executives and our principal external advisers (legal counsel,
outside auditors and compensation consultants), by reading the reports and other materials that we send them regularly and by participating in Board and Committee meetings.
Corporate Governance Principles
The goals of our
Board are to build long-term value for our shareholders and to ensure our vitality for our customers, employees and others who depend on us. Our Board has adopted and follows corporate governance practices that our Board and our senior management
believe promote these purposes, are sound and represent best practices. To this end we have established the following:
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A Code of Business Conduct that sets forth our ethical principles and applies to all of our directors, officers and employees;
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Corporate Governance Guidelines that set forth our corporate governance principles;
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A Related Person Transaction Policy that applies to all of our directors, officers and employees;
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Charters for our Audit, Compensation, Corporate Governance and Strategic Technology Assessment Committees; and
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A confidential, anonymous system for employees and others to report concerns about fraud, accounting matters, violations of our policies and other
matters.
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Under our Corporate Governance Guidelines and the applicable Committee charters, each director has
complete access to our management, and the Board and each Committee have the right to consult and retain independent legal counsel, accountants and other advisers at our expense. All of the foregoing documents are available via the Internet at our
website at
www.cray.com
under Company Company Information Investors Corporate Governance. We will post on this website any amendments to the Code of Business Conduct or waivers of the Code of Business
Conduct for directors and executive officers.
We periodically review our governance practices against requirements of the
SEC, the listing standards of the NASDAQ Global Market (
NASDAQ
), the laws of the state of Washington and practices suggested by recognized corporate governance authorities. In 2015, we also engaged an independent
third-party to help conduct a self-evaluation process for each of our directors and the Board, a practice which we generally undertake approximately every other year.
Independence
As of April 25, 2016, our Board
has eight members. The Board has determined that all of our directors serving on our Board as of April 25, 2016, except for Mr. Ungaro, our President and Chief Executive Officer, meet the NASDAQ and SEC standards for independence and that
all the members of the Audit Committee meet the heightened independence standards required for Audit Committee members under NASDAQ and SEC standards. Only independent directors may serve on our Audit, Compensation and Corporate Governance
Committees.
As set forth in our Corporate Governance Guidelines, the Board believes that at least two-thirds of the Board
should consist of independent directors and that, absent compelling circumstances, the Board should not contain more than two members from our management. As of April 25, 2016, seven of our eight directors were considered independent, and one
member of our management, Mr. Ungaro, our President and Chief Executive Officer, was on the Board.
10
In determining the independence of our directors, the Board affirmatively decides whether a
non-management director has a relationship that would interfere with that directors exercise of independent judgment in carrying out the responsibilities of being a director. In making that decision, the Board is informed of the NASDAQ and SEC
rules that disqualify a person from being considered as independent, considers the responses from each director in an annual questionnaire and reviews the applicable standards with each Board member.
Meetings and Attendance
During 2015, the Board met seven times and the Boards standing committees held a total of 32 meetings. The rate of attendance in 2015 for all directors at Board and Committee meetings was 98%.
The non-management directors meet in executive sessions of the Board on a regular basis, generally at the beginning and at the
end of each scheduled quarterly Board meeting and at other times as required. In addition, the Board committees meet periodically without members of our management present.
The Committees of the Board
The Board has
established an Audit Committee, a Compensation Committee, a Corporate Governance Committee and a Strategic Technology Assessment Committee as standing committees of the Board. None of the directors who serve as members of these Committees is, or has
ever been, one of our employees.
Audit Committee
. The current members of the Audit Committee
are Mr. Regis (Chair), Mr. Kiely, Ms. Narodick and Mr. Turner. Mr. Richards passed away in November 2015, and was replaced on the Audit Committee by Mr. Kiely. Mr. Turner was appointed as a member to the Audit
Committee on April 18, 2016. The Audit Committee and the Board have determined that each individual who currently is and who in 2015 was a member of the Audit Committee is independent, as that term is defined in SEC and NASDAQ rules
and regulations, and that Messrs. Regis, Kiely and Turner are each an audit committee financial expert, as that term is defined in SEC regulations. The Audit Committee met nine times during 2015. As noted above, the Audit
Committees charter is available at
www.cray.com
under Company Company Information Investors Corporate Governance. The Audit Committee assists the Board in fulfilling its responsibility for oversight
of:
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The quality and integrity of our accounting and financial reporting processes and the audits of our consolidated financial statements;
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The qualifications and independence of the independent registered public accounting firm engaged to issue an audit report on our consolidated financial
statements;
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The performance of our systems of internal controls and disclosure controls;
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The review and approval or ratification of related person transactions under our Related Person Transaction Policy; and
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Our procedures for legal and regulatory compliance, risk assessment and business conduct standards.
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The Audit Committee reviews all reports submitted on our anonymous, confidential reporting system and is directly and solely responsible
for appointing, determining the compensation payable to, overseeing, terminating and replacing any independent auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us. See
Discussion of Proposals Recommended by the Board Proposal 2: To Ratify the Appointment of Peterson Sullivan LLP as Our Independent Registered Public Accounting Firm for the Year Ending December 31, 2016 Audit
Committee Pre-Approval Policy below.
The report of the Audit Committee regarding its review of the consolidated
financial statements and other matters is set forth below beginning on page 53.
Compensation
Committee
. The current members of the Compensation Committee are Mr. Schireson (Chair), Mr. Kiely, Ms. Narodick and Mr. Turner. Dr. Lederman did not stand for re-election to our Board at our
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2015 annual meeting of shareholders and his term on the Compensation Committee ended on June 10, 2015, the date of our 2015 annual meeting of shareholders. Mr. Richards passed away in
November 2015, and was replaced on the committee by Ms. Narodick. Mr. Turner was appointed as a member to the Compensation Committee on April 18, 2016. The Compensation Committee and the Board have determined that each individual who
currently is and who in 2015 was a member of the Compensation Committee is independent, as that term is defined in NASDAQ rules and regulations, and an outside director within the meaning of Section 162(m) of the IRC.
The Compensation Committee met five times during 2015. As noted above, the Compensation Committees charter is available at
www.cray.com
under Company Company Information Investors Corporate
Governance. The Compensation Committee assists the Board in fulfilling its responsibilities for the oversight of:
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Our compensation policies, plans and benefit programs;
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The compensation of the Chief Executive Officer and other executive officers;
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The administration of our equity compensation plans; and
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Evaluation and mitigation of potential risks related to our compensation policies.
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See Compensation of the Executive Officers Compensation Discussion and Analysis for further information regarding
the Compensation Committee and its actions with respect to senior officer compensation. The Compensation Committees Report on the Compensation Discussion and Analysis and related matters is set forth below beginning on page 24.
Corporate Governance Committee
. The current members of the Corporate Governance Committee are
Mr. Kiely (Chair), Ms. Narodick and Mr. Regis. Dr. Lederman did not stand for re-election to our Board at our 2015 annual meeting of shareholders and his term on the Corporate Governance Committee ended on June 10, 2015, the
date of our 2015 annual meeting of shareholders. The Corporate Governance Committee and the Board have determined that each individual who currently is and who in 2015 was a member of the Corporate Governance Committee is independent, as
that term is defined in NASDAQ rules and regulations. The Corporate Governance Committee met eight times during 2015. As noted above, the Corporate Governance Committees charter is available at
www.cray.com
under Company
Company Information Investors Corporate Governance. The Corporate Governance Committee has the responsibility to:
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Develop and recommend to the Board a set of corporate governance principles;
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Recommend qualified individuals to the Board for nomination as directors;
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Review the compensation of Board members and recommend to the full Board changes to Board compensation as appropriate to attract and retain qualified
directors;
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Lead the Board in its annual review of the Boards performance; and
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Recommend directors to the Board for appointment to Board Committees.
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See Shareholder Communications, Director Candidate Recommendations and Nominations and Other Shareholder Proposals regarding
the Corporate Governance Committees processes for evaluating potential Board members and how shareholders can nominate director candidates, propose matters to come before the shareholders and communicate with the Board.
Strategic Technology Assessment Committee
. The current members of the Strategic Technology Assessment
Committee are Dr. Banerjee (Chair), Mr. Homlish and Mr. Schireson. Dr. Lederman did not stand for re-election to our Board at our 2015 annual meeting of shareholders and his term on the Strategic Technology Assessment Committee
ended on June 10, 2015, the date of our 2015 annual meeting of shareholders. The Strategic Technology Assessment Committee and the Board have determined that each individual who currently is a member of the Strategic Technology Assessment
Committee is independent, as that term is defined in NASDAQ rules and regulations, although such independence is not a requirement for membership on this Committee. The Strategic Technology Assessment Committee met five times during
2015. As noted above, the
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Strategic Technology Assessment Committees charter is available at
www.cray.com
under Company Company Information Investors Corporate
Governance. The Strategic Technology Assessment Committee has the responsibility to:
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Assist the Board in its oversight of our technology development, including our product development roadmap; and
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Assess whether our research and development investments are sufficient and appropriate to support the competitiveness of our offerings in the
marketplace.
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From time to time, the Board establishes other committees on an ad-hoc basis to assist in its oversight
responsibilities.
Board Leadership Structure
We separate the roles of Chairman of the Board and Chief Executive Officer in recognition of the differences between the two roles.
Mr. Kiely has served as Chairman of the Board, a non-executive position, since August 2005. As Chairman, Mr. Kiely consults with Mr. Ungaro, our Chief Executive Officer, regarding agenda items for Board meetings; chairs executive
sessions of the Boards independent directors; on behalf of the independent directors, provides feedback and mentoring to the Chief Executive Officer; and performs such other duties as the Board deems appropriate. We believe that this structure
is currently appropriate given the experience of Mr. Kiely, both outside of his service with us and as a member of our Board, our size and stage of development and the operational efficiencies that currently result from separating the roles.
However, we believe that it is in the best interests of our shareholders for the Board to make a determination regarding the separation or combination of these roles each time it elects a new Chairman of the Board or Chief Executive Officer or at
other times, based in each case on the relevant facts and circumstances applicable at that time.
Boards
Role in Risk Oversight
The Boards role in our risk oversight process includes receiving regular reports from members
of our senior management on areas of material risk to us, including competitive, economic, operational, financial, legal and regulatory, and strategic and reputational risks. We also utilize a formal Enterprise Risk Management system (the
ERM System
) to assist us in tracking and mitigating risks. In addition to periodic review, evaluation and modification of risks maintained in the ERM System by management, we provide periodic reports of risks tracked in the
ERM System to the Audit Committee. The Audit Committee receives these reports from the management personnel principally responsible for identifying, managing and mitigating a particular area of risk within the organization to enable it to understand
our risk identification, risk management and risk mitigation strategies. When the Audit Committee receives the report, the chairman of the Audit Committee reports on the discussion to the full Board during the committee reports portion of the next
Board meeting, which enables the Board and the Audit Committee to coordinate the risk oversight role, particularly with respect to risk interrelationships. As part of its charter, the Audit Committee discusses our policies with respect to risk
assessment, risk management and the ERM System process set forth above.
Risk Considerations in Our Compensation
Program
Our Compensation Committee has discussed the concept of risk as it relates to our compensation program. The
Compensation Committee engages an independent compensation consultant, Mercer (US) Inc., a wholly-owned subsidiary of Marsh & McLennan Companies, Inc. (
Mercer
) to assess the risks of its compensation program. The
Compensation Committee does not believe our compensation program encourages excessive or inappropriate risk-taking for the following reasons:
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Base salaries are consistent with our employees responsibilities so that they are not motivated to take excessive risks to achieve a reasonable
level of financial security;
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The determination of cash incentive awards is based on a review of a variety of performance indicators, including individual performance, thus
diversifying the risk associated with any single performance
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indicator; likewise, our cash incentive plan includes a 200% cap on the target awards and utilizes a balanced scorecard approach to appropriately weight goals and performance. We
believe this cap limits the incentive for excessive risk-taking by our employees;
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Long-term equity compensation programs are designed to reward executives and other participants for driving sustainable and profitable growth for
shareholders;
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Equity incentive awards for our executive officers have included different types of equity instruments (with both time-based vesting and performance
vesting), which helps to diversify the executive officers interests and limit the potential value of excessive risk taking:
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The vesting periods for our time-based vesting equity awards are designed to encourage executives and other participants to focus on sustained stock
price appreciation;
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Our performance vesting restricted shares and performance vesting restricted stock units vest upon the achievement of certain operational and financial
milestones, and those milestones and/or the terms of the grants are designed to encourage sustained, measurable performance;
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The mix between fixed and variable, annual and long-term, and cash and equity compensation is designed to encourage strategies and actions that are in
our shareholders long-term best interests;
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Our system of internal controls over financial reporting, standards of business conduct and compliance programs, among other things, reduce the
likelihood of manipulation of our financial performance to enhance payments under our bonus and sales compensation plans;
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Our Chief Executive Officer is subject to, and is in compliance with, our stock ownership guidelines, described under Compensation Discussion and
Analysis Compensation Program Components and Purposes, which encourage a level of stock ownership that we believe appropriately aligns his long-term interests with those of our shareholders;
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We have a clawback or recoupment policy for certain performance-based incentive compensation of our executive officers; and
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Our Insider Trading Policy prohibits all employees from pledging shares, engaging in short sales or hedging transactions involving Crays
securities.
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Director Attendance at Annual Meetings
We encourage but do not require our directors to attend the annual meeting of shareholders either in person or telephonically. In 2015,
five of our directors who were directors at the time of our annual meeting of shareholders attended the 2015 annual meeting.
Shareholder Communications, Director Candidate Recommendations and Nominations and Other Shareholder Proposals
Communications
. The Corporate Governance Committee has established a procedure for our shareholders to
communicate with the Board. Communications should be in writing, addressed to Corporate Secretary, Cray Inc., 901 Fifth Avenue, Suite 1000, Seattle, WA 98164, and addressed to the attention of the Board or any of its individual committees or to the
Chairman of the Board. Copies of all communications so addressed will be promptly forwarded to the chairman of the committee involved, in the case of communications addressed to the Board as a whole or to individual directors, to the Corporate
Governance Committee or, if addressed to the Chairman, to the Chairman of the Board.
Director
Candidates
. The criteria for Board membership as adopted by the Board include a persons integrity, knowledge, judgment, skills, expertise, collegiality, diversity of experience and other time commitments (including
positions on other company boards) in the context of the then-current composition of the Board. While our Corporate Governance Guidelines do not prescribe diversity standards, as a matter of practice, the Corporate Governance Committee considers
diversity in the context of the Board as a whole and
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takes into account the personal characteristics (gender, ethnicity, age) and experience (industry, professional, public service) of current and prospective directors to facilitate Board
deliberations that reflect a broad range of perspectives. The Corporate Governance Committee is responsible for assessing the appropriate balance of skills brought to the Board by its members, and ensuring that an appropriate mix of specialized
knowledge (
e.g.
, financial, industry or technology) is represented on the Board. Since 2012, the Corporate Governance Committee has engaged a third-party consulting firm, Heidrick & Struggles, International, Inc., to assist the
Corporate Governance Committee in identifying candidates for Board membership.
Once the Corporate Governance Committee has
identified a potential director nominee, the Corporate Governance Committee, in consultation with the Chief Executive Officer, evaluates the prospective nominee against the specific criteria that the Board has established and as set forth in our
Corporate Governance Guidelines. If the Corporate Governance Committee determines to proceed with further consideration, then members of the Corporate Governance Committee, the Chief Executive Officer and other members of the Board, as appropriate,
interview the prospective nominee. After completing this evaluation and interview, the Corporate Governance Committee makes a recommendation to the full Board, which makes the final determination whether to appoint the new director.
The Corporate Governance Committee will consider candidates for director recommended by shareholders and will evaluate those candidates
using the criteria set forth above. Shareholders should accompany their recommendations with a sufficiently detailed description of the candidates background and qualifications to allow the Corporate Governance Committee to evaluate the
candidate in light of the criteria described above, a document signed by the candidate indicating his or her willingness to serve if elected and evidence of the nominating shareholders ownership of our common stock. Such recommendation and
documents should be submitted in writing to Corporate Secretary, Cray Inc., 901 Fifth Avenue, Suite 1000, Seattle, WA 98164, and addressed to the attention of the Corporate Governance Committee.
Director Nominations by Shareholders
. Our Bylaws permit shareholders to nominate directors at a
shareholders meeting. In order to nominate a director at a shareholders meeting, a shareholder making a nomination must notify us not fewer than 60 nor more than 90 days in advance of the meeting or, if less than 60 days notice or
prior public disclosure of the date of the meeting is given or made to the shareholders, by the 10th business day following the first public announcement of the meeting. In addition, the proposal must contain the information required in our Bylaws
for director nominations, including:
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The nominating shareholders name and address;
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A representation that the nominating shareholder is entitled to vote at such meeting;
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The number of shares of our common stock that the nominating shareholder owns and when the nominating shareholder acquired such shares;
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A representation that the nominating shareholder intends to appear at the meeting, in person or by proxy;
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The nominees name, age, address and principal occupation or employment;
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All information concerning the nominee that must be disclosed about nominees in proxy solicitations under the SEC proxy rules; and
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The nominees executed consent to serve as a director if so elected.
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The Chairman of the Board, in his discretion, may determine that a proposed nomination was not made in accordance with the required
procedures and, if so, disregard the nomination.
COMPENSATION OF THE EXECUTIVE OFFICERS
Compensation Discussion and Analysis
The following discussion describes the material elements of compensation for 2015 for the following executive officers identified in the Summary Compensation Table below (the
Named
Executive Officers
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Peter J. Ungaro
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President and Chief Executive Officer
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Brian C. Henry
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Executive Vice President and Chief Financial Officer
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Michael C. Piraino
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Senior Vice President Administration, General Counsel and Corporate Secretary
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Steven L. Scott
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Senior Vice President and Chief Technology Officer
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Margaret A. Williams
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Senior Vice President, Research and Development
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This discussion covers 2015 corporate performance, our compensation philosophy and objectives for 2015,
the components of our compensation program and the process we followed in determining executive compensation for 2015. It also presents a detailed discussion and analysis of the Compensation Committees specific decisions about the compensation
of these Named Executive Officers for 2015.
2015 Corporate Performance
We believe it is critical to our short-term and long-term success that our compensation policies, plans and programs be closely correlated
with our corporate performance. The following are three areas of corporate performance we evaluated in connection with determining our Named Executive Officers total compensation in 2015:
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Revenue.
Revenue increased from $561.6 million in 2014 to $724.7 million in 2015. As further described below, the
achievement of predetermined revenue goals, including from certain of our key initiatives, was a significant factor in determining the target and actual total compensation of our Named Executive Officers in 2015.
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Adjusted Operating Income.
Adjusted Operating Income was $41.0 million in 2015, up from $9.2 million in 2014.
There were no adjustments to operating income in 2015 or 2014. We use the achievement of a specified level of adjusted operating income as a significant component for determining the target and actual total compensation of our Named Executive
Officers because we believe it rewards growing revenues, controlling expenses and increasing gross profit contributions, in furtherance of our long-term goal of profitable growth.
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Net Income.
We reported net income of $27.5 million or $0.68 per share in 2015. Net income was $62.3 million or
$1.54 per share in 2014. Net income results for 2014 benefited from a $52.6 million income tax benefit which was driven by a reduction of substantially all of the valuation allowance held against the Companys deferred tax assets. Although we
do not use a predetermined net income goal as an actual component for determining the target and actual total compensation of our Named Executive Officers, we believe sustained, profitable growth is a critical long-term corporate goal.
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Overview of 2015 Compensation Determinations
As a result of our operational and financial performance in 2015 and earlier, and in light of the Mercer analyses and other factors
described in this Proxy Statement, the Compensation Committee:
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Base Salary Maintained base salaries at the same levels as in 2014 for Messrs. Ungaro, Henry, Piraino and Drs. Scott and Williams;
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Annual Cash Incentive Compensation Plan
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Target Bonuses Maintained the target bonus awards as a percentage of base salary at the same levels as in 2014 for Messrs. Ungaro and Henry and
Drs. Scott and Williams and increased the target bonus award for Mr. Piraino in connection with his promotion to Senior Vice President.
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Performance Goals and Achievement For 2015, the annual cash incentive plan for our senior officers used a balanced scorecard, which was based on
quantitative financial goals and qualitative individual leadership goals, consistent with prior years. Our 2015 annual cash incentive plan for our senior officers included a 25% 100% and 200% level percentage attainment for our quantitative
financial goals and qualitative individual leadership goals. If the minimum 25% threshold attainment is not met, then the attainment for that particular goal is deemed to be 0%. In addition, our approach has been to set stretch goals
such that even threshold attainment can reflect a significant accomplishment and therefore 0% attainment on a particular goal can result from what by external standards could be deemed successful execution. For 2015: the percentage achievement for
our Revenue goal was 95.7%; the percentage achievement for our Commercial Revenue goal was 200%; attainment against the New Product Revenue goal did not meet the minimum threshold; the percentage achievement for the Operating Income goal was 103%
and the percentage achievement for the Quarterly Scaling goals was 125%. Each of these goals is described in greater detail below. Considering these achievements together with the attainment of the individual leadership goals of our Named Executive
Officers, for 2015, the overall percentage achievement under our 2015 annual cash incentive plan for Mr. Ungaro was 103.8%, for Mr. Henry it was 103%, for Mr. Piraino it was 102.8%, for Dr. Williams it was 103.3% and for
Dr. Scott it was 102.6%.
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Granted long-term equity awards in the form of time-based vesting stock options, time-based vesting restricted stock units and performance vesting
restricted stock units to Messrs. Ungaro, Henry and Piraino and Drs. Scott and Williams.
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As a result of
these decisions, approximately 92% of the total 2015 target compensation for our Chief Executive Officer and approximately 86% to 90% of the total 2015 target compensation for all of our other Named Executive Officers was performance vesting and
dependent upon organizational and individual performance.
Philosophy and Objectives
We offer technology-differentiated products and services that require a highly educated, specialized and sought-after workforce and often
involve long development cycles. In light of these challenges, our compensation philosophy is to provide and effectively implement policies, plans and programs designed to attract, retain and motivate the workforce required for us to achieve our
strategic as well as tactical goals and create long-term value for our shareholders. To assist in these efforts, our compensation program has the following objectives:
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To provide effective compensation and benefit programs that are competitive both within our industry and with other relevant organizations with which
we compete for employees;
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To encourage and reward behaviors that ultimately contribute to the achievement of organizational goals that increase long-term shareholder value
without encouraging unbalanced short-term focus or inappropriate risk taking, thus fostering an innovative, high-performance culture;
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To align the interests of employees with the long-term interests of our shareholders;
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To provide a retention incentive; and
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To provide a work environment that promotes integrity, innovation and excellence, teamwork and respect for the individual.
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Compensation Program Components and Purposes
We believe the components of our compensation program described below provide an appropriate mix of fixed and variable pay, balance
incentives for short-term operational performance with long-term increases in shareholder value, reinforce an innovative, high-performance culture, encourage recruitment and retention of our employees and officers and create direct alignment with
our shareholders by providing equity ownership in the company. As employees assume greater levels of responsibility, an increasing proportion of their compensation is linked to performance. We review our compensation program periodically and make
adjustments as needed or appropriate to meet our objectives. We describe below the principal components of our compensation program and the purpose of each component.
The Compensation Committee believes that the overall structure of the compensation for the Named Executive Officers is in furtherance of our compensation philosophy and objectives in providing, within our
means and for our industry, competitive total target compensation with sufficient base salaries coupled with a significant proportion of the total target compensation based on performance and at risk, including a meaningful proportion that is
equity-based, to align the officers interests with those of our shareholders and provide a strong retention and performance incentive.
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Base Salaries To provide fixed compensation to attract and retain the best employees at all levels
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Base pay opportunities for all positions are determined based on appropriate competitive reference points from salary surveys and other sources,
internal responsibilities and each employees experience, qualifications, performance and potential impact within our organization.
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Short-Term Incentives To motivate and reward achievement of and significant progress related to critical, tactical, strategic and financial
goals
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Consistent with competitive practices, virtually all employees have a portion of targeted total compensation at risk, contingent on performance
relative to corporate, team and individual objectives. Employees should share in rewards when mutual efforts contribute to outstanding overall results.
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Long-Term Incentives To encourage recipients to focus on creating long-term shareholder value and to provide significant retention incentives
in the face of retention challenges
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Key decision-makers have a meaningful portion of their total compensation opportunity linked to our success in or progress towards meeting our
long-term objectives and increasing shareholder value.
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Significant retention incentives are necessary to retain highly educated, specialized and sought-after leaders, particularly in competition with
companies with significantly greater resources.
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Long-term equity awards, such as awards of restricted stock, restricted stock units and stock options, encourage recipients to focus on performance and
initiatives that should lead to an increase in the market price of our common stock, which benefits our shareholders; and unvested awards of restricted stock, restricted stock units and in-the-money stock options can provide a retention incentive.
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Employee Benefits To meet the health and welfare needs of our employees and their dependents
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We assist employees in meeting important needs such as retirement income, affordable health care, survivor income, disability income, paid vacation and
other needs through company-sponsored programs that promote good health and financial security and provide employees with reasonable flexibility in meeting their individual needs.
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We do not provide the Named Executive Officers or our other senior officers any deferred compensation or special retirement or pension plans nor any
benefits or perquisites that are not available to our employees generally.
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Severance Policy and Change of Control Agreements To attract and retain officers and to encourage them to remain focused and engaged in the
event of rumored or actual fundamental corporate changes and during any corporate transition
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We provide continuation of compensation and benefits to certain officers if they are terminated without Cause or resign for Good Reason, as those terms
are defined in our policies and agreements.
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Other Compensation-Related Policies and Practices To enforce our commitment to good corporate governance practices related to compensation,
including:
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Our insider trading policy prohibits transactions that involve pledging, hedging or short sales of Cray equity. Our Chief Executive Officer is subject
to, and is in compliance with, our stock ownership guidelines, which encourages a level of stock ownership that we believe appropriately aligns his long-term interests with those of our shareholders. We have a clawback or recoupment policy for
certain performance-based incentive compensation of our executive officers.
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We do not provide company-paid retirement benefits.
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Benchmarking and Other Factors
For its 2015 compensation decisions,
the Compensation Committee considered Mercers recommendations to contextualize the overall total compensation approach and general market competitiveness and compared the compensation approach to our peer group companies.
Each year, to assist the Compensation Committee in its deliberations on executive compensation, the Compensation Committee reviews and
updates our list of peer companies (our
Peer Group
) as points of comparison, as necessary, to ensure that the comparisons are meaningful. When considering companies for inclusion as one of our peer group companies, the
Compensation Committee considers companies that are in our industry, are similar to us with respect to elements such as operating results, research and development investments and product solutions, and those companies with whom we compete in the
recruitment of executive officers. Based on these factors and managements input, Mercer recommended, and the Compensation Committee approved, the following companies to comprise our peer group: Ansys Inc., Avid Technology, Inc., Cavium Inc.,
Commvault Systems, Inc., Extreme Networks, Inc., F5 Networks, Inc., FEI Company, Harmonic Inc., Mellanox Technologies Inc., OSI Systems, Qlik Technologies, Inc., QLogic Corporation, Quantum Corp., Riverbed Technology Inc., Silicon Graphics
International Corp. and Super Micro Computer, Inc. Between 2014 to 2015, our Peer Group changed with (i) the addition of Avid Technology, Inc., Cavium Inc., Commvault Systems, Inc., Harmonic Inc., Mellanox Technologies Inc. and Qlik
Technologies, Inc. based on industry, revenue size and business description and (ii) the removal of (a) Electro Scientific Industries, Inc., Mercury Systems, Inc., Micrel, Incorporate and Radisys Corporation, due to their respective small
revenue size compared to us, (b) Fusion-IO Inc. due to its acquisition in 2014 and (c) Ocz Technology Group, Inc. due to its bankruptcy in 2014. During 2015, we removed Emulex Corporation and Riverbed Technology, Inc. from our Peer Group
as they were both acquired and no longer remained public companies. The Compensation Committee also relied on data from the 2015 Radford Global Technology Survey, which is comprised of organizations within the technology sector and includes data
subsets that are comprised of organizations that are similar to us in terms of size. However, the Compensation Committee does not benchmark its compensation to any particular level or against any specific member of the Peer Group. Rather, it
utilizes the Peer Group information and the Radford and IPAS surveys as data points in determining, with the assistance of Mercer, the appropriate overall total compensation.
As in previous years, the Compensation Committee, in making specific decisions regarding each Named Executive Officers (other than Mr. Ungaro) compensation, considered Mr. Ungaros
recommendations described above regarding our other senior officers and factors such as the internal and external relative parity among senior management, the experience and performance of individual officers, their current compensation levels,
their potential impact within Cray and the reasonableness of the officers compensation in light of our
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compensation objectives and our operational and financial performance. Historically, we have had a relatively flat salary structure for our senior officers, with the significant differences in
total compensation among the senior officers reflected in short-term cash and long-term equity incentive awards. This approach helps us manage our fixed costs and yet provides the potential for higher compensation levels based on
performance-dependent, short- and long-term incentives.
The Compensation Committee recognizes that competition for our Named
Executive Officers, including Mr. Ungaro, generally comes from much larger companies with significantly greater resources, whether in the high performance computing industry or other technology companies, for which directly comparable
compensation information may not be publicly available. The Compensation Committee also believes that for technical and engineering positions, there are less consistently defined positions across technology companies so that the survey and peer
group compensation information is less directly applicable to them.
Each of the Named Executive Officers has significant high
performance computing experience or achievements and roles not reflected in general survey and peer group analyses. The Compensation Committee also supplemented the specific compensation information provided by Mercer with its collective experience,
judgment and trending assumptions to establish the 2015 compensation for the Named Executive Officers and other senior officers.
Results of the 2015 Say-on-Pay Vote
We value the input of our
shareholders on our compensation programs. We hold an advisory vote on executive compensation on an annual basis. When designing our 2016 executive compensation program for our Named Executive Officers, the Compensation Committee carefully
considered, among other things, the vote results from our 2015 annual meeting. The Compensation Committee considered the results of our 2015 say-on-pay vote that reflected strong support for our compensation practices, as well as the lack of any
significant shareholder feedback requiring compensation changes, and decided to continue our existing compensation policies and practices. In addition, we engage in dialogue with our large stockholders on an ongoing basis. The Compensation Committee
will continue to consider the results of our say-on-pay votes when making future compensation decisions for named executive officers.
2015 Compensation Determinations
Base Salary
The Compensation Committee uses a salary structure based on market data as a tool to estimate competitive base
salaries. With Mr. Ungaros assistance (except with respect to Mr. Ungaros salary), the salary of each executive officer is evaluated relative to the market median salary according to experience, qualifications, performance and
the particular impact the role can have within Cray. The actual salaries of our Named Executive Officers averaged 2% below the estimated market median of the position based on competitive market data.
The Compensation Committee considered the base salaries of Messrs. Ungaro, Henry and Piraino and Drs. Scott and Williams to be
appropriate and they remained unchanged from 2014. While Named Executive Officers salaries are reviewed each year, increases are infrequent.
Annual Cash Incentive Compensation Plan
Our annual cash incentive
plans are an important element of the compensation program for our employees (the
2015 Employee Bonus Plan
) and senior officers, including the Named Executive Officers (the
2015 Executive Bonus
Plan
). Our 2015 Executive Bonus Plan was based on a balanced scorecard award plan, which in turn was based on quantitative financial goals and individual goals. These awards were payable only if the specified goals were
achieved.
Based on analysis of our Peer Group and the Radford and IPAS Surveys described above, for 2015, the target awards
as a percentage of base salary for Messrs. Ungaro and Piraino were above the 75th percentile and
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the target awards as a percentage of base salary for Drs. Scott and Williams were between the 50th and 75th percentiles and the target award as a percentage of base salary for Mr. Henry was
between the 25th and the 50th percentile. We maintained the target bonus awards as a percentage of base salary at the same levels as in 2014 for Messrs. Ungaro and Henry and Drs. Scott and Williams and increased the target bonus award for
Mr. Piraino in connection with his promotion to Senior Vice President. However, the Compensation Committee does not benchmark its compensation to any particular level or against any specific member of the Peer Group. Rather, it utilizes the
Peer Group information as a data point in determining, with the assistance of Mercer, the appropriate compensation. The Compensation Committee believes that the Named Executive Officers should have a greater proportion of their variable compensation
relative to total compensation at-risk and based on performance, thus emphasizing the incentive nature of their compensation. The Compensation Committee also believes that the incentive plan targets should contain rigorous thresholds that must be
met before the target awards can be earned.
Annual Cash Incentive Compensation Targets
The following table sets forth the 2015 target award amount for the Named Executive Officers listed below pursuant to our 2015 annual cash
incentive plan:
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Named Executive Officer
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Title
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Target Award as
% of Base Salary
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Peter J. Ungaro
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President and Chief Executive Officer
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150
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%
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Brian C. Henry
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Executive Vice President and Chief Financial Officer
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65
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%
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Michael C. Piraino
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Senior Vice President Administration, General Counsel and Corporate Secretary
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65
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%
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Steven L. Scott
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Senior Vice President and Chief Technology Officer
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65
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%
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Margaret A. Williams
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Senior Vice President, Research and Development
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75
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%
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General Conditions
The minimum percentage achievement for each balanced scorecard goal was 25% (at the Threshold target below the Threshold target achievement was set at 0%) and the maximum was 200%
(at the Maximum target). In addition, our approach has been to set stretch goals such that even threshold attainment can reflect a significant accomplishment and therefore 0% attainment on a particular goal can result from
what by external standards could be deemed successful execution. Subject to the caps described below, the achievement for each balanced scorecard goal was added based on the weighting of that particular goal for the individual to determine an
overall balanced scorecard percentage payout.
The aggregate bonus payment to all participants (including both Named Executive
Officers and employees) under the 2015 Employee Bonus Plan and the 2015 Executive Bonus Plan (together, the
Bonus Plans
) may not exceed 33% of PBOI (pre-bonus operating income, defined below). To the extent,
absent this cap, the aggregate bonus payment under the Bonus Plans would exceed 33% of PBOI, all such bonus payments are reduced on a pro-rata basis such that the aggregate bonus payment under the Bonus Plans equals 33% of PBOI.
PBOI
means Operating Income with aggregate bonuses otherwise payable under the Bonus Plans added back. For 2015, no PBOI adjustment was required.
The 2015 Executive Bonus Plan includes qualified financial goals, which are weighted differently for each participating Named Executive Officer, depending on their areas of responsibility and the factors
over which they have the most influence. In addition, each Named Executive Officer has individual leadership goals.
Qualified Financial Goals
The following are the qualified financial goals included in our Bonus Plans and the rationale for including them. These goals were established by our Compensation Committee.
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Revenue To emphasize the importance of improving our overall financial performance by expanding our addressable market in areas where we can
leverage our experience and technology.
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Commercial Revenue To emphasize the importance of growth in this strategic market segment.
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New Product Revenue To emphasize the importance of growth in new offerings recently brought to market.
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Operating Income (GAAP operating income excluding the in-year costs and benefits of acquisitions and divestitures, with the following added back
that impacted GAAP operating income: non-cash accounting changes; restructuring charges or impairment costs; and one-time events) to maintain an emphasis on profitability during a period of rapid growth.
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Quarterly Scaling To emphasize the importance of planning and preparing operationally for continued rapid growth.
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With respect to the Revenue goal, the threshold goal, or 25% attainment, was $655 million, the target goal, or 100% attainment, was $730
million, and the maximum goal, or 200% attainment, was $880 million or above. With respect to the Commercial Revenue goal, the minimum goal, or 25% attainment, was $35 million, the target goal, or 100% attainment, was $73 million, and the maximum
goal, or 200% attainment, was $110 million or above. With respect to the New Product Revenue goal, the minimum goal, or 25% attainment, was $20 million, the target goal, or 100% attainment, was $40 million, and the maximum goal, or 200% attainment,
was $70 million or above. With respect to the Operating Income goal, the threshold goal, or 25% attainment, was $20 million, the target goal, or 100% attainment, was $40 million, and the maximum goal, or 200% attainment, was $72 million or above.
With respect to the Quarterly Scaling goals of 24 possible, the minimum goal, or 25% attainment, was 17 goals, the target goal, or 100% attainment, was 20 goals, and the maximum goal, or 200% attainment, was 24 goals.
The 2015 scorecards for each Named Executive Officer were the same except for their Leadership goals. 20% was weighted for Revenue, 10%
for Commercial Revenue, 10% for New Product Revenue, 40% for Operating Income, 10% for Quarterly Scaling and 10% for Leadership goals. For 2015, the percentage achievement for the Revenue goal was 95.7% and the percentage achievement for the
Commercial Revenue goal was 200%. Attainment against the New Product Revenue goal did not meet the minimum threshold. The percentage achievement for the Operating Income goal was 103%. The percentage achievement for the Quarterly Scaling goals was
125%.
Individual Leadership Goals
In addition to the quantitative financial goals, each Named Executive Officer had his or her own leadership goals, which are described in more detail below. With respect to the leadership goals, the
minimum goal, or 25% attainment, was Meets Some Expectations, the target goal, or 100% attainment, was Fully Meets Expectations, and the maximum goal, or 200% attainment, was Dramatically Exceeds Expectations.
If actual results fell between the specified levels but above the minimum threshold goal, a resulting percentage could, in
the discretion of the Compensation Committee, be interpolated.
For each of the Named Executive Officers, following is a
summary of their individual leadership goals for 2015:
Peter J. Ungaro
Mr. Ungaros leadership
goals included positioning the Company to grow revenue at 20% year-to-year in 2015 and beyond, developing overall strategy to meet our business goals, living our core values and continued compliance with applicable governmental rules and
regulations.
Brian C. Henry
Mr. Henrys leadership goals included supporting the Products
organization on business decisions, improving management reporting with leading and key operating performance indicators, developing revenue recognition policies for new revenue recognition standards, shortening manufacturing order-to-delivery lead
times, building an adequate manufacturing capacity and space plan, living our core values and continued compliance with applicable governmental rules and regulations.
29
Michael C. Piraino
Mr. Pirainos leadership goals included
building a strong hiring and on-boarding process to bring the best talent to the Company, defining and documenting succession planning for each team overseen by Mr. Piraino, managing facilities long-term space planning and implementing
facilities near-term space plans, developing a three to five year information technology infrastructure plan, including cybersecurity, living our core values and continued compliance with applicable governmental rules and regulations.
Steven L. Scott
Dr. Scotts leadership goals included working on product roadmaps, supporting various
organizations within the Company, living our core values and continued compliance with applicable governmental rules and regulations.
Margaret A. Williams
Dr. Williams leadership goals included completing research and development deliverables and milestones, delivering on-time products pursuant to Company
product roadmaps, living our core values and continued compliance with applicable governmental rules and regulations.
Based
upon the Compensation Committees review of the Named Executive Officers achievement against each of their individual leadership goals during 2015 under the 2015 Executive Bonus Plan, it was determined that: Mr. Ungaro attained 110%
of his leadership goals; Mr. Henry attained 102% of his leadership goal; Mr. Piraino attained 99% of his leadership goal; Dr. Scott attained 98% of his leadership goal; and Dr. Williams attained 105% of her leadership goals.
For 2015, the overall percentage achievement under our 2015 Executive Bonus Plan for Mr. Ungaro was 103.8%, for
Mr. Henry it was 103%, for Mr. Piraino, it was 102.8%, for Dr. Scott it was 102.6% and for Dr. Williams it was 103.3%.
For information regarding actual amounts paid under the 2015 Executive Bonus Plan, see the tables and associated footnotes and narratives under Compensation Tables below.
Difficulty of Performance Goals
We believe that the Compensation Committee has historically set performance targets for our annual cash incentive plan that are achievable, but that include significant challenges to be met, with annual
incentive awards at target being at substantial risk and incentive awards above target being very difficult to realize. In the past five years, we paid above-target awards for 2012, and paid below-target awards for 2010, 2011, 2013 and 2014. The
Compensation Committee likewise determined that the 2015 qualified financial goals and the individual leadership goals were achievable, but required significant effort to be met, and these goals were achieved above target for 2015.
Discretionary Bonuses
Our Compensation Committee may award discretionary cash bonuses to, among other things, incentivize new hires, encourage retention of executives and reward individuals or groups of individuals who make
exceptional contributions to Cray. No discretionary bonuses were paid to our Named Executive Officers during 2015.
Long-Term Equity Awards
Historically, and in 2015, we granted stock options, restricted stock awards and restricted stock units to certain new hires, principally for senior manager and officer positions and generally on an
annual basis as part of the total target compensation plan for the Named Executive Officers and other senior officers. In addition in 2015, we granted performance vesting restricted stock units to our senior officers.
In accordance with our compensation philosophy and objectives described above, these grants are designed to:
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Align the interest of recipients with our shareholders;
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Motivate and reward recipients to increase shareholder value over the long-term;
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Provide a significant portion of their total target compensation at risk subject to future performance; and
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Provide a retention incentive.
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In the past several years we have recruited a number of key senior officers and through that process have learned that the available talent pool in our industry is limited and that candidates and our
officers have significant other opportunities. Given these circumstances, the Compensation Committee has emphasized the retention nature of equity awards to keep our senior management team in place.
Target Total Equity Awards
Mercer provided market data estimating the total long-term incentive values expressed as multiples of base salaries for each of the Named Executive Officers. The Compensation Committee has not used any
one factor in its equity grant determinations. Rather, in determining the size of equity awards, the Compensation Committee considered the Named Executive Officers (i) contributions to our overall performance, (ii) future potential
performance and contributions to Cray, (iii) current ownership of our common stock, (iv) extent and frequency of prior stock option grants and restricted stock awards and/or restricted stock units and (vi) unvested stock options and
restricted stock awards and/or restricted stock units and the remaining duration of the outstanding stock options, restricted stock awards and/or restricted stock units. In addition, in 2015, the Compensation Committee decided to create a special
performance incentive, that also has significant retention benefits, reflected in the performance vesting restricted stock unit grants to our senior officers.
The following table sets forth the value of the 2015 equity grants to the Named Executive Officers expressed as a multiple of their respective base salary:
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Named Executive Officers
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Title
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Total Equity Award Value as a
Multiple of Base Salary(1)
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Peter J. Ungaro
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President and Chief Executive Officer
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10.54x
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Brian C. Henry
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Executive Vice President and Chief Financial Officer
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7.22x
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Michael C. Piraino
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Senior Vice President Administration, General Counsel and Corporate Secretary
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8.36x
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Steven L. Scott
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Senior Vice President and Chief Technology Officer
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7.04x
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Margaret A. Williams
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Senior Vice President, Research and Development
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5.85x
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(1)
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These multiples are based on the closing price per share of our common stock on the date of grant for restricted stock units and the value of the closing price per
share of our common stock one business day prior to the date of grant for stock options based on the Black-Scholes Model.
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For additional information regarding equity grants in 2015 and in prior years, see the tables and associated footnotes and narratives under Compensation Tables below.
Time-Based Vesting Equity Awards
To provide longer-term performance and retention incentives, we generally grant stock options and restricted stock units. Our stock options typically have ten-year terms and four-year vesting schedules,
with the exercise price equaling 100% of the most recent closing price for our common stock as reported by NASDAQ prior to the date of grant. Our time-based vesting restricted stock units typically have four-year vesting schedules. Equity awards are
typically granted each year to certain employees. Whether grants are made and the number of shares granted varies based on many factors, including financial performance and retention concerns. As financial gain from stock options depends on
increases in the market price for our common stock after the date of grant, we believe stock option grants encourage recipients to focus on performance and initiatives that should lead to an increase in the market price of our common stock, which
benefits all of our shareholders. In addition, for unvested restricted stock units, and when the market price for the underlying common stock is higher than the exercise prices of stock options that are not fully vested, those grants of restricted
stock units or options provide a
31
retention incentive. Stock options, however, represent a high-risk and potential high-return component, as the realizable value, and consequently the retention incentive, of each stock option can
fall to zero if the market price for the underlying common stock falls below the exercise price.
In 2015, we granted
time-based vesting restricted stock units and stock options to each of our Named Executive Officers. For Messrs. Ungaro, Henry and Piraino and Dr. Scott, 25% of such restricted stock units vest on each of May 6, 2016, May 6, 2017, May 6, 2018
and May 6, 2019. For Dr. Williams, 50% of such restricted stock units vest on each of May 6, 2016 and May 6, 2017. For Messrs. Ungaro, Henry and Piraino and Dr. Scott, 25% of such stock option awards vest on May 6, 2016,
with the remaining balance vesting monthly over the next 36 months, so that all options will be vested on May 6, 2019. For Dr. Williams, 50% of such stock option award vests on each of May 6, 2016 and May 6, 2017.
Performance Vesting Equity Awards
The Compensation Committee continues to believe that, in the right circumstances, performance vesting of equity awards can create a significant performance incentive.
In March 2015, to provide performance incentives, each of our Named Executive Officers was granted restricted stock units that vest upon
the achievement of certain revenue and operating income milestones, if both milestones are met in fiscal year 2016, 2017, 2018 or 2019 (with achievement to be determined, generally, no later than July 1 of each subsequent calendar year),
subject to the executive officers provision of services to us on the applicable determination dates (such awards, the
Performance Vesting RSUs
). Such Performance Vesting RSUs will expire completely and will be
terminated on July 2, 2020 if the milestones are not satisfied in any of 2016, 2017, 2018 or 2019. None of the Performance Vesting RSUs were eligible to be earned or vested in 2015.
The Compensation Committee selected these metrics because they are relevant indicators of our financial performance over the short- and
longer-terms. Operating income is indicative of our operational profitability and efficiency and provides some balance to encourage profitable revenue growth. Revenue reflects growth in our business. The Compensation Committee believes these
milestones represent challenging goals that will require significant growth in revenues and profitability to achieve.
No
performance vesting equity awards granted in prior years were eligible to vest in 2015.
Severance Policy and Change of
Control Agreements
The Companys Executive Severance Policy, Management Retention Agreements, stock option plans
and equity award agreements provide for certain employment termination and/or change in control benefits. Each is described in more detail under Termination of Employment and Change of Control Arrangements Narrative to the
Termination of Employment and Change of Control Payments Table below.
Retirement Plans
Our only retirement plan for all U.S. employees, including the Named Executive Officers, is a qualified 401(k) plan under which employees
may contribute a portion of their salary on a pre-tax basis. Participants may invest in a limited number of mutual funds, and may sell, but may not direct the purchase of, shares of our common stock. For 2015, we matched 20% of each
participants total 2015 contributions in cash.
We do not have a pension plan for any of our U.S. employees, including
our Named Executive Officers. We do not have any plan for any of our Named Executive Officers or other employees that provides for the deferral of compensation on a qualified or non-qualified basis under the IRC other than our 401(k) Plan.
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Additional Benefits and Perquisites
We have health and welfare plans available on a non-discriminatory basis to all employees in the United States designed to meet the health
and welfare needs of our employees and their families and to provide a total competitive compensation package. We provide these benefits to the Named Executive Officers and other senior officers on the same terms and conditions as provided to all
other eligible employees:
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Group health insurance and dental and vision benefits;
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Life insurance based on salary, with additional coverage available for purchase up to a maximum of $500,000;
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Employee Stock Purchase Plan qualified under Section 423 of the IRC;
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Long-term care insurance;
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Short-term and long-term disability insurance;
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Supplemental income protection (available for purchase);
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Flexible spending accounts for health care and dependent care; and
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An employee assistance plan and travel assistance plan.
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We do not provide benefits or perquisites for the Named Executive Officers or other senior officers that are not available on the same terms to our employees generally.
Chief Executive Officer Stock Ownership Guidelines
. We have stock ownership guidelines for our Chief
Executive Officer in furtherance of our goal of aligning the interests of our Chief Executive Officer with those of our shareholders. Under the guidelines, our Chief Executive Officer is expected to hold 200,000 vested shares of our common stock,
which amount represented, when we adopted this guideline, at least three (3) times the value of his then-current base salary based on the closing stock price of our stock as of December 31, 2010 (this amount is greater than three
(3) times his current base salary based on the closing price per share of our common stock on December 31, 2015), within the later of five years from appointment as Chief Executive Officer and February 2016.
Compensation Recovery
. We have a recoupment or clawback policy for cash and equity
incentive awards paid to executive officers. The policy provides that if an executive officers actual compensation was based upon the achievement of financial results that were subsequently the subject of a substantial restatement of our
financial statements and the executive officers fraud or intentional illegal conduct materially contributed to that financial restatement, then, in addition to any other remedies available to us under applicable law, to the extent permitted by
law and as the Board determines appropriate, we may:
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cancel any outstanding compensation award granted after the adoption of the policy (whether or not granted pursuant to a plan and regardless of whether
it is vested or deferred); and/or
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require recoupment of all or a portion of any after-tax portion of any bonus, incentive payment, commission, equity-based award or other compensation
granted or received after the adoption of the policy.
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Under the policy, it is a requirement that the
individual was an executive officer when the compensation was granted or received and that the financial restatement resulted in greater compensation than would have otherwise been received.
The Executive Compensation Process
The Compensation Committee determines base salary, the level of target awards under our annual cash incentive plan, including the balanced scorecard goals and objectives described below, and
the number and type of equity grants to be awarded under our long-term equity incentive plans for our senior officers during the
33
year. In making these determinations, the Compensation Committee considers our corporate goals, business plan and objectives for the year, reviews analyses from our independent compensation
consultant, Mercer, and consults with our Chief Executive Officer, when appropriate. For its 2015 compensation decisions, the Compensation Committee considered the Mercer analyses described below to contextualize our overall total compensation
approach and general market competitiveness. The Compensation Committee also analyzed compensation payable by companies that we consider to be in our peer group and by other companies with which we generally compete for hiring executives. The
Compensation Committee also considered the roles, responsibilities and specialized expertise of the Named Executive Officers, including our Chief Executive Officer and that competition for our Named Executive Officers generally comes from much
larger companies with significantly greater resources.
Role and Authority of the Compensation Committee
The current members of the Compensation Committee are Mr. Schireson (Chair), Mr. Kiely, Ms. Narodick
and Mr. Turner. Mr. Richards served on the Compensation Committee as a member and also served as its Chairman from June 10, 2015 until his death in November 2015. On November 20, 2015, the Board appointed Ms. Narodick to the
Compensation Committee and named Mr. Schireson as its Chairman. Mr. Turner was appointed to the Compensation Committee on April 18, 2016. The Board has determined that each individual who served on the Compensation Committee in 2015
and each current member of the Compensation Committee is independent, as that term is defined in NASDAQ rules and regulations, and an outside director within the meaning of Section 162(m) of the IRC and a
non-employee director as defined in Rule 16b-3 under the Exchange Act. During 2015, the Compensation Committee met in person or by telephone five times.
The Compensation Committee assists our Board in fulfilling its responsibilities for the oversight of our compensation policies, plans and benefit programs, the compensation of our Chief Executive Officer
and other senior officers, and the administration of our equity compensation plans. After reviewing competitive market data, expectations for the position, our corporate goals, business plan and objectives for the year and our prior performance, the
Compensation Committee determines base salary, the level of target awards under our annual cash incentive plan, including the balanced scorecard goals and objectives, and the number and type of equity grants to be awarded under our long-term equity
incentive plans for our senior officers during that year. The Compensation Committee has the authority to determine the annual compensation for our senior officers, subject to any approval by the full Board which the Compensation Committee or legal
counsel determines to be desirable or that is required by applicable law or the listing standards of The NASDAQ Stock Market.
The Compensation Committee also: determines the policy for awarding stock options and/or restricted stock units to new hires who are not
senior officers; makes grants of stock options and/or restricted stock units to other employees; evaluates risks, if any, associated with our compensation programs; works with the Board in overseeing our 401(k) Plan; periodically reviews our
staffing, including open positions and turnover; receives reports on our health and safety records and any equal employment opportunity claims, investigations and reports; and considers our medical and other health benefits, including potential
changes and enhancements, from both a cost and a competitive perspective.
Role of the Chief Executive Officer and
Management
The Compensation Committee confers regularly with Mr. Ungaro, our Chief Executive Officer, and other
senior officers and members of our Human Resources department regarding the structure and effectiveness of our compensation plans and proposals for changes to our compensation programs. As members of our Board, Compensation Committee members obtain
information regarding our tactical and strategic objectives, goals, operational and financial results, our annual financial plan and the outlook regarding our future performance. The Compensation Committee meets twice each year with Mr. Ungaro
to review his performance and at least once a year to review his evaluation of the performance of other senior officers, and annually to review his recommendations for the compensation of the other senior officers, including the other Named
Executive Officers. Mr. Ungaros recommendations cover base salary, the structure of the annual cash incentive plan, including target awards and performance goals and objectives for each senior officer and the level and form of equity
grants.
34
Role of Compensation Consultants
The Compensation Committee retained Mercer to review our compensation programs for senior officers, advise the Compensation Committee
regarding total compensation philosophy, define the applicable market and conduct benchmarking analyses and provide continuing insight into and education on executive compensation trends and practices. The Compensation Committee actively seeks an
independent broad view of current compensation levels, practices and programs, particularly in the high-technology industry. Mercer reported directly to the Compensation Committee and has not performed any services for our management either prior to
or since its engagement by the Compensation Committee. The total fees paid to Mercer for 2015 were $68,450. During 2015, the Compensation Committee reviewed the services of Mercer and the fees provided to Mercer relative to Mercers revenues.
Based on the foregoing, and other factors relating to Mercers independence, the Compensation Committee confirmed that Mercer was an independent compensation advisor to the Compensation Committee and that its engagement did not present any
conflicts of interest.
Securities Trading Policies
Our securities trading policy includes that, except for trades pursuant to approved Rule 10b5-1 plans, directors, officers and employees
may not trade in Cray securities while possessing material nonpublic information concerning Cray or trade in Cray securities outside of the applicable trading windows. Our securities trading policy further includes that directors, officers and
employees may not purchase or sell puts or calls to sell or buy our common stock, engage in short sales, put options, call options, or any other hedging transactions with respect to our common stock, or buy our common stock on margin or pledge
shares of our common stock. Except for trades pursuant to approved Rule 10b5-1 plans, our policy restricts trading in Cray securities by directors, officers and employees to open window periods following the widespread public release of our
quarterly and annual financial results.
Tax Deductibility
Section 162(m) of the IRC limits to $1.0 million per person the amount that we may deduct for compensation paid in any one year to
our Chief Executive Officer and certain of our most highly compensated officers, unless certain requirements are met. This limitation does not apply, however, to performance-based compensation, as defined in the IRC. Our stock options
generally qualify as performance-based compensation, except for incentive stock options. We anticipate that the compensation income paid by Cray realized upon the exercise of qualifying stock options may be deductible. Compensation
income paid by Cray realized upon the settlement of restricted stock units granted under a shareholder-approved equity incentive plan may be deductible if certain pre-existing performance criteria and certain other requirements of
Section 162(m) of the IRC are satisfied. In addition, compensation income paid by Cray as a cash bonus is generally not anticipated to be fully deductible. The deductibility of some types of compensation payments depends upon the timing of the
awards and the vesting or exercise of previously granted rights. Interpretations of and changes in applicable tax laws and regulations, as well as other factors beyond our control, also can affect deductibility of compensation. Although
deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs, particularly given our considerable net loss carry-forward position for U.S. tax purposes. Rather, we maintain the flexibility to
structure our compensation programs in ways that promote the best interests of our shareholders.
Risk from Compensation
Policies and Practices
The Compensation Committee reviews our compensation policies and practices to determine areas
of resulting risk and the actions that we have taken, or should take, to mitigate any such identified risk. Based on the Compensation Committees review of our compensation policies and practices, we do not believe that any risks relating from
our compensation policies and practices for our employees are reasonably likely to have a material adverse effect on our business. Additional information on the committees analysis of compensation-related risk is set forth above under
The Board of Directors Risk Considerations in Our Compensation Program.
35
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The information contained in this report shall not be deemed to be soliciting material, to be
filed with the SEC or 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 Exchange Act, and shall not be deemed to be incorporated by
reference in future filings with the SEC except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Exchange Act.
The Audit Committee is responsible for overseeing the Companys accounting and financial reporting processes and audits of the
Companys consolidated financial statements. As set forth in its charter, which can be found at
www.cray.com
under Company Company Information Investors Corporate Governance, the Audit
Committee acts only in an oversight capacity and relies on the work and assurances of management, which has primary responsibility for the Companys consolidated financial statements and reports, as well as of the independent registered public
accounting firm, which is responsible for expressing an opinion on the conformity of the Companys audited consolidated financial statements to generally accepted accounting principles. The Audit Committee periodically meets separately with our
management, without the auditors present, and with the auditors, without management present. The Audit Committee believes it has satisfied its charter responsibilities for 2015.
The Company reported no material weaknesses in its system of internal controls over financial reporting and has received favorable
opinions from the independent auditors for each year since 2004, including for 2015. The Company included the 2015 report and opinion in its Annual Report on Form 10-K for the year ended December 31, 2015. The Audit Committee met in person or
by telephone eight times in 2015. In the course of these meetings, the Audit Committee reviewed the results of audit examinations, evaluations of the Companys internal controls and the overall quality of its financial reporting.
In accordance with Audit Committee policy and the requirements of law, the Audit Committee pre-approves all services to be provided by
any independent auditors responsible for providing an opinion on the Companys consolidated financial statements filed with the SEC. Peterson Sullivan LLP, the Companys independent registered public accounting firm, did not perform any
non-audit services for the Company in 2014 or 2015. See Discussion of Proposals Recommended by the Board Proposal 2: To Ratify the Appointment of Peterson Sullivan LLP as Our Independent Registered Public Accounting Firm for the
Year Ending December 31, 2016 below.
The Audit Committee engaged Peterson Sullivan LLP as the Companys
independent registered public accounting firm for 2015, and reviewed its overall audit scope and plans. The Audit Committee also has discussed with Peterson Sullivan LLP the matters required to be discussed by SAS No. 61, as amended (AICPA,
Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has received and reviewed the written disclosures and the letter from Peterson Sullivan LLP required by
applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountants communications with the Audit Committee concerning independence, and has discussed with Peterson Sullivan LLP its independence from
the Company.
The Audit Committee has engaged Peterson Sullivan LLP as the Companys independent registered public
accounting firm for 2016. In taking this action, the Audit Committee considered carefully Peterson Sullivan LLPs performance for the Company in that capacity since its retention in mid-2005, its independence with respect to the services to be
performed and its general reputation for adherence to professional auditing standards. Although the Audit Committee has the sole authority to appoint the independent registered public accounting firm, the Audit Committee has recommended that the
Board ask the shareholders to ratify the appointment of Peterson Sullivan LLP as the Companys independent registered public accounting firm at the Annual Meeting. The Board has followed the Audit Committees recommendation. See
Discussion of Proposals Recommended by the Board Proposal 2: To Ratify the Appointment of Peterson Sullivan LLP as Our Independent Registered Public Accounting Firm for the Year Ending December 31, 2016 below.
53
The Audit Committee has reviewed and discussed the audited consolidated financial statements
for 2015 with our management, including a discussion of the quality and acceptability of the financial reporting, the reasonableness of significant accounting judgments and estimates and the clarity of disclosures in the consolidated financial
statements.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board that
the audited consolidated financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2015, for filing with the SEC.
The Audit Committee
Daniel C. Regis, Chair
Stephen C. Kiely
Sally G. Narodick
54
DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD
Proposal 1: To Elect Eight Directors for One-Year Terms
Our Bylaws provide that our Board shall consist of no less than five and no more nine members, with the exact number of members within the
variable range to be fixed from time to time by resolution of the Board. On April 18, 2016, our Board authorized an increase in the size of the Board from seven to eight members and, upon the recommendation of our Corporate Governance
Committee, appointed Mr. Turner as a director of Cray effective as of April 18, 2016. As of April 25, 2016, all eight directors on our Board serve with terms ending at the Annual Meeting. The Board has nominated
(i) Dr. Banerjee, Mr. Homlish, Mr. Kiely, Ms. Narodick, Mr. Regis, Mr. Schireson and Mr. Ungaro for re-election and (ii) Mr. Turner for election to the Board each to hold office until the Annual
Meeting in 2017.
We know of no reason why any nominee may be unable to serve as a director. If any nominee becomes unable to
serve, your proxy may vote for another nominee proposed by the Board, or the Board may reduce the number of directors to be elected. If any director resigns, dies or is otherwise unable to serve out his or her term, or the Board increases the number
of directors, then the Board may fill the vacancy.
Board Recommendation:
The Board recommends
that you vote
FOR
the election of all nominees for director.
Director Qualifications
The following paragraphs provide information as of the date of this Proxy Statement about each nominee. The
information presented includes information each director has given us about his or her age, all positions he or she holds, his or her principal occupation and business experience for the past five years, and the names of other publicly held
companies of which he or she currently serves as a director or has served as a director during the past five years. In addition to the information presented below regarding each nominees specific experience, qualifications, attributes and
skills that led our Board to the conclusion that he or she should serve as a director, we also believe that all of our director nominees have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated
business acumen and an ability to exercise sound judgment, as well as a commitment of service to us and our Board. Finally, we value their significant experience on other public company boards of directors and board committees.
Information about the number of shares of common stock beneficially owned by each director appears above under the heading Our
Common Stock Ownership. There are no family relationships among any of the directors and executive officers of Cray.
Prithviraj (Prith) Banerjee
Dr. Banerjee
, 55, joined our Board in 2013. Since September 2015, Dr. Banerjee has been Executive Vice President and Chief Technology Officer of Schneider Electric, a global specialist in
energy management and automation. Previously, between 2013 and 2015, Dr. Banerjee was Managing Director of Global Technology Research and Development at Accenture. Prior to Accenture, from 2012 to 2013, he led the technology direction of ABB
Ltd., a power and automation company, as its Executive Vice President and Chief Technology Officer. From 2007 until 2012, he served as Senior Vice President of Research at the Hewlett-Packard Company and served as the Director of HP Labs, the
companys central research organization. Throughout his career, Dr. Banerjee has held several academic positions, including Dean of the College of Engineering at the University of Illinois at Chicago, Professor and Chairman of Electrical
and Computer Engineering at Northwestern University, and the Director of the Computational Science and Engineering program and Professor of Electrical and Computer Engineering at the University of Illinois at Urbana-Champaign. Additionally,
Dr. Banerjee founded two electronic design automation companies, BINACHIP Inc. and AccelChip Inc. Dr. Banerjee currently serves on the technical advisory board of Cypress Semiconductor Corporation and previously served on the Computer
Science Advisory Board of the National Academy of Engineering, the advisory board for the Anita
55
Borg Institute for Women and Technology and on the technical advisory boards of several private companies, including Ambit Design Systems, Inc., Atrenta Inc. and Calypto Design Systems, Inc. He
is a Fellow of the American Association for the Advancement of Science, the Association for Computing Machinery and the Institute of Electrical and Electronics Engineers. He received a B.Tech from the Indian Institute of Technology and an M.S. and
Ph.D. in Electrical Engineering from the University of Illinois at Urbana-Champaign. We believe Dr. Banerjees qualifications to sit on our Board of Directors include his vast experience with high-technology, his deep technical expertise
and his significant experience developing technology strategies.
Martin J. Homlish
Mr. Homlish,
63, joined our Board in 2015. Mr. Homlish previously ran marketing for iconic high-tech brands such as Sony
Corporation, SAP AG and Hewlett-Packard, and is currently the Chief Executive Officer of AMP, an end-to-end marketing agency within the holding company Omnicom Group. As Chief Executive Officer of AMP, Mr. Homlish works with senior executive
clients to get the most out of their marketing investment. Prior to AMP, he was most recently a member of the HP Executive Committee. In his tenure at HP he held the roles of Executive Vice President and Chief Customer Officer, and also served as
Executive Vice President and Chief Marketing Officer. Prior to HP, Mr. Homlish spent 11 years at SAP, where he held various executive leadership positions, including Global Chief Marketing Officer, Chief Operating Officer and Corporate Officer.
He also spent 15 years at Sony, holding several executive leadership positions there, and led the launch of the Sony PlayStation in North America. He received a B.A. in communications from Goddard College in Vermont. We believe
Mr. Homlishs qualifications to sit on our Board of Directors include his more than 40 years of experience in marketing and executive leadership positions.
Stephen C. Kiely
Mr. Kiely
, 70, joined our Board in 1999,
was appointed Lead Director in January 2005 and non-executive Chairman of the Board in August 2005. From 1999 to July 2008, he was Chairman of Stratus Technologies, Inc., a provider of fault tolerant computer servers, technologies and services.
Mr. Kiely served as Chief Executive Officer of Stratus Technologies from 1999 through June 2005. He joined Stratus Technologies in 1994 and held various executive positions, becoming President of the Stratus Enterprise Computer division in
1998. Prior to joining Stratus, Mr. Kiely held a number of executive positions with several information technology companies, including EON Corporation, Bull Information Systems, Prisma, Inc., Prime Computer Inc. and IBM. Mr. Kiely was a
member of the board of directors of Stratus Technologies from 1999 to 2014. Mr. Kiely received a B.A. from Fairfield University and an M.S. in Management from the Stanford University Graduate School of Business. We believe Mr. Kielys
qualifications to sit on our Board of Directors include his significant experience as a Chief Executive Officer and executive in the computer and information technology industries, combined with his corporate governance expertise.
Sally G. Narodick
Ms. Narodick
, 70, joined our Board in 2004. She is a retired educational technology and e-learning consultant. From 2000 to 2004, Ms. Narodick was President of Narodick Consulting, an
e-learning consulting firm. From 1998 to 2000, she served as Chief Executive Officer of Apex Online Learning, an Internet educational software company. Previously, Ms. Narodick served as an education technology consultant, both independently
and for the Consumer Division of IBM from 1996 to 1998. From 1989 to 1996, Ms. Narodick served as Chairman and Chief Executive Officer of Edmark Corporation, an educational software company sold to IBM in 1996. From 1973 to 1987, she served in
a variety of financial management capacities at Seafirst Corporation and Seafirst Bank, and was a securities analyst at Paine Webber from 1970 to 1973. Ms. Narodick previously served as a member on the boards of Penford Corporation from 1993 to
2015, SumTotal Systems from 1999 to 2009, Puget Energy, Inc. from 1989 to 2009 and Solutia Inc. from 2000 to 2008. A graduate of Boston University, Ms. Narodick received an M.A. in Teaching from Teachers College, Columbia University, and an
M.B.A. from New York University. We believe Ms. Narodicks qualifications to sit on our Board of Directors include her years of experience as a technology consultant and Chief Executive Officer of a technology company combined with her
Board and financial management expertise.
56
Daniel C. Regis
Mr. Regis
, 76, joined our Board in 2003. He is currently the General Partner of Regis Investments, LP and has served in this
role since 1998. He was Chairman of the advisory board for Fluke Venture Partners II, LP, a Northwest venture capital partnership, from 2004 to 2011. From 2000 to 2009, he was Managing Director of Digital Partners, a venture capital fund
specializing in Northwest emerging technology companies. From 1996 to 1999, he was President of Kirlan Venture Capital, Inc., where he managed similarly focused technology funds. During that time, he was also a director or chairman of several
pre-public companies. Prior to 1996, Mr. Regis spent more than 30 years with Price Waterhouse LLP, including serving as Managing Partner of the Seattle office and previously of the Northwest and Portland, Oregon offices. From 2003 to 2015,
Mr. Regis served as a member of the board of directors of Columbia Banking Systems, Inc., was a member of its audit committee and chaired its Risk Management Committee from 2010 to 2015. In 2004, Mr. Regis was a member of the audit
committee of Art Technology Group, Inc. and also joined their board and became Chairman of the board of directors in 2005, where he served in this role until January 2011 when Art Technology Group merged with Oracle Corporation. From 2003 to 2004,
Mr. Regis was a member of the board of directors of Primus Knowledge Solutions, Inc. until its merger with Art Technology Group, Inc. in 2004 and chaired its audit committee. He received a B.S. from Seattle University. We believe
Mr. Regis qualifications to sit on our Board of Directors include his over three decades of experience in finance and accounting, including as a managing partner at a national accounting firm, as well as his experience evaluating and
directing technology companies.
Max L. Schireson
Mr. Schireson
, 45, joined our Board in 2014. Mr. Schireson is a consultant to a variety of technology companies and to Battery
Ventures, a technology focused investment firm. Prior to his consulting work, Mr. Schireson was at MongoDB, Inc. from February 2011 to December 2014, where he was Chief Executive Officer from January 2013 to September 2014, President from
February 2011 to January 2013 and Vice Chairman from August 2014 to December 2014. Fortune 500 companies and startups alike are using MongoDB to create new types of applications, improve customer experience, accelerate time to market and reduce
costs. Prior to MongoDB, Mr. Schireson spent over seven years at MarkLogic, provider of a database for unstructured information, where he played a variety of executive roles including Chief Operating Officer. Before MarkLogic,
Mr. Schireson spent nine years at Oracle where he held a number of roles including Chief Applications Architect and Vice President, E-Commerce and Self Service Applications. We believe Mr. Schiresons qualifications to sit on our
Board of Directors include his experience as a technology executive and Chief Executive Officer, his deep experience in software and his technical expertise.
Brian V. Turner
Mr. Turner
, 56, was appointed to our
Board on April 18, 2016. He was the Chief Financial Officer of Coinstar Inc. from 2003 until June 2009. Prior to Coinstar, from 2001 to 2003, he served as Senior Vice President of Operations, Chief Financial Officer and Treasurer of
RealNetworks, Inc., a digital media and technology company. Prior to RealNetworks, from 1999 to 2001, Mr. Turner was employed by BSquare Corp., a software company, where he initially served as Senior Vice President of Operations, Chief
Financial Officer and Secretary, before being promoted to President and Chief Operating Officer. From 1995 to 1999, Mr. Turner was Chief Financial Officer and Vice President of Administration of Radisys Corporation, an embedded software
company. Mr. Turners experience also includes 13 years at PricewaterhouseCoopers LLP where he held several positions including Director, Corporate Finance. Mr. Turner has served as a Director of Microvision, Inc. since 2006 and
currently serves as the Chairman of the Board and Lead Independent Director, and also serves on its Compensation and Audit Committees. Mr. Turner sits on various private company boards. We believe Mr. Turners qualifications to sit on
our Board of Directors include his financing expertise and knowledge of operational finance and accounting.
Peter J.
Ungaro
Mr. Ungaro
, 47, has served as Chief Executive Officer and as a member of our Board since August
2005 and as President since March 2005. From September 2004 until August 2005, Mr. Ungaro served as our Senior
57
Vice President responsible for sales, marketing and services and from August 2003 until September 2004, he served as Vice President responsible for sales and marketing. Prior to joining us, he
served as Vice President, Worldwide Deep Computing Sales for IBM beginning in April 2003 and as IBMs Vice President, Worldwide HPC Sales beginning in February 1999. He also held a variety of other sales leadership positions at IBM beginning in
1991. Mr. Ungaro received a B.A. from Washington State University. We believe Mr. Ungaros qualifications to sit on our Board of Directors include his many years of experience as a leader in the high performance computing industry as
both a sales and operational executive, including more than 10 years as our Chief Executive Officer, and his extensive sales and marketing expertise.
Proposal 2: To Ratify the Appointment of Peterson Sullivan LLP as Our Independent Registered Public Accounting Firm for the Year Ending December 31, 2016
The Audit Committee has retained Peterson Sullivan LLP to serve as our independent registered public accounting firm to conduct an audit
of our consolidated financial statements for 2016, and the Board has directed that our management submit the selection of Peterson Sullivan LLP for ratification by the shareholders at the Annual Meeting. In retaining Peterson Sullivan LLP, the Audit
Committee considered carefully Peterson Sullivan LLPs performance for us in that capacity since its retention in mid-2005, its independence with respect to the services to be performed and its general reputation for adherence to professional
auditing standards.
Board Recommendation:
The Board recommends that you vote
FOR
Proposal 2 to ratify the appointment of Peterson Sullivan LLP as our independent registered public accounting firm for the year ending December 31, 2016.
Selection of our independent registered public accounting firm is not required to be submitted to a vote of the shareholders for
ratification. The Sarbanes-Oxley Act of 2002 requires the Audit Committee to be directly responsible for the appointment, compensation and oversight of the audit work of the independent registered public accounting firm. The Board is, however,
submitting this matter to the shareholders as a matter of good corporate practice. If the shareholders fail to vote on an advisory basis in favor of ratifying this selection, the Audit Committee will reconsider whether to retain Peterson Sullivan
LLP, and may retain that firm or another firm without re-submitting the matter to our shareholders. Even if the shareholders vote on an advisory basis in favor of ratifying the appointment, the Audit Committee, in its discretion, may direct the
appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of us and our shareholders.
Representatives of Peterson Sullivan LLP are expected to be present at the Annual Meeting. They will have the opportunity to make a
statement if they desire to do so and are expected to be available to respond to appropriate questions.
Services and
Fees
The following table lists the fees for services rendered by Peterson Sullivan LLP for 2014 and 2015:
|
|
|
|
|
|
|
|
|
Services
|
|
2014
|
|
|
2015
|
|
Audit Fees(1)
|
|
$
|
492,547
|
|
|
$
|
513,426
|
|
Audit-Related Fees(2)
|
|
|
|
|
|
|
|
|
Tax Fees(3)
|
|
|
|
|
|
|
|
|
All Other Fees(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
492,547
|
|
|
$
|
513,426
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Audit services billed in 2014 and 2015 consisted of audits of our annual consolidated financial statements, audits of our internal controls over financial reporting
under Section 404 of the Sarbanes-Oxley Act, reviews of our quarterly consolidated financial statements, statutory and regulatory audits, consents, comfort letters and other services related to filings with the SEC and capital-raising
offerings.
|
58
|
(2)
|
No audit-related services were billed in 2014 or 2015.
|
|
(3)
|
No tax services were billed in 2014 or 2015.
|
|
(4)
|
There were no fees billed for other services in 2014 or 2015.
|
Peterson Sullivan LLP to date has not performed any non-audit services for us.
Audit Committee Pre-Approval Policy
All audit, tax and other services to be performed for us by our independent auditors must be pre-approved by the Audit Committee. The Audit Committee reviews the description of the services and an
estimate of the anticipated costs of performing those services. Services not previously approved cannot commence until such approval has been granted. Pre-approval usually is granted at regularly scheduled meetings. If unanticipated items arise
between meetings of the Audit Committee, the Audit Committee has delegated approval authority to the Chairman of the Audit Committee, in which case the Chairman communicates such pre-approvals to the full Audit Committee at its next meeting. During
2015, all services performed by Peterson Sullivan LLP were pre-approved by the Audit Committee in accordance with this policy.
Proposal 3:
To Amend and Restate the 2013 Equity Incentive Plan to Increase the Number of Shares of Common Stock Authorized for Issuance Thereunder and to Re-Approve the Performance Factors Under Our 2013 Equity Incentive Plan for Purposes of Section
162(m) of the IRC.
Overview
We are asking our shareholders to approve the amendment and restatement of our 2013 Equity Incentive Plan (the
Plan
) to (i) increase the number of shares that may be issued
thereunder by 2,500,000, (ii) make certain clarifying and technical changes and (iii) re-approve the material terms of the performance factors under the Plan for purposes of Section 162(m) of the IRC. Our Board has approved the
amendment and restatement of our Plan, subject to shareholder approval.
If our shareholders do not approve the amendment and
restatement of the Plan, the number of shares available for grant under the Plan will not be increased and the proposed changes to the Plans terms will not be made and the Plan will instead maintain its existing terms.
Reasons why the Board recommends a vote FOR the amendment and restatement of the Plan to increase the number of shares and to
re-approve the performance factors under the Plan for purposes of Section 162(m) of the IRC
Equity
Compensation Is a Critical Element of Our Compensation Policy
Equity incentive awards are an
important part of our compensation philosophy. We firmly believe that a broad-based equity program is a necessary and powerful employee incentive and retention tool that benefits all of our shareholders. As stated in the Compensation
Discussion and Analysis section of this proxy statement, equity ownership programs are central to our compensation program because they encourage recipients to focus on creating long-term shareholder value and to provide a significant
retention incentive. Historically, we have granted equity awards to a broad base of employees and to all of our non-employee directors. These grants are an important component of our long-term employee incentive and retention plan and have been very
effective in enabling us to attract, retain and motivate the workforce required for us to achieve our performance goals, including strategic, tactical and financial goals, and create long-term value for our shareholders.
We Have Carefully Considered and Forecasted Our Need for Shares
Our share request and the resulting pool of available shares is reasonable and competitive.
59
Our share request was developed based on our forecast in anticipated growth, hiring plans,
and retention needs as well as our historical share usage and forfeiture rates. We anticipate that the 2,500,000 shares we seek to add to the Plan should support our grant practices for approximately three to four years; however, a change in
business conditions or our strategy could alter this projection.
The Plan provides for Broad-Based Eligibility for
Equity Awards
We believe having the ability to grant equity awards to a broad base of employees is important. By doing
so, we can link employee interests with shareholder interests throughout the organization and motivate our employees to act as owners of the business. Approximately 56% of all outstanding awards as of April 8, 2016 are held by employees who are
not Named Executive Officers or directors.
The Plan Incorporates Sound Corporate Governance and Aligns with Long-Term
Shareholder Interest
The Plan includes provisions that are designed to protect our shareholders interests and to
reflect corporate governance best practices as summarized in the table below. The table also highlights some of our key equity-related practices outside of the Plan that also reflect our commitment to strong corporate governance.
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Feature
|
|
Description
|
Independent Administration
|
|
Administered by our independent Compensation Committee
|
Reasonable Share Pool
|
|
The pool of requested shares approximates 6.1% of our outstanding common shares which is reasonable against our peers
|
Reasonable Share Plan Duration
|
|
Our plan was developed to support a three-year equity plan duration to ensure we obtain frequent shareholder input on our share usage
|
Fungible Share Pool
|
|
Uses a fungible share pool model in which each full value award (
i.e.
, awards other than stock options (
Options
) and stock appreciation rights
(
SARs
)) counts as 1.55 share against the Plan reserve
|
Minimum Exercise Price
|
|
Requires that Options and SARs must have an exercise price of no less than fair market value
|
No Repricing or Buyouts of Underwater Awards
|
|
Option and SAR repricing is
prohibited
without explicit shareholder approval
|
No Evergreen Feature
|
|
Does
not
contain any evergreen features which would automatically provide for an increase in the shares available for grant
|
No Reload Options or Loans to Purchase Shares
|
|
Does not permit the use of reloads or Company loans to exercise or purchase shares under the Plan
|
No Liberal Share Recycling for Options, SARs. Restricted Stock Awards, Restricted Stock Units, Performance Vesting Restricted Stock Award or Performance Vesting Restricted Stock
Unit
|
|
Does
not
permit liberal share recycling of Options or SARs. In particular, the following shares may not be used again for new awards: any shares withheld to pay the exercise
price or satisfy a tax withholding obligation in connection with any Option, SAR, restricted stock award, restricted stock unit, performance vesting restricted stock award or performance vesting restricted stock unit; any shares not issued as a
result of the net settlement of an Option, SAR, restricted stock award, restricted stock unit, performance vesting restricted stock award or
|
60
|
|
|
Feature
|
|
Description
|
|
|
performance vesting restricted stock unit; or any shares we repurchase using Option exercise proceeds
|
No Liberal Change in Control Definition
|
|
Change in control benefits are triggered only by the occurrence, rather than by the shareholder approval, of a merger or other change in control event
|
No Automatic Single Trigger Acceleration on Change in Control
|
|
If awards are assumed by a successor company in a connection with a change in control, such awards will not automatically vest and pay out solely as a result of the change in
control
|
No Excise Tax Gross-ups
|
|
The Plan does not provide for future tax gross-ups
|
Limit on Non-Employee Director Awards
|
|
The Plan establishes a maximum amount of shares that that may be granted to a non-employee director in any fiscal year
|
Awards Subject to Clawback Policy
|
|
Awards granted under the Plan are subject to our clawback policy
|
CEO Stock Ownership Guidelines
|
|
CEO is subject to stock ownership requirements, as discussed above under Compensation Disclosure & Analysis Chief Executive Officer Stock Ownership
Guidelines
|
Background for Requested Share Increase
In determining the number of shares to reserve for issuance under the Plan, our Compensation Committee considered a number of factors,
including:
Our Current Reserve of Shares Will Be Depleted Following Our 2016 Annual Grant
As of April 8, 2016, only 1,540,533 shares of our common stock remained available for future grants and awards under the Plan, an
amount that the Board believes to be insufficient to meet Crays anticipated needs beyond the upcoming 2016 annual grant. Therefore, the Board has unanimously adopted, subject to shareholder approval, the amendment and restatement of our Plan
to increase the maximum number of shares of our common stock that may be issued under the Plan by 2,500,000 shares or 6.1% of our common shares outstanding, shares to ensure that Cray will continue to have available a reasonable number of shares for
use pursuant to its equity incentive program.
Our Burn Rate Levels Are Expected to Be Consistent
Burn rate measures our usage of shares for our equity plans as a percentage of our outstanding stock. For 2015, 2014 and 2013, our burn
rate was 2.9%, 2.0% and 3.4%, respectively. The rates were calculated by dividing the aggregate number of shares subject to options, restricted stock awards and restricted stock units granted during the fiscal year by the weighted average number of
shares outstanding during the fiscal year.
The Resulting Pool of Shares Will Be Reasonable
As of April 8, 2016, stock options to purchase 1,840,551 shares (with a weighted average price of $15.22 and remaining term of 6.1
years), 535,943 restricted stock awards, 511,000 Performance Vesting RSAs (assuming that the maximum number of eligible Performance Vesting RSAs vest), 291,550 restricted stock units and 656,285 Performance Vesting RSUs (assuming that the maximum
number of eligible Performance Vesting RSUs vest), were outstanding under all of our equity plans, and we had 309 participants in the Plan as of April 8, 2016. Accordingly, our approximately 3,835,329 outstanding awards (awards commonly
referred to as the overhang and not including awards under our employee stock purchase plan) plus approximately 1,540,533 shares available under the
61
Plan, each as of April 8, 2016, plus the 2,500,000 shares proposed to be available for future grant under our Plan represent approximately 19% of our outstanding shares. Based on this
analysis, the Compensation Committee concluded that the total overhang percentage would not result in excessive overhang for shareholders.
Clarifying and Technical Changes
The proposed amendment and restatement
of the Plan also includes certain technical changes for enhanced clarity, but that do not change the substance or meaning of the terms and provisions of the Plan.
Section 162(m) Re-approval
We are also asking our shareholders to
re-approve the material terms of the Plan to preserve our ability to deduct, for federal income tax purposes, the compensation income recognized by our senior executives without application of the deduction limit contained in Section 162(m) of
the IRC. Pursuant to Section 162(m) of the IRC, we generally may not deduct for federal income tax purposes compensation paid to our Chief Executive Officer and our three most highly compensated employees (referred to in the IRC as
covered persons) to the extent that any of these persons receive more than $1.0 million in compensation in any single tax year. Where such compensation qualifies as performance-based compensation for purposes of
Section 162(m) of the IRC, however, we may deduct this compensation for federal income tax purposes, even if it causes a covered persons total compensation to exceed $1.0 million in a single year. Our shareholders must periodically
re-approve the material terms of the Plan, as well as the types of performance criteria that may be used as performance factors in awards granted under the Plan. While we do not need re-approval of our performance factors until 2018, we are seeking
re-approval now for future years. The performance factors for re-approval by our shareholders include the factors listed below under Eligibility Under Section 162(m).
Summary of the Plan
The complete text of the Plan is attached to this Proxy Statement as Appendix A. The following is a summary of the key provisions of the Plan as proposed to be amended (including the material terms of the
performance goals for purposes of Section 162(m) of the IRC), and is qualified in its entirety by reference to Appendix A.
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Plan Term:
|
|
From March 26, 2013, the date the Plan was approved by our Board (the
Effective Date
) to March 26, 2023.
|
|
|
Eligible Participants:
|
|
Only employees, including officers and directors who are also employees, are eligible to receive grants of incentive stock options. All other awards may be granted to any of our
employees, directors, consultants, and independent contractors, provided that the grantee renders bona fide services to us. Our Compensation Committee determines which individuals will participate in the Plan. Currently, pursuant to the terms of the
Plan, there are approximately 1,295 employees and seven non-employee directors who are eligible to participate in the Plan.
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|
|
Shares Authorized:
|
|
There are currently (and without giving effect to the proposed amendment to increase the share reserve) 3,500,000 shares of common stock authorized under the Plan, plus 2,585,004
shares that were reserved, but not issued or not subject to outstanding grants under our 2009 Amended and Restated Long-Term Equity Compensation Plan, our 2006 Long-Term Incentive Plan, our 2004 Long-Term Incentive Plan and our 2003 Stock Option
Plan (collectively, the
Prior Plans
) on the Effective Date, and which were added to the Plan on the Effective Date pursuant to a pour over provision: plus (i) shares that are subject to Options or other awards
granted under the Prior Plans that cease to be subject to awards by forfeiture or otherwise after the Effective Date for any reason; (ii) shares issued
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62
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|
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|
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under the Prior Plans before or after the Effective Date pursuant to the exercise of Options or SARs that are, after the Effective
Date, forfeited; (iii) shares issued under the Prior Plans that are repurchased by us at the original issue price; and (iv) shares that are subject to Options or other awards granted under the Prior Plans that otherwise terminate without shares of
our common stock being issued, in each case, regardless of the type of award that could be issued with respect to such shares under the Prior Plans.
In addition, shares subject to awards, and shares issued under the Plan under any award, will again be available for grant and issuance under the Plan to
the extent such shares: (i) are subject to issuance upon exercise of an Option or SAR granted under the Plan but which cease to be subject to the Option or SAR for any reason other than exercise of the Option or SAR; (ii) are subject to awards
granted under the Plan that are forfeited or are repurchased by us at the original issue price; (iii) are subject to awards granted under the Plan that otherwise terminate without such shares being issued; or (iv) are surrendered pursuant to an
exchange program approved by our shareholders as required by the Plan.
The
following shares may not be used again for new awards: (i) any shares withheld to pay the exercise price or satisfy a tax withholding obligation in connection with any Option, SAR, restricted stock award, restricted stock unit, performance vesting
restricted stock award or performance vesting restricted stock unit; (ii) any shares not issued as a result of the net settlement of an Option, SAR, restricted stock award, restricted stock unit, performance vesting restricted stock award or
performance vesting restricted stock unit; or (iii) any shares we repurchase using Option exercise proceeds.
|
|
|
Award Types:
|
|
(1) Non-qualified and incentive stock options
(2) Restricted stock awards
(3) Stock bonus awards
(4) Stock appreciation rights
(5) Restricted stock units
(6) Performance vesting restricted stock awards
(7) Performance vesting restricted stock units
|
|
|
Full-Value Share Multiple for Determining the Number of Shares Available for Grant:
|
|
For purposes of determining the number of shares available for grant under the Plan against the maximum number of shares authorized, any full-value award (
i.e.
, anything
other than an Option or a SAR) reduces the number of shares available for issuance under the Plan by 1.55 shares.
|
|
|
Share Limit on Awards:
|
|
No more than one million (1,000,000) shares may be granted to any individual under the Plan during any calendar year, other than new employees, who are eligible to receive up to
two million (2,000,000) shares in the calendar year during which they begin employment. In addition, if a performance award is settled in cash, no participant may be eligible to receive more than five million dollars ($5,000,000) in any calendar
year. These limits are intended to ensure, together with certain performance vesting criteria discussed below, that awards that are intended to qualify under Section 162(m) of the IRC will qualify under such subsection. Failure to qualify under this
section might result in our inability to take a tax deduction for part of our performance-based compensation to senior executives.
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Award Terms:
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Options have a term no longer than ten years from the date the Options were granted, except in the case of incentive Options granted to holders of more than 10% of our voting
power, which have a term no longer than five years. Stock appreciation rights have a term no longer than ten years from the date they were granted.
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63
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Grants to Non-Employee Directors:
|
|
Currently, when a non-employee director joins the Board, he or she receives an initial grant of a fully vested Option to purchase 20,000 shares of common stock. Additionally,
each continuing non-employee director elected by the shareholders receives a grant of restricted shares of common stock with a value equal to such directors cash fees earned in the previous fiscal year. The restricted shares vest in full upon
the earlier of the one year from the date of grant or the date that is immediately prior to the date of our next annual shareholders meeting. A non-employee director may receive awards for no more than 150,000 shares per calendar
year.
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Repricing Prohibited:
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|
Repricing, or reducing the exercise price of outstanding Options or SARs, is prohibited without shareholder approval under the Plan. Such prohibited repricing includes canceling,
substituting, or exchanging outstanding Options or SARs in exchange for cash, other awards or Options or SARs with an exercise price that is less than the exercise price of the original Options or SARs, unless approved by
shareholders.
|
Terms Applicable to Stock Options and Stock Appreciation Rights
The exercise price of grants made under the Plan of Options or SARs may not be less than the fair market value which is the closing price
of our common stock as reported by NASDAQ on the trading day immediately prior to the date of grant.
On the record date, the
closing price of our common stock as reported by NASDAQ was $41.36 per share. The term of these awards may not be longer than ten years. Our Compensation Committee determines at the time of grant the other terms and conditions applicable to such
award, including vesting and exercisability.
Terms Applicable to Restricted Stock Awards, Restricted Stock Units,
Performance Vesting Restricted Stock Awards, Performance Vesting Restricted Stock Units and Stock Bonus Awards
Our
Compensation Committee determines the terms and conditions applicable to the granting of restricted stock awards, restricted stock units, performance vesting restricted stock awards, performance vesting restricted stock units and stock bonus awards.
Our Compensation Committee may make the grant, issuance, retention and/or vesting of restricted stock awards, restricted stock units, performance vesting restricted stock awards, performance restricted stock units and stock bonus awards contingent
upon continued employment with us, the passage of time, or such performance criteria and the level of achievement versus such criteria as it deems appropriate. Awards of performance vesting restricted stock or performance vesting restricted stock
units may be settled in shares or in cash.
Eligibility Under Section 162(m)
Awards may, but need not, include performance criteria that satisfy Section 162(m) of the IRC. To the extent that awards other than
Options or SARs are intended to qualify as performance-based compensation under Section 162(m), the performance criteria may include among other criteria, one of the following criteria, either individually, alternatively or in any
combination, applied to either Cray as a whole or to a business unit or subsidiary, either individually, alternatively, or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a
pre-established target, to previous years results or to a designated comparison group, in each case as specified by our Compensation Committee in the award:
64
|
|
|
Earnings (which may include earnings before interest and taxes, earnings before taxes, and net earnings);
|
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|
Controllable operating profit, or net operating profit;
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Operating expenses or operating expenses as a percentage of revenue;
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Total shareholder return;
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Return on assets or net assets;
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|
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The Companys stock price;
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Growth in shareholder value relative to a pre-determined index;
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Return on invested capital;
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Cash flow (including free cash flow or operating cash flows);
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Individual confidential business objectives;
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Contract awards or backlog;
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Overhead or other expense reduction;
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Strategic plan development and implementation;
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Succession plan development and implementation;
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Improvement in workforce diversity;
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New product invention or innovation;
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|
Attainment of research and development milestones;
|
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|
|
Improvements in productivity;
|
|
|
|
Attainment of objective operating goals and employee metrics;
|
|
|
|
Any other metric that is capable of measurement as determined by the Compensation Committee; and
|
|
|
|
Any sale or initial public offering of a Subsidiary or the Company.
|
65
To the extent that an award under the Plan is designated as a performance award,
but is not intended to qualify as performance-based compensation under Section 162(m), the performance criteria can include the achievement of strategic objectives as determined by the Board.
Notwithstanding satisfaction of any completion of any performance criteria described above, to the extent specified at the time of grant
of an award, the number of shares of common stock, number of shares subject to Options or other benefits granted, issued, retainable and/or vested under an award on account of satisfaction of performance criteria may be reduced by our Compensation
Committee on the basis of such further considerations as our Compensation Committee in its sole discretion determines. The Compensation Committee may, in its sole discretion, in recognition of unusual or non-recurring items such as
acquisition-related activities or changes in applicable accounting rules, provide for one or more equitable adjustments (based on objective standards) to the performance criteria to preserve the Compensation Committees original intent
regarding the performance criteria at the time of the initial award grant.
Transferability
Except as otherwise determined by the Board or the Compensation Committee, awards granted under the Plan may not be sold, pledged,
assigned, hypothecated, transferred or disposed of except by will or the laws of descent and distribution. No award may be made subject to execution, attachment or other similar process.
Administration
Our Compensation Committee administers the Plan. Subject to the terms and limitations expressly set forth in the Plan, our Compensation Committee selects the persons who receive awards, determines the
number of shares covered thereby, and, establishes the terms, conditions and other provisions of the grants. Our Compensation Committee may construe and interpret the Plan and prescribe, amend and rescind any rules and regulations relating to the
Plan. Our Compensation Committee may, to the extent permitted by applicable law, delegate to one or more executive officers pursuant to a specific delegation the authority to grant awards to Plan participants, so long as such participants are not
officers, members of our Board, or any other person who is subject to Section 16 of the Exchange Act and to take certain other actions with respect to participants who are not executive officers.
Amendments
The Board may terminate or amend the Plan at any time, provided that no action may be taken by the Board (except those described in Adjustments below) to the extent that shareholder approval
is required.
Adjustments
If the number of outstanding shares is changed by an extraordinary cash dividend, a stock dividend, recapitalization, spin-off, stock split, reverse stock split, subdivision, combination, reclassification
or similar change in our capital structure, without consideration, then (a) the number of shares reserved for issuance and future grant under the Plan, (b) the exercise prices or purchases prices, as applicable, of and number of shares
subject to outstanding awards, (c) the number of shares subject to other outstanding awards, (d) the maximum number of shares that may be issued as incentive stock options under the Plan, and (e) the maximum number of shares that may
be issued to an individual or to a new employee in any one calendar year under the Plan or to a non-employee director under the Plan shall be proportionately adjusted, subject to any required action by our board of directors or our shareholders and
in compliance with applicable securities laws. No fraction of a share will be issued following any adjustment.
66
Change in Control Transactions
The Plan does not provide for automatic single trigger acceleration upon a change in control transaction. In the event of a change in
control transaction, the Board shall determine the treatment of all outstanding awards and shares of common stock acquired under the Plan. All awards need not be treated similarly, and our Board will provide for one or more of the following with
respect to each award: (i) the continuation of the award; (ii) the assumption of the award; (iii) the substitution of the award; (iv) full vesting and exercisability of the award; or (v) or the payment of the excess of the
fair market value of the shares subject to the award over the exercise price or purchase price of such shares. Also, in the event that a successor or acquiring corporation (if any) refuses to continue, assume or substitute the awards, or replace the
awards with a payment, then any Option and/or SAR, and any Shares subject to any Option and/or SAR shall become fully exercisable and fully vested and/or all other Awards shall become fully vested contingent upon the consummation of such change in
control transaction.
In addition, awards granted to non-employee directors shall vest and become exercisable, if applicable,
in full upon a change in control transaction.
U.S. Tax Consequences
The following is a general summary as of the date of this Proxy Statement of the U.S. federal income tax consequences to us and
participants in the Plan. The federal tax laws may change and the federal, state and local tax consequences for any participant will depend upon his or her individual circumstances. Each participant has been, and is, encouraged to seek the advice of
a qualified tax advisor regarding the tax consequences of participation in the Plan.
Non-Qualified Stock Options
A participant will realize no taxable income at the time a non-qualified stock option is granted under the Plan, but
generally at the time such non-qualified stock option is exercised, the participant will realize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the Option exercise price. Upon a
disposition of such shares, the difference between the amount received and the fair market value on the date of exercise will generally be treated as a long-term or short-term capital gain or loss, depending on the holding period of the shares. We
will generally be entitled to a deduction for federal income tax purposes at the same time and in the same amount as the participant is considered to have realized ordinary income in connection with the exercise of the non-qualified stock option.
Incentive Stock Options
A participant will realize no taxable income at the time any incentive stock option is granted. If certain employment and holding period conditions are satisfied, then no taxable income will result upon
the exercise of such Option and we will not be entitled to any deduction in connection with the exercise of such Option. Upon disposition of the shares after expiration of the statutory holding periods, any gain realized by a participant will be
taxed as long-term capital gain and any loss sustained will be long-term capital loss, and we will not be entitled to a deduction in respect to such disposition. While no ordinary taxable income is recognized at exercise (unless there is a
disqualifying disposition, in the year of exercise see below), the excess of the fair market value of the shares over the Option exercise price is a preference item that is recognized for alternative minimum tax purposes.
Except in the event of death, if shares acquired by a participant upon the exercise of an incentive stock option are disposed of by such
participant before the expiration of two years from the date of the grant or one year from date of the exercise (
i.e.
, a disqualifying disposition), such participant will be considered to have realized as compensation taxed as
ordinary income in the year of such disposition an amount, not exceeding the
67
gain realized on such disposition, equal to the difference between the Option price and the fair market value of such shares on the date of exercise of such Option. Generally, any gain realized
on the disposition in excess of the amount treated as compensation or any loss realized on the disposition will constitute capital gain or loss, respectively. If a participant makes a disqualifying disposition, in the fiscal year of such
disqualifying disposition we will be allowed a deduction for federal income tax purposes in an amount equal to the compensation realized by such participant.
Stock Appreciation Rights
A grant of a SAR (which can be settled in
cash or our common stock) has no federal income tax consequences at the time of grant. Upon the exercise of SARs, the value received is generally taxable to the recipient as ordinary income, and we generally will be entitled to a corresponding tax
deduction.
Restricted Stock Awards
A participant receiving restricted stock awards pursuant to the Plan pays tax when the restrictions lapse (
i.e.
, they become vested), unless a participant makes an election under Section 83(b)
of the IRC, in which case the participant will be taxed in the calendar year of the grant. The value of the award for tax purposes is the excess of the fair market value of the shares at that time over the amount (if any) paid for the shares. This
value is taxed as ordinary income and is subject to income tax withholding. We receive a tax deduction at the same time and for the same amount taxable to the participant.
Restricted Stock Units
In general, no taxable income is realized
upon the grant of a restricted stock unit. The participant will include in ordinary income the fair market value of the award of stock at the time shares of stock are delivered to the participant. We will be entitled to a tax deduction at the time
and in the amount that the participant recognizes ordinary income.
Performance Vesting Restricted Stock Awards and
Performance Vesting Restricted Stock Units
Similar to restricted stock units and restricted stock awards, no taxable
income is realized upon the grant of performance vesting restricted stock awards or performance vesting restricted stock units. The participant will include in ordinary income the fair market value of the award of stock or the award of cash at the
time shares of stock or cash are delivered to the participant. We will be entitled to a tax deduction at the time and in the amount that the participant recognizes ordinary income. Performance vesting restricted stock awards and performance vesting
restricted stock units usually vest upon the achievement of metrics established by the Board.
ERISA Information
The plan is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended.
Plan Benefits
Future awards under the Plan to executive officers, employees or other eligible participants are discretionary and cannot be determined at this time.
68
History of Grants Under the Plan
Our Chief Executive Officer, other Named Executive Officers, current executive officers as a group, current non-employee directors as a
group and employees (excluding executive officers and directors) as a group have been granted equity awards under the Plan, over the life of the Plan, through April 8, 2016, as follows:
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|
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Name and Position
|
|
Number of
Underlying
Awards
|
|
Peter J. Ungaro, President and Chief Executive Officer
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|
|
385,700
|
|
Brian C. Henry, Executive Vice President and Chief Financial Officer
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|
|
195,600
|
|
Michael C. Piraino, Senior Vice President Administration, General Counsel and Corporate Secretary
|
|
|
145,600
|
|
Steven L. Scott, Senior Vice President and Chief Technology Officer
|
|
|
168,600
|
|
Margaret A. Williams, Senior Vice President, Research and Development
|
|
|
96,600
|
|
All executive officers * (9 persons)
|
|
|
1,427,900
|
|
All non-employee directors (6 persons)
|
|
|
69,912
|
|
All employees (excluding executive officers)
|
|
|
1,753,374
|
|
*
|
Includes Messrs. Ungaro, Henry, Fairchild, Morreale, Piraino and Waite and Drs. Bolding, Scott and Williams as our executive officers as of April 8, 2016.
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Equity Compensation Plan Information
The following table provides information as of December 31, 2015, with respect to compensation plans under which shares of our common
stock are authorized for issuance, including plans previously approved by our shareholders and plans not previously approved by our shareholders.
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|
|
|
|
|
|
Plan Category
|
|
Number of Shares
of
Common Stock to be
Issued Upon
Exercise of
Outstanding Options
|
|
|
Weighted-Average
Exercise Price of
Outstanding Options
|
|
|
Number of Shares
of
Common Stock Available
for Future Issuance
Under
Equity Compensation
Plans (excluding shares
reflected in 1st
column)
|
|
Equity compensation plans approved by shareholders(1)
|
|
|
1,909,819
|
|
|
$
|
15.02
|
|
|
|
1,791,731
|
|
Equity compensation plans not approved by shareholders(2)
|
|
|
38,656
|
|
|
$
|
5.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,948,475
|
|
|
|
|
|
|
|
1,791,731
|
|
(1)
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The shareholders approved our 1995, 1999 and 2003 stock option plans, our 2004, 2006 and 2009 long-term equity compensation plans, our 2013 equity
incentive plan and our 2001 employee stock purchase plan, as amended. Our 1995, 1999 and 2003 stock option plans and our 2004, 2006 and 2009 long-term equity compensation plans have terminated and no more options, restricted shares, restricted units
or stock bonus awards may be granted under those plans. Pursuant to the 2013 equity incentive plan, incentive options may be granted to employees (including officers) and nonqualified options may be granted to employees, officers, directors, agents
and consultants with exercise prices at least equal to the fair market value of the underlying common stock at the time of grant. While our Board of Directors may grant options with varying vesting periods under these plans, most options granted to
employees vest over four years, with 25% of the options vesting after one year and the remaining options vesting monthly over the next three years, and most option grants to non-employee directors vesting immediately. Also pursuant to the 2013
equity incentive plan, our Board of Directors may grant restricted stock awards, stock bonus awards, stock appreciation rights, restricted stock units, performance vesting restricted stock awards and performance vesting restricted stock units to
employees, directors, consultants, independent contractors and advisors. As of December 31, 2015, under the 2013 equity incentive plan, an aggregate of 1,791,731 shares remained available for grant as stock options or
|
69
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stock appreciation rights and an aggregate of 1,155,955 shares were available for restricted stock awards, stock bonus awards, restricted stock units, performance vesting restricted stock awards
or performance vesting restricted stock units to employees, directors, consultants, independent contractors and advisors.
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(2)
|
The shareholders did not approve the 2000 non-executive employee stock option plan. Under the 2000 non-executive employee stock option plan approved by our Board of
Directors on March 30, 2000, an aggregate of 1,500,000 shares pursuant to non-qualified options could be issued to employees, agents and consultants but not to officers or directors. Otherwise, the 2000 non-executive employee stock option plan
is similar to the stock option plans described in footnote (1) above. On March 30, 2010, the 2000 non-executive employee stock option plan was terminated, which ended future grants but did not affect then outstanding options. As of
December 31, 2015, under the 2000 non-executive employee stock plan, we had options for 38,656 shares outstanding.
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To be approved, Proposal No. 3 requires the affirmative vote of the majority of the shares of our common stock entitled to vote and present in person or represented by proxy at the Annual Meeting and
who vote for or against the proposal.
Board Recommendation:
The Board recommends that
you vote
FOR
Proposal 3 to approve the amendment and restatement of the Plan and to re-approve the performance factors under the Plan for purposes of Section 162(m) of the IRC.
Proposal 4: Advisory Vote on the Compensation of Our Named Executive Officers
We are asking our shareholders to vote, on an advisory or non-binding basis, to approve the compensation of our Named Executive Officers
as disclosed pursuant to the Compensation Discussion and Analysis beginning on page 23, the tabular disclosure regarding such compensation, and the accompanying narrative disclosure in this Proxy Statement. This proposal, commonly known
as a say-on-pay proposal, gives our shareholders the opportunity to express their views on the compensation of our Named Executive Officers. As described in detail under the heading Compensation Discussion and Analysis, our
executive compensation programs are designed to align the interests of our executive officers with those of our shareholders, as well as attract, motivate, and retain key employees who are critical to our success. Under these programs, our executive
officers, including our Named Executive Officers, are motivated to achieve specific financial and strategic objectives that are expected to increase shareholder value. Please read the Compensation Discussion and Analysis and the
accompanying tables and narrative discussion for additional details about our executive compensation programs, including information about the 2015 compensation of our Named Executive Officers.
Recommendation
We are
asking for shareholder approval of the compensation of our Named Executive Officers as described in this Proxy Statement by voting in favor of the resolution set forth below. This vote is not intended to address any specific item of compensation,
but rather the overall compensation of our Named Executive Officers and the policies and practices described in this Proxy Statement.
RESOLVED, that the shareholders approve, in a non-binding vote, the compensation of the Companys Named Executive Officers as disclosed pursuant to the Compensation Discussion and Analysis
section, the tabular disclosure regarding such compensation, and the accompanying narrative disclosure set forth in the Proxy Statement relating to the Companys 2016 Annual Meeting of Shareholders.
Even though this say-on-pay vote is advisory and therefore will not be binding on us, we value the opinions of our shareholders.
Accordingly, to the extent there is a significant vote against the compensation of our Named Executive Officers, we will consider our shareholders concerns and the Compensation Committee will evaluate what actions may be necessary or
appropriate to address those concerns.
Board Recommendation:
The Board recommends that you vote
FOR
Proposal 4 to approve of the compensation of our Named Executive Officers, as disclosed in this Proxy Statement.
70
OTHER BUSINESS DISCRETIONARY AUTHORITY
While the Notice of 2016 Annual Meeting of Shareholders provides for the transaction of all other business that may properly come before
the Annual Meeting, including any adjournments or postponements of the Annual Meeting, the Board knows of no matters to be brought before the Annual Meeting other than those referred to in this Proxy Statement. If, however, other matters are
properly presented at the Annual Meeting, the individuals appointed as proxies will vote your shares as they determine in their discretion to be advisable.
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, including consolidated financial statements and schedules, forms a part of our 2015 Annual Report that was provided to
shareholders with this Proxy Statement. The Annual Report is available on our website:
www.cray.com
under
Company
Company Information Investors Proxy Materials.
Additional copies of
the 2015 Annual Report on Form 10-K may be obtained without charge by writing to Ruby H. Alexander, Assistant Corporate Secretary, Cray Inc., 901 Fifth Avenue, Suite 1000, Seattle, WA 98164.
By order of the Board of Directors,
Michael C. Piraino
Corporate Secretary
Seattle, Washington
April 25, 2016
71
APPENDIX A
CRAY INC.
2013 EQUITY INCENTIVE PLAN
(as adopted March 26, 2013)
(as amended and restated
, 2016)
1.
PURPOSE
. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the
Company, and any Parents and Subsidiaries that exist now or in the future, by offering them an opportunity to participate in the Companys future performance through the grant of Awards. Capitalized terms not defined elsewhere in the text are
defined in Section 26.
2.
SHARES SUBJECT TO THE PLAN
.
2.1
Number of Shares Available
. Subject to Sections 2.5 and 20 and any other applicable provisions hereof, the total number of
Shares reserved and available for grant and issuance pursuant to this Plan is Six Million (6,000,000) Shares plus (i) any reserved shares not issued or not subject to outstanding grants under the Companys 2009 Amended and Restated
Long-Term Equity Compensation Plan, the Companys 2006 Long-Term Incentive Plan, the Companys 2004 Long-Term Incentive Plan or the Companys 2003 Stock Option Plan, collectively, (the
Prior Plans
) on the
Effective Date (as defined below); (ii) shares that are subject to options or other awards granted under the Prior Plans that cease to be subject to Awards by forfeiture or otherwise after the Effective Date for any reason; (iii) shares
issued under the Prior Plans before or after the Effective Date pursuant to the exercise of options or stock appreciation rights that are, after the Effective Date, forfeited, (iv) shares issued under the Prior Plans that are repurchased by the
Company at the original issue price; and (v) shares that are subject to options or other awards granted under the Prior Plans that otherwise terminate without shares being issued, in each case, regardless of the type of award that could be
issued with respect to such shares under the Prior Plans. Any Award other than an Option or a SAR granted with respect to such shares shall reduce the number of Shares available for issuance by 1.55 Shares. Awards issued as an Option or a SAR shall
reduce the number of Shares available for issuance by the number of Shares underlying the Award, regardless of the number of Shares actually issued upon exercise of the Award. The Company may issue Shares that are authorized but unissued shares
pursuant to the Awards granted under the Plan. The Company will reserve and keep available a sufficient number of Shares to satisfy the requirements of all outstanding Awards granted under the Plan.
2.2
Lapsed, Returned Awards
. Subject to Section 20 hereof, Shares subject to Awards, and Shares issued under the Plan under
any Award, will again be available for grant and issuance in connection with subsequent Awards under this Plan to the extent such Shares: (a) are subject to issuance upon exercise of an Option or SAR granted under this Plan but which cease to
be subject to the Option or SAR for any reason other than exercise of the Option or SAR; (b) are subject to Awards granted under this Plan that are forfeited or are repurchased by the Company at the original issue price; (c) are subject to
Awards granted under this Plan that otherwise terminate without such Shares being issued; or (d) are surrendered pursuant to an Exchange Program. The following Shares may not again be made available for future grant and issuance as Awards under
the Plan: (i) Shares that are withheld to pay the exercise or purchase price of an Award or to satisfy any tax withholding obligations in connection with an Option or SAR, (ii) Shares not issued or delivered as a result of the net
settlement of an outstanding Option or SAR or (iii) shares of the Companys Common Stock repurchased on the open market with the proceeds of an Option exercise price. To the extent that a Performance Award in the form of a cash bonus has
been made, such Award will not reduce the number of Shares available for issuance under the Plan. To the extent that any Award other than an Option or a SAR is forfeited, repurchased or terminates without Shares being issued pursuant to this
Section 2.2, Shares may again be available for issuance under this Plan at the rate of 1.55 Shares for every such Share returned to the Plan.
A-1
2.3
Minimum Share Reserve
. At all times the Company shall reserve and keep available
a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Awards granted under this Plan.
2.4
Limitations
. No more than 10,000,000 Shares shall be issued pursuant to the exercise of ISOs.
2.5
Adjustment of Shares
. If the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company, without consideration, then (a) the number of Shares reserved for issuance and future grant under the Plan set forth in Sections 2.1 or 2.2, (b) the Exercise Prices of and number of
Shares subject to outstanding Options and SARs, (c) the number of Shares subject to other outstanding Awards, (d) the maximum number of shares that may be issued as ISOs set forth in Section 2.4, (e) the maximum number of Shares
that may be issued to an individual or to a new Employee in any one calendar year set forth in Section 3, and (f) the number of Shares that are granted as Awards to Non-Employee Directors as set forth in Section 12, shall be
proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and in compliance with applicable securities laws; provided that fractions of a Share will not be issued.
3.
ELIGIBILITY
. ISOs may be granted only to Employees. All other Awards may be granted to Employees, Consultants, Directors
and Non-Employee Directors of the Company or any Parent or Subsidiary of the Company;
provided
such Consultants, Directors and Non-Employee Directors render bona fide services not in connection with the offer and sale of securities in a
capital-raising transaction. No Participant will be eligible to receive more than 1,000,000 Shares in any calendar year under this Plan pursuant to the grant of Awards except that new Employees of the Company or a Parent or Subsidiary of the Company
(including new Employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company) are eligible to receive up to a maximum of 2,000,000 Shares in the calendar year in which they commence their employment.
4.
ADMINISTRATION
.
4.1
Committee Composition; Authority
. This Plan will be administered by the Committee or by the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan,
and to the direction of the Board, the Committee will have full power to implement and carry out this Plan, except, however, the Board shall establish the terms for the grant of an Award to Non-Employee Directors. The Committee will have the
authority to:
(a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant
to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Awards may vest and be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating
thereto, based in each case on such factors as the Committee will determine;
(e) determine the number of Shares or other
consideration subject to Awards;
(f) determine the Fair Market Value in good faith and interpret the applicable provisions
of this Plan and the definition of Fair Market Value in connection with circumstances that impact the Fair Market Value, if necessary;
A-2
(g) determine whether Awards will be granted singly, in combination with, in tandem with,
in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;
(h) grant waivers of Plan or Award conditions;
(i) determine the vesting,
exercisability and payment of Awards;
(j) correct any defect, supply any omission or reconcile any inconsistency in this
Plan, any Award or any Award Agreement;
(k) determine whether an Award has been earned;
(l) subject to Section 8, determine the terms and conditions of any, and to institute any Exchange Program;
(m) reduce or waive any criteria with respect to Performance Factors;
(n) adjust Performance Factors to take into account changes in law and accounting or tax rules as the Committee deems necessary or
appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code with
respect to persons whose compensation is subject to Section 162(m) of the Code
(o) adopt terms and conditions, rules
and/or procedures (including the adoption of any subplan under this Plan) relating to the operation and administration of the Plan to accommodate requirements of local law and procedures outside of the United States;
(p) make all other determinations necessary or advisable for the administration of this Plan; and
(q) delegate any of the foregoing as permitted by applicable law to one or more executive officers pursuant to a specific delegation, in
which case references to Committee in this Section 4.1 will refer to such delegate(s), except with respect to Insiders.
4.2
Committee Interpretation and Discretion
. Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in
contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. Any dispute regarding the interpretation of
the Plan or any Award Agreement shall be submitted by the Participant or the Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and the Participant. The Committee may
delegate to one or more executive officers the authority to review and resolve disputes with respect to Awards held by Participants who are not Insiders, in which case references to Committee in this Section 4.2 will refer to such
delegate(s), and such resolution shall be final and binding on the Company and the Participant.
4.3
Section 162(m) of
the Code and Section 16 of the Exchange Act
. When necessary or desirable for an Award to qualify as performance-based compensation under Section 162(m) of the Code the Committee shall include at least two persons who are
outside directors (as defined under Section 162(m) of the Code) and at least two (or a majority if more than two then serve on the Committee) such outside directors shall approve the grant of such Award and timely
determine (as applicable) the Performance Period and any Performance Factors upon which vesting or settlement of any portion of such Award is to be subject. When required by Section 162(m) of the Code, prior to settlement of any such Award at
least two (or a majority if more than two
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then serve on the Committee) such outside directors then serving on the Committee shall determine and certify in writing the extent to which such Performance Factors have been timely
achieved and the extent to which the Shares subject to such Award have thereby been earned. Awards granted to Participants who are subject to Section 16 of the Exchange Act must be approved by two or more non-employee directors (as
defined in the regulations promulgated under Section 16 of the Exchange Act).With respect to Participants whose compensation is subject to Section 162(m) of the Code, and provided that such adjustments are consistent with the regulations
promulgated under Section 162(m) of the Code, the Committee may adjust the performance goals to account for changes in law and accounting and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of
extraordinary or unusual items, events or circumstances to avoid windfalls or hardships, including without limitation (i) restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (ii) an
event either not directly related to the operations of the Company or not within the reasonable control of the Companys management, or (iii) a change in accounting standards required by generally accepted accounting principles.
4.4
Documentation
. The Award Agreement for a given Award, the Plan and any other documents may be delivered to, and
accepted by, a Participant or any other person in any manner (including electronic distribution or posting) that meets applicable legal requirements.
5.
OPTIONS
. The Committee may grant Options to Participants and will determine whether such Options will be Incentive Stock Options within the meaning of the Code
(
ISOs
) or Nonqualified Stock Options (
NQSOs
), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may vest and be exercised, and all
other terms and conditions of the Option, subject to the following:
5.1
Option Grant
. Each Option granted under this
Plan will identify the Option as an ISO or an NQSO. An Option may be, but need not be, awarded upon satisfaction of such Performance Factors during any Performance Period as are set out in advance in the Participants individual Award
Agreement. If the Option is being earned upon the satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for each Option; and (y) select from among the
Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and Participants may participate simultaneously with respect to Options that are subject to different performance goals and other criteria.
5.2
Date of Grant
. The date of grant of an Option will be the date on which the Committee makes the determination to
grant such Option, or a specified future date. The Award Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option.
5.3
Exercise Period
. Options may be exercisable within the times or upon the conditions as set forth in the Award Agreement
governing such Option;
provided
,
however
, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and
provided further
that no ISO granted to a person who, at the time
the ISO is granted, directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company (
Ten Percent
Stockholder
) will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or
otherwise, in such number of Shares or percentage of Shares as the Committee determines.
5.4
Exercise Price
. The
Exercise Price of an Option will be determined by the Committee when the Option is granted; provided that: (i) the Exercise Price of an Option will be not less than one hundred percent (100%) of the Fair Market Value of the Shares on the
date of grant and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than one hundred ten percent (110%) of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased
may be made in accordance with Section 11 and the Award Agreement and in accordance with any procedures established by the Company.
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5.5
Method of Exercise
. Any Option granted hereunder will be exercisable according to
the terms of the Plan and at such times and under such conditions as determined by the Committee and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share. An Option will be deemed exercised when the Company
receives: (i) notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together
with applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the
name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a
stockholder will exist with respect to the Shares, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the Shares are issued, except as provided in Section 2.5 of the Plan. Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is exercised.
5.6
Termination of
Participant
. Except as may be set forth in the Participants Award Agreement, vesting ceases on such Participants Termination Date (unless determined otherwise by the Committee). The exercise of an Option will be subject to the
following (except as may be otherwise provided in an Award Agreement):
(a) If the Participant is Terminated for any reason
except for Cause or the Participants death or Disability, then the Participant may exercise such Participants Options only to the extent that such Options would have been exercisable by the Participant on the Termination Date no later
than three (3) months after the Termination Date (or such shorter time period or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination
Date deemed to be the exercise of an NQSO), but in any event no later than the expiration date of the Options.
(b) If the
Participant is Terminated because of the Participants death (or the Participant dies within three (3) months after a Termination other than for Cause or because of the Participants Disability), then the Participants Options
may be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participants legal representative, or authorized assignee, no later than twelve
(12) months after the Termination Date (or such shorter time period not less than six (6) months or longer time period not exceeding five (5) years as may be determined by the Committee), but in any event no later than the expiration
date of the Options.
(c) If the Participant is Terminated because of the Participants Disability, then the
Participants Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant (or the Participants legal representative or
authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter time period not less than six (6) months or longer time period not exceeding five (5) years as may be determined by the Committee), with
any exercise beyond (a) three (3) months after the Termination Date when the Termination is for a Disability that
is not
a permanent and total disability as defined in Section 22(e)(3) of the Code, or
(b) twelve (12) months after the Termination Date when the Termination is for a Disability that
is
a permanent and total disability as defined in Section 22(e)(3) of the Code, deemed to be exercise of an NQSO, but
in any event no later than the expiration date of the Options.
(d) If the Participant is terminated for Cause, then
Participants Options shall expire on such Participants Termination Date, or at such later time and on such conditions as are determined by the Committee, but in any no event later than the expiration date of the Options. Unless otherwise
provided in the Award Agreement, Cause will have the meaning set forth in the Plan.
5.7
Limitations on Exercise
. The
Committee may specify a minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent any Participant from exercising the Option for the full number of Shares for which it is then
exercisable.
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5.8
Limitations on ISOs
. With respect to Awards granted as ISOs, to the extent that
the aggregate Fair Market Value of the Shares with respect to which such ISOs are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand
dollars ($100,000), such Options will be treated as NQSOs. For purposes of this Section 5.8, ISOs will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the
Option with respect to such Shares is granted. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date to provide for a different limit on the Fair Market Value of Shares permitted to be subject to
ISOs, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.
5.9
Modification, Extension or Renewal
. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action
may not, without the written consent of a Participant, impair any of such Participants rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with
Section 424(h) of the Code. Subject to Section 8 of this Plan, by written notice to affected Participants, the Committee may reduce the Exercise Price of outstanding Options without the consent of such Participants;
provided
,
however
, that the Exercise Price may not be reduced below the Fair Market Value on the date the action is taken to reduce the Exercise Price.
5.10
Delegation
. The Committee may, to the extent permitted by applicable law, delegate to one or more executive officers pursuant to a specific delegation the authority to grant Options to
Participants other than Insiders, subject to the foregoing provisions of this Section 5 (substituting references to the Committee by the Committees delegate(s) as the context requires).
5.11
No Disqualification
. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be
interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO
under Section 422 of the Code.
6.
RESTRICTED STOCK AND OTHER STOCK AWARDS
.
6.1
Awards of Restricted Stock
. A Restricted Stock Award is an offer by the Company to sell to a Participant Shares that are
subject to restrictions (
Restricted Stock
) or not subject to restrictions (
Stock Bonus Award
). The Committee will determine to whom an offer will be made, the number of Shares the Participant may
purchase, the Purchase Price, if any, the restrictions under which the Shares will be subject and all other terms and conditions of the Restricted Stock Award or Stock Bonus Award, subject to the Plan.
6.2
Restricted Stock Purchase Agreement
. All purchases under a Restricted Stock Award or Stock Bonus Award will be evidenced by an
Award Agreement. Except as may otherwise be provided in an Award Agreement, a Participant accepts an Award by signing and delivering to the Company an Award Agreement with full payment of the Purchase Price, within thirty (30) days from the
date the Award Agreement was delivered to the Participant. If the Participant does not accept such Award within thirty (30) days, then the offer of such Award may be terminated by the Company, unless the Committee determines otherwise.
6.3
Purchase Price
. The Purchase Price, if any, for a Restricted Stock Award or Stock Bonus Award will be determined
by the Committee and may be zero. Payment of the Purchase Price must be made in accordance with Section 11 of the Plan, and the Award Agreement, and the Award Agreement and in accordance with any procedures established by the Company.
6.4
Terms of Restricted Stock Awards
. Restricted Stock Awards will be subject to such restrictions as the Committee
may impose or are required by law. These restrictions may be based on completion of a specified number of years of service with the Company or upon completion of Performance Factors, if any, during any
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Performance Period as set out in advance in the Participants Award Agreement. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, length and
starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the
Participant. Performance Periods may overlap and a Participant may participate simultaneously with respect to Restricted Stock Awards that are subject to different Performance Periods and having different performance goals and other criteria.
6.5
Termination of Participant
. Except as may be set forth in the Participants Award Agreement, vesting ceases
on such Participants Termination Date (unless determined otherwise by the Committee).
6.6
Delegation
. The
Committee may, to the extent permitted by applicable law, delegate to one or more executive officers pursuant to a specific delegation the authority to grant Restricted Stock Awards or Stock Bonus Awards to Participants other than Insiders, subject
to the foregoing provisions of this Section 6 (substituting references to the Committee by the Committees delegate(s) as the context requires).
7.
STOCK APPRECIATION RIGHTS
.
7.1
Awards of SARs
. A Stock Appreciation Right (
SAR
) is an award to a Participant that may be settled in cash or Shares, having a value equal to (a) the difference
between the Fair Market Value on the date of exercise over the Exercise Price multiplied by (b) the number of Shares with respect to which the SAR is being settled (subject to any maximum number of Shares that may be issuable as specified in an
Award Agreement). All SARs shall be made pursuant to an Award Agreement.
7.2
Terms of SARs
. The Committee will
determine the terms of each SAR including, without limitation: (a) the number of Shares subject to the SAR; (b) the Exercise Price and the time or times during which the SAR may be settled; (c) the consideration to be distributed on
settlement of the SAR; and (d) the effect of the Participants Termination on each SAR. The Exercise Price of the SAR will be determined by the Committee when the SAR is granted, and may not be less than Fair Market Value. A SAR may be
awarded upon satisfaction of Performance Factors, if any, during any Performance Period as are set out in advance in the Participants individual Award Agreement. If the SAR is being earned upon the satisfaction of Performance Factors, then the
Committee will: (x) determine the nature, length and starting date of any Performance Period for each SAR; and (y) select from among the Performance Factors to be used to measure the performance, if any. Performance Periods may overlap and
Participants may participate simultaneously with respect to SARs that are subject to different Performance Factors and other criteria.
7.3
Exercise Period and Expiration Date
. A SAR will be exercisable within the times or upon the occurrence of events determined by the Committee and set forth in the Award Agreement governing such
SAR. The SAR Agreement shall set forth the expiration date; provided that no SAR will be exercisable after the expiration of ten (10) years from the date the SAR is granted. The Committee may also provide for SARs to become exercisable at one
time or from time to time, periodically or otherwise (including, without limitation, upon the attainment during a Performance Period of performance goals based on Performance Factors), in such number of Shares or percentage of the Shares subject to
the SAR as the Committee determines. Except as may be set forth in the Participants Award Agreement, vesting ceases on such Participants Termination Date (unless determined otherwise by the Committee). Notwithstanding the foregoing, the
rules of Section 5.6 also will apply to SARs.
7.4
Form of Settlement
. Upon exercise of a SAR, a Participant will
be entitled to receive payment from the Company in an amount determined by multiplying (i) the difference between the Fair Market Value of a Share on the date of exercise over the Exercise Price; times (ii) the number of Shares with
respect to which the SAR is exercised. At the discretion of the Committee, the payment from the Company for the SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. The portion of a SAR being settled
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may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee determines, provided that the terms of the SAR and any deferral satisfy the
requirements of Section 409A of the Code.
7.5
Termination of Participation
. Except as may be set forth in the
Participants Award Agreement, vesting ceases on such Participants Termination Date (unless determined otherwise by the Committee).
7.6
Delegation
. The Committee may, to the extent permitted by applicable law, delegate to one or more executive officers pursuant to a specific delegation the authority to grant SARs to
Participants other than Insiders, subject to the foregoing provisions of this Section 7 (substituting references to the Committee by the Committees delegate(s) as the context requires).
8.
REPRICING; EXCHANGE AND BUYOUT OF AWARDS
. The repricing of Options or SARs is not permitted without prior stockholder
approval. Repricing is defined as the terms of outstanding awards may not be amended to reduce the exercise price of outstanding Options or SARs or cancel, substitute, buyout or exchange outstanding Options or SARs in exchange for cash, other Awards
or Options or SARs with an exercise price that is less than the exercise price of the original Options or SARs. The Committee may, at any time or from time to time authorize the Company, in the case of an Option or SAR exchange with stockholder
approval, and with the consent of the respective Participants (unless not required pursuant to Section 5.9 of the Plan), to pay cash or issue new Awards in exchange for the surrender and cancellation of any, or all, outstanding Awards.
9.
RESTRICTED STOCK UNITS
.
9.1
Awards of Restricted Stock Units
. A Restricted Stock Unit (
RSU
) is an award to a Participant covering a number of Shares that may be settled in cash, or by issuance of
those Shares. All RSUs shall be made pursuant to an Award Agreement.
9.2
Terms of RSUs
. The Committee will determine
the terms of an RSU including, without limitation: (a) the number of Shares subject to the RSU; (b) the time or times during which the RSU may be settled; (c) the consideration to be distributed on settlement; and (d) the effect
of the Participants Termination on each RSU. An RSU may be awarded upon satisfaction of such performance goals based on Performance Factors (if any) during any Performance Period as are set out in advance in the Participants Award
Agreement. If the RSU is being earned upon satisfaction of Performance Factors, then the Committee will: (x) determine the nature, length and starting date of any Performance Period for the RSU; (y) select from among the Performance
Factors to be used to measure the performance, if any; and (z) determine the number of Shares deemed subject to the RSU. Performance Periods may overlap and participants may participate simultaneously with respect to RSUs that are subject to
different Performance Periods and different performance goals and other criteria.
9.3
Form and Timing of Settlement
.
Payment of earned RSUs shall be made as soon as practicable after the date(s) determined by the Committee and set forth in the Award Agreement. The Committee, in its sole discretion, may settle earned RSUs in cash, Shares, or a combination of both.
The Committee may also permit a Participant to defer payment under a RSU to a date or dates after the RSU is earned provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of the Code.
9.4
Termination of Participant
. Except as may be set forth in the Participants Award Agreement, vesting ceases on such
Participants Termination Date (unless determined otherwise by the Committee).
9.5
Delegation
. The Committee may,
to the extent permitted by applicable law, delegate to one or more executive officers pursuant to a specific delegation the authority to grant RSUs to Participants other than Insiders, subject to the foregoing provisions of this Section 9
(substituting references to the Committee by the Committees delegate(s) as the context requires).
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10.
PERFORMANCE AWARDS
.
10.1
Performance Awards
. A Performance Award is an award to a Participant of a cash bonus or a Performance Share bonus. Grants of
Performance Awards shall be made pursuant to an Award Agreement.
10.2
Terms of Performance Awards
. The Committee will
determine, and each Award Agreement will set forth, the terms of each award of Performance Award including, without limitation: (a) the amount of any cash bonus; (b) the number of Shares deemed subject to a Performance Share bonus;
(c) the Performance Factors and Performance Period that shall determine the time and extent to which each Performance Award will be settled; (d) the consideration to be distributed on settlement; and (e) the effect of the
Participants Termination on each Performance Award. In establishing Performance Factors and the Performance Period the Committee will: (x) determine the nature, length and starting date of any Performance Period; and (y) select from
among the Performance Factors to be used. Prior to settlement the Committee shall determine the extent to which Performance Awards have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to
Performance Awards that are subject to different Performance Periods and different performance goals and other criteria. No Participant will be eligible to receive more than five million dollars ($5,000,000) in Performance Awards in any calendar
year under this Plan.
10.3
Value, Earning and Timing of Performance Shares
. Any Performance Share bonus will have an
initial value equal to the Fair Market Value of a Share on the date of grant. After the applicable Performance Period has ended, the holder of a Performance Share bonus will be entitled to receive a payout of the number of Shares earned by the
Participant over the Performance Period, to be determined as a function of the extent to which the corresponding Performance Factors or other vesting provisions have been achieved. The Committee, in its sole discretion, may pay an earned Performance
Share bonus in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Shares at the close of the applicable Performance Period) or in a combination thereof. Performance Share bonuses may
also be settled in Restricted Stock.
10.4
Termination of Participant
. Except as may be set forth in the
Participants Award Agreement, vesting ceases on such Participants Termination Date (unless determined otherwise by the Committee).
10.5
Delegation
. The Committee may, to the extent permitted by applicable law, delegate to one or more executive officers pursuant to a specific delegation the authority to grant Performance Awards
to Participants other than Insiders, subject to the foregoing provisions of this Section 10 (substituting references to the Committee by the Committees delegate(s) as the context requires).
11.
PAYMENT FOR SHARE PURCHASES
. Payment from a Participant for Shares purchased pursuant to this Plan may be made in cash
or by check or, where expressly approved for the Participant by the Committee and where permitted by law (and to the extent not otherwise set forth in the applicable Award Agreement):
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares of the Company held by the Participant that have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Award will be exercised or settled;
(c) by waiver of compensation
due or accrued to the Participant for services rendered or to be rendered to the Company or a Parent or Subsidiary of the Company;
(d) by consideration received by the Company pursuant to a broker-assisted or other form of cashless exercise program implemented by the Company in connection with the Plan;
(e) by any combination of the foregoing; or
(f) by any other method of payment as is permitted by applicable law.
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12.
GRANTS TO NON-EMPLOYEE DIRECTORS
.
12.1
Types of Awards
. Non-Employee Directors are eligible to receive any type of Award offered under this Plan except ISOs;
provided, that no such Award shall exceed 150,000 Shares in any one fiscal year. Awards pursuant to this Section 12 may be automatically made pursuant to policy adopted by the Board, or made from time to time as determined in the discretion of
the Board.
12.2
Eligibility
. Awards pursuant to this Section 12 shall be granted only to Non-Employee Directors.
A Non-Employee Director who is elected, re-elected or appointed as a member of the Board will be eligible to receive an Award under this Section 12.
12.3
Vesting, Exercisability and Settlement
. Except as set forth in Section 20, Awards shall vest, become exercisable and be settled as determined by the Board. With respect to Options and
SARs, the exercise price granted to Non-Employee Directors shall not be less than the Fair Market Value of the Shares at the time that such Option or SAR is granted.
12.4
Election to Receive Awards in Lieu of Cash
. A Non-Employee Director may elect to receive his or her annual retainer payments and/or meeting fees from the Company in the form of cash or Awards
or a combination thereof, as determined by the Committee. Such Awards will be issued under the Plan. An election under this Section 12.4 shall be filed with the Company on the form prescribed by the Company.
13.
WITHHOLDING TAXES
.
13.1
Withholding Generally
. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company, or to the Parent or
Subsidiary employing the Participant, an amount sufficient to satisfy applicable U.S. federal, state, local and international withholding tax requirements or any other tax liability legally due from the Participant prior to the delivery of Shares
pursuant to exercise or settlement of any Award. Whenever payments in satisfaction of Awards granted under this Plan are to be made in cash, such payment will be net of an amount sufficient to satisfy applicable U.S. federal, state, local and
international withholding tax requirements or any other tax liability legally due from the Participant.
13.2
Stock
Withholding
. No election under Section 83(b) of the Code will be available or permitted with respect to any of the Restricted Stock and any income recognized as a result of receiving the Restricted Stock will be treated as ordinary
compensation income subject to federal, state and local income, employment and other tax withholding. At the election of the Committee and without further consent from Participant, upon the vesting of any Award, the Company will either
(1) retain and cancel or (2) sell pursuant to a sell to cover mandatory sale arranged by the Company (on Participants behalf), that number of Shares having an aggregate Fair Market Value equal to the minimum amount the
Company is required to withhold for income and employment tax purposes with respect to the Award. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.
14.
TRANSFERABILITY
.
14.1
Transfer Generally
. Unless determined otherwise by the Committee or its delegate(s) or pursuant to this Section 14, an Award may not be sold, pledged, assigned, hypothecated, transferred,
or disposed of in any manner, other than by (i) a will or (ii) by the laws of descent or distribution. If the Committee makes an Award transferable, including, without limitation, by instrument to an inter vivos or testamentary trust in
which the Awards are to be passed to beneficiaries upon the death of the trustor (settlor) or by gift or domestic relations order to a Permitted Transferee, such Award may contain such additional terms and conditions as the Committee or its
delegate(s) deems appropriate. All Awards will be exercisable: (A) during the Participants lifetime only by (x) the Participant, or (y) the Participants guardian or legal representative; (B) after the
Participants death, by
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the legal representative of the Participants heirs or legatees; and (C) in the case of all awards except ISOs, by a Permitted Transferee (for awards made transferable by the Committee)
or such persons guardian or legal representative.
14.2
Award Transfer Program
. Notwithstanding any contrary
provision of the Plan, the Committee shall have all discretion and authority to determine and implement the terms and conditions of any Award Transfer Program instituted pursuant to this Section 14.2 and will have the authority to amend the
terms of any Award participating, or otherwise eligible to participate in, the Award Transfer Program, including (but not limited to) the authority to (i) amend (including to extend) the expiration date, post-termination exercise period and/or
forfeiture conditions of any such Award, (ii) amend or remove any provisions of the Award relating to the Award holders continued service to the Company or one of its Subsidiaries, (iii) amend the permissible payment methods with
respect to the exercise or purchase of any such Award, (iv) amend the adjustments to be implemented in the event of changes in the capitalization and other similar events with respect to such Award, and (v) make such other changes to the
terms of such Award as the Committee deems necessary or appropriate in its sole discretion. Notwithstanding anything to the contrary in the Plan, in no event will the Committee have the right to determine and implement the terms and conditions of
any Award Transfer Program without stockholder approval.
15.
PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON
SHARES
.
15.1
Voting and Dividends
. No Participant will have any of the rights of a stockholder with
respect to any Awards until the Shares subject to the Award are issued to the Participant, except for any Dividend Equivalent Rights permitted by an applicable Award Agreement. After Shares are issued to the Participant, the Participant will be a
stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares;
provided
, that if such Shares are
Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the
Company will be subject to the same restrictions as the Restricted Stock;
provided
,
further
, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at
the Participants Purchase Price or Exercise Price, as the case may be, pursuant to Section 15.2.
15.2
Restrictions on Shares / Dividend Equivalent Rights
. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) a right of forfeiture or a right to repurchase a portion of any or all Unvested Shares held by a
Participant following such Participants Termination, with any right of repurchase being exercised for cash and/or cancellation of purchase money indebtedness, at the Participants Purchase Price or Exercise Price, as the case may be. The
Committee, in its discretion, may provide in the Award Agreement evidencing any Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Shares during the period beginning on the
date the Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date on which the Award is exercised or settled or the date on which they are forfeited. Such Dividend Equivalent Rights, if any, shall be
credited to the Participant in the form of additional whole Shares as of the date of payment of such cash dividends on Shares.
16.
CERTIFICATES
. All Shares or other securities, whether or not certificated, delivered under this Plan will be subject to
such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable U.S. federal, state or foreign securities law, or any rules, regulations and other requirements
of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted and any non-U.S. exchange controls or securities law restrictions to which the Shares are subject.
17.
ESCROW; PLEDGE OF SHARES
. To enforce any restrictions on a Participants Shares, the Committee may require the
Participant to deposit all certificates representing Shares, together with stock powers
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or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have
lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of
Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of the Participants obligation to the Company under the promissory note;
provided
,
however
, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note
notwithstanding any pledge of the Participants Shares or other collateral. In connection with any pledge of the Shares, the Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from
time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid.
18.
SECURITIES LAW AND OTHER REGULATORY COMPLIANCE
. An Award will not be effective unless such Award is in compliance with all applicable U.S. and foreign federal and state securities and
exchange control laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the
Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals
from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal or foreign law or ruling of any governmental body that
the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any foreign or state securities
laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.
19.
NO OBLIGATION TO EMPLOY
. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to
continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participants employment or other relationship at
any time.
20.
CORPORATE TRANSACTIONS
.
20.1
Assumption or Replacement of Awards by Successor
. In the event of a Corporate Transaction, all Shares acquired under the Plan
and all Awards will be treated in one or more of the following ways, as determined in the Boards discretion. All Awards do not need to be treated in an identical manner.
(a) The continuation of the Award by the Company (if the Company is the surviving corporation).
(b) The assumption of the Award by the surviving corporation or its parent and, with respect to an Award that is subject to
Section 409A of the Code, in a manner that complies with Section 424(a) of the Code (whether or not the Award is an ISO).
(c) The substitution by the surviving corporation or its parent of a new Award, and with respect an Award that is subject to Section 409A of the Code, in a manner that complies with
Section 424(a) of the Code (whether or not the Award is an ISO).
(d) Full exercisability of an Option and/or a SAR,
full vesting of the Shares subject to an Option and/or a SAR and/or full vesting of all other Awards, followed by the cancellation of the Option, SAR or Award. The full exercisability of an Option and/or a SAR, full vesting of the Shares subject to
the Option and/or SAR
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and/or full vesting of all other Awards may be contingent on the closing of such Corporate Transaction. The Participant will be able to exercise an Option and/or a SAR during a period of not less
than five full business days preceding the effective date of such Corporate Transaction, unless (i) a shorter period is required to permit a timely closing of such Corporate Transaction and (ii) such shorter period still offers the
Participant a reasonable opportunity to exercise an Option and/or a SAR. Any exercise of an Option and/or a SAR during such period may be contingent on the closing of such Corporate Transaction.
(e) A payment to the Participant equal to the excess of (i) the Fair Market Value of the Shares subject to the Award as of the
effective date of such Corporate Transaction over (ii) the Exercise Price or Purchase Price of Shares, as the case may be, subject to the Award in connection with the cancellation of the Award. Such payment will be made in the form of cash,
cash equivalents, or securities of the surviving corporation or its parent with a Fair Market Value equal to the required amount. The successor corporation may provide substantially similar consideration to Participants as was provided to
stockholders (after taking into account the existing provisions of the Awards). Subject to Section 409A of the Code, such payment may be made in installments and may be deferred until the date or dates when the Award would have become
exercisable or such Shares would have vested. The amount of such payment initially will be calculated without regard to whether or not the Award is then exercisable or such Shares are then vested. However, such payment may be subject to vesting
based on the Participants continuing service as an Employee, Consultant or Director. In addition, any escrow, holdback, earnout or similar provisions in the agreement for such Corporate Transaction may apply to such payment to the same extent
and in the same manner as such provisions apply to the holders of Shares. If the Exercise Price of the Shares subject to an Option exceeds the Fair Market Value of such Shares, then the Option may be cancelled without making a payment to the
Participant. For purposes of this subsection, the Fair Market Value of any security will be determined without regard to any vesting conditions that may apply to such security.
In the event that such successor or acquiring corporation (if any) refuses to continue, assume or substitute the Awards, or replace the Awards with a payment, then notwithstanding any other provision in
this Plan to the contrary, any Option and/or SAR, and any Shares subject to any Option and/or SAR shall become fully exercisable and fully vested and/or all other Awards shall become fully vested contingent upon the consummation of such Corporate
Transaction, and after which acceleration the Option, SAR or Award shall be cancelled. The full exercisability of an Option and/or a SAR, full vesting of the Shares subject to the Option and/or SAR and/or full vesting of all other Awards may be
contingent on the closing of such Corporate Transaction. The Participant will be able to exercise an Option and/or a SAR during a period of not less than five full business days preceding the effective date of such Corporate Transaction, unless
(i) a shorter period is required to permit a timely closing of such Corporate Transaction and (ii) such shorter period still offers the Participant a reasonable opportunity to exercise an Option and/or a SAR. Any exercise of an Option
and/or a SAR during such period may be contingent on the closing of such Corporate Transaction.
20.2
Assumption of Awards
by the Company
. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award
under this Plan in substitution of such other companys award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution
or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company
assumes an award granted by another company, the terms and conditions of such award will remain unchanged (
except
that the Purchase Price or the Exercise Price, as the case may be, and the number and nature of Shares issuable upon exercise or
settlement of any such Award will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option in substitution rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price. Substitute Awards will not reduce the number of Shares authorized for grant under the Plan or authorized for grant to a Participant in any calendar year.
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20.3
Non-Employee Directors Awards
. Notwithstanding any provision to the
contrary herein, in the event of a Corporate Transaction, the vesting of all Awards granted to Non-Employee Directors shall accelerate and such Awards shall become exercisable (as applicable) in full prior to the consummation of such event at such
times and on such conditions as the Committee determines.
21.
ADOPTION AND STOCKHOLDER APPROVAL
. This Plan
shall be submitted for the approval of the Companys stockholders, consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board.
22.
TERM OF PLAN/GOVERNING LAW
. Unless earlier terminated as provided herein, this Plan will become effective on the
Effective Date and will terminate ten (10) years from the date this Plan is adopted by the Board. This Plan and all Awards granted hereunder shall be governed by and construed in accordance with the laws of the State of Washington, without
regard to its conflict of laws rules.
23.
AMENDMENT OR TERMINATION OF PLAN
. The Board may at any time terminate
or amend this Plan in any respect, including, without limitation, amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan;
provided
,
however
, that the Board will not, without the approval of the
stockholders of the Company, amend this Plan in any manner that requires such stockholder approval;
provided further
, that a Participants Award shall be governed by the version of this Plan then in effect at the time such Award was
granted.
24.
NONEXCLUSIVITY OF THE PLAN
. Neither the adoption of this Plan by the Board, the submission of this
Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including,
without limitation, the granting of stock awards and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
25.
INSIDER TRADING POLICY
. Each Participant who receives an Award shall comply with any policy adopted by the Company from
time to time covering transactions in the Companys securities by Employees, officers and/or directors of the Company.
26.
DEFINITIONS
. As used in this Plan, and except as elsewhere defined herein, the following terms will have the following
meanings:
Award
means any award under the Plan, including any Option, Restricted Stock Award, Stock
Bonus Award, Stock Appreciation Right, Restricted Stock Unit or Performance Award.
Award Agreement
means, with respect to each Award, the written or electronic agreement between the Company and the Participant setting forth the terms and conditions of the Award, and
country-specific
appendix thereto for
grants to
non-U.S.
Participants, which shall be in substantially a form (which need not be the same for each Participant) that the Committee (or in the case of Award Agreements that are not used by Insiders,
the Committees delegate(s)) has from time to time approved, and will comply with and be subject to the terms and conditions of this Plan.
Award Transfer Program
means, any program instituted by the Committee that would permit Participants the opportunity to transfer for value any outstanding Awards to a financial
institution or other person or entity approved by the Committee. A transfer for value shall not be deemed to occur under this Plan where an Award is transferred by a Participant for bona fide estate planning purposes to a trust or other
testamentary vehicle approved by the Committee.
Board
means the Board of Directors of the Company.
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Cause
means (i) the violation by the optionee of any
reasonable rule or policy of the Board or the optionees superiors or the chief executive officer or the President of the Company, Parent or Subsidiary that results in damage to the Company, Parent or Subsidiary or which, after notice to do so,
the optionee fails to correct within a reasonable time; (ii) any willful misconduct or gross negligence by the optionee in the responsibilities assigned to him or her; (iii) any willful failure to perform his or her job as required to meet
the objectives of the Company, Parent or Subsidiary; (iv) any wrongful conduct of an optionee which has an adverse impact on the Company, Parent or Subsidiary or which constitutes a misappropriation of the assets of the Company, Parent or
Subsidiary; (v) unauthorized disclosure of confidential information; (vi) the optionees performing services for any other Company, Parent or Subsidiary or person which competes with the Company, Parent or Subsidiary while he or she
is employed by or provides services to the Company, without the prior written approval of the Chairman or President of the Company; or (vii) a resignation by an optionee of employment with or service to the Company, Parent or Subsidiary if
(A) the Company, Parent or Subsidiary has given prior notice to such optionee of its intent to dismiss the optionee for circumstances that constitute cause, or (B) within two months of the optionees resignation, the Chairman or
President of the Company or the Board determines, which determination shall be final and binding, that such resignation was related to an act which would have led to a termination for cause.
Code
means the United States Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder.
Committee
means the Compensation Committee of the Board or those persons to whom
administration of the Plan, or part of the Plan, has been delegated as permitted by law.
Common
Stock
means the common stock of the Company.
Company
means CRAY INC., or any
successor corporation.
Consultant
means any person, including an advisor or independent contractor,
engaged by the Company or a Parent or Subsidiary to render services to such entity.
Corporate
Transaction
means the occurrence of any of the following events: (i) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner (as defined in Rule 13d-3
of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Companys then-outstanding voting securities; (ii) the consummation of
the sale or disposition by the Company of all or substantially all of the Companys assets; (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent
(50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation; (iv) any other transaction which qualifies as a
corporate transaction under Section 424(a) of the Code wherein the stockholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the
outstanding shares of the Company); or (v) any liquidation or dissolution of the Company. Notwithstanding the foregoing, to the extent that any amount constituting deferred compensation as defined in Section 409A of the Code) would become
payable under this Plan by reason of a Change in Control, such amount shall become payable only if the event constituting a Change in Control would also constitute a change in ownership or effective control of the Company or a change in the
ownership of a substantial portion of the assets of the Company (both as defined in Section 409A of the Code.
Director
means a member of the Board.
Disability
means in the case of incentive stock options, total and permanent disability as defined in Section 22(e)(3) of the Code and in the case of other Awards, as
determined by Company policies.
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Dividend Equivalent Right
means the right of a Participant,
granted at the discretion of the Committee or as otherwise provided by the Plan, to receive a credit for the account of such Participant in an amount equal to the cash dividends paid on one Share for each Share represented by an Award held by such
Participant.
Effective Date
means the date this Plan is approved by the Companys
stockholders, the date of which shall be within twelve (12) months before or after the date this Plan is adopted by the Board.
Employee
means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a
directors fee by the Company will be sufficient to constitute employment by the Company.
Exchange Act
means the United States Securities Exchange Act of 1934, as amended.
Exchange Program
means a program pursuant to which (i) outstanding Awards are surrendered, cancelled or
exchanged for cash, the same type of Award or a different Award (or combination thereof) or (ii) the exercise price of an outstanding Award is increased or reduced.
Exercise Price
means, with respect to an Option, the price at which a holder may purchase the Shares issuable upon exercise of an Option and with respect to a SAR, the price at
which the SAR is granted to the holder thereof.
Fair Market Value
means, as of any date, the value
of a share of the Companys Common Stock determined as follows:
(a) its closing price on the date of determination on
the principal national securities exchange on which the Common Stock is listed or admitted to trading as officially quoted in the composite tape of transactions on such exchange or such other source as the Board or the Committee deems reliable for
the applicable date;
(b) if such Common Stock is publicly traded but is neither listed nor admitted to trading on a national
securities exchange, the average of the closing bid and asked prices on the date of determination as reported in
The Wall Street Journal
or such other source as the Board or the Committee deems reliable; or
(c) if none of the foregoing is applicable, by the Board or the Committee in good faith.
Insider
means an officer or director of the Company or any other person whose transactions in the
Companys Common Stock are subject to Section 16 of the Exchange Act.
Non-Employee
Director
means a Director who is not an Employee of the Company or any Parent or Subsidiary.
Option
means an award of an option to purchase Shares pursuant to Section 5 or Section 12 of the
Plan.
Parent
has the same meaning as parent corporation in Section 424(e) of the
Code.
Participant
means a person who holds an Award under this Plan.
Performance Award
means an Award granted pursuant to Section 10 or Section 12 of the Plan.
Performance Factors
means the factors selected by the Committee applicable to the Company or a
Parent or Subsidiary of the Company, business unit or market segment, which may include, but are not limited to the, the following measures (whether or not in comparison to other peer companies) to determine whether the performance goals established
by the Committee and applicable to Awards have been satisfied:
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Earnings (which may include earnings before interest and taxes, earnings before taxes, and net earnings);
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Controllable operating profit, or net operating profit;
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Operating expenses or operating expenses as a percentage of revenue;
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Total stockholder return;
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Return on assets or net assets;
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The Companys stock price;
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Growth in stockholder value relative to a pre-determined index;
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Return on invested capital;
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Cash Flow (including free cash flow or operating cash flows)
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Individual confidential business objectives;
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Contract awards or backlog;
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Overhead or other expense reduction;
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Strategic plan development and implementation;
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Succession plan development and implementation;
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Improvement in workforce diversity;
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New product invention or innovation;
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Attainment of research and development milestones;
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Improvements in productivity;
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Attainment of objective operating goals and employee metrics;
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Any other metric that is capable of measurement as determined by the Committee; and
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Any sale or initial public offering of a Subsidiary or the Company.
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The Committee may, in recognition of unusual or non-recurring items such as acquisition-related activities or changes in applicable
accounting rules, provide for one or more equitable adjustments (based on objective standards) to the Performance Factors to preserve the Committees original intent regarding the Performance Factors at the time of the initial award grant. It
is within the sole discretion of the Committee to make or not make any such equitable adjustments.
Performance
Period
means the period of service determined by the Committee or its delegate(s) with respect to Participants who are not Insiders, not to exceed five (5) years, during which years of service or performance is to be measured for
the Award.
Performance Share
means a performance share bonus granted as a Performance Award
pursuant to Section 10 or Section 12 of the Plan.
Permitted Transferee
means any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (including adoptive relationships) of the Employee,
any person sharing the Employees household (other than a tenant or employee), a trust in which these persons (or the Employee) have more than 50% of the beneficial interest, a foundation in which these persons (or the Employee) control the
management of assets, and any other entity in which these persons (or the Employee) own more than 50% of the voting interests.
Plan
means this Cray Inc. 2013 Equity Incentive Plan.
Purchase Price
means the price to be paid for Shares acquired under the Plan, other than Shares acquired upon
exercise of an Option or SAR.
Restricted Stock Award
means an award of Shares pursuant to
Section 6 or Section 12 of the Plan, or issued pursuant to the early exercise of an Option.
Restricted
Stock Unit
means an Award granted pursuant to Section 9 or Section 12 of the Plan.
SEC
means the United States Securities and Exchange Commission.
Securities Act
means the United States Securities Act of 1933, as amended.
Shares
means shares of the Companys Common Stock and the common stock of any successor security.
Stock Appreciation Right
means an Award granted pursuant to Section 7 or Section 12 of
the Plan.
Stock Bonus Award
means an Award granted pursuant to Section 6 or Section 12 of
the Plan.
Subsidiary
has the same meaning as subsidiary corporation in
Section 424(f) of the Code.
Termination
or
Terminated
means, for
purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor or advisor to the Company or a Parent or Subsidiary of the
Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee;
provided
, that such leave is for a
period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided
A-18
otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the
Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Parent or Subsidiary of the Company as it may deem appropriate, except that in no event may an Award be exercised
after the expiration of the term set forth in the applicable Award Agreement. In the event of military leave, if required by applicable laws, vesting will continue for the longest period that vesting continues under any other statutory or Company
approved leave of absence and, upon a Participants returning from military leave (under conditions that would entitle him or her to protection upon such return under the Uniform Services Employment and Reemployment Rights Act), he or she will
be given vesting credit with respect to Awards to the same extent as would have applied had the Participant continued to provide services to the Company throughout the leave on the same terms as he or she was providing services immediately prior to
such leave. An employee will have terminated employment as of the date he or she ceases to provide services (regardless of whether the termination is in breach of local laws or is later found to be invalid) and employment will not be extended by any
notice period or garden leave mandated by local law. The Committee will have sole discretion to determine whether a Participant has ceased to provide services for purposes of the Plan and the effective date on which the Participant ceased to provide
services (the
Termination Date
).
Unvested Shares
means Shares that have
not yet vested or are subject to a right of repurchase in favor of the Company (or any successor thereto).
A-19
CRAY INC.
901 FIFTH AVENUE, STE.1000
SEATTLE, WA 98164
ATTN: LEGAL DEPARTMENT
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