Item
1.01.
Entry
Into a Material Definitive Agreement.
(1)
Restricted
Stock Agreements dated and effective as of October 4, 2006 by and between
Pacific Ethanol, Inc. and certain Employees
On
October 4, 2006, Pacific Ethanol, Inc. (the “Company”) granted to certain
employees shares of restricted stock under the Company’s 2006 Stock Incentive
Plan (the “Plan”) pursuant to Restricted Stock Agreements dated and effective as
of October 4, 2006 by and between the Company and those employees. The Plan
is
described below and is filed herewith as Exhibit 10.1. The form of Restricted
Stock Agreement for employees is filed herewith as Exhibit 10.2.
The
Company granted an aggregate of 836,360 shares of restricted stock to the
employees, with an aggregate of 246,920 shares of restricted stock vesting
immediately and an aggregate of 117,888 shares of restricted stock vesting
on
each of the next five anniversaries of the grant date starting on October 4,
2007.
Pursuant
to the Restricted Stock Agreements and the Plan, the following executive
officers of the Company were granted shares of restricted stock as described
below:
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Neil
M. Koehler, President and Chief Executive Officer and a member of
the
Board of Directors, was granted 93,600 shares of restricted stock,
23,400
shares of which vested immediately and 14,040 shares of which will
vest,
subject to continued employment, on each of the next five anniversaries
of
the grant date;
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John
T. Miller, Chief Operating Officer, was granted 70,200 shares of
restricted stock, 17,550 shares of which vested immediately and 10,530
shares of which will vest, subject to continued employment, on each
of the
next five anniversaries of the grant date;
and
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Christopher
W. Wright, Vice President, General Counsel and Secretary, was granted
70,200 shares of restricted stock, 17,550 shares of which vested
immediately and 10,530 shares of which will vest, subject to continued
employment, on each of the next five anniversaries of the grant
date.
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As
a
condition to subsequent vesting of the shares of restricted stock, an employee
must remain continuously employed by the Company on a full time basis from
the
grant date through each subsequent vesting date. The interest of the employees
in the restricted stock may vest as to 100% of the unvested shares of restricted
stock upon a change in control but only in accordance with the
Plan.
The
employees have the right to vote the shares of restricted stock and to receive
any cash dividends paid to or made with respect to the shares of restricted
stock; provided, however, that dividends paid, if any, with respect to the
shares of restricted stock that have not vested at the time of the dividend
payment will be held in the custody of the Company and will be subject to the
same restrictions that apply to the corresponding shares of restricted
stock.
The
Company is obligated to withhold minimum withholding tax amounts with respect
to
vested shares of restricted stock and upon future vesting of shares of
restricted stock granted to its employees. Each employee is entitled to pay
the
minimum withholding tax amounts to the Company in cash or to elect to have
the
Company withhold a vested amount of shares of restricted stock having a value
equivalent to the Company’s minimum withholding tax requirements, thereby
reducing the number of shares of vested restricted stock that the employee
ultimately receives. If an employee fails to timely make such election, the
Company will withhold the necessary shares of vested restricted stock.
Shares
of
vested restricted stock withheld by the Company to satisfy minimum withholding
tax requirements and shares of unvested restricted stock that are forfeited
by
an employee as a result of the failure of such shares to vest may be used for
further grants under the Plan.
(2)
Restricted
Stock Agreements dated and effective as of October 4, 2006 by and between
Pacific Ethanol, Inc. and certain Non-Employee Directors
On
October 4, 2006, the Company granted to certain non-employee directors shares
of
restricted stock under the Plan pursuant to Restricted Stock Agreements dated
and effective as of October 4, 2006 by and between the Company and those
non-employee directors. The Plan is described below and is filed herewith as
Exhibit 10.1. The form of Restricted Stock Agreement for non-employee directors
is filed herewith as Exhibit 10.2.
Except
as
otherwise described below, the terms and conditions of the grant of the shares
of restricted stock to the non-employee directors are substantially the same
as
described above with respect to the grant of shares of restricted stock to
certain employees.
The
Company granted an aggregate of 109,200 shares of restricted stock to the
non-employee directors, with an aggregate of 33,800 shares of restricted stock
vesting immediately and an aggregate of 26,000 shares of restricted stock
vesting on each of the next two anniversaries of the grant date starting on
October 4, 2007 and, for one non-employee director, 4,680 shares of restricted
stock vest on each of the next five anniversaries of the grant date starting
on
October 4, 2007.
Pursuant
to the Restricted Stock Agreements and the Plan, the following non-employee
directors of the Company were granted shares of restricted stock as described
below:
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William
L. Jones was granted 31,200 shares of restricted stock, 7,800 shares
of
which vested immediately and 4,680 shares of which will vest, subject
to
continued service as a member of the Board of Directors of the Company,
on
each of the next five anniversaries of the grant date;
and
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Terry
L. Stone, Robert P. Thomas, Douglas L. Kieta, John L. Prince and
Frank P.
Greinke were each granted 15,600 shares of restricted stock, 5,200
shares
of which vested immediately and 5,200 shares of which will vest,
subject
to continued service as members of the Board of Directors of the
Company,
on each of the next two anniversaries of the grant
date.
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As
a
condition to subsequent vesting of the shares of restricted stock, a
non-employee director must remain continuously in the service of the Company
as
a member of its Board of Directors from the grant date through each subsequent
vesting date. The Company is not obligated to withhold minimum withholding
tax
amounts with respect to shares of restricted stock granted to non-employee
directors.
(3)
Pacific
Ethanol, Inc. 2006 Stock Incentive Plan
On
July
19, 2006, the Board of Directors of the Company adopted the Plan, subject to
stockholder approval. Stockholder approval of the Plan was obtained on September
7, 2006. The Company has registered the issuance of its securities under the
Plan on a Registration Statement on Form S-8 under the Securities Act of 1933,
as amended.
The
Plan
is intended to promote the Company’s interests by providing eligible persons in
the Company’s service with the opportunity to acquire a proprietary or economic
interest, or otherwise increase their proprietary or economic interest, in
the
Company as an incentive for them to remain in such service and render superior
performance during such service. The Plan consists of two equity-based incentive
programs, the Discretionary Grant Program and the Stock Issuance Program.
Principal features of each program are summarized below.
Administration
The
Compensation Committee of the Board of Directors of the Company has the
exclusive authority to administer the Discretionary Grant and Stock Issuance
Programs with respect to option grants, restricted stock awards, restricted
stock units, stock appreciation rights, direct stock issuances and other
stock-based awards (“equity awards”) made to executive officers and non-employee
Board members, and also has the authority to make equity awards under those
programs to all other eligible individuals. However, the Board of Directors
may
retain, reassume or exercise from time to time the power to administer those
programs. Equity awards made to members of the Compensation Committee must
be
authorized and approved by a disinterested majority of the Board of
Directors.
The
term
“plan administrator,” as used in this summary, means the Compensation Committee
or the Board of Directors, to the extent either entity is acting within the
scope of its administrative jurisdiction under the Plan.
Share
Reserve
Initially,
2,000,000 shares of common stock are authorized for issuance under the Plan.
No
participant in the Plan may be granted equity awards for more than 250,000
shares of common stock per calendar year. This share-limitation is intended
to
assure that any deductions to which the Company would otherwise be entitled,
either upon the exercise of stock options or stock appreciation rights granted
under the Discretionary Grant Program with an exercise price per share equal
to
the fair market value per share of the Company’s common stock on the grant date
or upon the subsequent sale of the shares purchased under those options, will
not be subject to the $1.0 million limitation on the income tax deductibility
of
compensation paid per covered executive officer imposed under Internal Revenue
Code (“IRC”) Section 162(m). In addition, shares issued under the Stock Issuance
Program may qualify as performance-based compensation that is not subject to
the
IRC Section 162(m) limitation, if the issuance of those shares is approved
by
the Compensation Committee and the vesting is tied solely to the attainment
of
the corporate performance milestones discussed below in the summary description
of that program.
The
shares of common stock issuable under the Plan may be drawn from shares of
the
Company’s authorized but unissued shares or from shares reacquired by the
Company, including shares repurchased on the open market. Shares subject to
any
outstanding equity awards under the Plan that expire or otherwise terminate
before those shares are issued will be available for subsequent awards. Unvested
shares issued under the Plan and subsequently repurchased by the Company at
the
option exercise or direct issue price paid per share, pursuant to the Company’s
repurchase rights under the Plan, will be added back to the number of shares
reserved for issuance under the Plan and will be available for subsequent
reissuance.
If
the
exercise price of an option under the Plan is paid with shares of common stock,
then the authorized reserve of common stock under the Plan will be reduced
only
by the net number of new shares issued under the exercised stock option. If
shares of common stock otherwise issuable under the Plan are withheld in
satisfaction of the withholding taxes incurred in connection with the issuance,
exercise or vesting of an equity award, then the number of shares of common
stock available for issuance under the Plan will be reduced only by the net
number of shares issued pursuant to that equity award. The withheld shares
will
not reduce the share reserve. Upon the exercise of any stock appreciation right
granted under the Plan, the share reserve will only be reduced by the net number
of shares actually issued upon exercise, and not by the gross number of shares
as to which the stock appreciation right is exercised.
Eligibility
Officers,
employees, non-employee directors, and consultants and independent advisors
who
are under written contract and whose securities issued pursuant to the Plan
could be registered on Form S-8, all of whom are in the Company’s service or the
service of any parent or subsidiary of the Company’s, whether now existing or
subsequently established, are eligible to participate in the Discretionary
Grant
and Stock Issuance Programs.
Valuation
The
fair
market value per share of the Company’s common stock on any relevant date under
the Plan will be deemed to be equal to the closing selling price per share
of
the Company’s common stock at the close of regular hours trading on the Nasdaq
Global Market (or other applicable marker) on that date, as the price is
reported by the National Association of Securities Dealers. If there is no
closing selling price for the Company’s common stock on the date in question,
the fair market value will be the closing selling price on the last preceding
date for which a quotation exists.
Discretionary
Grant Program
The
plan
administrator has complete discretion under the Discretionary Grant Program
to
determine which eligible individuals are to receive equity awards under that
program, the time or times when those equity awards are to be made, the number
of shares subject to each award, the time or times when each equity award is
to
vest and become exercisable, the maximum term for which the equity award is
to
remain outstanding and the status of any granted option as either an incentive
stock option or a non-statutory option under the federal tax laws.
Stock
Options
.
Each
granted option will have an exercise price per share determined by the plan
administrator, provided that the exercise price will not be less than 85% or
100% of the fair market value of a share on the grant date in the case of
non-statutory or incentive options, respectively. No granted option will have
a
term in excess of ten years. Incentive options granted to an employee who
beneficially owns more than 10% of the Company’s outstanding common stock must
have exercise prices not less than 110% of the fair market value of a share
on
the grant date and a term of not more than five years measured from the grant
date. Options generally will become exercisable in one or more installments
over
a specified period of service measured from the grant date. However, options
may
be structured so that they will be immediately exercisable for any or all of
the
option shares. Any unvested shares acquired under immediately exercisable
options will be subject to repurchase, at the exercise price paid per share,
if
the optionee ceases service with the Company prior to vesting in those
shares.
An
optionee who ceases service with the Company other than due to misconduct will
have a limited time within which to exercise outstanding options for any shares
for which those options are vested and exercisable at the time of cessation
of
service. The plan administrator has complete discretion to extend the period
following the optionee’s cessation of service during which outstanding options
may be exercised (but not beyond the expiration date) and/or to accelerate
the
exercisability or vesting of options in whole or in part. Discretion may be
exercised at any time while the options remain outstanding, whether before
or
after the optionee’s actual cessation of service.
Stock
Appreciation Rights
.
The
plan administrator has the authority to issue the following three types of
stock
appreciation rights under the Discretionary Grant Program:
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Tandem
stock appreciation rights, which provide the holders with the right,
upon
approval of the plan administrator, to surrender their options for
an
appreciation distribution in an amount equal to the excess of the
fair
market value of the vested shares of common stock subject to the
surrendered option over the aggregate exercise price payable for
those
shares.
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Standalone
stock appreciation rights, which allow the holders to exercise those
rights as to a specific number of shares of common stock and receive
in
exchange an appreciation distribution in an amount equal to the excess
of
the fair market value on the exercise date of the shares of common
stock
as to which those rights are exercised over the aggregate base price
in
effect for those shares. The base price per share may not be less
than the
fair market value per share of the common stock on the date the standalone
stock appreciation right is granted, and the right may not have a
term in
excess of ten years.
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Limited
stock appreciation rights, which may be included in one or more option
grants made under the Discretionary Grant Program to executive officers
or
directors who are subject to the short-swing profit liability provisions
of Section 16 of the Securities Exchange Act of 1934, as amended
(“Exchange Act”). Upon the successful completion of a hostile takeover for
more than 50% of the Company’s outstanding voting securities or a change
in a majority of the Board of Directors of the Company as a result
of one
or more contested elections for Board membership over a period of
up to 36
consecutive months, each outstanding option with a limited stock
appreciation right may be surrendered in return for a cash distribution
per surrendered option share equal to the excess of the fair market
value
per share at the time the option is surrendered or, if greater and
the
option is a non-statutory option, the highest price paid per share
in the
transaction, over the exercise price payable per share under the
option.
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Payments
with respect to exercised tandem or standalone stock appreciation rights may,
at
the discretion of the plan administrator, be made in cash or in shares of common
stock. All payments with respect to exercised limited stock appreciation rights
will be made in cash. Upon cessation of service with the Company, the holder
of
one or more stock appreciation rights will have a limited period within which
to
exercise those rights as to any shares as to which those stock appreciation
rights are vested and exercisable at the time of cessation of service. The
plan
administrator will have complete discretion to extend the period following
the
holder’s cessation of service during which his or her outstanding stock
appreciation rights may be exercised and/or to accelerate the exercisability
or
vesting of the stock appreciation rights in whole or in part. Discretion may
be
exercised at any time while the stock appreciation rights remain outstanding,
whether before or after the holder’s actual cessation of service.
Repricing
.
The
plan administrator has the authority, with the consent of the affected holders,
to effect the cancellation of any or all outstanding options or stock
appreciation rights under the Discretionary Grant Program and to grant in
exchange one or more of the following: (i) new options or stock
appreciation rights covering the same or a different number of shares of common
stock but with an exercise or base price per share not less than the fair market
value per share of common stock on the new grant date, or (ii) cash or shares
of
common stock, whether vested or unvested, equal in value to the value of the
cancelled options or stock appreciation rights. The plan administrator also
has
the authority with or, if the affected holder is not subject to the short-swing
profit liability of Section 16 of the Exchange Act, then without, the consent
of
the affected holders, to reduce the exercise or base price of one or more
outstanding stock options or stock appreciation rights to the then current
fair
market value per share of common stock or to issue new stock options or stock
appreciation rights with a lower exercise or base price in immediate
cancellation of outstanding stock options or stock appreciation rights with
a
higher exercise or base price.
Stock
Issuance Program
Shares
of
common stock may be issued under the Stock Issuance Program for valid
consideration under the Delaware General Corporation Law as the plan
administrator deems appropriate, including cash, past services or other
property. In addition, restricted shares of common stock may be issued pursuant
to restricted stock awards that vest in one or more installments over the
recipient’s period of service or upon attainment of specified performance
objectives. Shares of common stock may also be issued under the program pursuant
to restricted stock units or other stock-based awards that entitle the
recipients to receive the shares underlying those awards upon the attainment
of
designated performance goals, the satisfaction of specified service requirements
and/or upon the expiration of a designated time period following the vesting
of
those awards or units, including without limitation, a deferred distribution
date following the termination of the recipient’s service with the
Company.
The
plan
administrator will have complete discretion under the Stock Issuance Program
to
determine which eligible individuals are to receive equity awards under the
program, the time or times when those equity awards are to be made, the number
of shares subject to each equity award, the vesting schedule to be in effect
for
the equity award and the consideration, if any, payable per share. The shares
issued pursuant to an equity award may be fully vested upon issuance or may
vest
upon the completion of a designated service period and/or the attainment of
pre-established performance goals.
To
assure
that the compensation attributable to one or more equity awards under the Stock
Issuance Program will qualify as performance-based compensation that will not
be
subject to the $1.0 million limitation on the income tax deductibility of the
compensation paid per covered executive officer imposed under IRC Section
162(m), the Compensation Committee will also have the discretionary authority
to
structure one or more equity awards under the Stock Issuance Program so that
the
shares subject to those particular awards will vest only upon the achievement
of
certain pre-established corporate performance goals. Goals may be based on
one
or more of the following criteria: (i) return on total stockholders’ equity;
(ii) net income per share; (iii) net income or operating income; (iv) earnings
before interest, taxes, depreciation, amortization and stock-based compensation
costs, or operating income before depreciation and amortization; (v) sales
or
revenue targets; (vi) return on assets, capital or investment; (vii) cash flow;
(viii) market share; (ix) cost reduction goals; (x) budget comparisons; (xi)
implementation or completion of projects or processes strategic or critical
to
the Company’s business operations; (xii) measures of customer satisfaction;
(xiii) any combination of, or a specified increase in, any of the foregoing;
and
(xiv) the formation of joint ventures, research and development collaborations,
marketing or customer service collaborations, or the completion of other
corporate transactions intended to enhance the Company’s revenue or
profitability or expand the Company’s customer base; provided, however, that for
purposes of items (ii), (iii) and (vii) above, the Compensation Committee may,
at the time the equity awards are made, specify certain adjustments to those
items as reported in accordance with generally accepted accounting principles
in
the U.S. (“GAAP”), which will exclude from the calculation of those performance
goals one or more of the following: certain charges related to acquisitions,
stock-based compensation, employer payroll tax expense on certain stock option
exercises, settlement costs, restructuring costs, gains or losses on strategic
investments, non-operating gains, certain other non-cash charges, valuation
allowance on deferred tax assets, and the related income tax effects, purchases
of property and equipment, and any extraordinary non-recurring items as
described in Accounting Principles Board Opinion No. 30 or its successor,
provided that those adjustments are in conformity with those reported by the
Company on a non-GAAP basis. In addition, performance goals may be based upon
the attainment of specified levels of the Company’s performance under one or
more of the measures described above relative to the performance of other
entities and may also be based on the performance of any of the Company’s
business groups or divisions thereof or any parent or subsidiary. Performance
goals may include a minimum threshold level of performance below which no award
will be earned, levels of performance at which specified portions of an award
will be earned, and a maximum level of performance at which an award will be
fully earned. The Compensation Committee may provide that, if the actual level
of attainment for any performance objective is between two specified levels,
the
amount of the award attributable to that performance objective shall be
interpolated on a straight-line basis.
The
plan
administrator will have the discretionary authority at any time to accelerate
the vesting of any and all shares of restricted stock or other unvested shares
outstanding under the Stock Issuance Program.
Outstanding
restricted stock units or other stock-based awards under the Stock Issuance
Program will automatically terminate, and no shares of common stock will
actually be issued in satisfaction of those awards, if the performance goals
or
service requirements established for those awards are not attained. The plan
administrator, however, will have the discretionary authority to issue shares
of
common stock in satisfaction of one or more outstanding restricted stock units
or other stock-based awards as to which the designated performance goals or
service requirements are not attained.
Notwithstanding
the foregoing, no vesting requirements tied to the attainment of performance
objectives may be waived with respect to shares that were intended at the time
of issuance to qualify as performance-based compensation under IRC Section
162(m), except in the event of certain involuntary terminations or changes
in
control or ownership.
General
Provisions
Acceleration
.
If a
change in control occurs, each outstanding equity award under the Discretionary
Grant Program will automatically accelerate in full, unless (i) that award
is
assumed by the successor corporation or otherwise continued in effect, (ii)
the
award is replaced with a cash retention program that preserves the spread
existing on the unvested shares subject to that equity award (the excess of
the
fair market value of those shares over the exercise or base price in effect
for
the shares) and provides for subsequent payout of that spread in accordance
with
the same vesting schedule in effect for those shares, or (iii) the acceleration
of the award is subject to other limitations imposed by the plan administrator.
In addition, all unvested shares outstanding under the Discretionary Grant
and
Stock Issuance Programs will immediately vest upon the change in control, except
to the extent the Company’s repurchase rights with respect to those shares are
to be assigned to the successor corporation or otherwise continued in effect
or
accelerated vesting is precluded by other limitations imposed by the plan
administrator. Each outstanding equity award under the Stock Issuance Program
will vest as to the number of shares of common stock subject to that award
immediately prior to the change in control, unless that equity award is assumed
by the successor corporation or otherwise continued in effect or replaced with
a
cash retention program similar to the program described in clause (ii) above
or
unless vesting is precluded by its terms. Immediately following a change in
control, all outstanding awards under the Discretionary Grant Program will
terminate and cease to be outstanding except to the extent assumed by the
successor corporation or its parent or otherwise expressly continued in full
force and effect pursuant to the terms of the change in control
transaction.
The
plan
administrator will have the discretion to structure one or more equity awards
under the Discretionary Grant and Stock Issuance Programs so that those equity
awards will vest in full either immediately upon a change in control or in
the
event the individual’s service with the Company or the successor entity is
terminated (actually or constructively) within a designated period following
a
change in control transaction, whether or not those equity awards are to be
assumed or otherwise continued in effect or replaced with a cash retention
program.
A
change
in control will be deemed to have occurred if, in a single transaction or series
of related transactions:
(i)
any
person (as that term is used in Section 13(d) and 14(d) of the Exchange Act),
or
persons acting as a group, other than a trustee or fiduciary holding securities
under an employment benefit program, is or becomes a beneficial owner (as
defined in Rule 13-3 under the Exchange Act), directly or indirectly of
securities representing 51% or more of the combined voting power of the
Company;
(ii)
there
is
a merger, consolidation, or other business combination transaction of the
Company with or into an other corporation, entity or person, other than a
transaction in which the holders of at least a majority of the shares of the
Company’s voting capital stock outstanding immediately prior to such transaction
continue to hold (either by such shares remaining outstanding or by their being
converted into shares of voting capital stock of the surviving entity) a
majority of the total voting power represented by the shares of voting capital
stock of the Company (or the surviving entity) outstanding immediately after
the
transaction; or
(iii)
all
or
substantially all of the Company’s assets are sold.
Stockholder
Rights and Option Transferability
.
The
holder of an option or stock appreciation right will have no stockholder rights
with respect to the shares subject to that option or stock appreciation right
unless and until the holder exercises the option or stock appreciation right
and
becomes a holder of record of shares of common stock distributed upon exercise
of the award. Incentive options are not assignable or transferable other than
by
will or the laws of inheritance following the optionee’s death, and during the
optionee’s lifetime, may only be exercised by the optionee. However,
non-statutory options and stock appreciation rights may be transferred or
assigned during the holder’s lifetime to one or more members of the holder’s
family or to a trust established for the benefit of the holder and/or one or
more family members or to the holder’s former spouse, to the extent the transfer
is in connection with the holder’s estate plan or pursuant to a domestic
relations order.
A
participant will have certain stockholder rights with respect to shares of
common stock issued to the participant under the Stock Issuance Program, whether
or not the participant’s interest in those shares is vested. Accordingly, the
participant will have the right to vote the shares and to receive any regular
cash dividends paid on the shares, but will not have the right to transfer
the
shares prior to vesting. A participant will not have any stockholder rights
with
respect to the shares of common stock subject to restricted stock units or
other
stock-based awards until the awards vest and the shares of common stock are
actually issued. However, dividend-equivalent units may be paid or credited,
either in cash or in actual or phantom shares of common stock, on outstanding
restricted stock units or other stock-based awards, subject to terms and
conditions the plan administrator deems appropriate.
Changes
in Capitalization
.
If any
change is made to the outstanding shares of common stock by reason of any
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares or other change in corporate structure effected without the Company’s
receipt of consideration, appropriate adjustments will be made to (i) the
maximum number and/or class of securities issuable under the Plan, (ii) the
maximum number and/or class of securities for which any one person may be
granted equity awards under the Plan per calendar year, (iii) the number and/or
class of securities and the exercise price or base price per share in effect
under each outstanding option or stock appreciation right, and (iv) the number
and/or class of securities subject to each outstanding restricted stock unit
or
other stock-based award under the Plan and the cash consideration, if any,
payable per share. All adjustments will be designed to preclude any dilution
or
enlargement of benefits under the Plan and the outstanding equity awards
thereunder.
Special
Tax Election
.
Subject
to applicable laws, rules and regulations, the plan administrator may permit
any
or all holders of equity awards to utilize any or all of the following methods
to satisfy all or part of the federal and state income and employment
withholding taxes to which they may become subject in connection with the
issuance, exercise or vesting of those equity awards:
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Stock
Withholding
:
The election to have the Company withhold, from the shares otherwise
issuable upon the issuance, exercise or vesting of an equity award,
a
portion of those shares with an aggregate fair market value equal
to the
percentage of the withholding taxes (not to exceed 100%) designated
by the
holder and make a cash payment equal to the fair market value directly
to
the appropriate taxing authorities on the individual’s behalf.
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Stock
Delivery
:
The election to deliver to the Company certain shares of common stock
previously acquired by the holder (other than in connection with
the
issuance, exercise or vesting that triggered the withholding taxes)
with
an aggregate fair market value equal to the percentage of the withholding
taxes (not to exceed 100%) designated by the holder.
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Sale
and Remittance
:
The election to deliver to the Company, to the extent the award is
issued
or exercised for vested shares, through a special sale and remittance
procedure pursuant to which the optionee or participant will concurrently
provide irrevocable instructions to a brokerage firm to effect the
immediate sale of the purchased or issued shares and remit to the
Company,
out of the sale proceeds available on the settlement date, sufficient
funds to cover the withholding taxes the Company is required to withhold
by reason of the issuance, exercise or
vesting.
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Amendment,
Suspension and Termination
The
Board
of Directors of the Company may suspend or terminate the Plan at any time.
The
Board of Directors of the Company may amend or modify the Plan, subject to
any
required stockholder approval. Stockholder approval will be required for any
amendment that materially increases the number of shares available for issuance
under the Plan, materially expands the class of individuals eligible to receive
equity awards under the Plan, materially increases the benefits accruing to
optionees and other participants under the Plan or materially reduces the price
at which shares of common stock may be issued or purchased under the Plan,
materially extends the term of the Plan, expands the types of awards available
for issuance under the Plan, or as to which stockholder approval is required
by
applicable laws, rules or regulations.
Unless
sooner terminated by the Board of Directors of the Company, the Plan will
terminate on the earliest to occur of: (i) July 19, 2016; (ii) the date on
which
all shares available for issuance under the Plan have been issued as
fully-vested shares; and (iii) the termination of all outstanding equity awards
in connection with certain changes in control or ownership. If the Plan
terminates on July 19, 2016, then all equity awards outstanding at that time
will continue to have force and effect in accordance with the provisions of
the
documents evidencing those awards.
Federal
Income Tax Consequences
The
following discussion summarizes income tax consequences of the Plan under
current federal income tax law and is intended for general information only.
In
addition, the tax consequences described below are subject to the limitations
of
IRC Section 162(m), as discussed in further detail below. Other federal taxes
and foreign, state and local income taxes are not discussed, and may vary
depending upon individual circumstances and from locality to
locality.
Option
Grants
.
Options
granted under the Plan may be either incentive stock options, which satisfy
the
requirements of IRC Section 422, or non-statutory stock options, which are
not
intended to meet those requirements. The federal income tax treatment for the
two types of options differs as follows:
Incentive
Stock Options
.
No
taxable income is recognized by the optionee at the time of the option grant,
and, if there is no disqualifying disposition at the time of exercise, no
taxable income is recognized for regular tax purposes at the time the option
is
exercised, although taxable income may arise at that time for alternative
minimum tax purposes equal to the excess of the fair market value of the
purchased shares at the time over the exercise price paid for those
shares.
The
optionee will recognize taxable income in the year in which the purchased shares
are sold or otherwise made the subject of certain dispositions. For federal
tax
purposes, dispositions are divided into two categories: qualifying and
disqualifying. A qualifying disposition occurs if the sale or other disposition
is made more than two years after the date the option for the shares involved
in
the sale or disposition was granted and more than one year after the date the
option was exercised for those shares. If either of these two requirements
is
not satisfied, a disqualifying disposition will result.
Upon
a
qualifying disposition, the optionee will recognize long-term capital gain
in an
amount equal to the excess of the amount realized upon the sale or other
disposition of the purchased shares over the exercise price paid for the shares.
If there is a disqualifying disposition of the shares, the excess of the fair
market value of those shares on the exercise date over the exercise price paid
for the shares will be taxable as ordinary income to the optionee. Any
additional gain or any loss recognized upon the disposition will be taxable
as a
capital gain or capital loss.
If
the
optionee makes a disqualifying disposition of the purchased shares, the Company
will be entitled to an income tax deduction, for the Company’s taxable year in
which the disposition occurs, equal to the excess of the fair market value
of
the shares on the option exercise date over the exercise price paid for the
shares. If the optionee makes a qualifying disposition, the Company will not
be
entitled to any income tax deduction.
Non-Statutory
Stock Options
.
No
taxable income is recognized by an optionee upon the grant of a non-statutory
option. The optionee will, in general, recognize ordinary income, in the year
in
which the option is exercised, equal to the excess of the fair market value
of
the purchased shares on the exercise date over the exercise price paid for
the
shares, and the Company will be required to collect certain withholding taxes
applicable to the income from the optionee.
The
Company will be entitled to an income tax deduction equal to the amount of
any
ordinary income recognized by the optionee with respect to an exercised
non-statutory option. The deduction will in general be allowed for the Company’s
taxable year in which the ordinary income is recognized by the
optionee.
If
the
shares acquired upon exercise of the non-statutory option are unvested and
subject to repurchase in the event of the optionee’s cessation of service prior
to vesting in those shares, the optionee will not recognize any taxable income
at the time of exercise but will have to report as ordinary income, as and
when
the Company’s repurchase right lapses, an amount equal to the excess of the fair
market value of the shares on the date the repurchase right lapses over the
exercise price paid for the shares. The optionee may elect under IRC Section
83(b) to include as ordinary income in the year of exercise of the option an
amount equal to the excess of the fair market value of the purchased shares
on
the exercise date over the exercise price paid for the shares. If a timely
IRC
Section 83(b) election is made, the optionee will not recognize any additional
income as and when the repurchase right lapses.
Stock
Appreciation Rights
.
No
taxable income is recognized upon receipt of a stock appreciation right. The
holder will recognize ordinary income in the year in which the stock
appreciation right is exercised, in an amount equal to the excess of the fair
market value of the underlying shares of common stock on the exercise date
over
the base price in effect for the exercised right, and the Company will be
required to collect certain withholding taxes applicable to the income from
the
holder.
The
Company will be entitled to an income tax deduction equal to the amount of
any
ordinary income recognized by the holder in connection with the exercise of
a
stock appreciation right. The deduction will in general be allowed for the
Company’s taxable year in which the ordinary income is recognized by the
holder.
Direct
Stock Issuances
.
Stock
granted under the Plan may include issuances such as unrestricted stock grants,
restricted stock grants and restricted stock units. The federal income tax
treatment for such stock issuances are as follows:
Unrestricted
Stock Grants
.
The
holder will recognize ordinary income in the year in which shares are actually
issued to the holder. The amount of that income will be equal to the fair market
value of the shares on the date of issuance, and the Company will be required
to
collect certain withholding taxes applicable to the income from the holder.
The
Company will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the holder at the time the shares are issued.
The
deduction will in general be allowed for the Company’s taxable year in which the
ordinary income is recognized by the holder.
Restricted
Stock Grants
.
No
taxable income is recognized upon receipt of stock that qualifies as
performance-based compensation unless the recipient elects to have the value
of
the stock (without consideration of any effect of the vesting conditions)
included in income on the date of receipt. The recipient may elect under IRC
Section 83(b) to include as ordinary income in the year the shares are actually
issued an amount equal to the fair market value of the shares. If a timely
IRC
Section 83(b) election is made, the holder will not recognize any additional
income when the vesting conditions lapse and will not be entitled to a deduction
in the event the stock is forfeited as a result of failure to vest.
If
the
holder does not file an election under IRC Section 83(b), he will not recognize
income until the shares vest. At that time, the holder will recognize ordinary
income in an amount equal to the fair market value of the shares on the date
the
shares vest. The Company will be required to collect certain withholding taxes
applicable to the income of the holder at that time.
The
Company will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the holder at the time the shares are issued,
if
the holder elects to file an election under IRC Section 83(b), or the Company
will be entitled to an income tax deduction at the time the vesting conditions
occur, if the holder does not elect to file an election under IRC Section 83(b).
Restricted
Stock Units
.
No
taxable income is recognized upon receipt of a restricted stock unit award.
The
holder will recognize ordinary income in the year in which the shares subject
to
that unit are actually issued to the holder. The amount of that income will
be
equal to the fair market value of the shares on the date of issuance, and the
Company will be required to collect certain withholding taxes applicable to
the
income from the holder.
The
Company will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the holder at the time the shares are issued.
The
deduction will in general be allowed for the Company’s taxable year in which the
ordinary income is recognized by the holder.
Deductibility
of Executive Compensation
The
Company anticipates that any compensation deemed paid by the Company in
connection with disqualifying dispositions of incentive stock option shares
or
the exercise of non-statutory stock options or stock appreciation rights with
exercise prices or base prices equal to or greater than the fair market value
of
the underlying shares on the grant date will qualify as performance-based
compensation for purposes of IRC Section 162(m) and will not have to be taken
into account for purposes of the $1.0 million limitation per covered individual
on the deductibility of the compensation paid to certain executive officers.
Accordingly, all compensation deemed paid with respect to those options or
stock
appreciation rights should remain deductible without limitation under IRC
Section 162(m). However, any compensation deemed paid by the Company in
connection with shares issued under the Stock Issuance Program will be subject
to the $1.0 million limitation on deductibility per covered individual, except
to the extent the vesting of those shares is based solely on one or more of
the
performance milestones specified above in the summary of the terms of the Stock
Issuance Program.
Accounting
Treatment
Pursuant
to the accounting standards established by Statement of Financial Accounting
Standards No. 123R, Share-Based Payment, or SFAS 123R, the Company is required
to recognize all share-based payments, including grants of stock options,
restricted stock units and employee stock purchase rights, in the Company’s
financial statements effective January 1, 2006. Accordingly, stock options
that
are granted to the Company’s employees and non-employee Board members will have
to be valued at fair value as of the grant date under an appropriate valuation
formula, and that value will have to be charged as stock-based compensation
expense against the Company’s reported GAAP earnings over the designated vesting
period of the award. Similar option expensing will be required for any unvested
options outstanding on January 1, 2006, with the grant date fair value of those
unvested options to be expensed against the Company’s reported earnings over the
remaining vesting period. For shares issuable upon the vesting of restricted
stock units awarded under the Plan, the Company will be required to expense
over
the vesting period a compensation cost equal to the fair market value of the
underlying shares on the date of the award. If any other shares are unvested
at
the time of their direct issuance, the fair market value of those shares at
that
time will be charged to the Company’s reported earnings ratably over the vesting
period. This accounting treatment for restricted stock units and direct stock
issuances will be applicable whether vesting is tied to service periods or
performance goals. The issuance of a fully-vested stock bonus will result in
an
immediate charge to the Company’s earnings equal to the fair market value of the
bonus shares on the issuance date.
Stock
options and stock appreciation rights granted to non-employee consultants will
result in a direct charge to the Company’s reported earnings based on the fair
value of the grant measured on the vesting date of each installment of the
underlying shares. Accordingly, the charge will take into account the
appreciation in the fair value of the grant over the period between the grant
date and the vesting date of each installment comprising that grant.