MANAGEMENT
MANAGEMENT
Executive Officers
Our The Company's executive officers as of the date of this Proxy Statement, and their ages as of May 13, 2005July 21, 2006, are as follows:
| Name
|
|
|
|
| | Age |
|
|
| | Position |
|
|---|
Hong Liang Lu Lu(1) | | 50
51 | | President, Chief Executive Officer and Chairman of the Board |
Ying Wu Wu(1) | | 45
46 | | Executive Vice President and Vice Chairman of the Board, Chairman and Chief Executive Officer for China |
Michael Sophie
| | 47
| | Senior Vice President of Finance, Chief Financial Officer and Assistant Secretary
|
William Huang | | 42
43 | | Senior Vice President and Chief Technology Officer |
Shao Ning J. Chou
Francis Barton | | 43
59 | | SeniorExecutive Vice President, President and Chief OperatingFinancial Officer for China
|
Hong Liang
- (1)
- On May 5, 2006, Mr. Lu
has servednotified the Company of his resignation as ourthe Company's President, Chief Executive Officer and Chairman of the Board, effective December 31, 2006. Mr. Wu will assume the position of Chief Executive Officer effective January 1, 2007. Mr. Toy, currently our Lead Director, will assume the position of Chairman of the Board effective January 1, 2007.
Hong Liang Lu has served as the Company's President, Chief Executive Officer and director since June 1991. Mr. Lu has served as the Chairman of the Board since March 2003. In June 1991, Mr. Lu co-founded UTStarcom under its prior name, Unitech Telecom, Inc., which subsequently acquired StarCom Network Systems, Inc. in September 1995. From 1986 through December 1990, Mr. Lu served as President and Chief Executive Officer of Kyocera Unison, a majority owned subsidiary of Kyocera International, Inc. HeMr. Lu served as President and Chief Executive Officer of Unison World, Inc., a software development company from 1983 until its merger with Kyocera in 1986. From 1979 to 1983, heMr. Lu served as Vice President and Chief Operating Officer of Unison World, Inc. Mr. Lu also serves as a director of Shanda Interactive Entertainment Ltd. Mr. Lu holds a B.S. in Civil Engineering from the University of California at Berkeley.
Ying Wuhas served as ourthe Company's Executive Vice President and Vice Chairman of the Board since October 1995. Mr. Wu has also served as the Chairman and Chief Executive Officer, and, until February 2004, as President, of one of ourthe Company's subsidiaries, UTStarcom China Co., Ltd., beginning his duties there in October 1995. Mr. Wu was a co-founder, and from February 1991 to September 1995 served as Senior Vice President, of StarCom Network Systems, Inc., a company that marketed and distributed third party telecommunications equipment. From 1988 to 1991, Mr. Wu served as a member of the technical staff of Bellcore Laboratories. From 1987 through 1988, Mr. Wu served as a consultant at AT&T Bell Labs. Mr. Wu also serves as a director of AsiaInfo Holdings, Inc. HeMr. Wu holds a B.S. in Electrical Engineering from Beijing Industrial University and an M.S. in Electrical Engineering from the New Jersey Institute of Technology.
William HuangMichael Sophie has been our Chief Financial Officer since August 1999, and was appointed Senior Vice President of Finance in January 2003. Prior to joining our Company, Mr. Sophie held executive positions at P-Com, Inc. from August 1993 to August 1999, including Vice President Finance, Chief Financial Officer and Group President. From 1989 through 1993, Mr. Sophie was Vice President of Finance at Loral Fairchild Corporation. Mr. Sophie also serves as a director of McData Corporation. He holds a B.S. from California State University, Chico and an M.B.A. from the University of Santa Clara.
William Huang has been ourCompany's Chief Technology Officer since September 1999, and was appointed ourthe Company's Senior Vice President in September 2001. From December 1996 to September 1999, heMr. Huang was ourthe Company's Vice President of Strategic Product Planning. From June 1995 to December 1996, Mr. Huang served as ourthe Company's Vice President of China Operations. From 1994 to June 1995, Mr. Huang was ourthe Company's Director of Engineering. From 1992 to 1994, heMr. Huang was a memberconsultant, Member of the technical staffTechnical Staff and project leader at AT&T Systems.CellRelay Systems (part of Bell Labs). Mr. Huang serves on the board of Shenzhen Gin De (Group) Ltd., a publicly listed real estate investment company in China. Mr. Huang holds a B.S. in Electrical Engineering from Huazhong University of Science & Technology, and an M.S. in Electrical Engineering and Computer Sciences from the University of Illinois.
Francis P. BartonShao-Ning J. Chou has been ourthe Company's Executive Vice President and Chief OperatingFinancial Officer for China since August 2005. From May 2003 to July 1996. He2005, Mr. Barton was appointedExecutive Vice President and Chief Financial Officer of Atmel Corporation. From May 2001 to May 2003, Mr. Barton was Executive Vice
President and Chief Financial Officer of BroadVision Inc. From 1998 to 2001, Mr. Barton was Senior Vice President in September 2001, and PresidentChief Financial Officer of UTStarcom China Co., Ltd. in February 2004.Advanced Micro Devices, Inc. From March 19971996 to December 1998, heMr. Barton was Vice President and Chief Financial Officer of UTStarcom China Co., Ltd.,Amdahl. Corporation. From 1974 to 1996, Mr. Barton worked at Digital Equipment Corporation, beginning his career as a financial analyst and from February 1996moving his way up through various financial roles to March 1997 he served as Vice President and Chief Financial Officer of Engineering. From March 1995 to June 1996, he was Director of Engineering for wireless systems and software with Lucent Technologies Microelectronics IC group. From April 1993 to March 1995, he was a Technical Manager for the Global Wireless product group with AT&T consumer products where he led multiple development teams for handset and wireless personal base station products. From February 1985 to April 1993,Digital Equipment Corporation's Personal Computer Division. Mr. Chou was team leader and a member of the technical staff for advanced digital communication research in AT&T Bell Laboratories where he led and engaged in data communication equipment and multimedia product development. Mr. ChouBarton holds a B.S. in ElectricalChemical Engineering from City College of New York, an M.S. in Engineering from Princeton UniversityWorcester Polytechnic Institute and an M.B.A. with a focus in finance from the State University of New Jersey, Rutgers.Northeastern University.
Executive Compensation
The table below sets forth information for the three most recently completed fiscal years concerning the compensation of the Chief Executive Officer and our other executive officers.(1)
Summary Compensation Table
| | | | Annual Compensation | | | | Long-Term
Compensation | | | |
Name and Principal Position | | | | Fiscal Year | | Salary ($) | | Bonus ($) | | Other Annual
Compensation
($) | | Securities
Underlying
Options/SARs
(#) | | All Other
Compensation(4)
($) | |
Hong Liang Lu | | | 2004 | | | | $ | 700,000 | | | | $ | — | | | | $ | — | | | | 250,000 | | | | $ | 20,500 | | |
President, Chief Executive | | | 2003 | | | | $ | 500,000 | | | | $ | 325,000 | | | | $ | — | | | | 120,000 | | | | $ | 5,469 | | |
Officer and Chairman of the Board | | | 2002 | | | | $ | 300,000 | | | | $ | 150,000 | | | | $ | — | | | | 225,000 | | | | $ | 14,625 | | |
Ying Wu | | | 2004 | | | | $ | 500,000 | | | | $ | — | | | | $ | — | | | | 200,000 | | | | $ | 5,500 | | |
Executive Vice President | | | 2003 | | | | $ | 400,000 | | | | $ | 250,000 | | | | $ | 81,007 | (2) | | | 85,000 | | | | $ | 5,500 | | |
and Vice Chairman | | | 2002 | | | | $ | 250,000 | | | | $ | 125,000 | | | | $ | 78,697 | (2) | | | 150,000 | | | | $ | 13,682 | | |
Shao-Ning J. Chou | | | 2004 | | | | $ | 400,000 | | | | $ | — | | | | $ | — | | | | 150,000 | | | | $ | 5,500 | | |
Senior Vice President | | | 2003 | | | | $ | 300,000 | | | | $ | 250,000 | | | | $ | 859,162 | (3) | | | 75,000 | | | | $ | 5,500 | | |
| | | 2002 | | | | $ | 210,000 | | | | $ | 105,000 | | | | $ | 2,563,253 | (3) | | | 150,000 | | | | $ | 13,663 | | |
Michael Sophie | | | 2004 | | | | $ | 400,000 | | | | $ | — | | | | $ | — | | | | 150,000 | | | | $ | 13,000 | | |
Chief Financial Officer | | | 2003 | | | | $ | 300,000 | | | | $ | 200,000 | | | | $ | — | | | | 75,000 | | | | $ | 5,500 | | |
and Senior Vice President | | | 2002 | | | | $ | 250,000 | | | | $ | 125,000 | | | | $ | — | | | | 150,000 | | | | $ | 11,088 | | |
William Huang | | | 2004 | | | | $ | 300,000 | | | | $ | — | | | | $ | — | | | | 100,000 | | | | $ | 5,500 | | |
Chief Technology Officer | | | 2003 | | | | $ | 250,000 | | | | $ | 100,000 | | | | $ | — | | | | 50,000 | | | | $ | 2,344 | | |
and Senior Vice President | | | 2002 | | | | $ | 200,000 | | | | $ | 100,000 | | | | $ | — | | | | 120,000 | | | | $ | 9,863 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Annual Compensation
| | Long Term Compensation
|
|---|
Name and Principal Position
| | Fiscal
Year
| | Salary ($)
| | Bonus ($)
| | Annual
Other
Compensation
($)
| | Restricted
Stock Award
($)
| | Securities
Underlying
Options/SARs
(#)
| | All Other
Compensation
($) (6)
|
|---|
Hong Liang Lu
President, Chief Executive Officer
and Chairman of the Board | | 2005
2004
2003 | | $
$
$ | 700,000
700,000
500,000 | | $
$
$ | —
—
325,000 | | $
$
$ | —
—
— | | $
$
$ | —
—
— | | —
250,000
120,000 | | $
$
$ | 9,530
20,500
5,469 |
Ying Wu
Executive Vice President and Vice
Chairman |
|
2005
2004
2003 |
|
$
$
$ |
500,000
500,000
400,000 |
|
$
$
$ |
—
—
250,000 |
|
$
$
$ |
2,629,275
—
81,007 |
(2)
(2) |
$
$
$ |
—
—
— |
|
—
200,000
85,000 |
|
$
$
$ |
10,502
5,500
5,500 |
William Huang
Chief Technology Officer and
Senior Vice President |
|
2005
2004
2003 |
|
$
$
$ |
300,000
300,000
250,000 |
|
$
$
$ |
79,200
—
100,000 |
|
$
$
$ |
11,538
—
— |
(3)
|
$
$
$ |
—
—
— |
|
75,000
100,000
50,000 |
|
$
$
$ |
6,537
5,500
2,344 |
Francis Barton*
Executive Vice President and
Chief Financial Officer |
|
2005
2004
2003 |
|
$
$
|
167,667
—
— |
|
$
$
$ |
250,000
—
— |
|
$
$
|
—
—
— |
|
$
$
$ |
882,000
—
— |
(5)
|
400,000
—
— |
|
$
$
$ |
16,458
—
— |
Michael Sophie†
Former Executive Vice President and Chief
Operating Officer |
|
2005
2004
2003 |
|
$
$
$ |
400,000
400,000
300,000 |
|
$
$
$ |
—
—
200,000 |
|
$
$
$ |
—
—
— |
|
$
$
$ |
—
—
— |
|
100,000
150,000
75,000 |
|
$
$
$ |
12,370
13,000
5,500 |
Shao-Ning J. Chou
Former Senior Vice President |
|
2005
2004
2003 |
|
$
$
$ |
300,000
400,000
300,000 |
|
$
$
$ |
—
—
250,000 |
|
$
$
$ |
223,226
—
859,162 |
(4)
(4) |
$
$
$ |
—
—
— |
|
—
150,000
75,000 |
|
$
$
$ |
10,273
5,500
5,500 |
- *
- Mr. Barton joined the Company in August 2005.
- †
- Mr. Sophie resigned as the Company's Executive Vice President and Chief Operating Officer in May 2006.
- (1)
We have - The Company has provided full disclosure for all
ourits Section 16 executive officers, which includes the “named"named executive officers”officers" as defined in Item 402(a)(3) of Regulation S-K.
- (2)
- Consists of (i) a housing
and children’s education allowance of $68,350$48,000 in 2002 and $68,350 in 20032005 paid in connection with Mr. Wu’sWu's international work assignment, and (ii) a tax assistance payment of $10,347$2,581,275 in 2002 and $12,657 in 20032005 paid in connection with ourthe Company's tax equalization policy whereby we providethe Company provides qualified employees with tax assistance to mitigate the tax differential arising from an employee’semployee's international work assignment.(3) Consists of (i)assignment, (iii) a housing and children's education allowance of $36,000 in 2002 and $36,000$68,350 in 2003 paid in connection with Mr. Chou’sWu's international work assignment, and (ii)(iii) a tax assistance payment of $2,527,253 in 2002 and
$823,162$12,657 in 2003 paid in connection with ourthe Company's tax equalization policy whereby we providethe Company provides qualified employees with tax assistance to mitigate the tax differential arising from an employee’semployee's international work assignment. $2,239,432
- (3)
- Consists of a Paid Time Off cash out in the amount of $11,538.
- (4)
- Consists of a housing allowance of $27,000 in 2005 and $36,000 in 2003 paid in connection with Mr. Chou's international work assignment, (ii) a tax assistance payment of $116,229 in 2005 and $823,162 in 2003 paid in connection with our tax equalization policy whereby the Company provides qualified employees with tax assistance to mitigate the tax
assistance paymentsdifferential arising from an employee's international work assignment, and (iii) a Paid Time Off cash out payment made in 2002 and2005 in the amount of $79,997. $691,771 of the tax assistance payments made in 2003 were paid in connection with the deferred payment of a tax levied by the People’sPeople's Republic of China on gains realized from the exercise of stock options in 2001. While U.S. tax regulations require that these amounts be recorded as income, due to general limitation rules, a portion of Mr. Chou’sChou's paid foreign tax has been recovered by usthe Company pursuant to ourthe Company's tax equalization policy.
- (5)
- Dollar value of 100,000 shares of Common Stock granted on August 1, 2005 subject to the Company's right of repurchase (the "Restricted Shares") and pursuant to the Restricted Stock Agreement (the "Restricted Stock Agreement") by and between the Company and Mr. Barton. The closing sales price of $8.82 per share of the Common Stock as listed on the Nasdaq National Market on August 1, 2005 was used to determine the value of the Restricted Shares. Under the Restricted Stock Agreement, the Restricted Shares will vest in equal annual installments over a period of four (4) years beginning on August 1, 2005. Dividends are payable on the Restricted Shares, although historically the Company has never declared or paid cash dividends on the Common Stock.
- (6)
- All other compensation for
20042005 consists of 401(K) match payments, and tax and investment advice fees, health insurance premiums and driver's fee paid by usthe Company on behalf of certain of ourthe Company's executive officers.
Stock Ownership Guidelines
Effective January 1, 2006, by the decision of the Nominating and Corporate Governance Committee of the Board, the Company imposed minimum stock ownership guidelines (the "Guidelines") for Non-Employee Directors and certain officers of the Company.
Each officer and Non-Employee Director is expected to acquire the number of shares of Common Stock as set forth below by the Guidelines before the later of (i) 4 years after the effective date of the Guidelines and (ii) 4 years after an officer's appointment to such office or a Non-Employee Director's appointment to the Board, as the case may be.
Position
| | Minimum Share
Ownership Requirements
|
|---|
| Chief Executive Officer and President | | 50,000 |
| Executive Vice Presidents | | 25,000 |
| Senior Vice Presidents/Division Presidents | | 10,000 |
| Non-Employee Directors | | 10,000 |
The Company will review compliance with the Guidelines annually. Failure to comply with the Guidelines may result in a reduction in future long-term incentive grants and/or payment of future annual and/or long-term incentive payouts in the form of Common Stock. The Nominating and Corporate Governance Committee has the discretion to waive the Guidelines, if compliance would create severe personal hardship for an officer or Non-Employee Director or prevent an officer or Non-Employee Director from complying with a court order. The Nominating and Corporate Governance Committee expects that such instances will be rare.
Option Grants
The following table sets forth certain information with respect to stock option grants to ourthe Company's executive officers during the fiscal year ended December 31, 2004.2005.
Option Grants in Last Fiscal Year
| | Number of
Securities
Underlying
Options
Granted(1) | | % of Total
Options Granted
to Employees in
Fiscal Year 2004(2) | | Exercise
Price Per
Share | | Expiration
Date | | Potential Realizable Value
at Assumed Annual Rates of
Stock Price
Appreciation for Option
Term(3) | |
Name | | | | | | | | | | | | 5% | | 10% | |
Hong Liang Lu | | 250,000 | | | 4.3 | % | | $ | 37.46 | | 1/19/2014 | | $ | 5,889,598 | | $ | 14,925,398 | |
Ying Wu | | 200,000 | | | 3.4 | % | | $ | 37.46 | | 1/19/2014 | | $ | 4,711,679 | | $ | 11,940,319 | |
Michael Sophie | | 150,000 | | | 2.6 | % | | $ | 37.46 | | 1/19/2014 | | $ | 3,533,759 | | $ | 8,955,239 | |
Shao Ning J. Chou | | 150,000 | | | 2.6 | % | | $ | 37.46 | | 1/19/2014 | | $ | 3,533,759 | | $ | 8,955,239 | |
William Huang | | 100,000 | | | 1.7 | % | | $ | 37.46 | | 1/19/2014 | | $ | 2,355,839 | | $ | 5,970,159 | |
Total Grants in 2004 | | 5,875,197 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| | Potential Realizable
Value at Assumed
Annual Rates
of Stock Price Appreciation
for Option Term(3)
|
|---|
| |
| | % of Total
Options
Granted to
Employees in
Fiscal Year
2005(2)
| |
| |
|
|---|
| | Number of
Securities
Underlying
Options
Granted(1)
| |
| |
|
|---|
Name
| | Exercise
Price
Per Share
| | Expiration
Date
|
|---|
| | 5%
| | 10%
|
|---|
| Hong Liang Lu | | — | | — | | | — | | — | | | — | | | — |
| Ying Wu | | — | | — | | | — | | — | | | — | | | — |
| William Huang | | 75,000 | | 1.38 | % | $ | 8.29 | | 11/30/2015 | | $ | 391,015 | | $ | 990,909 |
| Francis Barton | | 400,000 | | 7.34 | % | $ | 8.82 | | 8/1/2015 | | $ | 2,218,740 | | $ | 5,622,723 |
| Michael Sophie* | | 100,000 | | 1.84 | % | $ | 8.29 | | 11/30/2015 | | $ | 521,354 | | $ | 1,321,212 |
| Shao Ning J. Chou | | — | | — | | | — | | — | | | — | | | — |
| Total Grants in 2005 | | 575,000 | | | | | | | | | | | | | |
- *
- Pursuant to the Severance Agreement and Release dated April 13, 2006, all options granted to Mr. Sophie that were not vested as of May 5, 2006 have been canceled or terminated. For more discussion on the Severance Agreement and Release, please see the section entitled "Severance Benefits" under "Certain Relationships and Related Transactions" in this Proxy Statement.
- (1)
- All options were granted pursuant to
ourthe 1997 Stock Plan. The options have a ten-year term and vest and become exercisable over four years. In the event of a change in controlyears as follows: 25% of the Company,shares underlying the options will be substituted byvest 12 months after the successor corporation or will fullygrant date and 1/48 of the shares underlying the options vest and become exercisable for a period of 15 days.each month thereafter, subject to the optionee's continuing employment with the Company.
- (2)
- Based on an aggregate of
5,875,1975,448,073 shares subject to options granted to ourthe Company's employees in 2004.2005.
- (3)
- The potential realizable value represents amounts, net of exercise price before taxes, which may be realized upon exercise of the options immediately prior to the expiration of the terms of such options, assuming appreciation of 5% and 10% over the option term. The 5% and 10% rates are calculated based on rules promulgated by the SEC based upon a per share market price of the Common Stock underlying the options at the time the options were granted and do not reflect the
Company’sCompany's estimate of future stock price growth. The actual value realized may be greater or less than the potential realizable value set forth in the table.
Option Exercises and Values
The following table sets forth information for ourthe Company's executive officers relating to the number and value of securities underlying exercisable and unexercisable options they held at December 31, 2004,2005, and sets forth the number of shares of Common Stock acquired and the value realized upon exercise of stock options held as of December 31, 20042005 by ourthe executive officers.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Name | | | | Number of
Shares
Acquired on
Exercise | | Value Realized(1) | | Number of Securities
Underlying
Unexercised Options at
December 31, 2004 | | Value of Unexercised
In-the-Money Options at
December 31, 2004(2) | |
| | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
Hong Liang Lu | | | — | | | | $ | — | | | 1,206,563 | | | 138,437 | | | $ | 10,776,788 | | | $ | 476,162 | | |
Ying Wu | | | — | | | | $ | — | | | 660,362 | | | 94,995 | | | $ | 4,651,154 | | | $ | 325,840 | | |
Michael Sophie | | | 9,839 | | | | $ | 212,555 | | | 297,099 | | | 89,579 | | | $ | 671,949 | | | $ | 308,996 | | |
Shao Ning J. Chou | | | — | | | | $ | — | | | 519,167 | | | 97,915 | | | $ | 1,795,369 | | | $ | 320,681 | | |
William Huang | | | 9,582 | | | | $ | 24,539 | | | 293,751 | | | 66,249 | | | $ | 1,077,833 | | | $ | 146,139 | | |
| |
| |
| | Number of Securities
Underlying Unexercised
Options at
December 31, 2005
| |
| |
|
|---|
| |
| |
| | Value of Unexercised
in-the-Money Options at
December 31, 2005(2)
|
|---|
| | Number of
Shares
Acquired on
Exercise
| |
|
|---|
Name
| | Value
Realized(1)
($)
|
|---|
| | Exercisable
| | Unexercisable
| | Exercisable
| | Unexercisable
|
|---|
| Hong Liang Lu | | 0 | | — | | 1,292,813 | | 52,187 | | $ | 1,424,000 | | — |
| Ying Wu | | 0 | | — | | 663,756 | | 36,244 | | $ | 284,800 | | — |
| William Huang | | 0 | | — | | 336,251 | | 98,749 | | | — | | — |
| Francis Barton | | 0 | | — | | — | | 400,000 | | | — | | — |
| Michael Sophie | | 0 | | — | | 353,350 | | 133,328 | | | — | | — |
| Shao Ning J. Chou | | 0 | | — | | 539,376 | | — | | | — | | — |
- (1)
- The
“Value Realized”"Value Realized" is based on the closing price of ourthe Common Stock as quoted on The Nasdaq National Market on the date of exercise, minus the per share exercise price, multiplied by the number of shares issued upon exercise of the option.
- (2)
- The value of unexercised in-the-money options is calculated based on the difference between the closing price of
$22.15$8.06 per share as quoted on The Nasdaq National Market on December 31, 2004,2005, and the exercise price for the shares, multiplied by the number of shares underlying the option.
Equity Compensation Plan Information
The following table sets forth information, as of December 31, 2005*, about equity awards under our equity compensation plans:
Plan Category
| | Number of Securities to
Be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
| | Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
| | Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (excluding securities
reflected in column (a))
| |
|---|
| | (a)
| | (b)
| | (c)
| |
|---|
| Equity compensation plans approved by security holders(1) | | 18,868,666 | (2) | $ | 17.80 | | 7,939,418 | (3) |
Equity compensation plans not approved by security holders |
|
1,073,086 |
(4) |
$ |
28.55 |
(5) |
470,540 |
(6) |
| | |
| | | | |
| |
| Total | | 19,941,752 | | $ | 18.35 | | 8,409,958 | |
| | |
| | | | |
| |
- *
- As of March 31, 2006, the number of shares of the Common Stock available for issuance but remained unissued under existing plans which will be rolled into the 2006 Equity Incentive Plan, if adopted by the Company's shareholders, was 3,933,333. As of March 31, 2006, options to purchase 22,848,484 shares of the Common Stock were outstanding under the existing plans. Such outstanding options had a weighted average exercise price of $15.707 and an average remaining term of 7.5 years as of March 31, 2006. There were also 200,000 shares of restricted stock awards outstanding as of March 31, 2006.
- (1)
- Includes the 1997 Plan which provides for an annual increase in the number of shares available for issuance under the plan equal to the lesser of (i) 4% of the outstanding Shares on such date, (ii) 6,000,000 shares or (iii) a lesser amount determined by the Board, and the 2000 Employee Stock Purchase Plan, which provides for an annual increase in the number of shares available for issuance under the plan equal to (i) 2% of the outstanding shares on such date, (ii) 2,000,000 shares or (iii) a lesser amount determined by the Board.
- (2)
- Includes shares of Common Stock to be issued upon exercise of options granted under the Company's 1997 Plan and Director Plan.
- (3)
- Includes 1,914,934 shares of Common Stock available for issuance under the 2000 Employee Stock Purchase Plan, 5,272,484 shares of Common Stock available for issuance under the 1997 Plan and 752,000 shares of Common Stock available for issuance under the Director Plan.
- (4)
- Includes 1,021,510 options outstanding under the 2003 Non-Statutory Stock Option Plan, a maximum of 36,312 performance shares outstanding under the Advanced Communication Devices Corporation Incentive Program and a maximum of 15,264 performance shares outstanding under the Issanni Communications, Inc. Incentive Program. Does not include 9,254 shares and 8,580 shares of Common Stock subject to outstanding options with a weighted-average exercise price of $2.67 that were assumed in our acquisitions of Advanced Communication Devices Corporation and RollingStreams Systems, Ltd., respectively.
- (5)
- Represents the average weighted exercise price of 1,021,510 options outstanding under the 2003 Non-Statutory Stock Option Plan. Excludes performance shares outstanding under the Advanced Communication Devices Corporation Incentive Program and the Issanni Communications, Inc. Incentive Program because performance shares do not have an exercise price.
- (6)
- Includes 470,540 shares of Common Stock available for issuance under the Company's 2003 Non-Statutory Stock Option Plan.
Employment Contracts, Termination of Employment and Change of Control Arrangements
The Company has entered into Change of Control Severance Agreements with each of Messrs. Sophie, Lu, Wu Chou and Huang dated April 12, 2002, January 17, 2003, January 31, 2003, January 31, 2003 and January 31, 2003, respectively. These agreementsrespectively (collectively, the "Lu, Wu and Huang Employment Agreements") and a Change of Control/Involuntary Termination Severance Agreement with Mr. Barton dated September 6, 2005 (the "Barton Employment Agreement" and, together with theLu, Wu and Huang Employment Agreements, the "Employment Agreements"). The Employment Agreements provide that if the employee’semployee's employment with usthe Company terminates as a result of involuntary termination at any time within 12 months after a change of control, (i) such employee will be entitled to 24 months of base salary as in effect as of the date of such termination payable in a lump sum within 30 days of termination and 100% of the bonus for the year in which termination occurs, (ii) all stock options granted to such employee will become fully vested and exercisable as of the date of termination and all stock held by him that is subject to a right of repurchase by(ii) the Company that was purchased prior to the change of control will have such right lapse, and (iii) we will continue to provide such employee the same level of health coverage as in effect on the day immediately preceding the termination date until the earlier of the date such employee is no longer eligible to receive continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or 12 months from the termination date.
Additionally, in connection with any such termination following a change of control, the Lu, Wu and Huang Employment Agreements provide that all stock options granted to such employee will become fully vested and exercisable as of the date of termination and the Company's right to repurchase any stock that was purchased by such employee prior to the change of control shall lapse. Similarly, the Barton Employment Agreement provides that all stock options granted to such employee will become fully vested and exercisable as of the date of termination, any share purchase rights granted to such employee will become fully vested and exercisable to the extent such share purchase rights are outstanding and unexercisable at the time of such termination and the Company's right to repurchase any stock that was purchased by such employee prior to the change of control shall lapse. In the event that the severance and other benefits provided to employees pursuant to the Change of Control Severance Agreement between us and such employeeEmployment Agreements constitute “parachute payments”"parachute payments" within the meaning of Section 280G of the Internal Revenue Code and would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, such employee’semployee's benefits under the Change of Control Severance AgreementEmployment Agreements shall be either delivered in full or delivered as to such lesser extent which would result in no portion of such benefits being subject to the excise tax, whichever results in the receipt by the employee, on an after-tax basis, of the greatest amount of benefits.
For the purpose of the Change of Control SeveranceEmployment Agreements, for Messrs. Lu, Wu, Sophie, Chou and Huang, “involuntary termination”"involuntary termination" includes (i) without the employee’semployee's express written consent, a significant reduction of the employee’semployee's duties, position or responsibilities relative to the employee’semployee's duties, position or responsibilities in effect immediately prior to such reduction, or the removal of the employee from such position, duties and responsibilities, unless the employee is provided with comparable duties, position and responsibilities (as, for example, following a change of control, ourthe Company's Chief Financial Officer is made the Chief Financial Officer of the acquiring entity), (ii) without the employee’semployee's express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the employee immediately prior to such reduction, (iii) a reduction by usthe Company of the employee’semployee's base salary as in effect immediately prior to such reduction, (iv) a material
reduction by usthe Company in the kind or level of employee benefits to which the employee is entitled immediately prior to such reduction with the result that the employee’semployee's overall benefits package is significantly reduced, (v) the relocation of the employee to a facility or a location more than 50 miles from his current location without the employee’semployee's express written consent, (vi) any purported termination of the employee by usthe Company which is not effected for cause or for which the grounds relied upon are not valid, or (vii) ourthe Company's failure to obtain the assumption of the Change of Control Severance AgreementAgreements by any successor to the Company.
“Change "Change of control”Control" in these agreementsthe Employment Agreements is defined as (i) the approval by ourthe Company's stockholders of a merger or consolidation with any other corporation, other than a merger or consolidation which would result in ourthe Company's voting securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by ourthe Company's voting securities or such surviving entity outstanding immediately after such merger or consolidation, (ii) the approval by ourthe Company's stockholders of a plan to complete liquidation or an agreement for the sale or disposition by the company of all or substantially all of ourthe Company's assets, (iii) any “person”"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becoming the “beneficial owner”"beneficial owner" (as defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of ourthe Company's securities representing 50% or more of the total voting power represented by ourthe Company's then outstanding voting securities, or (iv) a change in the composition of the Board, as a result of which fewer than a majority of the Directorsdirectors are incumbent Directors.directors.
The Barton Employment Agreement also provides for certain severance benefits to be paid to the employee terminated without Cause (as defined below), even if such termination does not result from a Change of Control. Such employee will be entitled to 12 months of his base salary as in effect as of the date of such termination, less applicable withholding, payable in a lump sum within 30 days of such termination, (ii) 100% of his bonus for the year in which such termination occurs, and (iii) continued vesting in stock options and share purchase rights granted to such employee prior to the date of such termination, for a period of 12 months from the date of such termination, with the right to exercise said stock options and share purchase rights within 90 days from the end of said 12-month period. However, in the event of a termination for Cause, the terminated employee shall not be entitled to any of the foregoing benefits.
"Cause" in the Barton Employment Agreement is defined as (i) any act of personal dishonesty taken by the employee in connection with his responsibilities as an employee which is intended to result in substantial personal enrichment of the employee, (ii) employee's conviction of a felony which the Board reasonably believes has had or will have a material detrimental effect on the Company's reputation or business, (iii) a willful act by the employee which constitutes misconduct and is injurious to the Company, and (iv) continued willful violations by the employee of the employee's obligations to the Company after a delivery of a written demand by the Company to the employee for performance which describes the basis of the Company's belief that the employee has not substantially performed his duties.
On April 13, 2006, the Company and Mr. Sophie entered into a Severance Agreement and Release (the "Severance Agreement") in connection with Mr. Sophie's resignation effective May 5, 2006. The Severance Agreement replaces and supersedes all prior agreements concerning Mr. Sophie's employment relationship with the Company, with the exception of the confidentiality agreement and any applicable stock option agreement entered into by and between the Company and Mr. Sophie under the Company's existing stock plans. Under the terms of the Severance Agreement, the Company paid Mr. Sophie the equivalent of 6 months of regular base salary in a lump sum of $220,000, less applicable withholdings. Mr. Sophie also received payments for his accrued but unpaid Paid Time Off and Floating Holiday Benefits (as described in the Severance Agreement). In addition, the Company paid the approximate equivalent of 6 months of Mr. Sophie's COBRA premiums in a lump sum of $6,000, less applicable withholdings.
Pursuant to the terms of the Severance Agreement, Mr. Sophie's stock options that were not vested as of May 5, 2006 were canceled or terminated. Mr. Sophie will have the right to exercise vested options at any time within 120 days after May 5, 2006, but no later than the option expiration date.
The Severance Agreement also provides for a mutual release of claims by the Company and Mr. Sophie.
On September 6, 2005, the Company entered into a restricted stock agreement (the "Restricted Stock Agreement") with Mr. Barton. The Restricted Stock Agreement provides for the purchase by Mr. Barton of 100,000 shares of the Common Stock (the "Restricted Shares") which will be released from the Company's repurchase right in equal annual installments over a period of 4 years beginning on August 1, 2005.
The Restricted Stock Agreement provides that, if, as a result of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividends, split-up, share combination, or other change in the corporate structure of the Company affecting the Common Stock, (i) the Restricted Shares will be increased, reduced or otherwise changed, (ii) Mr. Barton will be entitled to new or additional or different shares of stock, cash or securities (other than rights or warrants to purchase securities), and (iii) such new or additional or different shares, cash or securities will be considered to be the Restricted Shares not yet released from the Company's repurchase right and will be subject to all the restrictions of the Restricted Stock Agreement.
The Director Plan provides that, in the event of a proposed dissolution or liquidation of the Company, each outstanding option granted under the Director Plan that has not been exercised shall terminate immediately prior to the consummation of such proposed dissolution or liquidation. The Director Plan also provides that in the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, each outstanding option granted under the Director Plan may be assumed or substituted by the successor corporation. Following such assumption or substitution, if the optionee's status as a director or director of the successor corporation is terminated involuntarily, the option will become fully exercisable for a period of 3 months from the date of such termination. In the event the successor corporation refuses to assume or substitute the outstanding option, such option will become fully exercisable for a period of 30 days from the date the optionee is notified of such refusal by the Board.
The 1997 Plan provides that, in the event of a proposed dissolution or liquidation of the Company, the Board must notify each optionee under the 1997 Plan as soon as practicable prior to the effective date of such proposed dissolution or liquidation. The Board has the discretion to allow the optionee to exercise his or her option or stock purchase right until 15 days prior to the effective date of such dissolution or liquidation. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding option or stock purchase right under the 1997 Plan will be assumed or substituted by the successor corporation. In case the successor corporation refuses to assume or substitute the outstanding option or stock purchase right, such outstanding option or stock purchase right will become fully exercisable for a period of 15 days from the date the optionee is notified of such refusal by the Board.
In addition, both the 1997 Plan and the Director Plan (collectively, the "Plans") provide, in general, that an optionee whose status as a Service Provider (as defined in the 1997 Plan) or a director (as defined in the Director Plan) is terminated is entitled to exercise his or her option, to the extent such option has vested as of the date of termination, until the earlier of (i) expiration of the option according to its terms, (ii) expiration of a period of 3 months following termination, or (iii) expiration of a period of 12 months following termination as a result of death or disability (the "Post-Termination Exercise Period"). The 1997 Plan, unlike the Director Plan, allows the Post-Termination Exercise Period to extend beyond the default term, if the stock option agreement entered into by the Company and the optionee pursuant to the 1997 Plan provides for a longer term.
Prior to October 28, 2005, the Board had approved a form of stock option agreement (the "Existing Option Agreement") for use under the 1997 Plan in connection with stock option grants to the Company's (i) Service Providers (as defined in the 1997 Plan), (ii) executive officers, and (iii) directors, which provides for the default Post-Termination Exercise Period designated in the 1997 Plan of 3 months or 12 months for termination as a result of death or disability. On October 28, 2005, the Board approved a plan to modify the Existing Option Agreement, to the extent that the Existing Option Agreement applies to the executive officers and directors, to provide for a longer Post-Termination Exercise Period of 12 months for termination following a Change of Control (as defined below) (such modified Existing Agreement, the "Officer and Director Option Agreement"). On November 30, 2005, the Compensation Committee of the Board approved the use of the Officer and Director Option Agreement in conjunction with granting Mr. Huang and Mr. Sophie options to purchase 75,000 shares and 100,000 shares of the Common Stock, respectively. Then on December 2, 2005, the Compensation Committee of the Board formally adopted the Officer and Director Option Agreement for use exclusively in connection with option grants to executive officers and directors of the Company. The Existing Option Agreement will continue to be used for option grants to Service Providers other than executive officers and directors.
Under the Officer and Director Option Agreement, if the optionee's status as a Service Provider or director is terminated following a Change of Control (as defined below), the optionee shall be entitled to exercise his or her option, to the extent such option has vested as of the date of such termination, until the earlier of (i) expiration of the option according to its terms, or (ii) expiration of a period of 12 months following the termination of the optionee's status as a Service Provider or director.
For the purpose of the Officer and Director Option Agreement, a "Change of Control" means (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) the date of the consummation of a merger or consolidation of the Company with any other corporation that has been approved by the stockholders of the Company, 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) more than 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iii) the date of the consummation of the sale or disposition by the Company of all or substantially all the Company's assets. All options granted to officers or directors are subject to the foregoing terms of the Plans and the applicable forms of option agreement. For information on options granted to officers or directors under the Plans during 2005, please see sections entitled "Director Compensation" under "Board of Directors" and "Option Grants" under "Management" in this Proxy Statement.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consisted of Messrs. Toy and Horner throughout the 20042005 fiscal year, and Ms. Atkins joined the Compensation Committee in March 2004. Mr. Lenzmeier joined the Compensation Committee in April 2005. Ms. Atkins also served on the Compensation Committee from the beginning of 2005 to May 2005, when her term as a director expired. All members of the Compensation Committee during 20042005 were independent directors in accordance with the applicable independence requirements of the Nasdaq Marketplace Rules, and none were employees or officers or former employees of the Company. During 2004,2005, no executive officer of the Company served on the compensation committee (or equivalent) or board of directors of another entity whose executive officer(s) served on ourthe Company's Compensation Committee or Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our Directorsthe Company's directors and executive officers, and persons who own more than 10% of a registered class of ourthe Company's equity securities (“("Section 16 Filers”"), to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such Section 16 Filers are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’sCompany's knowledge, based solely on its review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 2004,2005, all Section 16 Filers complied with all Section 16(a) filing requirements except for the following inadvertent late filings: (i) Ms. Atkins, who is not standing for reelection,Mr. Horner filed a Form 4 on FebruaryNovember 2, 20042005 reporting one transaction late; (ii) Mr. ChouToy filed a Form 4 on October 19, 2004November 2, 2005 reporting one transaction late; (iii) Mr. HuangClarke filed an amendment to a previously filed Form 4 on September 27, 2004 reporting one transaction late; (iv) Mr. Lu filed a Form 4 on October 19, 2004 reporting one transaction late; (v) Mr. Sophie filed a Form 4 on October 19, 2004November 2, 2005 reporting one transaction late; and (vi)(iv) Mr. Wu filed a Form 4s5 on January 8, 2004 and October 19, 2004December 29, 2005 reporting two transactionsone transaction late.
16
REPORT OF THE COMPENSATION COMMITTEE
Introduction
The Compensation Committee of the Board of the Company was established on January 31, 1997. Mr. Toy, the Chairman of the Compensation Committee, and Mr. Horner served on the Committee throughout 2004. Ms. Atkins joined the Compensation Committee on March 29, 2004,2005, and Mr. Lenzmeier joined the Compensation Committee on April 11, 2005.
During 2004,2005, the Compensation Committee was comprised solely of Non-Employee Directors who were each: (i) independent as defined under the Nasdaq Marketplace Rules, (ii) a non-employee directorNon-Employee Director for purposes of Rule 16b-3 of the Securities Exchange Act of 1934, as amended, and (iii) an outside director for purposes of Section 162(m) of the Internal Revenue Code. During 2005,2006, the Committee will be comprised of directors who meet these same standards.
The primary purpose of the Compensation Committee is to discharge the responsibilities of the Company’s Board of Directors relating to all compensation, including equity compensation, of the Company’sCompany's executives. The Compensation Committee also has overall responsibility for evaluating and making recommendations to the Board regarding equity-based and cash variable compensation plans, policies and programs of the Company.
Compensation Philosophy
The philosophy of the Compensation Committee is to create a system in which employee compensation is tied to the performance of the Company, thereby promoting stockholder value. The Company’sCompany's compensation program consists of two principal components: cash-based compensation, both fixed and variable, and equity-based compensation. These two principal components are intended to attract, retain, motivate, increase the productivity of and reward, in a cost-effective manner, executives who are expected to manage both the short-term and long-term success and competitiveness of the Company. In addition, the Compensation Committee attempts to structure the compensation program to be regarded positively by the Company’sCompany's stockholders, employees, the financial community and the public in general.
Cash-based Compensation
The Compensation Committee believes that the annual cash compensation paid to executives should be commensurate with the performance of both the Company as a whole and the individual executive in question. For this reason, the Company’sCompany's executive cash compensation consists of base compensation (salary) and variable incentive compensation (annual bonus).
Base salaries for executive officers are established considering a number of factors, including the Company’sCompany's profitability, the individual performance and measurable contribution to the Company’sCompany's success of the executive in question and pay levels of similar positions with comparable companies in the industry. The Compensation Committee supports the Company’sCompany's philosophy by providing for moderation in fixed elements of compensation, philosophy of moderation for elements such as base salary and benefits. Base salary decisions are made as part of the Company’sCompany's formal annual review process.
An executive’s The amount of an executive's annual performance awardbonus generally depends on the financial performance of the Company relative to profit targets and the executive’sexecutive's individual performance with respect to the successful completion of objectives and goals deemed by the CompanyCompensation Committee to be important in maximizing long-term return to the Company’sCompany's stockholders. TheseThe Compensation Committee reviews these targets, objectives and goals are reviewed at least annually to meet the changing nature of the Company’sCompany's business. The incentive (bonus) portion of total cash compensation is set at a higher percentage for more senior officers, with the result that such officers have a higher percentage of their potential total cash compensation at risk.
Equity-based Compensation
The Compensation Committee administers an optionthe Company's equity incentive program, pursuant to which members of management, including the Company’sCompany's executive officers, may receive annual stock option grants upon a yearly reviewand/or restricted stock purchase rights from a pool of shares set aside by the Company.Company on an annual basis. The purpose of the optionequity incentive program is to provide additional incentive to executives and other key employees of the Company to work to maximize long-term return to the Company’sCompany's stockholders. The allocation of stock options and restricted stock purchase rights to the option pool,Company's employees, other than the shares allocated to the President and Chief Executive Officer, isare recommended by the President and Chief Executive Officer for approval by the Compensation Committee. The allocation of shares from the option poolstock options and restricted stock purchase rights to the President and Chief Executive Officer is determined solely by the Compensation Committee. In granting stock optionsequity incentive awards to the executive officers and the President and Chief Executive Officer, the Compensation Committee considers a number of objective and subjective factors, including the executive’sexecutive's position and responsibilities at the Company, such executive’sexecutive's past and anticipated individual performance, current market survey data with respect to market rates for optionequity compensation practices at other peer companies in the Company's industry and other factors thatthe level of achievement by such executive of the performance objectives (as described below) set by the Compensation Committee may deem relevant.Committee. Options and restricted stock purchase rights generally vest over a four-year period to encourage optionholdersexecutive officers to continue in the employ of the Company. Beginning in 2006, options and restricted stock purchase rights granted to executive officers may also be subject to performance vesting, such that the shares underlying the equity award will only vest if the performance objectives set by the Compensation Committee are achieved, as described further below. The exercise price of options is the market price on the date of grant, ensuring that the option will acquire value only to the extent that the price of the Company’sCompany's common stock increases relative to the market price at the date of grant. On December 31, 2004,The restricted stock purchase rights entitle the Company adopted an immediateexecutive officers to purchase the Company's common stock at par value.
Management Performance Objectives
Starting in 2006, the Compensation Committee will establish annual management performance objectives tailored for each executive officer. Under this regime, options or restricted stock awards granted to each executive officer will vest, or stock purchase rights will be granted, only to the extent that the established performance objectives for such officer have been achieved, upon achievement of pre-established performance objectives for each such executive officer, as determined by the Compensation Committee. The criteria for management performance objectives include (i) achievement of corporate financial measures such as bookings, gross margin, revenue, operating profit, cash flow, inventory turns, contribution margin and full accelerationcash collections, (ii) achievement of vestingcorporate objectives relating to quality and organization, including improvement as to the Company's compliance efforts under Section 404 of shares coveredthe Sarbanes-Oxley Act of 2002, and (iii) achievement by all stock options outstanding underexecutive officers of additional individualized performance objectives reviewed and approved by the 1997 Stock Plan with a per share exercise price greater than $22.15 to mitigate the potential impact of FASB Statement No. 123(R), which requires the Company to expense unvested options starting on July 1, 2005. The Committee previously decided to reduce the use of stock options as a means of compensation for all employees in 2004 to help limit the Company’s anticipated future compensation cost with respect to equity incentives, once FASB Statement No. 123(R) becomes effective.Compensation Committee.
President and Chief Executive Officer Compensation
The Compensation Committee generally uses the same factors and criteria described above for compensation decisions regarding the President, Chief Executive Officer and Chairman of the Board. During the fiscal year ended December 31, 2004,2005, Mr. Lu received a base salary of $700,000 for serving as the President, Chief Executive Officer and Chairman of the Board of the Company. No bonus was awarded to Mr. Lu with respect to the fiscal year ended December 31, 2004. However, in the fiscal year ended December 31, 2004, the Compensation Committee granted Mr. Lu options to purchase 250,000 shares of the Company’s Common Stock pursuant to the 1997 Stock Plan, based on his performance in the fiscal year ended December 31, 2003.2005. As with the other executives of the Company, Mr. Lu’sLu's compensation was set atdetermined by the discretion of the Board,Compensation Committee, based on the achievement of certain performance objectives of the Company. Criteria considered in the determination of Mr. Lu’sLu's compensation included such factors as (i) the compensation provided to
chief executive officers of companies comparable to the Company, (ii) specific benchmarks tied to the revenue, growth or profitability of the Company, (iii) decisions made by Mr. Lu in the past fiscal year that improved the business prospects or financial condition of the Company, and (iv) Mr. Lu’sLu's leadership role in accomplishing specific goals set for the Company in the past fiscal year. The performance objectives are reviewed annually by the Compensation Committee to ensure that they are consistent with the Company’sCompany's compensation philosophy.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a federal tax deduction to publicly held companies for compensation in excess of $1 million paid to the Company’sCompany's President and Chief Executive Officer and to each of the other four most highly compensated executive officers. For this purpose, compensation can include, in addition to cash compensation, the difference between thegain realized upon exercise price of stock options and the valuevesting of the underlying stock on the date of exercise.restricted stock. The Company’sCompany's policy
is to qualify, to the extent reasonable, its executive officers’officers' stock option grants for deductibility under applicable tax laws. However, the Compensation Committee believes that its primary responsibility is to provide a compensation program that will attract, retain and reward the executive talent necessary for the Company’sCompany's success because the Compensation Committee feels such objective is in the best interest of the Company’sCompany's stockholders. Consequently, the Compensation Committee recognizes that the loss of a tax deduction may be necessary in some circumstances.
Subsequent to the annual shareholderstockholder meeting of 2004, awards granted under the 1997 Stock Plan no longer qualify as performance-based compensation for 162(m) purposes and therefore are subject to the $1 million$1,000,000 limit. Assuming the shareholdersstockholders approve the 20052006 Equity Incentive Plan, the Company will once again be able to issue options and other forms of equity compensation that is considered performance-based compensation and therefore exempt from the application of the $1,000,000 162(m) limit. As a result, the Committee has decided to delay executive officer grants, if any, until after the 2005 shareholder meeting so that, if shareholders approve the 2005 Equity Incentive Plan, the grants will qualify as performance-based compensation for 162(m) purposes.purposes and therefore excluded from the calculation of compensation for purposes of the $1,000,000 limit.
Summary
The Compensation Committee believes that its compensation program to date has been fair and motivating, and has been successful in attracting and retaining qualified employees and in linking compensation directly to the Company’sCompany's success. The Compensation Committee intends to review this program on an ongoing basis to evaluate its continued effectiveness.
| | The Compensation Committee |
| |
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Thomas Toy, Chairman
Betsy Atkins
Larry Horner
Allen Lenzmeier
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19
REPORT OF THE AUDIT COMMITTEE
The following is the report of the Audit Committee with respect to the Company’sCompany's audited financial statements for the fiscal year ended December 31, 2004.2005. The information contained in this report shall not be deemed to be “soliciting material”"soliciting material" or to be “filed”"filed" with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates the information by reference in such filing.
Established on January 31, 1997, the Audit Committee is currently comprised of five non-employee directors.four Non-Employee Directors. Mr. Horner, the Chairman of the Audit Committee, and Mr. Toy and Ms. Atkins served on the Audit Committee throughout 2004.2005. Mr. Clarke joined the Audit Committee on January 17, 2005 and Mr. Lenzmeier joined the Audit Committee on March 15, 2005. The Board of Directors has determined that each of the members of the Audit Committee is independent as defined by Nasdaq Marketplace Rules and the SEC. The Board also determined that each member of the Audit Committee is “financially literate”"financially literate" and has accounting or related financial management expertise. The Board also determined that each of Messrs. Horner, Clarke Lenzmeier and ToyLenzmeier is an “audit"audit committee financial expert”expert" as defined by SEC rules through his business and professional experience.
The purpose of the Audit Committee is to assist the Board of Directors in its general oversight of the Company’sCompany's financial reporting, internal controls and audit functions. The Audit Committee is directly responsible for the appointment, retention, evaluation, compensation, oversight and termination of the Company’sCompany's independent registered public accounting firm.
The Audit Committee reviews the results and scope of audit and other services provided by the independent auditors and reviews the accounting principles and auditing practices and procedures to be used in the Company’sCompany's financial reporting process, including its systems of internal control, and in the preparation of consolidated financial statements in accordance with generally accepted accounting principles. The Company’sCompany's independent registered public accounting firm for the last fiscal year, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”("PricewaterhouseCoopers"), is responsible for performing an independent audit of those financial statements. As more fully explained in the Audit Committee’sCommittee's charter, the Audit Committee’sCommittee's responsibility is to provide oversight of and to review those processes. The Audit Committee does not conduct auditing or accounting reviews or procedures, and relies on information and representations provided by management and the independent auditors. The Audit Committee has relied on management’smanagement's representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America and on the representations of the independent auditors included in their report on the Company’sCompany's financial statements.
The Audit Committee held 2330 meetings during the last fiscal year. The Audit Committee operates pursuant to a charter that it reviews annually.
Audited Financial Statements
The Audit Committee has reviewed the audited financial statements prepared for the fiscal year ended December 31, 2004.2005. The Audit Committee has discussed the audited financial statements with various members of the management of the Company.
Management is responsible for maintaining adequate internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting. In addition to its independent audit of the Company’sCompany's financial statements, PricewaterhouseCoopers has the responsibility for auditing management’smanagement's assessment of, and the effectiveness of, internal control over financial reporting and expressing an opinion thereon based on its audit. The Audit Committee was kept apprised of the progress
of management’smanagement's assessment of the Company’sCompany's internal control over financial reporting and
provided oversight to management during the process. In connection with this oversight, the Audit Committee received periodic updates provided by management and PricewaterhouseCoopers at meetings throughout the year. At the conclusion of the process, management provided the Audit Committee with a report on the effectiveness of the Company’sCompany's internal control over financial reporting. The Audit Committee reviewed this report of management and Item 9A, “Control"Control and Procedures,”" contained in the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 20042005 filed with the SEC, as well as PricewaterhouseCoopers’ ReportPricewaterhouseCoopers' report of Independent Registered Public Accounting Firmindependent registered public accounting firm (included in the Company’sCompany's Annual Report on Form 10-K) relating to its audit of (i) the consolidated financial statements, (ii) management’smanagement's and the independent auditors’auditors' assessment of the effectiveness of internal control over financial reporting and (iii) the effectiveness of internal control over financial reporting. The Audit Committee also reviewed with management and PricewaterhouseCoopers (a) the Company’sCompany's completed, current and planned initiatives to remediate material weaknesses in the Company’sCompany's internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 and (b) the additional analyses undertaken and procedures performed by the Company to support certifications by the Company’sCompany's Chief Executive Officer and Chief Financial Officer that are required by the SEC and the Sarbanes-Oxley Act to accompany the Company’sCompany's periodic filings with the SEC.
In addition, the Audit Committee has discussed the audited financials with PricewaterhouseCoopers, including such items as Statement on Auditing Standards No. 61 and PCAOB Auditing Standard No. 2, “An"An Audit of Internal Control Over Financial Reporting Conducted in Conjunction with an Audit of Financial Statements.”" The Audit Committee has also received from PricewaterhouseCoopers a letter and other written disclosures required under Independence Standards Board Standard No. 1, and has had discussions with PricewaterhouseCoopers regarding the independence of PricewaterhouseCoopers as the Company’sCompany's independent registered public accounting firm.
After review of all discussions and all written correspondence described above, as well as such other matters deemed relevant and appropriate by the Audit Committee, the Audit Committee recommended to the Board of Directors that the audited financial statements for the last fiscal year be included in the Company’sCompany's Annual Report on Form 10-K.
| | The Audit Committee |
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Larry Horner, Chairman
Jeff Clarke
Allen Lenzmeier
Thomas Toy |
Larry Horner, Chairman
Betsy Atkins
Jeff Clarke
Allen Lenzmeier
Thomas Toy
21
PROPOSAL TWONO. 2
APPROVAL OF 2005THE 2006 EQUITY INCENTIVE PLAN
This section summarizes The stockholders are being asked to approve a new employee equity incentive plan, the proposal to adopt the 20052006 Equity Incentive Plan (the “"Incentive Plan”").
We are asking stockholders The Company's 1997 Plan is set to approveexpire in January 2007. The Company also maintains the Incentive Plan. Adoption ofDirector Plan and the Incentive2003 Nonstatutory Stock Option Plan will enable the Company to (i) have greater flexibility in recruiting, motivating and retaining talented employees to help achieve the Company’s business goals, and (ii) receive a federal income tax deduction for certain compensation paid under the Incentive Plan.(the "2003 Plan"). The Board has approved adoption of the Incentive Plan, subject to stockholder approval from the stockholders at the Annual Meeting. Stockholder approvalIf the stockholders approve the Incentive Plan, it will replace the Company's 1997 Plan, Director Plan and 2003 Plan and no further awards will be made under such plans, but they will continue to govern awards previously granted thereunder. If the stockholders do not approve the Incentive Plan, the 1997 Plan, Director Plan and 2003 Plan will remain in effect through the remainder of their respective terms. Approval of the Incentive Plan requires the affirmative vote of the holders of a majority of the shares of the Common Stock that are present in person or by proxy and entitled to vote on the proposal at the Annual Meeting. If
The Board believes that long-term incentive compensation programs align the interests of management, employees and the stockholders approve adoptionto create long-term stockholder value. The Board believes that plans such as the Incentive Plan increase the Company's ability to achieve this objective, especially, in the case of the Incentive Plan, itby allowing for several different forms of long-term incentive awards, which the Board believes will replacehelp the 1997 Stock Plan.
Company to recruit, reward, motivate and retain talented personnel. The main substantive difference betweenrecent changes in the Incentive Plan and the 1997 Stock Plan is that in addition to stock options and restricted stock, the Incentive Plan also allowsequity compensation accounting rules, which became effective for the following new forms of awards: stock appreciation rights, restricted stock units, performance units and performance shares. In addition, the Incentive Plan contains a specific list of performance goalsCompany on January 1, 2006, also make it important for the purposesCompany to have greater flexibility under its employee equity incentive plan. As the new equity compensation accounting rules come into effect for all companies, competitive equity compensation practices may change materially, especially as they pertain to the use of classifying awards as “performance-based”equity compensation within the meaning of 162(m) of the Internal Revenue Code.vehicles other than stock options.
The Incentive Plan also provides for automatic, non-discretionary grants to our Non-Employee Directors, formalizing the Board’s past practice of making annual discretionary grants to Non-Employee Directors under the 1997 Stock Plan.
WeBoard believes strongly believe that the approval of the Incentive Plan is essential to ourthe Company's continued success. TheIn particular, the Company believes that its employees are its most valuable assets and that the awards providedpermitted under the Incentive Plan are vital to ourthe Company's ability to attract and retain outstanding and highly skilled individuals to work forin the Company and serve on our Board.
Our proposed changes reflect the environmentextremely competitive labor markets in which we operate. The proposed changes will provide us with needed flexibilityit competes. Such awards also are crucial to adopt our equity compensation practices to reflect changes in business conditions and the markets for labor in which we compete. Our employees and directors are our most important asset. We must continue to offer a competitive compensation package if we hope to continue our success in attracting outstanding talent. In the event stockholders do not approve the proposed changes, we will continue to provide equity compensation under our 1997 Stock Plan. However, ourCompany's ability to providemotivate employees to achieve the competitive compensation needed to attract, motivate, and retain outstanding talent may be hindered.Company's goals.
In connection withVote Required; Recommendation of the adoptionBoard of Directors
Approval of the Incentive Plan we proposerequires the reservationaffirmative vote of the numberholders of Common Stock equal toa majority of the number of shares of Common Stock currently authorized and available for issuance under the 1997 Stock Plan as of May 13, 2005 plus (i) any shares of Common Stock that returnare present in person or by proxy and entitled to the 1997 Stock Plan after May 13, 2005 and (ii) an annual increasevote on the first day of each fiscal year, beginning inproposal at the Annual Meeting.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE ADOPTION OF THE 2006 equal to the lesser of (a) 4%EQUITY INCENTIVE PLAN AND THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER.
Summary of the outstanding shares of Common Stock on the first day of the fiscal year, (b) 3,000,000 share of Common Stock; or (c) such lesser amount of Common Stock as determined by the Board. We generally are not asking stockholders to approve the issuance of any additional shares beyond the shares that we already would be permitted to issue under the 1997 Stock Plan, except that the automatic increase in available shares of Common Stock under the 1997 Plan (which generally is the same formula described in the preceding sentence) would have expired when the 1997 Plan was scheduled to expire in 2007 and now will expire in 2015.
Description of the2006 Equity Incentive Plan
The following paragraphs provideis a summary of the principleprincipal features of the Incentive Plan and its operation. The Incentive Plan is set forth in its entirety as Annex A to this Proxy Statement. The following summary is qualified in its entirety by reference to the Incentive Plan.Plan itself set forth in Annex A.
Purpose. The Incentive Plan is intended to enhance our ability to attract and retainprovides for the best available personnel for positions of substantial responsibility, provide additional incentive to employees, directors and consultants, and promote the successgrant of the Company’s business.
following types of incentive awards: (i) stock options, (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units, (v) performance shares and performance units, and (vi) and other stock or cash awards. (each, an "EligibilityAward," collectively, "Awards"). The Administrator (as defined below) selectsThose who will be eligible for Awards under the Incentive Plan include employees, directors and consultants who provide services to the Company and its affiliates. As of June 1, 2006,
the Company had approximately 6540 employees, directors and consultants, all of whom would be eligible to participate in the Incentive Plan.
Number of Shares of Common Stock Available Under the Incentive Plan. The maximum aggregate number of shares that may be awarded and sold under the Incentive Plan is 4,500,000 shares plus (i) any shares that have been reserved but remain unissued under the 1997 Plan, Director Plan, and 2003 Plan as of the date of stockholder approval of the Incentive Plan, and (ii) any shares subject to stock options or similar awards granted under the 1997 Plan, Director Plan, and 2003 Plan that expire or become exercisable without having been exercised in full and shares issued pursuant to awards granted under the 1997 Plan, Director Plan, and 2003 Plan that are forfeited to or repurchased by the Company. The shares may be authorized, but unissued, or reacquired Common Stock. As of March 31, 2006, the number of shares that were reserved and available for issuance but remained unissued under the 1997 Plan, Director Plan and 2003 Plan was 3,933,333. As of March 31, 2006, options to purchase 22,848,484 shares of the Common Stock were outstanding under the 1997 Plan, Director Plan and 2003 Plan. Also as of March 31, 2006, there were 200,000 shares of restricted stock awards outstanding under these plans.
If the Company declares a stock dividend or engages in a reorganization or other change in its capital structure, including a merger, the Board will behave the discretion to adjust (i) the number of shares available for issuance under the Incentive Plan, (ii) the number of shares subject to outstanding Awards, and (iii) the number of shares specified as per-person limits on Awards, as appropriate, to reflect the change.
Administration of the Incentive Plan. The Board, or a committee of directors or of other individuals satisfying applicable laws and appointed by the Board, will administer the Incentive Plan. To make grants to certain of the Company's officers and key employees, the members of the committee must qualify as "Non-Employee Directors" under Rule 16b-3 of the Securities Exchange Act of 1934, and as "outside directors" under Section 162(m) of the Internal Revenue Code (so that the Company can receive a federal tax deduction for certain compensation paid under the Incentive Plan). Subject to the terms of the Incentive Plan, the Board or its committee has the sole discretion to select the employees, consultants, and directors who will receive Awards, determine the terms and conditions of Awards, and to interpret the provisions of the Incentive Plan and outstanding Awards. Notwithstanding the foregoing, the Board or committee may not modify or amend an option or stock appreciation right to reduce the exercise price of that Award after it has been granted awardsor to cancel any outstanding option or stock appreciation right and replace it with a new option or stock appreciation right with a lower exercise price. The Board or other committee administering the Incentive Plan is referred to below as the "Administrator."
Options. The Administrator is able to grant nonstatutory stock options and incentive stock options under the Incentive Plan. The actualAdministrator determines the number of individuals who willshares subject to each option, although the Incentive Plan provides that a participant may not receive options for more than 1,000,000 shares in any fiscal year, except in connection with his or her initial service with the Company, in which case he or she may be granted an award cannot be determined in advance because the Administrator has discretionoption to select the participants.purchase up to an additional 2,000,000 shares.
Types of Awards. The Administrator is allowed to grant six typesdetermines the exercise price of awardsoptions granted under the Incentive Plan:Plan, provided the exercise price must be at least equal to the fair market value of the Common Stock on the date of grant. In addition, the exercise price of an incentive stock option granted to any participant who owns more than 10% of the total voting power of all classes of the Company's outstanding stock must be at least 110% of the fair market value of the Common Stock on the grant date.
The term of an option may not exceed seven years, except that, with respect to any participant who owns 10% of the voting power of all classes of the Company's outstanding capital stock, the term of an incentive stock option may not exceed five years.
After a termination of service with the Company, a participant will be able to exercise the vested portion of his or her option for the period of time stated in the Award agreement. If no such period of time is stated in the participant's Award agreement, the participant will generally be able to exercise his or her option for (i) three months following his or her termination for reasons other than death or disability, and (ii) twelve months following his or her termination due to death or disability. In no event may an option be exercised later than the expiration of its term.
· Stock Appreciation Rights. stock options;
· stock appreciation rights;
· restricted stock awards;
· restricted stock units;
· performance share awards; and
· performance unit awards.
The Administrator currently intendswill be able to grant stock optionsappreciation rights, which are the rights to receive the appreciation in fair market value of Common Stock between the exercise date and the date of grant. The Company can pay the appreciation in either cash or shares of Common Stock. Stock appreciation rights will become exercisable at the times and on the terms established by the Administrator, subject to the terms of the Incentive Plan. The Administrator, subject to the terms of the Incentive Plan, will have complete discretion to determine the terms and conditions of stock appreciation rights as our principal forms of awards. However, we believegranted under the Incentive Plan, provided, however, that we need to have flexibility to grant other types of equity compensation awards in order to compete successfully for talented employees and in light of potential accounting, legal and other changes.
Stock options. A stock option is the right to acquire shares of common stock at a fixed exercise price for a fixed period of time (usually ten years). The Administrator may grant nonstatutory stock options and/or incentive stock options (which entitle employees, but not the Company, to more favorable tax treatment).
The exercise price of each stock option is set by the Administrator but cannot be less than 100% of the fair market value (on the date of grant) of the stock covered by the option. (The 1997 Stock Plan permitted the Administrator to grant nonstatutory stock options with exercise prices less than fair market value.) Thus, an individual will be able to profit from an option only if the fair market value of our Common Stock increases after the option is granted. In other words, the Incentive Plan does not allow for “discounted” stock options. An exception is made only for options that the Company grants to substitute for options held by employees of companies that we acquire (in which case the exercise price preserves the economic value of the employee’s cancelled stock option from his or her former employer).
An option generally cannot be exercised until it becomes vested. Although the Incentive Plan does not prevent the Administrator from granting early exercisable options, the Administrator currently plans to continue the practice of permitting only vested options to be exercisable. The Administrator establishes the vesting schedule at the time the option is granted. Vesting usually requires continued employment by the participant for a period of years, usually four.
The Administrator determines the term of options, except that incentive stock options may have terms of no more than ten years. The Administrator intends to continue the practice that all options shall have a term of no more than ten years. Upon termination of service to the Company, an option usually remains exercisable, to the extent then vested, for three months, although the Administrator has the discretion to permit an option to remain exercisable for a longer period of time. Upon termination of service due to death or disability, an option usually remains exercisable, to the extent then vested, for twelve months. However, in no event may an option be exercised after the expiration of its term.
The exercise price of each option must be paid in full at the time of exercise. Payment may be made in cash, by check, through a “cashless exercise program” or, if the Administrator permits, with a promissory note, reduction in our liabilities to the participant, in shares of our Common Stock that are already owned by the participant or by any other means that provides legal consideration for the shares and is consistent with the Incentive Plan’s purpose.
Non-Employee Director options. The Incentive Plan provides for the automatic, non-discretionary grant of nonstatutory stock options to purchase 25,000 shares of Common Stock to our Non-Employee Directors on the first market trading day on or after every August 23, if such Non-Employee Director has served as a director for at least the preceding five months. The exercise price is the fair market value of the covered sharesshare on the date of grant and the option veststerm of a stock appreciation right may not exceed seven years. No participant will be granted stock appreciation rights covering more than 1,000,000 shares during any fiscal year, except that a participant may be granted stock appreciation rights covering up to an additional 2,000,000 shares in connection with his or her initial service as to one-twelfth (1¤12 ) ofan employee with the covered shares each month, subject to the director continuing to serve as a director through each vesting date. FollowingCompany.
After termination of service these options remain exercisablewith the Company, a participant will be able to exercise the vested portion of his or her stock appreciation right for the period of time stated in the Award agreement. If no such period of time is stated in a participant's Award agreement, a participant will generally be able to exercise his or her stock appreciation right for (i) three months following his or her termination for reasons other than death or disability, and (ii) twelve months subjectfollowing his or her termination due to death or disability. In no event will a stock appreciation right be exercised later than the ten-year optionexpiration of its term. Our Board previously approved similar grants each year under
Restricted Stock. Awards of restricted stock are rights to acquire or purchase shares of the 1997Common Stock, Plan. Assuming stockholders approvewhich vest in accordance with the Incentive Plan, our Boardterms and conditions established by the Administrator in its sole discretion. For example, the Administrator may set restrictions based on the achievement of specific performance goals. The Award agreement will discontinue the practice of making annual, discretionary Non-Employee Director grants every August.
Stock appreciation rights. Stock appreciation rights are awards thatgenerally grant the participant theCompany a right to receive an amountrepurchase or reacquire the shares upon the termination of money equal to (i)the participant's service with the Company for any reason (including death or disability). The Administrator will determine the number of shares exercised multiplied by (ii)granted pursuant to an Award of restricted stock, but no participant will be granted a right to purchase or acquire more than 300,000 shares of restricted stock during any fiscal year, except that a participant may be granted up to an additional 600,000 shares of restricted stock in connection with his or her initial employment with the amount by which ourCompany.
Restricted Stock Units. Awards of restricted stock price exceedsunits result in a payment to a participant only if the exercise price.vesting criteria the Administrator establishes is satisfied. For example, the Administrator may set restrictions based on the achievement of specific performance goals. Upon satisfying the applicable vesting criteria, the participant will be entitled to the payout specified in the Award agreement. Notwithstanding the foregoing, at any time after the grant of restricted stock units, the Administrator may reduce or waive any vesting criteria that must be met to receive a payout. The exercise price cannotAdministrator, in its sole discretion, may pay earned restricted stock units in cash, shares, or a combination thereof. Restricted stock units that are fully paid in cash will not reduce the number of shares available for grant under the Incentive Plan. On the date set forth in the Award agreement, all unearned restricted stock units will be less than 100%forfeited to the Company. The Administrator determines the number of restricted
stock units granted to any participant, but during any fiscal year of the stock’s fair marketCompany, no participant may be granted more than 300,000 restricted stock units during any fiscal year, except that the participant may be granted up to an additional 600,000 restricted stock units in connection with his or her initial employment to the Company.
Performance Units and Performance Shares. The Administrator will be able to grant performance units and performance shares, which are Awards that will result in a payment to a participant only if the performance goals or other vesting criteria the Administrator may establish are achieved or the Awards otherwise vest. The Administrator will establish performance or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out to participants. Notwithstanding the foregoing, after the grant of performance units or shares, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such performance units or shares. During any fiscal year, no participant will receive more than 300,000 performance shares and no participant will receive performance units having an initial value greater than $2,000,000, except that a participant may be granted performance shares covering up to an additional 600,000 shares in connection with his or her initial employment with the Company. Performance units will have an initial dollar value established by the Administrator on or before the date of grant. Thus,Performance shares will have an individual will be ableinitial value equal to profit from a stock appreciation right only if the fair market value of a share of the stock increases after the stock appreciation right is granted. The Administrator generally will provide that a stock appreciation right may be exercised only if it becomes vested basedCommon Stock on the vesting schedule established by the Administrator. Stock appreciation rights expire under the same rules that apply to options.grant date.
Restricted stock awards Performance Goals.. Restricted stock awards are shares that vest based on a schedule established by the Administrator. However, if stockholders approve this proposal, shares Awards of restricted stock, generally may not vest (i) at a rate of more than one-third (1¤3 ) of the shares each year if vesting is subject solely to continued service and (ii) within twelve months of the date of grant if vesting is subject to satisfaction of specified performance objectives. Notwithstanding the foregoing, shares of restricted stock may vest sooner in the event of a participant’s death, disability or retirement or a major capital change of the Company. The 1997 Stock Plan permitted the grant of restricted stock (these awards were called “stock purchase rights” in the 1997 Stock Plan), but the 1997 Stock Plan did not impose any limitations on the vesting schedule.
Performanceunits, performance shares, and performance unit awards. Performance shares and performance units may result in a payment toand other incentives under the participant in cash or shares if the performance goals and/or other vesting criteria established by the Administrator are achieved or the awards otherwise vest. Performance shares and performance units generally vest upon satisfaction of company-wide, business unit, or individual goals (including solely continued service), measured over a period of at least twelve months.
Restricted Stock Units. Restricted stock units are awards of restricted stock, performance shares, or performance units that the Administrator permits to be paid out in installments or on a deferred basis.
Administration, Amendment and Termination. The Incentive Plan may be administered by multiple committees undermade subject to the Board (collectively,attainment of performance goals relating to one or more business criteria within the “Administrator”). Currently, the Board has authorized the Compensation Committee to assume primary responsibility for the administrationmeaning of all incentive compensation other than that of Non-Employee Directors, for whom the Disinterested Director Committee was created. To the extent we want certain compensation to qualify for an exemption under Rule 16b-3 of the Exchange Act or for federal tax deductions, members of the Administrator must qualify as non-employee directors under Rule 16b-3 or as outside directors under Section 162(m) of the Internal Revenue Code and may provide for a targeted level or levels of achievement including: annual revenue; cash collections; customer satisfaction MBOs; earnings per share; net income; new orders; operating profit; pro forma net income; return on designated assets; return on equity; return on sales; and product shipments. The performance goals may differ from participant to participant and from Award to Award and may be used to measure the performance of the Company as relevant.a whole or a business unit of the Company and may be measured relative to a peer group or index. Any criteria used may be measured in absolute terms, compared to another company or companies, measured against the performance of the Company as a whole or a segment of the Company, and/or measured on a pre-tax or post-tax basis.
Grants to Non-Employee Directors. The Incentive Plan gives the Administrator authority to grant discretionary awards to Non-Employee Directors, but it does not provide for automatic or nondiscretionary awards to Non-Employee Directors. Prior to April 27, 2006, it was the Company's policy to provide each Non-Employee Director an annual grant of an option to purchase 25,000 shares under the 1997 Plan. Non-Employee Directors were also eligible to receive non-discretionary stock option grants under the Director Plan, as described in the section entitled "Director Compensation" in this Proxy Statement. On April 27, 2006, concurrently with the effectiveness of the Company's compensation plan for the Non-Employee Directors in the year 2006, the Board suspended until further action all future grants of stock options under the Director Plan. On April, the Board also suspended the policy of granting annual option grants to the Non-Employee Directors under the 1997 Plan, choosing instead to issue a specific number of options as part of each Non-Employee Director's annual compensation package. The absence of provisions in the Incentive Plan allowing automatic or nondiscretionary awards reflects the Board's current policy of favoring discretionary awards.
Transferability of Awards. Awards granted under the Incentive Plan are generally not transferable, and all rights with respect to an Award granted to a participant generally may be exercised during a participant's lifetime only by the participant; provided, however, that with the Administrator's approval, a participant may (i) transfer an Award to a participant's spouse or former spouse pursuant to a court-approved domestic relations order which relates to the provision of child support, alimony payments or
Subjectmarital property rights, or (ii) transfer an Award by gift to or for the benefit of the participant's immediate family.
Change of Control. In the event of a change of control of the Company, each outstanding Award will be assumed or an equivalent option or right substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event that the successor corporation, or the parent or subsidiary of the successor corporation, refuses to assume or substitute for the Award, the participant will fully vest in and have the right to exercise all of his or her outstanding options or stock appreciation rights, including shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on restricted stock will lapse, and, with respect to restricted stock units, performance shares and performance units, all performance goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met. In addition, if an option or stock appreciation right is not assumed or substituted for in the event of a change of control, the Administrator will notify the participant in writing or electronically that the option or stock appreciation right will be fully vested and exercisable for a period of time determined by the Administrator in its sole discretion, and the option or stock appreciation right will terminate upon the expiration of such period.
Amendment and Termination of the Incentive Plan,Plan. The Administrator will have the Administrator has sole discretion to, in addition to other powers,:
· select the employees, directors and consultants who will receive awards;
· determine the number of shares of Common Stock covered by each award;
· determine the terms and conditions of awards (for example, the exercise price and vesting schedule);
· to modify or amend awards, including the discretionary authority to extend post-termination award exercisability or accelerate vesting; and
· interpret the provisions of the Incentive Plan.
If stockholders approve this proposal, the Administrator may not reduce the exercise or purchase price of an outstanding award (whether by (i) repricing the award or (ii) cancelling the award and granting a new award with a lower exercise or purchase price) without first obtaining stockholder approval. The 1997 Stock Plan permitted the administrator to institute an option exchange program without first obtaining stockholder approval.
The Board may amend, alter, suspend or terminate the Incentive Plan, at any time andexcept that stockholder approval will be required for any reason.amendment to the Incentive Plan to the extent required by any applicable laws. No amendment, alteration, suspension or termination of the Incentive Plan will impair the rights of any participant, unless mutually agreed otherwise between the participant and the Administrator and which agreement must be in writing and signed by the participant and the Company. The Incentive Plan expires pursuantwill terminate in June 2016, unless the Board terminates it earlier.
Number of Awards Granted to its terms on May 13, 2015. Future amendments will be submitted for stockholder approval if necessaryEmployees, Consultants, and Directors
Number of Awards Employees, Directors or appropriateConsultants Would Have Received since January 2005 to continue the Incentive Plan’s compliance with applicable law, including, without limitation, Section 162(m) of the Internal Revenue Code, or with Nasdaq rules.
If an award expires or is cancelled without having been fully exercised or vested, the unvested or cancelled shares generally will be returned to the available pool of shares. In addition a number of shares equal to the number of shares tendered or withheld to pay award exercise or purchase prices or to cover applicable tax withholding will be returned to the available pool of shares. Also, if a stock dividend, reorganization, spin-off or other change in the Company’s capital structure occurs, the Administrator has discretion to adjust the number of shares availableMarch 2006 under the Incentive Plan the per person limits on grants and the number of shares automatically granted to Non-Employee Directors, as appropriate to reflect the stock dividend or other change.
Limited Transferability of Awards. Unless otherwise determined by the Administrator, awards granted under the Incentive Plan may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or under applicable laws of descent and distribution. The Administrator may also, in its sole discretion, impose other transfer restrictions it deems advisable or appropriate.
Options Granted to Certain Individuals and Groups. If the Incentive Plan were in place last year, its terms would not have resulted in a different number of option or awardsAwards being granted.granted between the beginning of 2005 to March 31, 2006. The following table sets forth (i) the totalaggregate number of shares of the Company’s Common Stock subject to options granted under the 1997 Stock Plan, Director Plan, and 2003 Plan during this period, (ii) the average per share exercise price of such options, (iii) the aggregate number of shares issued pursuant to awards of restricted stock granted
under the listed persons1997 Plan during this period, and groups for(iv) the 2004 fiscal year.dollar value of such shares based on $7.64 per share.
25
New Plan Benefits Table
Name of Individual or Group
| | Number of
Options Granted
| | (Weighted)
Average Per Share
Exercise Price
| | Number of Shares
of Restricted Stock(1)
| | Dollar Value of Shares
of Restricted Stock
| |
|---|
Hong Liang Lu(2)
President, Chief Executive Officer and Chairman of the Board | | 260,000 | | $ | 6.25 | | 130,000 | | $ | 812,500 | |
Ying Wu(3)
Executive Vice President and Vice Chairman |
|
100,000 |
|
$ |
6.25 |
|
50,000 |
|
$ |
312,500 |
|
Francis Barton
Executive Vice President and Chief Financial Officer |
|
492,000 |
(4) |
$ |
8.34 |
|
146,000 |
(8) |
$ |
1,169,500 |
(12) |
William Huang
Senior Vice President and Chief Technology Officer |
|
141,667 |
(5) |
$ |
7.33 |
|
33,333 |
(9) |
$ |
208,331 |
|
Michael Sophie
Executive Vice President and Chief Operating Officer |
|
183,600 |
(6) |
$ |
7.36 |
|
41,800 |
(10) |
$ |
261,250 |
|
Shao-Ning Chou
Former Senior Vice President |
|
— |
|
|
— |
|
— |
|
|
— |
|
All executive officers, as a group |
|
1,177,267 |
(7) |
$ |
7.43 |
|
401,133 |
(11) |
$ |
2,764,081 |
(13) |
All directors who are not executive officers, as a group |
|
300,000 |
|
$ |
11.60 |
|
— |
|
|
— |
|
All employees who are not executive officers, as a group |
|
8,657,879 |
|
$ |
7.83 |
|
— |
|
|
— |
|
- (1)
- Represents stock purchase rights that were originally granted on February 28, 2006 as restricted stock purchase rights. Except for the award of 100,000 shares of the restricted stock granted on August 1, 2005 to Mr. Barton, the restricted stock purchase rights were allowed to lapse unexercised, and in their place the stock purchase rights may be granted following the 2006 fiscal year-end, based upon management performance objectives.
- (2)
- Mr. Lu did not receive any Award during the fiscal year 2005. The figures reflect the options to purchase 260,000 shares of the Common Stock granted on February 28, 2006 and the right to purchase 130,000 shares of the restricted stock granted on February 28, 2006, which expired
unexercised on March 31, 2006, and the stock purchase rights may be granted in their place following the 2006 fiscal year-end, based upon management performance objectives.
Name and Position | | | | Number of
Options Granted | | Average Per Share
Exercise Price of
Options | | Number of Shares
of Restricted Stock
Granted | |
Hong Liang Lu.
President, Chief Executive Officer
and Chairman of the Board | | | 250,000 | | | | $ | 37.46 | | | | — | | |
Ying Wu
Executive Vice President and
Vice Chairman | | | 200,000 | | | | $ | 37.46 | | | | — | | |
Shao-Ning J. Chou
Senior Vice President | | | 150,000 | | | | $ | 37.46 | | | | — | | |
Michael Sophie
Chief Financial Officer and
Senior Vice President | | | 150,000 | | | | $ | 37.46 | | | | — | | |
William Huang
Chief Technology Officer and
Senior Vice President | | | 100,000 | | | | $ | 37.46 | | | | — | | |
All current executive officers, as a group | | | 850,000 | | | | $ | 37.46 | | | | — | | |
All directors who are not executive officers, as a group | | | 75,000 | | | | $ | 16.34 | | | | — | | |
All employees who are not executive officers, as a group | | | 4,950,197 | | | | $ | 25.94 | | | | — | | |
- (3)
- Mr. Wu did not receive any Award during the fiscal year 2005. The figures reflect the options to purchase 100,000 shares of the Common Stock granted on February 28, 2006 and the right to purchase 50,000 shares of the restricted stock granted on February 28, 2006, which expired unexercised on March 31, 2006, and the stock purchase rights may be granted in their place following the 2006 fiscal year-end, based upon management performance objectives.
- (4)
- Reflects options to purchase (i) 400,000 shares of the Common Stock granted on August 1, 2005 and (ii) 92,000 shares of the Common Stock granted on February 28, 2006.
- (5)
- Reflects options to purchase (i) 75,000 shares of the Common Stock granted on November 15, 2005 and (ii) 66,667 shares of the Common Stock granted on February 28, 2006.
- (6)
- Reflects options to purchase (i) 100,000 shares of the Common Stock granted on November 15, 2005 and (ii) 83,600 shares of the Common Stock granted on February 28, 2006.
- (7)
- Reflects options to purchase (i) 575,000 shares of the Common Stock granted during the fiscal year 2005 and (ii) 602,267 shares of the Common Stock granted on February 28, 2006.
- (8)
- Reflects awards of (i) 100,000 shares of the restricted stock granted on August 1, 2005 and (ii) the right to purchase 46,000 shares of the restricted stock granted on February 28, 2006, which expired unexercised on March 31, 2006, and the stock purchase rights may be granted in their place following the 2006 fiscal year-end, based upon management performance objectives.
- (9)
- Reflects the restricted stock purchase right granted on February 28, 2006, which expired unexercised on March 31, 2006, and the stock purchase rights may be granted in their place following the 2006 fiscal year-end, based upon management performance objectives.
- (10)
- Reflects the restricted stock purchase right granted on February 28, 2006, which expired unexercised on March 31, 2006, and the stock purchase rights may be granted in their place following the 2006 fiscal year-end, based upon management performance objectives.
- (11)
- Reflects awards of (i) 100,000 shares of restricted stock granted on August 1, 2005 and (ii) the right to purchase 301,133 shares of restricted stock granted on February 28, 2006, which expired unexercised on March 31, 2006, and the stock purchase rights may be granted in their place following the 2006 fiscal year-end, based upon management performance objectives.
- (12)
- The closing sales prices of (i) $8.82 per share of the Common Stock as listed on the Nasdaq National Market on the grant date of 100,000 shares of the restricted stock to Mr. Barton, August 1, 2005, and (ii) $6.25 per share as listed on the Nasdaq National Market on the grant date of the right to purchase 46,000 shares of the restricted stock, February 28, 2006, have been used to determine the total dollar value of the restricted stock award granted Francis Barton from the beginning of 2005 to present.
- (13)
- The closing sales prices of (i) $8.82 per share of the Common Stock as listed on the Nasdaq National Market on the grant date of 100,000 shares of the restricted stock to Mr. Barton, August 1, 2005, and (ii) $6.25 per share as listed on the Nasdaq National Market on the grant date of the right to purchase 301,133 shares of the restricted stock to the named officers, February 28, 2006, have been used to determine the total dollar value of the restricted stock award granted to the named officers from the beginning of 2005 to present.
Number of Awards Non-Employee Directors and named executive officers have a financial interestMay Receive in this proposal because they are eligible to receive awards2006 under the Incentive Plan. Non-Employee Directors also havePlan
The number of Awards that an interestemployee or consultant may receive under the Incentive Plan in this proposal because they are provided annual, non-discretionary option grants.2006 is in the discretion of the Administrator and therefore cannot be determined in advance.
Federal Tax Aspects
The following isparagraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of awardsAwards granted under the Incentive Plan. Tax consequences for any particular individual may be different.
Nonstatutory Stock Options and Stock Appreciation RightsOptions.. No taxable income is reportable when a nonstatutory stock option or a stock appreciation right is granted with an exercise price equal to or greater than fair market value. Upon exercise, the recipient will recognize ordinary income equal to the fair market value of the sharesunderlying stock on the date of grant is granted to a participant. Upon exercise, date minusthe participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise price.date) of the shares purchased over the exercise price of the option. Any taxable income recognized in connection with an option exercise by an employee of the Company is subject to tax withholding by the Company. Any additional gain or loss recognized upon theany later disposition of the stock willshares would be capital gain or loss.
Incentive Stock OptionsOptions.. No taxable income is reportable when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case taxation is the same as for nonstatutory stock options). If the recipientparticipant exercises the option and then later sells or otherwise disposes of the shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as capital gain or loss. If the recipientparticipant exercises the option and then later sells or otherwise disposes of the shares before the end of the twotwo- or one-year holding periods described above, he or she generally will recognizehave ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or
the sale price, if less) minus the exercise price of the option,option.
Stock Appreciation Rights. No taxable income is reportable when a stock appreciation right with an exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares received. Any additional gain or loss willrecognized upon any later disposition of the shares would be capital gain or loss.
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares. A recipientparticipant generally will not have taxable income at the time an Award of restricted stock, restricted stock units, performance shares or performance units or performance shares will not recognize taxable income upon grant.are granted. Instead, he or she will recognize ordinary income in the first taxable year in which his or her interest in the shares underlying the Award becomes either (i) freely transferable, or (ii) no longer subject to substantial risk of forfeiture. However, the recipient of a restricted stock Award may elect to recognize income at the time of vesting equal tohe or she receives the fair market value on the vesting date of the shares (or cash) received minus anyAward in an amount paid for the shares. For restricted stock only, a recipient may instead elect to be taxed at the time of grant. Any additional gain or loss upon the disposition of the stock, if any, will be capital gain or loss.
Restricted Stock Units. A recipient of restricted stock units generally will not recognize taxable income on grant. Instead, so long as the settlement of the award complies with deferred compensation tax rules, the recipient will recognize ordinary income on the receipt of shares (or cash) equal to the fair market value of the shares (or cash) minus amounts paid. Ifunderlying the terms of settlement do not comply with deferred compensation tax rules,Award (less any cash paid for the recipient will recognize ordinary incomeshares) on vesting, equal to the fair market value ofdate the shares (or cash) minus amounts to be paid, and will be subject to an additional 20% exercise tax. Any additional gain or loss upon the disposition of the stock, if any, will be capital gain or loss.Award is granted.
Tax Effect for the CompanyCompany.. The Company generally will receivebe entitled to a tax deduction for anyin connection with an Award under the Incentive Plan in an amount equal to the ordinary income recognizedrealized by a participant from an award underand at the Incentive Plantime the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to ourthe Company's Chief Executive Officer and to each of its four other most highly compensated executive officers. Under Section 162(m) of the Internal Revenue Code, the annual compensation paid to eachany of these specified executives may notwill be deductible only to the extent that it exceeds $1 million.does not exceed $1,000,000. However, we are able tothe Company can preserve the deductibility of certain compensation over $1 millionin excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include stockholder approval of the Incentive Plan, setting limits on the number of awardsAwards that any individual may receive and for awardsAwards other than certain stock options, and stock appreciation rights, establishing stockholder approved performance criteria that must be met before the awardAward actually will vest or be paid. The Incentive Plan has been designed to permit the CommitteeAdministrator to grant awardsAwards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m). For example, the Incentive Plan limits the number of shares that may be granted to any one participant in any one year as follows (the limits with respect to the first calendar year in which an individual joins,
thereby permitting the Company are twice the following amounts):to continue to receive a federal income tax deduction in connection with such Awards.
· Section 409A. 700,000 shares under options;
· 700,000 shares under stock appreciation rights;
· 700,000 restricted shares;
· 700,000 performance shares; and
· performance units with an initial value not greater than $2 million.
In addition, in setting the vesting schedule of an award, the Administrator may provide that the award will vest only upon the achievement of objectives for one or more of:
· annual revenue;
· operating profit;
· customer satisfaction MBOs;
· earnings per share;
· net income;
· new orders;
· pro forma net income;
· return on designated assets;
· return on sales;
· return on equity;
· cash collections; or
· product shipments.
Each of these performance measures is defined in the Incentive Plan.
Summary
We are requesting that stockholders approve adoption of the Incentive Plan. The Incentive Plan would replace the 1997 Stock Plan, and would be materially different from the latter in that (i) in addition to stock options and restricted stock, the Incentive Plan allows for new forms of awards such as stock appreciation rights, performance units and performance shares and (ii) the Incentive Plan provides for a specific list of performance goals for the purposes of 162(m) Section 409A of the Internal Revenue Code. The Incentive Plan alsoCode, which was added by the American Jobs Creation Act of 2004, provides for automatic, non-discretionary grantscertain new requirements on non-qualified deferred compensation arrangements. These include new requirements with respect to our Non-Employee Directors.
We believe strongly thatan individual's election to defer compensation and the approvalindividual's selection of the Incentive Plan is essentialtiming and form of distribution of the deferred compensation. Section 409A also generally provides that distributions must be made on or following the occurrence of certain events (e.g., the individual's separation from service, a predetermined date, or the individual's death). Section 409A imposes restrictions on an individual's ability to our continued success.change his or her distribution timing or form after the compensation has been deferred. For certain individuals who are officers, Section 409A requires that such individual's distribution commence no earlier than six months after such officer's separation from service.
Awards such as those providedgranted under the Incentive Plan constitutewith a deferral feature will be subject to the requirements of Section 409A. If an important incentiveAward is subject to and help usfails to attractsatisfy the requirements of Section 409A, the recipient of that award may recognize ordinary income on the amounts deferred under the Award, to the extent vested, which may be prior to when the compensation is actually or constructively received. Also, if an Award that is subject to Section 409A fails to comply with Section 409A's provisions, Section 409A imposes an additional 20% federal income tax on compensation recognized as ordinary income, as well as interest on such deferred compensation. The Internal Revenue Service has not issued final regulations under Section 409A and, retain people whose skills and performanceaccordingly, the requirements of Section 409A (and the application of those requirements to Awards issued under the Plan) are critical to our success. Our employees and directors are our most important asset. We strongly believe that the Incentive Plan is vital to our ability to attract and retain outstanding and highly skilled individuals to work for the Company and serve on our Board.not entirely clear.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVALFOREGOING IS ONLY A SUMMARY OF THE ADOPTIONEFFECT OF FEDERAL INCOME TAXATION UPON PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF AWARDS UNDER THE INCENTIVE PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT'S DEATH OR THE PROVISIONS OF THE 2005 EQUITY INCENTIVE PLAN.INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
28
PROPOSAL THREENO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board has selected PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm,independent registered public accounting firm, to audit the financial statements of the Company for the fiscal year ending December 31, 20052006 and recommends that the stockholders ratify this selection. PricewaterhouseCoopers LLP also audited the Company’sCompany's financial statements for its fiscal year ended December 31, 2004.2005. The Board expects that representatives of PricewaterhouseCoopers LLP will be present at the Annual Meeting, will be given an opportunity to make a statement at the meeting and will be available to respond to appropriate questions.
Stockholder ratification of this selection of PricewaterhouseCoopers LLP as the Company’sCompany's Independent Public Accounting Firm is not required by the Bylaws or otherwise. However, the Board has elected to seek such ratification as a matter of good corporate practice. Should the stockholders fail to ratify the selection of PricewaterhouseCoopers LLP as Independent Registered Public Firm,independent registered public firm, the Audit Committee and the Board will consider whether to retain that firm for the year ended December 31, 2005.2006. Even if the selection is ratified, the Audit Committee, at its discretion, may direct the appointment of a different independent registered public accounting firm at anytime during the year if it determines that such a change would be in the best interests of the Company and its stockholders.
PricewaterhouseCoopers LLP Fees For Thefor the Fiscal Year Ended December 31, 20042005
Fees for the fiscal year ended December 31, 2005 audit and interim reviews were $11,900,000. Fees for the fiscal year ended December 31, 2004 audit and interim reviews were $8,423,663.00. Fees for the fiscal year ended December 31, 2003 audit and interim reviews were $1,667,281.00.$8,424,000.
Audit-related fees were $771,475.00$1,000,000 and $1,111,170.00$773,000 for fiscal years ended December 31, 20042005 and December 31, 2003,2004, respectively. Such services included due diligence and other procedures performed surrounding certain of the Company’sCompany's acquisitions and accounting consultation.
During the fiscal year ended December 31, 2004,2005, fees related to tax advice, compliance and planning were $3,134,642.00.$275,000. For the fiscal year ended December 31, 20032004 fees for tax advice, compliance and planning totaled $1,736,928.00.$3,135,000.
Other fees during the year ended December 31, 20042005 totaled $5,000.00 and consisted entirely of fees related to training. For the fiscal year ended December 31, 2003 other fees totaled $4,200.00$7,000 and consisted entirely of fees related to research tools. For the fiscal year ended December 31, 2004 other fees totaled $5,000 and consisted entirely of fees related to training.
The Audit Committee has determined that the provision by PricewaterhouseCoopers LLP of non-audit services to us in 20042005 is compatible with PricewaterhouseCoopers LLP maintaining its independence.
The Audit Committee has direct responsibility for the appointment, retention, evaluation, compensation, oversight and termination of the independent registered public accounting firm
employed by the Company. In October 2003, the Audit Committee of the Board established a Non-Audit Services
Subcommittee. The Non-Audit Services Subcommittee, consisting of Mr. Horner, is authorized to preapprove non-audit services to be performed by the Company’sCompany's independent public accountants in amounts not to exceed $50,000 per engagement. Non-audit services to be performed by the Company’sCompany's independent registered public accounting firm in amounts to exceed $50,000 per engagement will be approved by the Audit Committee. DuringFor the fiscal 2004,year 2005, there were no audit-related fees, tax fees, or any other non-audit fees that were approved by the Audit Committee pursuant to the “de minimis”"de minimis" exception under Regulation S-X Rule 2-01(c)(7)(i)(C).
Required Vote
The ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2006 requires the affirmative vote of the holders of a majority of the Votes Cast will be requiredshares of the Common Stock that are present in person or by proxy and entitled to ratifyvote on the selection of PricewaterhouseCoopers LLP asproposal at the Company’s Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2005.Annual Meeting.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR”"FOR" RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’SCOMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.FIRM.
30
COMPANY’SCOMPANY'S STOCK PERFORMANCE
Set forth below is a line graph comparing the annual percentage change in the cumulative return to the stockholders of the Company’sCompany's Common Stock with the cumulative return of the Nasdaq composite (U.S. and foreign) index and the S&P Wireless Telecommunication Services index for the period commencing on March 3,December 29, 2000 the first day the Company’s Common Stock was traded on The Nasdaq National Market, and ending on December 31, 2004.2005. The information contained in the performance graph shall not be deemed to be “soliciting material”"soliciting material" or to be “filed”"filed" with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The graph assumes that $100.00$100 was invested on March 3,December 29, 2000 in the Company’sCompany's Common Stock and in each index (based on the initial public offeringsales closing price of $18$15.50 per share)share on December 29, 2000), and that all dividends were reinvested. No cash dividends have been declared or paid on the Company’sCompany's Common Stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. The Company operates on a 52-week fiscal year that ended on Friday, December 31, 2004.2005. Under the assumptions stated above, over the period from March 3,December 29, 2000 to December 31, 20042005 the total return on an investment in the Company would have been 23.06%-48.00% as compared to -30.94%4.53% for the Nasdaq composite (U.S. and foreign) index and -66.7%-10.05% for the S&P Wireless Telecommunication Services index shown below.
STOCK PRICE PERFORMANCE GRAPH FOR
UTSTARCOM, INC.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
AMONG UTSTARCOM, INC., THE NASDAQ STOCK MARKET (U.S. & FOREIGN) INDEX
AND THE S & P WIRELESS TELECOMMUNICATION SERVICES INDEX
- *
$100 - $100 invested
on 3/3/00 in stock or in index on 2/29/00 in index—December 29, 2000—including reinvestment of dividends. Fiscal year ending December 31.31, 2005.
| | Period Ending
|
|---|
Index
|
|---|
| | 12/00
| | 12/01
| | 12/02
| | 12/03
| | 12/04
| | 12/05
|
|---|
| UTSTARCOM, INC. | | $ | 100.00 | | $ | 183.87 | | $ | 127.94 | | $ | 239.16 | | $ | 142.90 | | $ | 52.00 |
| NASDAQ STOCK MARKET (U.S. & FOREIGN) | | $ | 100.00 | | $ | 83.93 | | $ | 63.03 | | $ | 84.88 | | $ | 87.28 | | $ | 104.53 |
| S & P WIRELESS TELECOMMUNICATION SERVICES | | $ | 100.00 | | $ | 78.35 | | $ | 31.57 | | $ | 56.11 | | $ | 88.28 | | $ | 89.95 |
31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2004,2005, the Company was party to indemnification agreements with certain of its Directorsdirectors and executive officers.
One of the Company’s previous Directors, Masayoshi Son, who resigned from the Board effective September 15, 2004, is the President and Chief Executive Officer and a director of SOFTBANK CORP. SOFTBANK CORP. is an affiliate of SOFTBANK America, Inc., also one of ourthe Company's significant stockholders. Since the beginning of the 20042005 financial year, the Company has engaged, continues to engage or proposes to engage in the following transactions with entities affiliated with SOFTBANK CORP.:
- •
·On December 26, 2005, the Company and SOFTBANK CORP. entered into a Stock Purchase Agreement, pursuant to which the Company agreed to sell, and SOFTBANK CORP. agreed to purchase, the Company's 10% ownership interest in SB CHINA HOLDINGS PTE LTD ("SBCH"), an investment fund established by SOFTBANK CORP., represented by 8,022 ordinary shares of SBCH (the "Shares"), for a purchase price of $56.9 million. The closing of the sale and purchase of the Shares occurred on December 28, 2005 (the "Closing"). Upon the Closing, the Company no longer held an ownership interest in SBCH, which caused the Joint Venture Agreement between the Company and SOFTBANK CORP., entered into as of May 29, 2000 to govern the parties' respective shareholdings in SBCH, to terminate pursuant to its terms effective as of December 28, 2005.
- •
- On July 17, 2003, the Company entered into a Mezzanine Loan Agreement with BB Modem Rental PLC
(“("BB Modem”"), an affiliate of SOFTBANK CORP. Under the terms of the agreement, the Company loaned BB Modem $10.1 million at an effective interest rate of 12.01% per annum, for the purpose of investing in a portfolio of ADSL modems and associated modem rental agreements, from Softbank BB Corporation (“("Softbank BB”"), formerly BB Technologies, an affiliate of SOFTBANK America, Inc.·
- •
- The Company has
invested approximately $10.0 million in Softbank China, an investment fund established by SOFTBANK CORP. focused on investments in Internet companies in China. The investment balance as of December 31, 2004 was $5.3 million. The Company has also invested $2.0 million in Restructuring Fund No. 1, a venture capital investment limited partnership established by SOFTBANK INVESTMENT CORP., an affiliate of SOFTBANK CORP. The investment balance as of December 31, 20042005 was $1.8$2.0 million.
- •
·In December 2002, a venture capital fund affiliated with SOFTBANK CORP. made a capital investment in MDC Holding Limited (“("MDC Holding”Holding"). In December 2004, the Company exercised a warrant for ordinary shares of MDC Holding for which it paid approximately $0.8 million. In 2004, the Company received payments from Beijing MDC Telecommunications Co., Ltd. (“("Beijing MDC”MDC"), an affiliate of MDC Holding, of approximately $0.8 million for purchases of equipment and the provision of consulting services, and in 2004 the Company paid to Beijing MDC approximately $0.5 million for PAS value added services and as rental payments. During the period from January 2005 to March 2005, the Company entered into an agreement to sell equipment to Beijing MDC with a value of approximately $2.3 million. For additional information regarding the Company’s transaction with Beijing MDC, please read “Note 2—Summary of Significant Accounting Policies—Restatement of Consolidated Financial Statements” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.·
We
- •
- The Company recognized aggregate revenue of
$143.7$394.1 million during 20042005 with respect to sales to affiliates of SOFTBANK CORP., including (i) sales of telecommunications equipment to Softbank BB.· During August 2004, the Company entered into several agreements withBB, (ii) sales of equipment and services to Japan Telecom Co., Ltd. (“JT”),Ltd, a wholly owned subsidiary of SOFTBANK CORP., relatedand (iii) sales of equipment to the saleBB Cable and BB Hikari Dept KK, affiliates of telecommunication equipment and promotional services. The terms of these agreements specify that JT was to remit 50 percent of the contract value in cash to the Company within one month of the execution of the contract, which was August 20, 2004. As of December 31, 2004, there was $217.5 million included in customer advance related to these agreements. The Company also entered into an agreement during the third quarter of 2004 with JT to supply chassis equipment with an approximate value of $75 million.
SOFTBANK CORP.
Starcom Products, Inc.
Yulan Wu, the spouse of Ying Wu, Executive Vice President and Vice Chairman of the Board, is the beneficial owner of approximately 31% of Starcom Products, Inc. (“("Starcom Products”"). In 2004 2005
and during the period from January 20052006 to March 2005, we2006, the Company paid Starcom Products approximately $1.1$0.7 million and $0.3 million, respectively, for engineering consulting and employee placement services.
The Company obtains consulting services from Acoustek Int'l Corp. ("Acoustek"), which employs Minnie Huang, spouse of William Huang, our Senior Vice President and Chief Technology Officer. The Company paid to Acoustek $0.1 million in 2005 and $0.1 million in 2004 for consulting services provided by Ms. Huang.
On February 28, 2006, the Compensation Committee granted stock options and committed to grant rights to purchase stock to the executive officers as follows:
Name
| | Title
| | Number of
Shares
Underlying
Option Grants
| | Number of Shares
Underlying Stock
Purchase Rights
to Be Granted(1)
|
|---|
| Hong Lu | | Chief Executive Officer and President | | 260,000 | | 130,000 |
Ying Wu |
|
Executive Vice President; Chairman and Chief Executive Officer of China Operations |
|
100,000 |
|
50,000 |
Francis Barton |
|
Executive Vice President and Chief Financial Officer |
|
92,000 |
|
46,000 |
Michael Sophie(2) |
|
Former Executive Vice President and Chief Operating Officer |
|
83,600 |
|
41,800 |
William Huang |
|
Executive Vice President and Chief Technology Officer |
|
66,667 |
|
33,333 |
- (1)
- Represents stock purchase rights that were originally granted on February 28, 2006 as restricted stock purchase rights. The restricted stock purchase rights were allowed to lapse unexercised, and in their place the stock purchase rights may be granted following the 2006 fiscal year-end, based upon management performance objectives.
- (2)
- Effective May 5, 2006, the Securities granted to Mr. Sophie have been canceled or terminated pursuant to the Severance Agreement and Release dated April 13, 2006. For more information on the Severance Agreement and Release, see the section entitled "Severance Benefits" under "Certain Relationships and Related Transactions" in this Proxy Statement.
The options were issued to each executive officer under the 1997 Plan pursuant to the form of Stock Option Agreement approved for use under the 1997 Plan with respect to stock option grants to the Company's directors and executive officers, as previously filed with the Securities and Exchange Commission. Each option has an exercise price of $6.25 per share, which equals the closing price of the Common Stock on the Nasdaq Stock Market on the date of grant. The stock purchase rights, if granted, will entitle the executive officers to purchase Common Stock at par value. The options will vest, and the stock purchase rights will be granted, to each executive officer based upon management performance objectives established and tailored for such executive officer by the Compensation Committee for the Company's 2006 fiscal year, including (i) achievement of corporate financial measures such as bookings, gross margin, revenue, operating profit, cash flow, inventory turns, contribution margin and cash collections, (ii) achievement of corporate objectives relating to quality and organization and (iii) achievement by such executive officer of additional individualized
performance objectives reviewed and approved by the Compensation Committee. Performance will be measured against the established objectives and the options of each executive officer shall vest, and the stock purchase rights shall be granted, to the extent the established objectives have been achieved, on the date such a determination is made by the Compensation Committee, in its sole discretion, provided that such executive officer remains an employee of the Company on the date of determination. The Compensation Committee's determination as to the extent the established objectives have been achieved shall be made as soon as administratively practicable following the 2006 fiscal year-end.
On April 27, 2006, the Nominating and Corporate Governance Committee of the Board recommended to the Board, and the Board approved, the 2006 annual equity and cash compensation for the Non-Employee Directors, after a review of market trends and the changing level of responsibilities of the Non-Employee Directors. The changes in cash compensation, effective as of April 27, 2006, are as follows:
Cash and Incidental Compensation by Category:
Annual Compensation
| | Effective April 27, 2006
| | Prior to Change
|
|---|
| Director Retainer | | $ | 50,000 | | $ | 40,000 |
| Lead Director Fee | | $ | 22,500 | | $ | 20,000 |
| Audit Committee Chair Fee | | $ | 12,500 | | $ | 10,000 |
| Compensation Committee Chair Fee | | $ | 7,500 | | $ | 5,000 |
| Nominating and Governance Committee Chair Fee | | $ | 7,500 | | $ | 5,000 |
| Audit Committee Member Fee | | $ | 5,000 | | $ | 3,500 |
| Compensation Committee Member Fee | | $ | 4,500 | | $ | 3,000 |
| Nominating and Governance Committee Member Fee | | $ | 3,500 | | $ | 2,000 |
| Credit towards Company Products | | $ | 1,000 | | | None |
Annual Cash Compensation by Non-Employee Director:
Name
| | Annual Cash Compensation*
|
|---|
| Larry Horner | | | |
| | Director Retainer | | $ | 50,000 |
| | Lead Director Fee | | $ | † |
| | Audit Committee Chair Fee | | $ | 12,500 |
| | Compensation Committee Member Fee | | $ | 4,500 |
| | Nominating and Corporate Governance Committee Member Fee | | $ | 3,500 |
| | One-time cash award for services in 2005 | | $ | 20,000 |
| Thomas Toy | | | |
| | Director Retainer | | $ | 50,000 |
| | Lead Director Fee | | $ | † |
| | Compensation Committee Chair Fee | | $ | 7,5000 |
| | Audit Committee Member Fee | | $ | 5,000 |
| | Nominating and Corporate Governance Committee Member Fee | | $ | 3,500 |
| | One-time cash award for services in 2005 | | $ | 15,000 |
| Jeff Clarke | | | |
| | Director Retainer | | $ | 50,000 |
| | Nominating and Corporate Governance Committee Chair Fee | | $ | 7,500 |
| | Audit Committee Member Fee | | $ | 5,000 |
| | One-time cash award for services in 2005 | | $ | 15,000 |
| Allen Lenzmeier | | | |
| | Director Retainer | | $ | 50,000 |
| | Audit Committee Member Fee | | $ | 5,000 |
| | Compensation Committee Member Fee | | $ | 4,500 |
| | One-time cash award for services in 2005 | | $ | 15,000 |
- *
- Effective April 27, 2006
- †
- Mr. Horner will receive a pro-rated portion of the Lead Director Fee for his service as Lead Director prior to June 6, 2006. Mr. Toy will receive a pro-rated portion of the Lead Director Fee for his service as Lead Director from June 6, 2006.
In addition to cash compensation, on April 27, 2006, the Board granted stock options and preapproved the grant of restricted stock purchase rights (collectively, the "Non-Employee Grants") to the Non-Employee Directors as follows:
Name
| | Number of Shares Underlying Option Grants
| | Number of Shares of Restricted Stock*
|
|---|
| Larry Horner | | 20,675 | | 11,376 |
| Thomas Toy | | 19,905 | | 10,952 |
| Jeff Clarke | | 20,320 | | 11,180 |
| Allen Lenzmeier | | 20,675 | | 11,376 |
- *
- The grant of restricted stock purchase rights was preapproved by the Board to be effective on the second trading day following the date the Company files its Annual Report on Form 10-K for the
year ended December 31, 2005 and any other periodic reports then required to be filed with the SEC, contingent upon each Non-Employee Director's continued service on the Board as of such date.
The Non-Employee Grants were issued to each Non-Employee Director under the Company's 1997 Plan pursuant to the (i) form of Stock Option Agreement approved for use under the 1997 Plan with respect to stock option grants to the Company's Non-Employee Directors and (ii) form of restricted stock purchase agreement approved for use under the 1997 Plan, each as previously filed with the SEC. Each option has an exercise price of $7.67 per share, which equals 110% of the closing price of the Company's common stock on the Nasdaq Stock Market on April 27, 2006. The restricted stock purchase rights, as preapproved by the Board, will entitle the Non-Employee Directors to purchase the Company's common stock at par value. The options vest in equal monthly installments over a 12-month period beginning on April 27, 2006. The shares underlying the restricted stock purchase rights, when issued, will vest in equal quarterly installments over a 12-month period beginning on April 27, 2006.
Effective January 1, 2007, Mr. Toy, currently a Non-Employee Director of the Company, will assume the position of Chairman of the Board. To promote and facilitate a smooth transition of the role of Chairman of the Board, Mr. Toy has assumed greater responsibility on the Board during the transition period and has been assigned additional duties on the Board. The Nominating and Corporate Governance Committee of the Board is currently considering a compensation award to Mr. Toy to compensate him for his additional services on the Board during the transition period. The compensation award, if approved, will be paid in addition to the regular annual cash retainer, fees and equity grants previously approved by the Board as compensation for Mr. Toy's services as a member of the Board and Board committees and as Lead Director.
On April 13, 2006, the Company and Mr. Sophie entered into the Severance Agreement in connection with Mr. Sophie's resignation as Executive Vice President and Chief Operating Officer of the Company effective May 5, 2006. The Severance Agreement replaces and supersedes all prior agreements concerning Mr. Sophie's employment relationship with the Company, with the exception of the confidentiality agreement and any applicable stock option agreement entered into by and between the Company and Mr. Sophie under the Company's existing stock plans. Under the terms of the Severance Agreement, the Company paid Mr. Sophie the equivalent of six (6) months of regular base salary in a lump sum of $220,000, less applicable withholdings. Mr. Sophie also received payments for his accrued but unpaid Paid Time Off and Floating Holiday Benefits (as described in the Severance Agreement). In addition, the Company paid the approximate equivalent of six (6) months of Mr. Sophie's COBRA premiums in a lump sum of $6,000, less applicable withholdings.
Pursuant to the terms of the Severance Agreement, Mr. Sophie's stock options that were not vested as of May 5, 2006 were canceled or terminated. Mr. Sophie will have the right to exercise vested options at any time within 120 days after May 5, 2006, but no later than the option expiration date. The Severance Agreement also provides for a mutual release of claims by the Company and Mr. Sophie.
32
OTHER MATTERS
The Company knows of no other matters to be submitted to the Annual Meeting. If any other matters properly come before the Annual Meeting, it is the intention of the persons named in the enclosed proxy to vote the shares they represent as the Board may recommend.
|
| BY ORDER OF THE BOARD OF DIRECTORS |
|
|
/s/ MICHAEL J. SOPHIE |
| Michael J. SophieFRANCIS P. BARTON
Francis P. Barton
SeniorExecutive Vice President of Finance and
Chief Financial Officer |
Dated: June 21, 2006 |
|
|
Dated: April 18, 2005
33
ANNEX A
UTSTARCOM, INC.
2005
2006 EQUITY INCENTIVE PLAN
1.Purposes of the Plan.Plan. The purposes of this Plan are:
·
- •
- to attract and retain the best available personnel for positions of substantial responsibility,
·
- •
- to provide
additional incentiveincentives to Employees, Directorsindividuals who perform services to the Company, and Consultants, and·
- •
- to promote the success of the
Company’sCompany's business.
The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Restricted StockPerformance Units, Performance Units,Shares and Performance Shares.other stock or cash awards as the Administrator may determine.
2.Definitions. Definitions. As used herein, the following definitions will apply:
(a) “"AdministratorAdministrator”" means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.
(b) “"Affiliate" means any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with the Company.
(c) "Annual Revenue”" means the Company’sCompany's or a business unit’sunit's net sales for the Fiscal Year,Performance Period, determined in accordance with generally accepted accounting principles; provided, however, that prior to the Fiscal Year,Performance Period, the Administrator shall determine whether any significant item(s) shall be excluded or included formfrom the calculation of Annual Revenue with respect to one or more Participants.
(c) “ (d) "Applicable Laws”" means the requirements relating to the administration of equity-based awards or equity compensation plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.
(d) “ (e) "AwardAward”" means, individually or collectively, a grant under or the Plan of Options, SARs, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares and other stock or Performance Shares.cash awards as the Administrator may determine.
(e) “ (f) "Award Agreement”" means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.
(f) “Awarded Stock” means the Common Stock subject to an Award.
(g) “"BoardBoard”" means the Board of Directors of the Company.
(h) “"Cash Collections”" means the actual cash or other freely negotiable consideration, in any currency, received in satisfaction of accounts receivable created by the sale of any Company products or services.
(i) “"Change in Control”" means the occurrence of any of the following events:
(i) Any “person”"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner”"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 Company’sCompany's then outstanding voting securities;
(ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’sCompany's assets;
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(iii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors”"Incumbent Directors" means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or
(iv) 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.
(j) “"CodeCode”" means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to any successor or amended section of the Code.
(k) “"CommitteeCommittee”" means a committee of Directors or of other individuals satisfying Applicable Laws appointed by the Board in accordance with Section 4 hereof.
(l) "Common Stock" means the common stock of the Plan.Company.
(l) “Common Stock” means the Common Stock of the Company, or in the case of Performance Units and Restricted Stock Units, the cash equivalent thereof, as applicable.
(m) “"CompanyCompany”" means UTStarcom, Inc., a Delaware corporation, or any successor thereto.
(n) “"ConsultantConsultant”" means any person, including an advisor, engaged by the Company or a Parent or Subsidiaryits Affiliates to render services to such entity.
(o) “"Customer Satisfaction MBOs”" means as to any Participant, the objective and measurable individual goals set by a “management"management by objectives”objectives" process and approved by the Administrator, which goals relate to the satisfaction of external or internal customer requirements.
(p) “"Determination Date" means the latest possible date that will not jeopardize the qualification of an Award granted under the Plan as "performance-based compensation" under Section 162(m) of the Code.
(q) "Director”" means a member of the Board.
(q) “ (r) "DisabilityDisability”" means total and permanent disability as defined in Section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Administrator from time to time.
(r) “Dividend Equivalent” means a credit, made at the discretion of the Administrator, to the account of a Participant in an amount equal to the value of dividends paid on one Share for each Share represented by an Award held by such Participant.
(s) “"Earnings Per Share”" means as to any Fiscal Year,Performance Period, the Company’sCompany's Net Income or a business unit’sunit's Pro Forma Net Income, divided by a weighted average number of common sharesShares outstanding and dilutive common equivalent sharesShares deemed outstanding.
(t) “"EmployeeEmployee”" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company.its Affiliates. Neither service as a Director nor payment of a director’sdirector's fee by the Company will be sufficient to constitute “employment”"employment" by the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor.
A- (u) "2
(u) “Exchange Act”" means the Securities Exchange Act of 1934, as amended.
(v) “"Fair Market Value”" means, as of any date, the value of Common Stock determined as follows:
(i)the Administrator may determine in good faith by reference to the price of such stock on any established stock exchange or a national market system on the day of determination if the Common Stock is so listed on any established stock exchange or a national market system. If the Common Stock is not listed on any established stock exchange or a national market system, including without limitation The Nasdaq National Market or The Nasdaq SmallCap Marketthe value of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock will be the mean between the high bid and low asked prices for the Common Stock for the last trading day prior to the day of determination, as reported in The Wall Street Journal or such other source asdetermined by the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.faith.
(w) “"Fiscal Year”" means the fiscal year of the Company.
(x) “"Incentive Stock Option”" means an Option that by its terms qualifies and is otherwise intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(y) “"Net Income”" means as to any Fiscal Year,Performance Period, the income after taxes of the Company determined in accordance with generally accepted accounting principles, provided that prior to the Fiscal Year,Performance Period, the Administrator shall determine whether any significant item(s) shall be included or excluded from the calculation of Net Income with respect to one or more Participants.participants.
(z) “"New Orders”" means as to any Fiscal Year,Performance Period, the firm orders for a system, product, part, or service that are being recorded for the first time as defined in the Company’sCompany's order recognition policy.
(aa) “"Nonstatutory Stock Option”" means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.
(bb) “"OfficerNon-Owner Outside Director” means an Outside Director who is not the beneficial owner of more than 5% of the Company’s outstanding capital stock.
(cc) “Officer”" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(dd) “ (cc) "Operating Profit”" means as to any Fiscal Year,Performance Period, the difference between revenue and related costs and expenses, excluding income derived from sources other than regular activities and before income deductions.
(ee) “ (dd) "OptionOption”" means a stock option granted pursuant to the Plan.
(ff) “ (ee) "ParentOutside Director”" means a Director who is not an Employee.
(gg) “Parent” means a “parent"parent corporation,”" whether now or hereafter existing, as defined in Section 424(e) of the Code.
(hh) “ (ff) "ParticipantParticipant”" means the holder of an outstanding Award granted underAward.
(gg) "Performance Goals" will have the meaning set forth in Section 11 of the Plan.
(ii) “ (hh) "Performance GoalsPeriod”" means any Fiscal Year of the goal(s) (or combined goal(s))Company or such other period as determined by the Administrator in its discretion, to be applicable to a Participant with respect to an Award. Assole discretion.
A- (ii) "3
determined by the Administrator, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (a) Annual Revenue, (b) Operating Profit, (c) Customer Satisfaction MBOs, (d) Earnings Per Share, (e) Net Income, (f) New Orders, (g) Pro Forma Net Income, (h) Return on Designated Assets, (i) Return on Sales, (j) Return on Equity, (k) Cash Collections, and (l) Product Shipments. The Performance Goals may differ from Participant to Participant and from Award to Award. Any criteria used may be (i) measured in absolute terms, (ii) compared to another company or companies, (iii) measured against the performance of the Company as a whole or a segment of the Company and/or (iv) measured on a pre-tax or post-tax basis (if applicable).
(jj) “Performance Share”" means an Award granted to a Service Providerdenominated in Shares which may be earned in whole or in part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine pursuant to Section 10 of the Plan.10.
(kk) “ (jj) "Performance Unit”" means an Award granted towhich may be earned in whole or in part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine and which may be settled for cash, Shares or other securities or a Service Providercombination of the foregoing pursuant to Section 10 of the Plan.10.
(ll) “ (kk) "Period of Restriction”" means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator. Notwithstanding any contrary provision of the Plan, a Period of Restriction shall expire (a) at a rate no faster than as to one-third (
(ll) "1Plan¤3) of the Shares covered by an Award each year if the Shares vest solely as a result of continued service and (b) no sooner than 12 months following the date of grant if the Shares vest upon satisfaction of performance objectives, unless determined otherwise by the Administrator at its discretion solely by reason of death, Disability, retirement, or major capital change, or unless vesting is accelerated automatically under Section 15.
(mm) “Plan”" means this 20052006 Equity Incentive Plan.
(nn) “ (mm) "Pro Forma Net IncomeProduct Shipments”" means as to any Fiscal Year,business unit for any Performance Period, the Net Income of such business unit, minus allocations of designated corporate expenses.
(nn) "Product Shipments" means as to any Performance Period, the quantitative and measurable number of units of a particular product that shipped during such Fiscal Year.Performance Period.
(oo) “"Pro Forma Net Income” means as to any business unit for any Fiscal Year, the Controllable Profits of such business unit, minus allocations of designated corporate expenses.
(pp) “Restricted Stock”" means Shares issued pursuant to aan Award of Restricted Stock award under Section 8 of the Plan, or issued pursuant to the early exercise of an option.Option.
(qq) “ (pp) "Restricted Stock Unit”" means a bookkeeping entry representing an Award thatamount equal to the Administrator permits to be paid in installments or on a deferred basisFair Market Value of one Share, granted pursuant to Sections 4Section 9. Each Restricted Stock Unit represents an unfunded and 11unsecured obligation of the Plan.Company.
(rr) “ (qq) "Return on Designated Assets”" means as to any Fiscal Year,Performance Period, the Pro Forma Net Income of a business unit, divided by the average of beginning and ending business unit designated assets, or Net Income of the Company, divided by the average of beginning and ending designated corporate assets.
(ss) “ (rr) "Return on Equity”" means, as to any Fiscal Year,Performance Period, the percentage equal to the value of the Company’sCompany's or any business unit’sunit's common stock investments at the end of such Fiscal Year,Performance Period, divided by the value of such common stock investments at the start of such Fiscal Year,Performance Period, excluding any common stock investments so designated by the Administrator.
(tt) “ (ss) "Return on Sales”" means as to any Fiscal Year,Performance Period, the percentage equal to the Company’sCompany's Net Income or the business unit’sunit's Pro Forma Net Income, divided by the Company’sCompany's or the business unit’sunit's Annual Revenue.
(uu) “ (tt) "Rule 16b-3”" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.
A- (uu) "4
(vv) “Section 16(b)”" means Section 16(b) of the Exchange Act.
(ww) “ (vv) "Service Provider”" means an Employee, Director or Consultant.
(xx) “ (ww) "ShareShare”" means a share of the Common Stock, as adjusted in accordance with Section 1514 of the Plan.
(yy) “ (xx) "Stock Appreciation Right” or “SAR”" means an Award, granted alone or in connection with an Option, that pursuant to Section 9 of the Plan7 is designated as a SAR.Stock Appreciation Right.
(zz) “ (yy) "SubsidiarySubsidiary”" means a “subsidiary corporation”,"subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code.
(zz) "Successor Corporation" has the meaning given to such term in Section 14(c) of the Plan.
3.Stock Subject to the Plan.Plan.
(a)Stock Subject to the Plan.Plan. Subject to the provisions of Section 1514 of the Plan, the maximum aggregate number of Shares that may be issuedawarded and sold under the Plan is the number of4,500,000 Shares authorized and available for issuance under the 1997 Stock Plan as of May 13, 2005 plus (i) any Shares that, returnas of the date of stockholder approval of this Plan, have been reserved but not issued pursuant to any awards granted under the Company's 1997 Stock Plan after May 13, 2005(the "1997 Plan"), the Company's Amended 2001 Director Option Plan (the "2001 Plan"), and the Company's 2003 Non-Statutory Stock Option Plan (the "2003 Plan") and are not subject to any awards granted thereunder, and (ii) an annual increase onany Shares subject to stock options or similar awards granted under the first day of each Fiscal Year, beginning1997 Plan, the 2001 Plan, and the 2003 Plan that expire or otherwise terminate without having been exercised in 2006, equalfull and Shares issued pursuant to awards granted under the lesser of (A) 4% of 1997 Plan,
the outstanding Shares on2001 Plan, and the first day of the Fiscal Year; (B) 3,000,000 Shares;2003 Plan that are forfeited to or (C) such lesser amount of Shares as determinedrepurchased by the Board.Company. The Shares may be authorized, but unissued, or reacquired Common Stock.
(b) Lapsed Awards. If an Award expires or becomes unexercisable without having been exercised in full, or, with respect to Restricted Stock, Restricted Stock Units, Performance Shares shall not be deemedor Performance Units, is forfeited to have beenor repurchased by the Company, the unpurchased Shares (or for Awards other than Options and Stock Appreciation Rights, the forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to Stock Appreciation Rights, all of the Shares covered by the Award (that is, Shares actually issued pursuant to a Stock Appreciation Right, as well as the Shares that represent payment of the exercise price) will cease to be available under the Plan. However, Shares that have actually been issued under the Plan with respectunder any Award will not be returned to any portionthe Plan and will not become available for future distribution under the Plan; provided, however, that if unvested Shares of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units are repurchased by the Company or are forfeited to the Company, such Shares will become available for future grant under the Plan. Shares used to pay the tax and exercise price of an Award thatwill not become available for future grant or sale under the Plan. To the extent an Award under the Plan is settledpaid out in cash. Uponcash rather than Shares, such cash payment will not result in Shares pursuant to the exercise of an Award,reducing the number of Shares available for issuance under the Plan shall be reduced only byPlan. Notwithstanding the foregoing and, subject to adjustment provided in Section 14, the maximum number of Shares actuallythat may be issued in such payment. If a Participant paysupon the exercise price (or purchase price, if applicable) of an Award throughIncentive Stock Options will equal the tenderaggregate Share number stated in Section 3(a), plus, to the extent allowable under Section 422 of the Code, any Shares or if Shares are tendered or withheld to satisfy any Company withholding obligations, the number of Shares so tendered or withheld shall again bethat become available for issuance pursuant to future Awards under the Plan.Plan under this Section 3(b).
(b) 4.Lapsed Awards. If any outstanding Award expires or is terminated or canceled without having been exercised or settled in full, or if Shares acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by the Company, the Shares allocable to the terminated portion of such Award or such forfeited or repurchased Shares shall again be available for grant under the Plan.
(c) Share Reserve. The Company, during the term Administration of the Plan shall at all times reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of the Plan..
4. (a)Administration of the Plan. Procedure
(a) Procedure..
(i)Multiple Administrative Bodies.Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.
(ii)Section 162(m).. To the extent that the Administrator determines it to be desirable and necessary to qualify Awards granted hereunder as “performance-based compensation”"performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan will be administered by a Committee of two or more “outside directors”"outside directors" within the meaning of Section 162(m) of the Code.
(iii)Rule 16b-3.16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.
A- (iv)5
(iv) Other Administration.Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, which committee will be constituted to satisfy Applicable Laws.
(v) (b)Delegation of Authority for Day-to-Day Administration. Except to the extent prohibited by Applicable Law, the Administrator may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to it in this Plan. Such delegation may be revoked at any time.
(b) Powers of the Administrator. Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Awards may be granted hereunder;
(iii) to determine the number of Shares to be covered by each Award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the 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 be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture or repurchase restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator, in its sole discretion, will determine;hereunder;
(vi)(iv) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(vii)(v) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws and/or qualifying for preferred tax treatment under applicable foreign tax laws;
(viii)(vi) to modify or amend each Award (subject to Section 1819(c) of the Plan), including. Notwithstanding the discretionary authority to extend the post-termination exercisability period of Awards longer than is otherwise provided for in the Plan;
(ix) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares or cash to be issued upon exercise or vesting of an Award that number of Shares or cash having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of any Shares to be withheld will be determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares or cash withheld for this purpose will be made in such form and under such conditions asprevious sentence, the Administrator may deem necessarynot modify or advisable;amend an Option or Stock Appreciation Right to reduce the exercise price of such Option or Stock Appreciation Right after it has been granted (except for adjustments made pursuant to Section 14), and neither may the Administrator cancel any outstanding Option or Stock Appreciation Right and immediately replace it with a new Option or Stock Appreciation Right with a lower exercise price;
(x)(vii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;
(xi)(viii) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award;
(xii)Award pursuant to determine whether Awards will be settled in Shares, cash or in any combination thereof;
(xiii) to determine whether Awards will be adjusted for Dividend Equivalents;
A-6
(xiv) to establish a program whereby Service Providers designated bysuch procedures as the Administrator can reduce compensation otherwise payable in cash in exchange for Awards under the Plan;
(xv) to impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by the Participant of any Shares issued as a result of or under an Award, including without limitation, (A) restrictions under an insider trading policy, and (B) restrictions as to the use of a specified brokerage firm for such resales or other transfers;may determine; and
(xvi)(ix) to make all other determinations deemed necessary or advisable for administering the Plan.
(c)Effect of Administrator’s Decision.Administrator's Decision. The Administrator’sAdministrator's decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards.
(d) 5.Shareholder Approval. Eligibility Notwithstanding any contrary provision of the Plan, the Administrator may not reduce the exercise/purchase price of an outstanding Award (whether by (i) repricing or (ii) canceling and then regranting the Award with a lower exercise/purchase price) without first obtaining shareholder approval.
5. Eligibility.. Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares and Restricted Stock Unitssuch other cash or stock awards as the Administrator determines may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.employees of the Company or any Parent or Subsidiary of the Company.
6.Limitations. Stock Options.
(a)( Limitationsa) ISO $100,000 Rule.. Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options 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 $100,000, such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options 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.
(b)Section 162(m) Limitations. Number of Shares Subject. The Administrator will have complete discretion to Section 15determine the number of the Plan, the following special limits shall applyOptions granted to Shares available for Awards under the Plan:
(i)any Participant, provided that during any Fiscal Year, no Service Provider shallParticipant will be granted Options in any one calendar year covering more than 700,000 Shares;
(ii) no Service Provider shall1,000,000 Shares. Notwithstanding the foregoing limitation, in connection with a Participant's initial service as an Employee, an Employee may be granted Stock Appreciation Rights in any one calendar yearOptions covering more than 700,000 Shares;
(iii) no Service Provider shall be granted more than 700,000 Shares of Restricted Stock in any one calendar year;
(iv) no Service Provider shall be granted more than 700,000 Performance Shares in any one calendar year; and
(v) no Service Provider shall be granted Performance Units in any one calendar year withup to an initial value in excess of $2,000,000.
(vi) If an Award is canceled in the same Fiscal Year of the Company in which it was granted, the canceled Award will be counted against the limits set forth above. For this purpose, if the exercise/purchase price of an Award is reduced, the transaction will be treated as a cancellation of the Award and the grant of a new Award.
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(vii) Notwithstanding Sections 6(b)(i) through 6(b)(vi) to the contrary, the limits applicable during the calendar year in which an individual first becomes a Service Provider shall be twice the amounts specified in Sections 6(b)(i) through 6(b)(v).
(c) No Rights as a Service Provider. Neither the Plan nor any Award shall confer upon a Participant any right with respect to continuing his or her relationship as a Service Provider, nor shall they interfere in any way with the right of the Participant or the right of the Company or its Parent or Subsidiaries to terminate such relationship at any time, with or without cause.additional 2,000,000 Shares.
7. Stock Options. (c)
(a) Term of Option.Option. The Administrator will determine the term of each Option in its sole discretion. Any Option granted under the Plan will not be stated inexercisable after the Award Agreement. In the caseexpiration of an Incentive Stock Option, the term will be ten (10)seven (7) years from the date of grant or such shorter term as may be provided in the Award Agreement. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.
(b)
(d)Option Exercise Price.Price and Consideration.
(i) Exercise Price. The per Shareshare exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by the Administrator; provided, however, that the per Share exercise priceAdministrator, but will be no less than 100% of the Fair Market Value per Share on the date of grant. Notwithstanding the foregoing,In addition, in the case of an Incentive Stock Option granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than 110% of the Fair Market Value per Share on the date of grant.
(ii) Substitute Options. Notwithstanding the foregoing provisions of this Section 7(b)(i)6(c), inOptions may be granted with a per Share exercise price of less than 100% of the event thatFair Market Value per Share on the Company or a Company Parent or Subsidiary consummatesdate of grant pursuant to a transaction described in, Section 424(a) of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who become Service Providers on account of such transaction may be granted Optionsand in substitution for options granted by their former employer. If such substitute Options are granted, the Administrator, in its sole discretion anda manner consistent with, Section 424(a) of the Code,Code. The Administrator may determine that such substitute Options shall havenot modify or amend an Option to reduce the exercise price less than one hundred percent (100%)of such Option after it has been granted (except for adjustments made pursuant to Section 14 of the Fair Market Value ofPlan) nor may the Shares ofAdministrator cancel any outstanding Option and replace it with a new Option, Stock Appreciation Right, or other Award with a lower exercise price, unless, in either case, such action is approved by the grant date.Company's stockholders.
(c) (ii)Waiting Period and Exercise Dates.Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised. The Administrator, in its sole discretion, may accelerate the satisfaction of such conditions at any time.
(d) (iii)Form of Consideration.Consideration. The Administrator will determine the acceptable formform(s) of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such considerationpayment, to the extent permitted by Applicable Laws may consist entirely of:Laws.
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which meet the conditions established by the Administrator;
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(v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the Participant, including any liability attributable to the Participant’s participation in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.
(e) Exercise of Option.Option.
(i)Procedure for Exercise; Rights as a Stockholder.Stockholder. 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 Administrator 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: (x) written or electronic(i) notice of exercise (in accordance withsuch form as the Award Agreement)Administrator specify from time to time) from the person entitled to exercise the Option, and (y)(ii) full payment for the Shares with respect to which the Option is exercised (including provision for any(together with an applicable tax withholding)withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Administrator 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 or, if requested by the Participant, in the name of the Participant and his or her spouse. 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 Awarded Stock, 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 1514 of the Plan or the applicable Award Agreement.
Exercising an Option in any manner will decrease the number of Shares thereafter available for sale under the Option, by the number of Shares as to which the Option is exercised.Plan.
(ii)Termination of Relationship as a Service Provider.Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’sParticipant's termination as the result of the Participant's death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the Participant’sParticipant's termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option as to all of the vested Shares within the time specified by the Administrator, the Option will terminate, and the remaining Shares covered by such Option will revert to the Plan.
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(iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’sParticipant's Disability, the Participant may exercise his or her Option within such
period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’sParticipant's termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option as to all of the vested Shares within the time specified by the Administrator,herein, the Option will terminate, and the remaining Shares covered by such Option will revert to the Plan.
(iv)Death of Participant.Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant’sParticipant's death within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the Optionoption be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant’sParticipant's designated beneficiary, provided such beneficiary has been designated prior to the Participant’sParticipant's death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’sParticipant's estate or by the persons)person(s) to whom the Option is transferred pursuant to the Participant’sParticipant's will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’sParticipant's death. Unless otherwise provided by the Administrator, if at the time of death the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the Option is not so exercised as to all of the vested Shares within the time specified by the Administrator,herein, the Option will terminate, and the remaining Shares covered by such Option will revert to the Plan.
8. (v)Restricted Stock. Other Termination. A Participant's Award Agreement may also provide that if the exercise of the Option following the termination of Participant's status as a Service Provider (other than upon the Participant's death or Disability) would result in liability under Section 16(b), then the Option will terminate on the earlier of (A) the expiration of the term of the Option set forth in the Award Agreement, or (B) the 10th day after the last date on which such exercise would result in such liability under Section 16(b). Finally, a Participant's Award Agreement may also provide that if the exercise of the Option following the termination of the Participant's status as a Service Provider (other than upon the Participant's death or disability) would be prohibited at any time solely because the issuance of Shares would violate the registration requirements under the Securities Act, then the Option will terminate on the earlier of (A) the expiration of the term of the Option, or (B) the expiration of a period of three (3) months after the termination of the Participant's status as a Service Provider during which the exercise of the Option would not be in violation of such registration requirements.
7. Stock Appreciation Rights.
(a) Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, a Stock Appreciation Right may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.
(a) (b) Number of Shares. The Administrator will have complete discretion to determine the number of Stock Appreciation Rights granted to any Participant, provided that during any Fiscal Year, no Participant will be granted Stock Appreciation Rights covering more than 1,000,000 Shares. Notwithstanding the foregoing limitation, in connection with a Participant's initial service
as an Employee, an Employee may be granted Stock Appreciation Rights covering up to an additional 2,000,000 Shares.
(c) Exercise Price and Other Terms. The Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of Stock Appreciation Rights granted under the Plan, provided, however, that the exercise price will be not less than 100% of the Fair Market Value of a Share on the date of grant. The Administrator may not modify or amend a Stock Appreciation Right to reduce the exercise price of such Stock Appreciation Right after it has been granted (except for adjustments made pursuant to Section 14 of the Plan) nor may the Administrator cancel any outstanding Stock Appreciation Right and replace it with a new Stock Appreciation Right, Option, or other Award with a lower exercise price, unless, in either case, such action is approved by the Company's stockholders.
(d) Stock Appreciation Right Agreement. Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
(e) Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6(e) also will apply to Stock Appreciation Rights.
(f) Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, 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 Stock Appreciation Right is exercised.
At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
8. Restricted Stock.
(a)Grant of Restricted Stock.Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine.
(b)Restricted Stock Agreement.Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Notwithstanding the foregoing sentence, during any Fiscal Year no Participant will receive more than an aggregate of 300,000 Shares of Restricted Stock; provided, however, that in connection with a Participant's initial service as an Employee, an Employee may be granted an aggregate of up to an additional 600,000 Shares of Restricted Stock. Unless the Administrator determines otherwise, Shares of Restricted Stock will be held by the Company as escrow agent until the restrictions on such Shares have lapsed.
(c)Transferability. Transferability. Except as provided in this Section 8, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.
(d)Other Restrictions.Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
(e)Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Administrator on or before the latest date permissible to enable the Restricted Stock to qualify as “performance-based compensation” under Section 162(m) of the
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Code. In granting Restricted Stock which is intended to qualify under Section 162(m) of the Code, the Administrator shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under Section 162(m) of the Code (e.g., in determining the Performance Goals).
(f) Removal of Restrictions.Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.
(g) (f)Voting Rights.Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.
(h) (g)Dividends and Other Distributions.Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.
(i) (h)Return of Restricted Stock to Company.Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the Plan.
9. Restricted Stock Appreciation Rights.Units.
(a)Grant of SARs. Subject to the terms and conditions of the Plan, a SAR. Restricted Stock Units may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.
(b) Number of Shares. The Administrator will have complete discretion to determine the number of SARs granted to any Service Provider.
(c) Exercise Price and Other Terms. The Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of SARs granted under the Plan; provided, however, that the exercise priceAdministrator. Each Restricted Stock Unit grant will be no less than 100% of the Fair Market Value of the Awarded Stock on the date of grant.
(d) Exercise of SARs. SARsevidenced by an Award Agreement that will be exercisable onspecify such other terms and conditions as the Administrator, in its sole discretion, will determine.determine, including all terms, conditions, and restrictions related to the grant, the number of Restricted Stock Units and the form of payout, which, subject to Section 9(d), may be left to the discretion of the Administrator. Notwithstanding the anything to the contrary in this subsection (a), during any Fiscal Year of the Company, no Participant will receive more than an aggregate of 300,000 Restricted Stock Units; provided, however, that in connection with a Participant's initial service as an Employee, an Employee may be granted an aggregate of up to an additional 600,000 Restricted Stock Units.
(b) Vesting Criteria and Other Terms. The Administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. After the grant of Restricted Stock Units, the Administrator, in its sole discretion, may accelerate exercisability atreduce or waive any time.
(e) SAR Agreement.restrictions for such Restricted Stock Units. Each SAR grantAward of Restricted Stock Units will be evidenced by an Award Agreement that will specify the exercise price, the term of the SAR, the conditions of exercise,vesting criteria, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
(f) (c)Expiration of SARs. Earning Restricted Stock Units An SAR granted under. Upon meeting the Planapplicable vesting criteria, the Participant will expire upon the date determined by the Administrator, in its sole discretion, and set forthbe entitled to receive a payout as specified in the Award Agreement. Notwithstanding the foregoing, at any time after the rulesgrant of Sections 7(e)(ii), 7(e)(iii) and 7(e)(iv) also will applyRestricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to SARs.receive a payout.
(g) (d) Form and Timing of Payment. Payment of SAR Amount. Upon exercise of an SAR, a Participantearned Restricted Stock Units will be entitled to receive payment frommade as soon as practicable after the Company (less applicable withholding)date(s) set forth in an amount determinedthe Award Agreement. The Administrator, in its sole discretion, may pay earned Restricted Stock Units in cash, Shares, or a combination thereof.
Shares represented by multiplying:Restricted Stock Units that are fully paid in cash again will be available for grant under the Plan.
(i) The difference between the Fair Market Value of a Share on (e) Cancellation. On the date of exercise overset forth in the exercise price; timesAward Agreement, all unearned Restricted Stock Units will be forfeited to the Company.
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(ii) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Administrator, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
10. Performance Units and Performance Shares.Shares.
(a)Grant of Performance Units/Shares.Shares Subject to the terms and conditions of the Plan,. Performance Units and Performance Shares may be granted to Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole discretion. The Administrator will have complete discretion in determining the number of Performance Units and Performance Units/Shares granted to each Participant.Participant provided that during any Fiscal Year, (a) no Participant will receive Performance Units having an initial value greater than $2,000,000, and (b) no Participant will receive more than 300,000 Performance Shares. Notwithstanding the foregoing limitation, in connection with a Participant's initial service as an Employee, an Employee may be granted up to an additional 600,000 Performance Shares and additional Performance Units having an initial value up to $2,000,000.
(b)Value of Performance Units/Shares.Shares. Each Performance Unit will have an initial value that is established by the Administrator on or before the date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.
(c)Performance Objectives and Other Terms.Terms (i). The Administrator will set performance objectives or other vesting provisions (including, without limitation, continued status as a Service Provider) in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units/Shares that will be paid out to the Participant. The time period during which theAdministrator may set performance objectives will be measured and must be satisfied will be calledbased upon the “Performance Period” and will have a durationachievement of at least 12 months.Company-wide, divisional, or individual goals, or any other basis determined by the Administrator in its discretion. Each Award of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in its sole discretion, will determine. The Administrator may set performance objectives based upon the achievement of Company-wide, divisional, or individual goals (including solely continued service), applicable federal or state securities laws, or any other basis determined by the Administrator in its discretion.
(ii) For purposes of qualifying grants (d) Earning of Performance Units/Shares as “performance-based compensation” under Section 162(m) of the Code, the Administrator in its discretion, may determine that the performance objectives applicable to Performance Units/Shares shall be based on the achievement of Performance Goals. The Performance Goals shall be set by the Administrator on or before the latest date permissible to enable the Performance Units/Shares to qualify as “performance-based compensation” under Section 162(m) of the Code. In granting Performance Units/Shares which are intended to qualify under Section 162(m) of the Code, the Administrator shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Performance Units/Shares under Section 162(m) of the Code (e.g., in determining the Performance Goals).
(d) Earning of Performance Units/Shares.. After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.
(e)Form and Timing of Payment of Performance Units/Shares.Shares. Payment of earned Performance Units/Shares will be made as soon as practicable after the expiration of the applicable Performance Period at the time determined by the Administrator.Period. The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof.
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(f) Cancellation of Performance Units/Shares.Shares. On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shares will be forfeited to the Company, and again will be available for grant under the Plan.
11. Performance Goals. The granting and/or vesting of Awards of Restricted Stock, Units. Restricted Stock Units, shall consistPerformance Shares and Performance Units and other incentives under the Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of the Code and may provide for a Restricted Stock, targeted level or levels of
achievement ("Performance Goals") including one or more of the following measures: (a) Annual Revenue, (b) Cash Collections, (c) Customer Satisfaction MBOs, (d) Earnings Per Share, (e) Net Income, (f) New Orders, (g) Operating Profit, (h) Pro Forma Net Income, (i) Return on Designated Assets, (j) Return on Equity, (k) Return on Sales, and (l) Product Shipments. Any Performance Goals may be used to measure the performance of the Company as a whole or a business unit of the Company and may be measured relative to a peer group or index. The Performance UnitGoals may differ from Participant to Participant and from Award thatto Award. Any criteria used may be (i) measured in absolute terms, (ii) compared to another company or companies, (iii) measured against the performance of the Company as a whole or a segment of the Company and/or (iv) measured on a pre-tax or post-tax basis (if applicable). Prior to the Determination Date, the Administrator will determine whether any significant element(s) will be included in its sole discretion, permitsor excluded from the calculation of any Performance Goal with respect to be paid out in installments or on a deferred basis, in accordance with rules and procedures established by the Administrator.any Participant.
12.Leaves of Absence.Absence/Transfer Between Locations. Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence. A Service Provider will not cease to be an Employee in the case of (i) any leave of absence and will resume on the date the Participant returns to work on a regular schedule as determinedapproved by the Company; provided, however, that no vesting credit will be awarded forCompany or (ii) transfers between locations of the time vesting has been suspended during such leave of absence.Company or between the Company and its Affiliates. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 91stninety-first (91st) day of such leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.
13.Formula Option Grants to Non-Owner Outside Directors. Transferability of Awards All grants of Options to Non-Owner Outside Directors pursuant to this Section 13 shall be automatic and nondiscretionary, except as otherwise provided herein, and will be made strictly in accordance with the following provisions:
(a) Type of Option. All Options granted pursuant to this Section shall be Nonstatutory Stock Options and, except as otherwise provided herein, shall be subject to the other terms and conditions of the Plan.
(b) No Discretion. No person shall have any discretion to select which Non-Owner Outside Directors shall be granted Options under this Section or to determine the number of Shares to be covered by such Options (except as provided in Section 13(e)).
(c) Option Grant. Commencing in 2005, each Non-Owner Outside Director automatically will be granted an Option to purchase 25,000 Shares (a “Director Option”) on the first trading day on or after August 23 of each year, if, as of such date, he or she has served on the Board for at least the preceding five (5) months.
(d) Terms. The terms of each Director Option shall be as follows:
(i) The term of the Director Option shall be ten (10) years.
(ii) The exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Director Option.
(iii) Subject to Section 15 hereof, the Director Option will vest and become exercisable as to one-twelfth (1¤12) of the Shares each month following the date of grant, provided that the Participant continues to serve as a Director through such dates.
(iv) The Director Option shall remain exercisable, to the extent then vested, for twelve (12) months following the termination of the Director’s status as a Service Provider, whether by death, Disability, resignation, or any other reason; provided, however, that no Director Option shall be exercisable after the expiration of the term set forth in clause (i) above.
(e) Amendment. The Administrator in its discretion may change the number of Shares subject to Director Options granted under this Section.
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14. Non-Transferability of Awards. Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. IfWith the approval of the Administrator, makesa Participant may, in a manner specified by the Administrator, (a) transfer an Award transferable, such Award will contain such additional termsto a Participant's spouse or former spouse pursuant to a court-approved domestic relations order which relates to the provision of child support, alimony payments or marital property rights, and conditions(b) transfer an Option by bona fide gift and not for any consideration, to (i) a member or members of the Participant's immediate family, (ii) a trust established for the exclusive benefit of the Participant and/or member(s) of the Participant's immediate family, (iii) a partnership, limited liability company of other entity whose only partners or members are the Participant and/or member(s) of the Participant's immediate family, or (iv) a foundation in which the Participant and/or member(s) of the Participant's immediate family control the management of the foundation's assets. For purposes of this Section 13, "immediate family" shall mean the Participant's spouse, former spouse, children, grandchildren, parents, grandparents, siblings, nieces, nephews, parents-in-law, sons-in-law, daughters-in-law, brothers-in-law, sisters-in-law, including adoptive or step relationships and any person sharing the Participant's household (other than as the Administrator deems appropriate.a tenant or employee).
15. 14.Adjustments; Dissolution or Liquidation; Merger or Change in Control.Control.
(a)Adjustments. Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, such that an adjustment is determined by the Administrator, (in its sole discretion) to be appropriate in order to prevent dilutiondiminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator shall, in such manner as it may deem equitable,(in its sole discretion) adjust the number and class of Shares whichthat may be delivered under the Plan and/or the number, class, and price of Shares subject to outstanding awards, the number of Shares covered by awards granted under Section 13,each outstanding Award, and the numerical Share limits set forth in Sections 3, 6, 7, 8, 9 and 6. Notwithstanding the preceding, the number of Shares subject to any Award always shall be a whole number.10.
(b)Dissolution or Liquidation.Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the right to exercise his or her Award, to the extent applicable, until ten (10) days prior to such transaction as to all of the Awarded Stock covered thereby, including Shares as to which the Award would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option or forfeiture rights applicable to any Award shall lapse 100%, and that Award vesting shall accelerate 100% and all vesting criteria is fully satisfied, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, or vested, an Award will terminate immediately prior to the consummation of such proposed action.
(c)Change in Control.Control
(i) Stock Options and SARs.. In the event of a Change in Control, each outstanding Option and SAR shallAward will be assumed or an equivalent option or SARright substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. Unless determined otherwise by the Administrator, incorporation (the "Successor Corporation"). In the event that the successor corporationSuccessor Corporation refuses to assume or substitute for the Option or SAR,Award, the Participant shallwill fully vest in and have the right to exercise the Option or SAR as to all of the Awardedhis or her outstanding Options and Stock Appreciation Rights, including Shares as to which itsuch Awards would not otherwise be vested or exercisable. Ifexercisable, all restrictions on Restricted Stock will lapse, and, with respect to Restricted Stock Units, Performance Shares and Performance Units, all Performance Goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met. In addition, if the Successor Corporation refuses to assume or substitute an Option or SAR is not assumed or substitutedStock Appreciation Right in the event of a Change in Control, the Administrator shallwill notify the Participant in writing or electronically that the Option or SAR shallStock Appreciation Right will be fully vested and exercisable to the extent vested, for a period of fifteen (15) days fromtime determined by the date of such notice,Administrator in its sole discretion, and the Option or SAR shallStock Appreciation Right will terminate upon the expiration of such period.
For the purposes of this paragraph, the Option or SAR shallsubsection (c), an Award will be considered assumed if, following the Change in Control, the option or SAR confers the right to purchase or receive, for each Share of Awarded Stock subject to the Option or SAR immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) received in the Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such
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consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or SAR, for each share of Awarded Stock subject to the Option or SAR, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control. Notwithstanding anything herein to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more performance goals will not be considered assumed if the Company or its successor modifies any of such performance goals without the Participant’s consent; provided, however, a modification to such performance goals only to reflect the successor corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.
(ii) Restricted Stock, Performance Shares, Performance Units, and Restricted Stock Units. In the event of a Change in Control, each outstanding Award of Restricted Stock, Performance Share, Performance Unit, and Restricted Stock Unit shall be assumed or an equivalent award substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. Unless determined otherwise by the Administrator, in the event that the successor corporation refuses to assume or substitute for the Award, the Participant shall fully vest in the Award including as to Shares/Units that would not otherwise be vested, all applicable restrictions will lapse, and all performance objectives and other vesting criteria will be deemed achieved at targeted levels. For the purposes of this paragraph, an Award of Restricted Stock, Performance Share, Performance Unit, and Restricted Stock Unit shall be considered assumed if, following the Change in Control, the award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the Change in Control, (and if a Restricted Stock Unit or Performance Unit, for each Share as determined based on the then current value of the unit), the consideration (whether stock, cash, or other securities or property) or, in the case of a Stock Appreciation Right upon the exercise of which the Administrator determines to pay cash or a Performance Share or Performance Unit which the Administrator can determine to pay in cash, the fair market value of the consideration received in the merger or Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent,Successor Corporation, the Administrator may, with the consent of the successor corporation,Successor Corporation, provide thatfor the consideration to be received for each Share (and ifupon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, Performance Share or Performance Unit, for each Share assubject to such Award (or in the case of an Award settled in cash, the number of implied shares determined based onby dividing the then current value of the unit)Award by the per share consideration received by holders of Common Stock in the Change in Control), to be solely common stock of the successor corporation or its ParentSuccessor Corporation equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control.
Notwithstanding anything hereinin this Section 14(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more performance goalsPerformance Goals will not be considered assumed if the Company or its successor modifies any of the performance goalssuch Performance Goals without the Participant’sParticipant's consent; provided, however, a modification to the performance goalssuch Performance Goals only to reflect the successor corporation’sSuccessor Corporation's post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.
(iii) 15.Outside Director Awards. Tax Withholding Notwithstanding any provision of Section 15(c)(i) or 15(c)(ii)
(a) Withholding Requirements. Prior to the contrary,delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes required to be withheld with respect to Awards grantedsuch Award (or exercise thereof).
(b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to an Outside Director that are assumedsuch procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or substituted for, ifin part by (without limitation) (a) paying cash, (b) electing to have the Company withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the amount required to be withheld, (c) delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld, or (d) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld. The amount of the withholding requirement will be deemed to include any amount which the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of or following the assumption or substitution the Participant’s status as a Director or a directortax to be withheld is to be determined. The Fair Market Value of the successor corporation,Shares to be withheld or delivered will be determined as applicable, is terminated other thanof the date that the taxes are required to be withheld.
16. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a voluntary resignation by the Participant then the Participant shall fully vest in and have theany right to exercise his or her Options and Stock Appreciation Rights as to all of the Awarded Stock, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units, as applicable, will lapse, and, with respect to Performance Shares and Performance Units, all performance goalscontinuing the Participant's relationship as a Service Provider with the Company, nor will they interfere in any way with the Participant's right or the Company's right to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.
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and other vesting criteria will be deemed achieved at target levels and all other terms and conditions met.
16. Date of Grant.Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.
17. 18.Term of Plan.Plan. Subject to Section 22 of the Plan, the Plan will become effective upon its adoption by the Board. It will continue in effect for a term of ten (10) years unless terminated earlier under Section 1819 of the Plan.
18. 19.Amendment and Termination of the Plan.Plan.
(a)Amendment and Termination.Termination. The BoardAdministrator may at any time amend, alter, suspend or terminate the Plan.
(b)Stockholder Approval.Approval. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. In accordance with the foregoing, the Company will obtain stockholder approval of any material (as determined by the Board) amendment to the Plan.
(c)Effect of Amendment or Termination.Termination. No amendment, alteration, suspension or termination of the Plan will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan will not affect the Administrator’sAdministrator's ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.
19. 20.Conditions Upon Issuance of Shares.Shares.
(a)Legal Compliance.Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to such compliance.
(b)Investment Representations.Representations. As a condition to the exercise or receipt of an Award, the Company may require the person exercising or receiving such Award to represent and warrant at the time of any such exercise or receipt that the Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.
20. 21.Severability. Notwithstanding any contrary provision of the Plan or an Award to the contrary, if any one or more of the provisions (or any part thereof) of this Plan or the Awards shall be held invalid, illegal, or unenforceable in any respect, such provision shall be modified so as to make it valid, legal, and enforceable, and the validity, legality, and enforceability of the remaining provisions (or any part thereof) of the Plan or Award, as applicable, shall not in any way be affected or impaired thereby.
21. Inability to Obtain Authority.Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’sCompany's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority will not have been obtained.
22.Stockholder Approval.Approval. The Plan will be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval will be obtained in the manner and to the degree required under Applicable Laws.
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Proxy — UTSTARCOM, INC.
Dear Stockholder:
Please take note of the important information enclosed with this Proxy. The issues discussed herein, related to the operation of the Company, require your immediate attention.
Your vote counts, and you are strongly encouraged to exercise your right to vote your shares.
Please mark the boxes on the proxy card to indicate how your shares will be voted. Then sign the card detach it and return your proxy in the enclosed postage paid envelope.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
UTStarcom, Inc.
PROXY
UTSTARCOM, INC.
1275 Harbor Bay Parkway
Alameda, California 94502
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints Michael J. Sophieappoint(s) Hong Liang Lu and Francis P. Barton, or any one of the two, with the power to appoint his substitute,their respective substitutes, and hereby authorizesauthorize(s) them as proxies to represent and vote as designated on the reverse side, all shares of common stock of the UTStarcom, Inc. (the "Company""Company") held of record by the undersigned on March 14, 2005May 25, 2006 at the Annual Meeting of Stockholders to be held on May 13, 2005July 21, 2006 and any adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS GIVEN WITH RESPECT TO THE PROPOSAL, THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
SEE REVERSE
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SEE REVERSE
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Telephone and Internet Voting Instructions
You can vote by telephone OR Internet! Available 24 hours a day 7 days a week!
Instead of mailing your proxy, you may choose one of the two voting methods outlined below to vote your proxy.
UTSTARCOM, INC.
C/O EQUISERVE TRUST COMPANY N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
To vote using the Telephone (within U.S. and Canada) |
| YourTo vote is important. Please vote immediately.using the Internet |
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Call toll free 1-800-652-VOTE (8683) in the United States or Canada any time on a touch tone telephone. There isNO CHARGE to you for the call. |
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Go to the following web site:
WWW.COMPUTERSHARE.COM/EXPRESSVOTE |
Vote-by-Internet
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Follow the simple instructions provided by the recorded message. | OR
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Enter the information requested on toyour computer screen and follow the Internet and go to | | Call toll-free
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http://www.eproxyvote.com/utsi
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| | | | simple instructions. |
VALIDATION DETAILS ARE LOCATED ON THE FRONT OF THIS FORM IN THE COLORED BAR.
If you vote over the internet or by telephone or the Internet, please do notDO NOT mail yourback this proxy card.
Proxies submitted by telephone or the Internet must be received by 1:00 a.m., Central Time, on July 21, 2006.
THANK YOU FOR VOTING
MR A SAMPLE
DESIGNATION (IF ANY)
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| DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL
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Annual Meeting Proxy Card 123456 C0123456789 12345
A. Election of Directors |
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PLEASE REFER TO THE REVERSE SIDE FOR TELEPHONE AND INTERNET VOTING INSTRUCTIONS. |
1. The Board of Directors recommends a vote FOR the listed nominees. |
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01—Jeff Clarke |
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02—Hong Liang Lu |
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B. Proposals
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The Board of Directors recommends a vote FOR the following proposals. |
votes as in
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Abstain |
this example.
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Adoption of the 2006 Equity Incentive Plan. | | o | | o | | o |
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Ratify the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm. |
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In their discretion, the Proxies are authorized to vote upon such other business that may properly come before the meeting. |
| | | | | | | | FOR | | AGAINST | | ABSTAIN |
1. | | Election of Directors: | | 2. | | Adoption of the 2005 Equity Incentive Plan | | o | | o | | o |
| | Nominees: (01) Allen Lenzmeier and (02) Larry D. Horner | 3. | | Ratify the appointment of PricewaterhouseCoopers
LLP as independent registered public accounting
firm | | o | | o | | o |
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NOMINEES | o | | o | WITHHELD FROM ALL NOMINEES | | | | | | | | | |
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| | | For all nominees except as noted above | | | In his discretion, the Proxy is authorized to vote upon such other business that may properly come before the meeting |
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| | | | | Please sign exactly as name appears hereon. Joint owners should each sign. Executors, administrators, trustees, guardians or other fiduciaries should give full title as such. If signing for a corporation, please sign in full corporate name by a duly authorized officer. |
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Signature: | | | Date: | | | Signature: | | | Date: | | |
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C. Authorized Signatures—Sign Here—This section must be completed for your instructions to be executed.
Please sign exactly as your name appears hereon. Joint owners should each sign. Executors, administrators, trustees, guardians or other fiduciaries should give full title as such. If signing for a corporation, please sign in full corporate name by a duly authorized officer.
Signature 1—Please keep signature within the box |
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Signature 2—Please keep signature within the box |
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QuickLinks
YOUR VOTE IS IMPORTANT
QUESTIONS AND ANSWERS ABOUT THE PROXY STATEMENT AND VOTING AT THE ANNUAL MEETING
PROPOSAL NO. 1 ELECTION OF DIRECTORS
BOARD OF DIRECTORS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT
MANAGEMENT
Summary Compensation Table
Option Grants in Last Fiscal Year
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
REPORT OF THE COMPENSATION COMMITTEE
REPORT OF THE AUDIT COMMITTEE
PROPOSAL NO. 2 APPROVAL OF THE 2006 EQUITY INCENTIVE PLAN
PROPOSAL NO. 3 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
COMPANY'S STOCK PERFORMANCE
STOCK PRICE PERFORMANCE GRAPH FOR UTSTARCOM, INC. COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN* AMONG UTSTARCOM, INC., THE NASDAQ STOCK MARKET (U.S. & FOREIGN) INDEX AND THE S & P WIRELESS TELECOMMUNICATION SERVICES INDEX
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OTHER MATTERS
ANNEX A UTSTARCOM, INC. 2006 EQUITY INCENTIVE PLAN
