UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14a INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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Filed by a Party other than the Registranto | ||
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Preliminary Proxy Statement | ||
o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
Definitive Proxy Statement | ||
o | Definitive Additional Materials | |
o | Soliciting Material Pursuant to §240.14a-12 |
UTSTARCOM, INC. | ||||
(Name of Registrant as Specified In Its Charter) | ||||
(Name of Person(s) Filing Proxy Statement, if other than the Registrant) | ||||
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o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. | |||
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(4) | Date Filed: |
June 21, 2006
Dear Stockholder:
You are cordially invited to attend the 20062008 annual meeting of stockholders of UTStarcom, Inc. (the "Company"), to be held at the Hilton Oakland Airport, 1 Hegenberger Road, Oakland,offices of the Company, 1275 Harbor Bay Parkway, Alameda, California 94621,94502, on Friday, July 21, 2006June 27, 2008 at 10:00 a.m.1 p.m., Pacific Daylight Time.local time. Enclosed are a notice of annual meeting of stockholders, a proxy statement describing the business to be transacted at the meeting and a proxy card for use in voting at the meeting.
At the annual meeting, you will be asked to vote on the important matters described in detail in the notice of annual meeting of stockholders and proxy statement accompanying this letter. ThereYou will also will behave an opportunity for you to ask questions and receive information about the business of the Company.Company's business.
Included with the proxy statement is a copy of the Company's annual reportAnnual Report to stockholders. We encourage you to read the annual report.Annual Report. It includes information on the Company's operations as well as the Company's audited financial statements.
Please take this opportunity to participate in the affairs of the Company by voting on the business to come before this meeting.WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASEYOU ARE URGED TO SUBMIT YOUR PROXY AND VOTING INSTRUCTIONS OVER THE INTERNET OR BY TELEPHONE, OR, COMPLETE, SIGN, DATE SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. Returning the proxy card does not deprive you of your right to attend the meeting and to vote your shares in person.
We look forward to seeing you at the meeting.
Sincerely, | ||
/s/ HONG LIANG LU Hong Liang Lu |
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. IF YOU ATTEND THE MEETING AND DESIRE TO WITHDRAW YOUR PROXY, YOU MAY VOTE IN PERSON AND YOUR PROXY WILL BE WITHDRAWN.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held June 27, 2008To Be Held July 21, 2006
To theour Stockholders:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the "Annual Meeting") of UTStarcom, Inc. (the "Company"), a Delaware corporation, will be held on Friday, July 21, 2006June 27, 2008 at 10:00 a.m.1 p.m., Pacific Daylight Time,local time, at the Hilton Oakland Airport, 1 Hegenberger Road, Oakland,offices of the Company, 1275 Harbor Bay Parkway, Alameda, California 94621,94502, for the following purposes:
The foregoing items of business are more fully described in the proxy statement accompanying this notice.
Only stockholders of record at the close of business on May 25, 2006April 29, 2008 are entitled to notice of, and to vote at, the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in person. However, to assure your representation at the Annual Meeting, you are urged to submit your proxy and voting instructions over the Internet or by telephone, or complete, sign, date and return the enclosed proxy card as promptly as possible in the postage-paid envelope enclosed for that purpose. Any stockholder of record attending the Annual Meeting may vote in person even if he or she returned a proxy.
Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on June 27, 2008: The Proxy Statement and Annual Report to Stockholders for the fiscal year ended December 31, 2007 are available free of charge at [ ].
By Order of the Board of Directors | ||
/s/ FRANCIS P. BARTON Francis P. Barton Executive Vice President and Chief Financial Officer |
Alameda, CaliforniaJune 21, 2006[ ], 2008
To assure your representation at the Annual Meeting, you are requestedasked to submit your proxy and voting instructions over the Internet or by telephone, or complete, sign and date the enclosed proxy as promptly as possible and return it in the enclosed postage-paid envelope, which requires no postage if mailed in the United States.
UTSTARCOM, INC.
PROXY STATEMENT
QUESTIONS AND ANSWERSINFORMATION ABOUT THE PROXY STATEMENT AND
VOTING AT THE ANNUAL MEETING
Q:
Only stockholders of record at the close of business on May 25, 2006April 29, 2008 (the "Record Date") are entitled to notice of, and to vote at, the Annual Meeting. As of the Record Date, 121,089,996[ ] shares of the Company's common stock, par value $0.00125 per share (the "Common Stock"), were issued and outstanding. No shares of the Company's preferred stock, par value $0.00125 per share, were issued and outstanding. The stock transfer books will not be closed between the Record Date and the date of the Annual Meeting.
These proxy solicitation materials and the Company's Annual Report to stockholders for the year ended December 31, 2007 were mailed on or about [ ], 2008 to all stockholders entitled to vote at the Annual Meeting.
Each proxy also gives each of the proxy holders discretionary authority to vote your shares in this Proxy Statement relatesaccordance with his or her judgment with respect to all additional matters that might come before the Annual Meeting.
Registered Stockholders. If your shares are registered directly in your name with UTStarcom's transfer agent, you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being provided to you directly by UTStarcom. As the stockholder of record, you have the right to grant your voting proxy directly to the proposalsindividuals listed on the proxy card, or to be voted onvote in person at the Annual Meeting.
Street Name Stockholders. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in "street name." These proxy materials are being forwarded to you by your broker, bank or other nominee, who is considered, with respect to those shares, the record holder. As the beneficial owner, you have the right to direct your broker, bank or other nominee how to vote, and you are also invited to attend the Annual Meeting. However, since you are not the record holder, you may not vote these shares in person at the Annual Meeting theunless you follow your broker, bank or other nominee's procedures for obtaining a legal proxy. Your broker, bank or other nominee has provided a voting process, the compensation of our directors and most highly paid executive officers in 2005, and certain other required information.instruction card for you to use.
Corporate Secretary
UTStarcom, Inc.
1275 Harbor Bay Parkway
Alameda, California 94502
510-864-8800
The Company will promptly mail a separate copy of this Proxy Statement upon such request, but any such request should be made as soon as possible to ensure timely delivery.
Stockholders who share an address and received multiple copies of this Proxy Statement may also request that a single copy of thefuture proxy statementstatements be delivered in the future by filling out the applicable section of the voter instruction card for the Annual Meeting.
Stockholder of Record: If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., as of the Record Date, you are considered, with respect to those shares, thestockholder of record, and these proxy materials are being sent directly to you by the Company. As thestockholder of record, you have the right to grant your voting proxy directly to the Company or to vote in person at the Annual Meeting. The Company has enclosed a proxy card for your use.
Beneficial Owner: If your shares are held in a brokerage account or by another nominee, you are considered thebeneficial owner of shares held instreet name, and these proxy materials are being forwarded to you together with a voting instruction card by your broker, trustee or nominee, as the case may be. As the beneficial owner, you have the right to direct your broker, trustee or nominee how to vote, and you are also invited to attend the Annual Meeting. Since a beneficial owner is not thestockholder of record, you may not vote your shares in person at the Annual Meeting unless you obtain a "legal proxy" from the broker, trustee or nominee that holds your shares giving you the right to vote the shares at the meeting. Your broker, trustee or nominee has enclosed or provided voting instructions for you to use in directing the broker, trustee or other nominee how to vote your shares.
Meeting, we recommend that you also submit your proxy or voting instructions as described below so that your vote will be counted if you later decide not to attend the meeting.
stockholder of record, you may vote by submitting a proxy. If you hold shares beneficially in street name, you may vote by submitting voting instructions to your broker, trusteebank or other nominee. For directions on how to vote, please refer to the instructions below and those included on your proxy card or, for shares held beneficially in street name, the voting instruction card provided by your broker, trusteebank or other nominee.
By Internet: Stockholders of record with Internet access may submit proxies by following the "Vote-Using-the-Internet""Vote by Internet" instructions on their proxy cards until 1:00 a.m., Central Time, on July 21, 2006.June 27, 2008. Most stockholders who hold shares beneficially in street name may vote by accessing the web site specified on the voting instruction cards provided by their brokers, trusteesbanks or other nominees. Please check the voting instruction card for Internet voting availability.
By Telephone: Stockholders of record who live in the United States, Canada or CanadaPuerto Rico may submit proxies by following the "Vote-Using-the-Telephone""Vote by telephone" instructions on their proxy cards until 1:00 a.m., Central Time, on July 21, 2006.June 27, 2008. Most stockholders who hold shares beneficially in street name may vote by phone by calling the number specified on the voting instruction cards provided by their brokers, trusteesbanks or other nominees. Please check the voting instruction card for telephone voting availability.
By Mail: Stockholders of record may submit proxies by completing, signing and dating their proxy cards and mailing them in the accompanying pre-addressed envelopes. Proxy cards submitted by mail must be received by the time of the meeting in order for your shares to be voted. Stockholders who hold shares beneficially in street name may vote by mail by completing, signing and dating the voting instruction cards provided by their brokers, trusteesbanks or other nominees and mailing them in the accompanying pre-addressed envelopes.
entitled to vote at the Annual Meeting, as of the Record Date, must be present in person or represented by proxy. Both abstentions and broker non-votes (described below) are counted for the purpose of determining the presence of a quorum.
The approval of the 2006 Equity Incentive Plan requires the affirmative "FOR" vote of a majority of the total number of shares present in person or represented by proxy and entitledproposals to vote on the proposal at the Annual Meeting.
The proposal to(i) ratify the appointment of PricewaterhouseCooperPricewaterhouseCoopers LLP as the Company's independent registered public accounting firm requiresand (ii) approve the stock option exchange program for employees described in this Proxy Statement, each require the affirmative "FOR" vote of a majority of the total number of shares present in person or represented by proxy and entitled to vote on the proposal at the Annual Meeting.
For the proposals to approve the 2006 Equity Incentive Plan and to(i) ratify the appointment of PricewaterhouseCooperPricewaterhouseCoopers LLP as the Company's independent registered public accounting firm, and (ii) approve a stock option exchange program for employees described in this Proxy Statement, you may vote "FOR," "AGAINST" or "ABSTAIN."
If you elect to "ABSTAIN," the abstention has the same effect as a vote "AGAINST.""AGAINST" such proposal. If you provide specific instructions with regard to certain proposals, your shares will be voted as you instruct on such proposals.
telephone, facsimile or electronic mail. No additional compensation will be paid to these persons for such services.
Corporate SecretaryUTStarcom, Inc.1275 Harbor Bay ParkwayAlameda, California 94502
Under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for a stockholder proposal to be considered for inclusion in the proxy statement for the 20072009 annual stockholders meeting (the "20072009 Annual Meeting"), the Secretary of the Company would have to receive the written proposal by a stockholder at the Company's principal executive offices no later than , 2009. Such proposals also must comply with the other provisions of Rule 14a-8 and additional applicable Securities and Exchange Commission ("SEC") rules regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Notice of such proposals should be addressed to:
Corporate Secretary
UTStarcom, Inc.
1275 Harbor Bay Parkway
Alameda, California 94502
If, however, the date of our 2009 annual meeting is more than 30 days before or after the anniversary of the 2008 Annual Meeting, then for a stockholder proposal under Rule 14a-8 to be considered for inclusion in the proxy statement for the 2009 Annual Meeting, the Secretary of the Company must receive the written proposal by such stockholder at the Company's principal executive offices no later than February 16, 2007. Such proposals also must comply with Securitieswithin a reasonable time before the Company begins to print and Exchange Commission (the "SEC") regulations under Rule 14a-8 regardingmail its proxy materials for the inclusion of stockholder proposals in company-sponsored proxy materials. Notice of such proposals should be addressed to:
Corporate SecretaryUTStarcom, Inc.1275 Harbor Bay ParkwayAlameda, California 945022009 Annual Meeting.
For a stockholder proposal that is not intended to be included in the Company's proxy statement under Rule 14a-8, the stockholder must, (i) deliver a proxy statement and form of proxy to holders of a sufficient number of shares of the Company's Common Stock to approve that proposal, (ii) provide the information required by the Bylaws of the Company and (iii)(ii) give timely notice to the Corporate Secretary in accordance with the Bylaws, which generally require that the notice be received by the Corporate Secretary of the Company prior to May 2, 2007., 2009.
However, if the date of the 20072009 Annual Meeting (the "20072009 Annual Meeting Date") is moved more than 30 days before or after the anniversary of the 20062008 Annual Meeting, then the Board shall determine an appropriate date by which notice of a stockholder proposal that is not intended to be included in the Company's proxy statement must be received by the Company (the "Notice Deadline"). The Company will publicize the Notice Deadline at least ten (10) days prior to the Notice Deadline by:
Nomination of Director Candidates: The Company's Bylaws permit stockholders to nominate directors for election at an annual stockholder meeting. To nominate a director, thea stockholder must provide the information required by the Bylaws. To nominate directors for election at the 20072009 Annual Meeting, the stockholder making such nomination must give timely notice to the Corporate
Secretary in accordance with the Bylaws, which must be received by the Corporate Secretary not less than one hundred twenty (120) days prior to the 2007date of the 2009 Annual Meeting.
However, in the event the Company fails to publicize the 20072009 Annual Meeting Date at least one hundred thirty (130) days prior to the 20072009 Annual Meeting, notice by thea stockholder must be received by the Corporate Secretary within ten (10) days of:
As noted above, we currently expect our 2009 Annual Meeting will be held on or around , 2009. As such, a stockholder must provide notice to the Corporate Secretary of a director nomination by , 2009.
Copy of Company Bylaws: Copies of the provisions of the Bylaws governing the form and delivery requirements of stockholder nominations or proposals may be obtained by sending an email request to the Company's investor relations department at investorrelations@utstar.com. A copy of the entire Bylaws is available via the link entitled "Corporate Governance" on the Company's website athttp://investorrelations.utstar.com/governancegovernance..
This Proxy Statement contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on our current expectations and involve risks and uncertainties, which may cause results to differ materially from those set forth in the statements. The forward-looking statements may include statements regarding actions to be taken by us. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements should be evaluated together with the many uncertainties that affect our business, particularly those mentioned in the section on forward-looking statements and in the risk factors in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and in our periodic reports on Form 10-Q and Form 8-K.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NomineesGeneral
The authorized number of directors of the Company is currently establishedset at six.seven. The Company's certificateBylaws provide that the Board of incorporationDirectors may set the number of directors at a minimum of six and a maximum of eight members. The Company's Certificate of Incorporation provides that directors shall be divided into three classes, with the classes serving for staggered, three-year terms (or less if they are filling a vacancy). Currently there arethe Board is comprised of two directors in each of Class I Class II and Class III. Each of thedirectors, two Class II directors and three Class III directors. The Company's Class I Directors, Allen LenzmeierThomas J. Toy and Larry Horner,Bruce J. Ryan, will hold office until the 20082010 annual meeting or until the Class III Director's successor has been duly elected and qualified, and each of the twothree Class IIII Directors, Thomas ToyFrancis P. Barton, Jeff Clarke and Ying Wu,Hong Liang Lu, will hold office until the 20072009 annual meeting or until the Class IIII Director's successor has been duly elected and qualified. The Company's nominees for election as the Class IIIII Directors at this Annual Meeting are the current Class IIIII Directors, Hong Liang LuLarry D. Horner and Jeff Clarke.Allen Lenzmeier. The Nominating and Corporate Governance Committee has recommended, and the Board of Directors has approved, the nomination of these nominees.
Nominees
The Board had anticipated that Mr. Horner, the Chairman of our Audit Committee, would retire from the Board of Directors after eight years of service but the Board has asked him to stand for re-election and remain on the Board to assist the Audit Committee during its leadership transition. The Board believes it is important that Mr. Horner be re-elected at this time in order to assure an effective transition of Audit Committee leadership.
Unless otherwise instructed, the proxy holders will vote the proxies received by them for the Company's two nominees for the Class IIIII Directors, Hong Liang LuLarry D. Horner and Jeff Clarke, each toAllen Lenzmeier, who will hold office until the 20092011 annual meeting or until either of the Class III Director's successor hastheir successors have been duly elected and qualified.
The Company expects that each nomineethe nominees for election as a Class III DirectorII Directors at the Annual Meeting will be able to serve if elected. Mr. Lu has notified the Company of his resignation as the Company's President, Chief Executive Officer and Chairman of the Board, effective December 31, 2006. Mr. Toy will assume the position of Chairman of the Board effective January 1, 2007.
In the event that anyeither nominee of the Company becomes unable or declines to serve as a director at the time of the Annual Meeting, the proxy holders will vote the proxies for any substitute nominee who is designated by the current Board to fill the vacancy.
Biographical Information for Director Nominees
Larry D. Horner has served as a director since January 2000. Mr. Horner currently serves on the board of directors of Atlantis Plastics, Inc., Clinical Data Inc., TOUSA, Inc. and several private companies. From 1994 until 2001, Mr. Horner served as Chairman of Pacific USA Holdings Corp., and from 1997 to 2001 he served as Chairman and Chief Executive Officer of Asia Pacific Wire & Cable Corporation Limited. Mr. Horner formerly served as Chairman and Chief Executive Officer of KPMG from 1984 to 1990. Mr. Horner, a Certified Public Accountant, holds a B.S. from the University of Kansas and is a graduate of the Stanford Executive Program.
Allen Lenzmeier has served as a director since March 2005. Mr. Lenzmeier has served as the Vice Chairman of Best Buy Co. Inc. since December 2004. From 2002 to 2004, Mr. Lenzmeier served as the President and Chief Operating Officer of Best Buy Co. Inc. Mr. Lenzmeier served as the President of Best Buy Retail from 2001 to 2002. From 1991 to 2001 Mr. Lenzmeier served as the Executive Vice President and Chief Financial Officer of Best Buy Co. Inc. and began his employment with the company in 1984. Mr. Lenzmeier serves on the board of directors of several private companies. Mr. Lenzmeier holds a B.S. from Minnesota State University Mankato.
Required Vote
The two nominees receiving the highest number of votes of the shares entitled to be voted for such nominees shall be elected as Class IIIII Directors. Votes withheld from any nominee will be counted for purposes of determining the presence or absence of a quorum for the transaction of business at the Annual Meeting, but have no other legal effect upon election of directors under the Delaware General Corporation Law.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS VOTING "FOR"
"FOR" THE NOMINEES SET FORTH HEREIN.
INFORMATION ABOUT OUR BOARD OF DIRECTORS
Our Directors and Nominees
The names of the two Class III nominees for director and the current Class I and Class II DirectorsIII directors with unexpired terms and the Class II nominees, their ages as of July 21, 2006April 30, 2008 and certain other information are set forth below:
Name of Director | Age | Principal Occupation | Director Since | Term Expires | ||||
---|---|---|---|---|---|---|---|---|
Nominees for Class III Directors: | ||||||||
Jeff Clarke(1) | 46 | Chief Executive Officer and President of Travel Distribution Services (TDS) Division of Cendant Corporation | 2005 | 2006 | ||||
Hong Liang Lu(2) | 51 | President, Chief Executive Officer and Chairman of the Board | 1991 | 2006 | ||||
Continuing Class II Directors: | ||||||||
Larry Horner | 72 | Member of the board of directors of ConocoPhillips, Clinical Data, Inc., Novitron International, Inc., Technical Olympic USA, Inc. and New River Pharmaceuticals, Inc. | 2000 | 2008 | ||||
Allen Lenzmeier | 62 | Vice Chairman and member of the board of directors of Best Buy Co. Inc. | 2005 | 2008 | ||||
Continuing Class I Directors: | ||||||||
Thomas Toy(2) | 51 | Managing Director of PacRim Venture Partners, partner of Smart Forest Ventures and member of the board of directors of White Electronic Designs Corporation | 1995 | 2007 | ||||
Ying Wu(2) | 46 | Executive Vice President and Vice Chairman of the Board, and Chairman and Chief Executive Officer for China | 1995 | 2007 |
Name of Director | Age | Position | Director Since | Term Expires | ||||
---|---|---|---|---|---|---|---|---|
Class I Directors: | ||||||||
Thomas J. Toy | 53 | Chairman of the Board | 1995 | 2010 | ||||
Bruce J. Ryan* | 64 | Director | 2008 | 2010 | ||||
Class II Nominees: | ||||||||
Larry D. Horner | 74 | Director | 2000 | 2008 | ||||
Allen Lenzmeier | 64 | Director | 2005 | 2008 | ||||
Class III Directors: | ||||||||
Francis P. Barton | 61 | Director, Executive Vice President and Chief Financial Officer | 2006 | 2009 | ||||
Jeff Clarke | 46 | Director | 2005 | 2009 | ||||
Hong Liang Lu | 53 | Director, Chief Executive Officer | 1991 | 2009 |
Except as set forth below, each nominee or incumbent director has been engaged in his principal occupation described abovebelow during the past five years. There isare no family relationshiprelationships between any of our directors or executive officers of the Company.officers.
�� Hong Liang LuFrancis P. Barton has served as the Company'sour Executive Vice President and Chief ExecutiveFinancial Officer since August 2005 and as a director since June 1991, and as Chairman of the Board since March 2003. In June 1991,October 2006. From May 2003 to July 2005, Mr. Lu co-founded
the Company 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 ChiefBarton was Executive Officer of Kyocera Unison, a majority-owned subsidiary of Kyocera International, Inc. Mr. 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, Mr. Lu served as Vice President and Chief OperatingFinancial Officer of Unison World,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. LuBarton was Senior Vice President and Chief Financial Officer of Advanced Micro Devices, Inc. From 1996 to 1998, Mr. Barton was Vice President and Chief Financial Officer of Amdahl Corporation. From 1974 to 1996, Mr. Barton worked at Digital Equipment Corporation, beginning his career as a financial analyst and moving his way up through various financial roles to Vice President and Chief Financial Officer of Digital Equipment Corporation's Personal Computer Division. Mr. Barton currently serves as a director of ON Semiconductor Corporation. He holds a B.S. in CivilChemical Engineering from the University of California at Berkeley.Worcester Polytechnic Institute and an M.B.A. with a focus in finance from Northeastern University.
Jeff Clarke has served as a director since January 17, 2005. Since May 2006, Mr. Clarke has served as Chief Executive Officer and President and a director of Travel Distribution Services (TDS) Division of Cendant Corporation.Travelport Incorporated, a private company. From April 2004 to April 2006, Mr. Clarke served as the Chief Operating Officer of CA, Inc., a global provider of management software. From 2002 to 2004, Mr. Clarke was Executive Vice President of Global Operations of Hewlett-Packard Company, and prior to that he was the Chief Financial Officer of Compaq Computer Corporation. Mr. Clarke serves as a director of Orbitz Worldwide, Inc. He holds a B.A. in Economics from the State University of New York at Geneseo and an M.B.A. from Northeastern University.
Larry D. Horner has served as a director since January 2000. Mr. Horner has served as a director of ConocoPhillips from 1991 to May 2006, and he currently serves on the board of directors of Atlantis Plastics, Inc., Clinical Data Inc., Technical Olympic USA, Inc., New River Pharmaceuticals,TOUSA, Inc. and several private
companies. From 1994 until 2001, Mr. Horner served as Chairman of Pacific USA Holdings Corp., and from 1997 to 2001 he served as Chairman and Chief Executive Officer of Asia Pacific Wire & Cable Corporation Limited. Mr. Horner formerly served as Chairman and Chief Executive Officer of KPMG Peat Marwick from 1984 to 1990. Mr. Horner, a Certified Public Accountant, holds a B.S. from the University of Kansas and is a graduate of the Stanford Executive Program.
Allen Lenzmeier has served as a director since March 15, 2005. Mr. Lenzmeier has served as the Vice Chairman of Best Buy Co. Inc. since December 2004. From 2002 to 2004, Mr. Lenzmeier served as the President and Chief Operating Officer of Best Buy Co. Inc. Mr. Lenzmeier served as the President of Best Buy Retail from 2001 to 2002. From 1991 to 2001 Mr. Lenzmeier served as the Executive Vice President and Chief Financial Officer of Best Buy Co. Inc. and began his employment with the company in 1984. Mr. Lenzmeier serves on the board of directors of several private companies. Mr. Lenzmeier holds a B.S. from Minnesota State University Mankato.
Hong Liang Lu served as our President and Chief Executive Officer and as a director from June 1991 through December 2006, and as Chairman of the Board from March 2003 to December 2006. On January 1, 2007, he assumed the title of Chief Executive Officer. In June 1991, Mr. Lu co-founded UTStarcom, Inc. 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. Mr. 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, Mr. Lu served as Vice President and Chief Operating Officer of Unison World, Inc. Mr. Lu holds a B.S. in Civil Engineering from the University of California at Berkeley.
Bruce J. Ryan has served as a director since April 2008. Mr. Ryan is currently a private consultant. From February 1998 to November 2002, he served as Executive Vice President and Chief Financial Officer of Global Knowledge Network, a provider of information technology and computer software training programs and certifications. From 1994 to 1997, he served as the Executive Vice President and Chief Financial Officer of Amdahl Corporation, a provider of information technology solutions. Mr. Ryan previously had a 25-year career at Digital Equipment Corporation, where he served in various executive positions, including Senior Vice President of the financial services, government and professional services business group. Mr. Ryan also serves as a director of KVH Industries, Inc., IONA Technologies PLC and several private companies. He holds a B.S. in business administration from Boston College and an M.B.A. from Suffolk University.
Thomas J. Toy has served as a director since February 1995.1995, and as Chairman of the Board since January 2007. Since March 1999, Mr. Toy has served as Managing Director of PacRim Venture Partners, a professional venture capital firm specializing in investments in the information technology sector. Since 2005, Mr. Toy has served as a partner of SmartForest Ventures, a professional venture firm specializing in the information technology sector. From 1987 until 1992, Mr. Toy was employed as a Vice President at Technology Funding and was a partner there from 1992 until 1999. Mr. Toy also serves as a director of White Electronic Designs Corporation, Solarfun Power Holdings and several private companies. Mr. Toy holds B.A. and M.M. degrees from Northwestern University.
Ying Wu has served as the Company's Executive Vice President and Vice Chairman of the Board since October 1995. Mr. Wu has also served as Chairman and Chief Executive Officer, and, until February 2004, as President, of one of the 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 to 1988, Mr. Wu served as a consultant at AT&T Bell Labs. Mr. Wu also serves as a director of AsiaInfo Holdings, Inc. Mr. 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.
The Company's Director Nomination Process
The Board's process for identifying and evaluating nominees for director consists mainly of evaluating candidates who are recommended by the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee identifies and recommends nominees for election or reelection to the Board, or for appointment to fill any vacancy that is anticipated or has arisen on the Board, in accordance with the criteria, policies and principles set forth in the Nominating and Corporate Governance Committee Charter, or otherwise approved by the
Board. In evaluating candidates to determine if they are qualified to become members of our board of directors, the Nominating and Corporate Governance Committee looks for the following attributes, among others: the candidate's judgment, skill, diversity and experience with other organizations of comparable purpose, complexity and size; the interplay of the candidate's experience with the experience of other Board members; the extent to which the candidate would be a desirable addition to the Board; whether or not the candidate has any relationships that might impair his or her independence; and the candidate's experience, perspective, skills and knowledge of our industry. Although the Nominating and Corporate Governance Committee uses these and other criteria to evaluate potential nominees, there are no stated minimum criteria for nominees.
The Board may also, on a periodic basis, solicit ideas for possible candidates from a number of sources, including current members of the Board, senior Company executives, individuals personally known to members of the Board, stockholders and employment of one or more third-party search firms.
The Company engaged a third-party search firm in connection with the identification of Mr. Clarke, whoNominating and Corporate Governance Committee's policy is a Class III Director candidate.
Stockholderthat stockholder nominations of director candidates will be given the same consideration and evaluated with the same criteria as candidates that are recommended internally.any other candidate. For more information on stockholder nominations of director candidates, please see the section entitled "Nomination of Director Candidates" under "Deadlines for Submission of Stockholder Proposals for 20072009 Annual Meeting" in this Proxy Statement. The form and delivery requirements of such stockholder nominations must comply with the relevant provisions of the Company's Bylaws, copiesa copy of which may be obtained by sending an email to the Company's investor relations department at investorrelations@utstar.com. A complete copy of the entire Bylaws is also available via the link entitled "Corporate Governance" on the Company's website athttp://investorrelations.utstar.com/governance.in the "Corporate Governance" section.
Stockholder Communications with the Board of Directors
The Board of Directors has established a process for stockholders to communicate with members of the Board, which includes the creation of the Lead Director position.Board. All concerns, questions or complaints regarding the Company's compliance with any policy or law, or any other Board-related communication, should be directed to the Board via the link entitled "Email Board of Directors" athttp://investorrelations.utstar.com/governance. All substantive and appropriate communications received from stockholders will be received and reviewed by one or more independent directors, or officers acting under their direction, who will forward such communications to the Board or particular Board committees, as appropriate.
Board Attendance, Director Independence and Financial Sophistication
Of the Company's incumbent directors standing for reelection and those with continuing terms, Messrs. Horner, Toy, Clarke and Lenzmeier have been determined by the Board to be independent as set forth in Rule 4200(a)(15) of the Nasdaq Marketplace Rules, the listing standards of The Nasdaq Stock Market, as currently in effect. In addition, the Board has also determined that each of Messrs. Horner, Clarke and Lenzmeier possess the attributes to be considered financially sophisticated for purposes of applicable Nasdaq Marketplace Rules and has the background to be considered an "audit committee financial expert" as defined by the rules and regulations of the SEC and required by the Nasdaq Marketplace Rules.
The Board held a total of 1318 meetings during the fiscal year ended December 31, 2005.2007. During fiscal year 2005,2007, each of the directors (other than former director Ying Wu who resigned from the Board on July 24, 2007) attended 75% or more of the aggregate number of meetings of the Board and the committees of the Board on which the director served subsequent to becoming a director or a member of such committee, except for Ms. Betsy Atkins, whose term as a director expired in May 2005, and Ying Wu, who missed 5 meetings for reasons related to his corporate duties. It is the
committee. The Board's policy is to encourage directors to attend the Annual Meeting. Three (3) directors attended the 20052007 annual meeting of stockholders.
Of the Company's incumbent directors standing for reelection and those with continuing terms, Messrs. Clarke, Horner, Lenzmeier, Ryan and Toy have been determined by the Board to be independent as set forth in Rule 4200(a)(15) of the NASDAQ Marketplace Rules, the listing standards of NASDAQ Stock Market, as currently in effect. In addition, the Board has also determined that Messrs. Clarke, Horner, Lenzmeier and Ryan possess the attributes to be considered financially sophisticated for purposes of applicable NASDAQ Marketplace Rules and each has the background to be considered an "audit committee financial expert" as defined by the rules and regulations of the SEC and required by the NASDAQ Marketplace Rules.
The Board has not established categorical standards or guidelines to make director independence determinations, but considers all relevant facts and circumstances. The Board based its determinations
primarily on a review of the responses of the directors to questions regarding employment and compensation history, affiliations, family and other relationships, and on discussions with our directors.
In making its independence determinations, the Board considered transactions between the Company and entities associated with the directors or members of their immediate family. All identified transactions that appear to relate to the Company and a person or entity with a known connection to a director are presented to the Board for consideration. In making its determination that each non-employee director is independent, the Board considered the transactions in the context of the NASDAQ standards, the standards established by the SEC for members of audit committees, and the SEC and Internal Revenue Service standards for compensation committee members. The Board's independence determinations included a review of the status of certain executive officers as limited partners of an investment fund managed by Mr. Toy. In each case, the Board determined that, because of the nature of each of these relationships and/or amounts involved, the relationships did not impair Mr. Toy's independence.
Board Committees and Related Functions
The principal standing committees of the Board are the Audit Committee, the CompensationNominating and Corporate Governance Committee and the Nominating and Corporate GovernanceCompensation Committee, each of which consists solely of non-employee, independent directors. In additionFrom time to these committees, effective June 6, 2006,time, the Board appointed Mr. Toy as Lead Director. Mr. Horner had previously served as Lead Director. The Lead Director's responsibilities include, among other things, facilitating communications among directors, working with the Chief Executive Officermay form a special committee or subcommittee of a standing committee to ensure appropriate information flows to the Board, chairing an executive session of the independent directors at regularly scheduled meetings as required by Nasdaq Marketplace Rule 4350(c)(2), overseeing processes established for stockholder communication with members of the Board, and acting as a liaison between disinterested directors and interested parties in the case of related-party transactions or other suchfocus on specific matters. The Lead Director is not an employee of the Company or a holder of 5% or more of the Company's issued and outstanding Common Stock.
Board Committees and Related Functions
Audit Committee
The Audit Committee of the Board is a separately-designated, standing committee of the Board of Directors and currently consistingconsists of five members of the Board of Directors, all of whom: (1) meet the criteria for "independence" set forth in rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended, and the listing standards of the NASDAQ Stock Market; (2) have not participated in the preparation of the financial statements of the Company or any of its current subsidiaries at any time during the past three years; and (3) are able to read and understand fundamental financial statements, including a company's balance sheet, income statement and cash flow statement. The members of the Audit Committee are Mr. Horner, who chairs the committee, and Messrs. Clarke, ToyLenzmeier, Ryan and Lenzmeier,Toy. Mr. Ryan was appointed as a member of the Committee effective April 25, 2008. The Audit Committee held 3022 meetings during the 20052007 fiscal year. Messrs. Clarke, Horner, Lenzmeier and Ryan have been determined by the Board to qualify as "audit committee financial experts" under applicable SEC and NASDAQ rules.
The Audit Committee, among other duties and responsibilities, (i) reviews and approves the annual appointment of the Company's independent registered public accounting firm; (ii) discusses and reviews in advance the scope and fees of the annual audit; (iii) reviews the results of the audit with the independent registered public accounting firm and discusses the foregoing with the Company's management; (iv) reviews and approves non-audit services of the independent registered public accounting firm; (v) reviews compliance with the Company's existing major accounting and financial reporting policies; (vi) reviews and approves in advance all related-party transactions that would require disclosure pursuant to the rules of the SEC and the policies and procedures related to such transactions; and (vii) provides oversight and monitoring of the Company's management and their activities with respect to the Company's financial reporting process. In connection with the execution of the responsibilities of the Audit Committee, including the review of the Company's quarterly earnings reports prior to public release, Audit Committee members communicated throughout 20052007 with the Company's management and the independent registered public accounting firm.
Each member of the Audit Committee meets the applicable independence and financial literacy requirements of the Nasdaq Marketplace Rules and the SEC. Further, Messrs. Horner, Clarke and Lenzmeier have been determined by theThe Board to meet the "financial expert" requirements of the same SEC and Nasdaq Marketplace Rules. On March 29, 2004, the Boardhas approved a revised charter of the Audit Committee, a copy of which was filed as an attachment to the Company's proxy statement for the 2004 annual meeting of stockholders. A copy of the Audit Committee Charter which is reviewed at least annually, periodically revised (most recently on July 26, 2007), and is available via the link entitled "Corporate Governance" on the Company's website athttp://investorrelations.utstar.com/governance.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee currently consistingconsists of four members of the Board of Directors, all of whom are "independent" in accordance with the rules of the NASDAQ Stock Market. The current members of the Committee are Mr. Clarke, who chairs the committee, and Messrs. Horner, Lenzmeier and Toy, held three (3) meetings during the last fiscal year. Each member of theToy. The Nominating and Corporate Governance Committee meetsheld 9 meetings during the applicable independence requirements of the Nasdaq Marketplace Rules.2007 fiscal year.
The Nominating and Corporate Governance Committee's responsibilities include the selection of director nominees for the Board and the development and annual review of the Company's governance principles. The Nominating and Corporate Governance Committee also (i) assists the Board by actively
identifying individuals qualified to become Board members; (ii) recommends director nominees to the Board for election at the next annual meeting of stockholders; (iii) monitors significant developments in the law and practice of corporate governance and of the duties and responsibilities of directors of public companies; (iv) leads the Board in its annual performance self-evaluation, including establishing criteria to be used in connection with such evaluation; (v) oversees compliance with the Company's Code of Business Conduct and Ethics; and (vi) develops and recommends to the Board and administers the corporate governance guidelines of the Company, including appropriate stock ownership guidelines for officers and directors.
On March 29, 2004, The Nominating and Corporate Governance Committee is also responsible for reviewing with the Board, from time to time, the appropriate skills and characteristics required of Board members in the context of the current composition of the Board. This assessment includes issues of diversity in numerous factors, including independence, operational experience as a senior executive, business judgment, age, understanding of the industry, willingness to mentor, personal network, and international perspective. Additional criteria include a candidate's personal and professional credibility, integrity and prestige, and his or her ability to blend with the Company's Board dynamics, as well as his or her willingness to devote sufficient time to attend meetings of the Board. The Nominating and Corporate Governance Committee reviews these factors and others deemed useful in the context of an assessment of the perceived needs of the Board at a particular point in time. As a result, the priorities and emphasis of the Nominating and Corporate Governance Committee and of the Board may change from time to time to take into account changes in business and other trends, in addition to the portfolio of skills and experience of current and prospective directors.
The Board has adopted a formal charter of the Nominating and Corporate Governance Committee, addressing the nominations process and such related matters as may be required under federal securities laws and NasdaqNASDAQ Marketplace Rule 4350(c)(4)(B). A copy of this charter was filed as an attachment to the Company's proxy statement for the 2004 annual meeting of stockholders. A copy of the Nominating and Corporate Governance Committee Charter, which is reviewed at least annually and is periodically revised (most recently on April 10, 2008), is available via the link entitled "Corporate Governance" on the Company's website athttp://investorrelations.utstar.com/governance.
Compensation Committee
The Compensation Committee currently consists of four members of the Board currently consisting of Directors, Mr. Toy,Lenzmeier, who chairs the committee, and Messrs. Clarke, Horner and Toy, all of whom are non-employee, outside directors in addition to being "independent directors" as defined under the rules of the NASDAQ Stock Market. The Compensation Committee met 12 times during fiscal year 2007 and acted twice by written consent. Messrs. Horner, Lenzmeier and Horner, held seven (7) formal meetings and one (1) subcommittee meeting duringToy served on the lastCommittee
throughout fiscal year.year 2007. Mr. Toy served as Chairman until April 27, 2007 when Mr. Lenzmeier succeeded him as Chairman. Mr. Clarke was appointed a member of the Committee on April 27, 2007.
The authority and dutiespurpose of the Compensation Committee include, among others,is to (i) approvingapprove and overseeingoversee the total compensation package for the Company's executives;executives, including their base salaries, incentives, deferred compensation, equity-based compensation, benefits and perquisites; (ii) reviewingreview and approvingapprove corporate goals and objectives relevant to the compensation of the Company's Chief Executive Officer;Officer (the "CEO"), evaluate CEO performance, and determine CEO compensation based on this evaluation; (iii) reviewingreview the CEO's performance evaluation of all executive officers and makingapprove pay decisions; and (iv) review periodically and make recommendations to the Board regarding all new employment agreementsany equity or arrangements; (iv) reviewinglong-term compensation plans, and making recommendationsadminister these plans.
The Compensation Committee operates according to the Board regarding long-term incentive compensation or equity plans, programs or similar arrangements of the Company;a charter that details its specific duties and (v) preparing an annual reportresponsibilities. The charter is reviewed at least annually, periodically revised (most recently on executive compensation as requiredOctober 25, 2007) by the SEC to be included in the Company's annual proxy statement filed with the SEC. Each member of the Compensation Committee, meets the applicable independence requirements of the Nasdaq Marketplace Rules.
The charter for the Compensation Committee provides that the purpose of such committeeand is to discharge the responsibilities of the Board relating to all compensation, including equity compensation ofavailable on the Company's executives.website athttp://investorrelations.utstar.com/governance. The charter also generally provides the membership requirements, authority and duties of the Compensation Committee. The Compensation Committee shallis to consist of no fewer than three members, all of whom (i) meet the independence requirements of the NasdaqNASDAQ Marketplace Rules, (ii) are "Non-Employee Directors""non-employee directors" under the definition of Rule 16b-3 promulgated under Section 16 of the Exchange Act, and (iii) are "outside directors" for purposes of the regulations promulgated under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). The chairDuring the fiscal year ended December 31, 2007, all members of the Compensation Committee is appointed bymet these criteria.
UTStarcom's Human Resources department supports the Board.Compensation Committee in its work. The Compensation Committee must conduct a self-evaluation annuallyalso has the authority to engage the services of outside advisers, experts and report such findingsothers for assistance. From time to the Board. In addition,time, the Compensation Committee must periodically assessmay direct an external advisor to work with the adequacyHuman Resources department to support management and the Compensation Committee in matters such as (i) peer group development, (ii) executive officer benchmarking, including pay-for-performance analyses and tally sheet preparation, and (iii) advising on pay levels and/or pay program design. In May 2007, the Compensation Committee retained Compensia, Inc. as its independent outside compensation consultant. For a further description of its charterthe role of the compensation consultant in our compensation process, please see the section entitled "Engagement of and recommend changesRole of Independent Compensation Consultant" in the Compensation Discussion and Analysis contained in this Proxy Statement.
Special Committee
In May 2006, the Board of Directors formed a special committee (the "Special Committee") to consider strategic alternatives available to the Board. A copyCompany. Mr. Toy was designated the Chairman of the Special Committee and Messrs. Clarke, Horner and Lenzmeier were appointed as members. The Special Committee completed its work in May 2007.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consisted of Messrs. Clarke, Horner, Lenzmeier and Toy during the 2007 fiscal year. All members of the Compensation Committee Charter is available viaduring 2007 were independent directors in accordance with the link entitled "Corporate Governance"applicable independence requirements of the NASDAQ Marketplace Rules, and none were employees or officers or former employees of the Company. During 2007, 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 the Company's website athttp://investorrelations.utstar.com/governance.Compensation Committee or Board.
Director Compensation for Fiscal Year 2007
Directors who are our employees of the Company receive no additional compensation for serving on the Board.Board of Directors. In 2005, Non-Employee Directorsfiscal year 2007, our non-employee directors received a quarterly participation fee of $10,000 for
services renderedboth cash and equity compensation as to meetings of the full Board.described below. In addition, Non-Employee Directors received annual retainer fees for committee membership and other duties as follows:
In January 2005, in recognition of services rendered in 2004, the Company also paid Mr. Horner, the Company's then Lead Director, a one-time compensation award of $25,000, and Mr. Toy and Ms. Atkins (whose term as a director expired in May 2005), both Non-Employee Directors, a one-time compensation award of $20,000.
The Company reimburseswe reimburse all directors for travel and other related expenses incurred in connection with theour business, of the Company, including attending stockholder meetings and meetings of the Board or any Board committee. For
The following table sets forth information on directorconcerning compensation paid or accrued for services rendered to us in all capacities by our non-employee directors (other than Mr. Ryan who was appointed to the Board in April 2008) for the fiscal year ended December 31, 2007.
Name | Fees Earned or Paid in Cash ($)(1) | Stock Awards ($)(2) | Option Awards ($)(3) | Total ($) | ||||
---|---|---|---|---|---|---|---|---|
Jeff Clarke | 133,000 | 24,686 | (4) | 200,814 | (5) | 358,500 | ||
Larry D. Horner | 153,500 | 25,695 | (6) | 28,062 | (7) | 207,257 | ||
Allen Lenzmeier | 127,000 | 24,778 | (8) | 160,312 | (9) | 312,090 | ||
Thomas J. Toy | 496,434 | 24,582 | (10) | 26,851 | (11) | 547,867 |
PriorCash Compensation
Approximately one-third of the compensation paid to April 27, 2006, Non-Employeeour non-employee directors is comprised of cash. During 2007, the non-employee directors' cash compensation was comprised of the following elements:
Type of Payment | Amount | ||
---|---|---|---|
Chairman of the Board (pro-rated and paid quarterly) | $ | 250,000 | |
Director Retainer (pro-rated and paid quarterly) | $ | 50,000 | |
Audit Committee Chair Fee | $ | 12,500 | |
Compensation Committee Chair Fee | $ | 7,500 | |
Nominating and Governance Committee Chair Fee | $ | 7,500 | |
Audit Committee Member Fee | $ | 5,000 | |
Compensation Committee Member Fee | $ | 4,500 | |
Nominating and Governance Committee Member Fee | $ | 3,500 | |
Credit towards Company Products | $ | 1,000 |
No changes have been made to cash compensation as set forth above for non-employee directors for fiscal year 2008.
In addition to the compensation set forth above, members of the Special Committee of the Board of Directors (see description above) were eligible to receive the following cash payments through May 2007 when the Special Committee concluded its work:
Special Committee Compensation | May 2006-May 2007 | ||
---|---|---|---|
Chairman Fee (per month) | $ | 15,000 | |
Chairman Meeting Fee (per meeting) | $ | 2,000 | |
Member Fee (per month) | $ | 10,000 | |
Member Meeting Fee (per meeting) | $ | 1,000 |
Equity Compensation
Approximately two-thirds of the compensation paid to our non-employee directors is comprised of equity: one-third of the aggregate value in stock option grants underoptions, and one-third of the 2001 Director Option Plan (the "Director Plan"). Under the Director Plan, each Non-Employee Director, upon appointment, was automatically awardedaggregate value in restricted stock. The number of options to purchase 80,000and shares of Common Stock (the "First Option"), which would vest in equal installments of 25% per year on each of the first four anniversaries of the date of grant. After the First Option has fully vested, each Non-Employee Director would have received an automatic annual grant of an option to purchase 20,000 shares of Common Stock (an "Annual Option"), which would vest in full on the first anniversary of the date of grant. 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 ofrestricted stock options to the Non-Employee Director under the Director Plan.
The past grants made to the Non-Employee Directors under the Director Plan are as follows. On May 11, 2001, the Company granted a First Option to each of Messrs. Horner and Toy, on March 20, 2002, the Company granted a First Option to Ms. Atkins (whose term as a director expired in May 2005), on January 17, 2005, the Company granted a First Option to Mr. Clarke and on March 15, 2005, the Company granted a First Option to Mr. Lenzmeier. The First Option granted to each of Messrs. Horner and Toynon-employee director (other than Mr. Ryan who was appointed to the Board in April 2008) during fiscal year 2007 is set forth below:
Name | Stock Options Granted (#) | Restricted Stock Granted (#) | ||
---|---|---|---|---|
Jeff Clarke | 43,103 | 21,552 | ||
Larry D. Horner | 48,621 | 24,310 | ||
Allen Lenzmeier | 41,034 | 20,517 | ||
Thomas J. Toy | 45,517 | 22,759 |
Each stock option has an exercise price of $22.71 and fully vested on May 11, 2005. Messrs. Horner and Toy were each granted an Annual Option on May 11, 2005 with an exercise$2.90 per share, equal to the closing price of $6.84. The First Option granted to Mr. Clarke has an exercise price of $16.96, the First Option granted to Mr. Lenzmeier has an exercise price of $13.14, and each will be fully vested on January 17, 2009 and March 15, 2009, respectively. The unvested and unexercised portion of the First Option granted to Ms. Atkins reverted back to the Director Plan upon the expiration of her term as a director in May 2005. If, following a change in control of the Company, a Non-Employee Director's status as a Director of the Company or the successor corporation is terminated (other than as a result of voluntary resignation), the options become fully exercisable for a period of 3 months from the date of such termination. The exercise price of all options granted under the Director Plan is 100% of the fair market value of theCompany's Common Stock on the NASDAQ Stock Market on November 30, 2007, the date of grant. The options expire ten years after the date of grant, subject to earlier termination if the optionee ceases to serve as a director.
Prior to April 27, 2006, it was also the Company's policy to grant each Non-Employee Director an annual grant of an option to purchase 25,000 shares pursuant to the Company's 1997 Stock Plan (the "1997 Plan"). The Board suspended this policy on April 27, 2006, choosing instead to issue a specific number of options as part of each Non-Employee Director's overall annual compensation package.
During 2005, pursuant to this now suspended policy, certain option grants were made as follows. On October 28, 2005 (the "Grant Date"), the Company granted an option to purchase 25,000 shares of Common Stock to each of Messrs. Horner, Toy, Clarke and Lenzmeier (the "Director Options") with a vesting commencement date of August 23, 2005 (the "Vesting Commencement Date"). The Director Options have an exercise price per share of $7.98, which equals the greater of the closing sales prices of the Common Stock as listed on the Nasdaq National Market on (i) the Grant Date and (ii) the Vesting Commencement Date. The Director Optionsrestricted stock vest in equal, monthly installments over a 12 month12-month period frombeginning on November 30, 2007. The grants were made pursuant to the Vesting Commencement DateCompany's 2006 Equity Incentive Plan (the "2006 Plan") and have an exercise term of 10 years. If, following a change in controlare subject to the standard terms and conditions of the Company, a Non-Employee Director's statusforms of restricted stock award and stock option agreements previously approved for use with the Company or2006 Plan and filed with the successor corporation is terminated (other than as a result of voluntary resignation), the Director Options will become fully exercisable for a period of 3 months from the date of such termination.SEC.
For further discussion onwith respect to the Company's policy and procedures relating to equity award grants that apply to non-employee directors and other service providers, please see the section entitled "Compensation Discussion and Analysis—Other Considerations—Equity Grant Practices" contained in this Proxy Statement.
For further discussion with respect to change of control arrangements regarding Director Options,applicable to outstanding equity awards, please see the section entitled "Change of Control ArrangementsProvisions in Option Agreements for Usethe Equity Compensation Plans" under the 1997 Stock Plan" under "Employment Contracts"Potential Payments upon Termination and Change of Control Arrangements"Control" contained in this Proxy Statement.
For further discussion with respect to modifications made to certain outstanding equity awards held by non-employee directors, please see the section entitled "Executive Compensation—Modifications to Outstanding Equity Awards" contained in this Proxy Statement.
Indemnification Agreements
All of our directors other than Mr. Ryan are currently party to indemnification agreements with the Company. The form of indemnification agreement is filed as Exhibit 10.1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS DIRECTORS AND MANAGEMENT
The following table sets forth certain information with respect to beneficial ownership of theour Common Stock as of May 12, 2006April 1, 2008 (except as otherwise indicated), by: (i) each person who is known by the Companyto us to own beneficially more than 5% of theour Common Stock; (ii) each director of the Company's President and Chief Executive Officer and each of the named executive officers as defined in Item 402(a)(3) of Regulation S-K,UTStarcom; (iii) each of the Company's directors;Named Executive Officer; and (iv) all of our current directors and executive officers as a group. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to allCalculations are based on 125,099,129 shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable.
Calculations are based on a total number ofissued and outstanding shares of 121,089,996 shares as of May 12, 2006.April 1, 2008.
Name and Address of Beneficial Owner | Shares Beneficially Owned(1) | Approximate Percent Owned(1) | |||
---|---|---|---|---|---|
Entities affiliated with SOFTBANK CORP.(2) | 14,651,630 | 12.10 | % | ||
Brandes Investment Partners, L.P.(3) | 14,063,327 | † | 11.61 | % | |
FMR Corp.(4) | 8,273,850 | † | 6.83 | % | |
Donald Smith & Co., Inc.(5) | 7,417,738 | † | 6.13 | % | |
Ying Wu(6) | 4,676,965 | 3.84 | % | ||
Hong Liang Lu(7) | 4,097,027 | 3.35 | % | ||
William Huang(8) | 1,132,056 | * | |||
Michael Sophie(9) | 405,166 | * | |||
Francis Barton(10) | 100,000 | * | |||
Larry Horner(11) | 239,208 | * | |||
Thomas Toy(12) | 153,235 | * | |||
Jeff Clarke(13) | 44,219 | * | |||
Allen Lenzmeier(14) | 94,278 | * | |||
Shao-Ning J. Chou(15) | 0 | * | |||
All current directors and officers as a group (9 persons)(16) | 10,942,154 | 8.80 | % |
Name and Address of Beneficial Owner(1) | Shares Beneficially Owned(2) | Percent of Total Outstanding(2) | |||
---|---|---|---|---|---|
Entities affiliated with SOFTBANK CORP.(3) | 14,651,630 | 11.7 | % | ||
Brandes Investment Partners, L.P.(4) | 8,094,233 | 6.5 | % | ||
Barclays Global Investors, N.A.(5) | 7,552,347 | 6.0 | % | ||
Hong Liang Lu(6) | 4,783,382 | 3.8 | % | ||
Francis P. Barton(7) | 1,554,848 | 1.2 | % | ||
Peter Blackmore | 900,000 | * | |||
Philip Christopher(8) | 305,812 | * | |||
David King(9) | 148,511 | * | |||
Ying Wu(10) | 4,720,801 | 3.8 | % | ||
Jeff Clarke(11) | 159,604 | * | |||
Larry D. Horner(12) | 294,447 | * | |||
Allen Lenzmeier(13) | 208,085 | * | |||
Bruce J. Ryan** | 0 | * | |||
Thomas J. Toy(14) | 230,460 | * | |||
All current directors and executive officers as a group (12 persons)(15) | 8,530,705 | 6.8 | % |
Japanese corporation. Softbank America Inc. has sole power to vote or direct the voting of 14,651,630 shares and sole dispositive power over 14,651,630 shares. The business address for these entities is c/o SOFTBANK CORP., 24 1 Nihonbashi Hakozakicho, Chuoku, Tokyo 103 8501Shiodome Blvd., 1-9-1, Higashi-shimbashi, Minato-ku, Tokyo 105-7303 Japan.
Glenn R. Carlson and Jeffrey A. Busby. Each of Brandes Investment Partners, L.P., Brandes Investment Partners, Inc., Brandes Worldwide Holdings, L.P., Charles H. Brandes, Glenn R. Carlson and Jeffrey A. Busby has shared power to vote or direct the voting of 12,168,7166,722,748 shares and shared dispositive power over 14,063,3278,094,233 shares. The business address for Brandes Investment Partners, L.P. is 11988 El Camino Real, Suite 500, San Diego, CA 92130.
2008. Mr. Wu's employment as our Executive Vice President and Chairman and Chief Executive Officer of our subsidiary, UTStarcom China Co., Ltd., terminated on June 1, 2007 and Mr. Wu resigned from the Board of Directors on July 24, 2007. As of June 1, 2007, Mr. Wu was vested in options to purchase 780,000 shares of the Company's Common Stock, and those options are exercisable for twelve months from the date of his termination of employment.
Executive Officers
The Company's Our current executive officers as of the date of this Proxy Statement, and their ages as of July 21, 2006,April 30, 2008 are as follows:
Name | Age | Position | ||
---|---|---|---|---|
Hong Liang | Chief Executive Officer | |||
Peter Blackmore | 61 | President | ||
Francis P. Barton | Executive Vice President and Chief Financial Officer | |||
Philip Christopher | 59 | President of UTStarcom Personal Communications LLC | ||
Mark Green | 40 | Senior Vice President, Global Human Resources and Real Estate | ||
David King | 45 | Senior Vice President, International Sales and Marketing | ||
Viraj Patel | 45 | Vice President, Corporate Controller and Chief Accounting Officer |
Hong Liang Lu has served as the Company'sour President and Chief Executive Officer and as a director sincefrom June 1991. Mr. Lu has served1991 though December 2006, and as the Chairman of the Board sincefrom March 2003.2003 to December 2006. On January 1, 2007, he assumed the title of Chief Executive Officer. In June 1991, Mr. Lu co-founded UTStarcom, Inc. 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 ownedmajority-owned subsidiary of Kyocera International, Inc. Mr. 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, Mr. Lu served as Vice President and Chief Operating Officer of Unison World, Inc. Mr. Lu holds a B.S. in Civil Engineering from the University of California at Berkeley.
Ying WuPeter Blackmore has served as our President and Chief Operating Officer since July 2007. From 2005 until he joined the Company'sCompany, Mr. Blackmore served as Executive Vice President in charge of world-wide sales, marketing and Vice Chairman of the Board since October 1995. Mr. Wu has alsotechnology at Unisys Corporation. Prior to joining Unisys in 2005, he served as the Chairman and Chief Executive Officer, and, until February 2004, as President, of one of the 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 marketedthe Customer Solutions Group at Hewlett-Packard Company from 2004 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. Mr. 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 Huang has been the Company's Chief Technology Officer since September 1999, and was appointed the Company's Senior Vice President in September 2001. From December 1996 to September 1999, Mr. Huang was the Company'sExecutive Vice President of Strategic Product Planning.the Enterprise Systems Group from 2002 through 2004. From June 1995 to December 1996,1991 until its acquisition by Hewlett-Packard in 2002, Mr. HuangBlackmore served in a number of senior management positions with Compaq Computer Corporation, most recently as the Company'sits Executive Vice President of China Operations. From 1994 to June 1995,worldwide sales and services from 2000 through 2002. Mr. Huang was the Company's Director of Engineering. From 1992 to 1994, Mr. Huang was a consultant, Member of the Technical Staff and project leader at AT&T CellRelay Systems (part of Bell Labs). Mr. Huang serves on the board of Shenzhen Gin De (Group) Ltd., a publicly listed real estate investment companyBlackmore holds an M.A. in China. Mr. Huang holds a B.S. in Electrical EngineeringEconomics from Huazhong University of Science & Technology, and an M.S. in Electrical Engineering and Computer Sciences from the University of Illinois.Trinity College, Cambridge, U.K.
Francis P. Barton has been the Company'sserved as our Executive Vice President and Chief Financial Officer since August 2005.2005 and as a director since October 2006. From May 2003 to July 2005, Mr. Barton was Executive 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 and Chief Financial Officer of Advanced Micro Devices, Inc. From 1996 to 1998, Mr. Barton was Vice President and Chief Financial Officer of Amdahl.Amdahl Corporation. From 1974 to 1996, Mr. Barton worked at Digital Equipment Corporation, beginning his career as a financial analyst and moving his way up through various financial roles to Vice President and Chief Financial Officer of Digital Equipment Corporation's Personal Computer Division. Mr. Barton currently serves on the board of directors of ON Semiconductor Corporation. He holds a B.S. in Chemical Engineering from Worcester Polytechnic Institute and an M.B.A. with a focus in finance from Northeastern University.
Executive CompensationUniversity
The table below sets forth informationPhilip Christopher has served as President of UTStarcom Personal Communications LLC, one of our wholly owned subsidiaries, since June 2004. Prior to joining us, Mr. Christopher was President and CEO of Audiovox Communications Corporation and Executive Vice President of Audiovox Corporation. Prior to our acquisition of Audiovox Communications Corporation, Mr. Christopher had been employed with Audiovox Corporation since 1970 and was elected to the company's board of directors in 1987. Mr. Christopher was a member of the White House Economic Council, and also serves on the board of directors of the Cellular Telecommunications Industry Association. Mr. Christopher is also the recipient of numerous industry and humanitarian awards and honors, including the prestigious Ellis Island Medal of Honor.
Mark Green has served as our Senior Vice President of Global Human Resources and Real Estate since February 2007, and served as our Vice President of Human Resources from January 2006 to January 2007. Prior to joining us, Mr. Green was at Verisign Inc. from June 2005 as the Human Resources Director of Verisign Security Services. From 1992 to 2005, Mr. Green was at Nortel, where he joined their Human Resources Leadership Development Program, rotating through multiple Human Resources areas in the U.K. and the U.S. He then moved to Hong Kong, as International Human Resources Services Manager for the three most recently completed fiscal years concerningAPAC region, returning to the compensationU.S. as Senior Human Resources Business Partner for the Clarify eBusiness-Software Applications Division, then Human Resources Director of Nortel's Enterprise Division. Mr. Green received his BEng(Hons) in Electrical and Electronic Engineering from Leeds University, U.K., and MSc(econ) in Human Resources Management and Industrial Relations from the London School of Economics. He is also a graduate of the Institute of Personnel and Development, U.K.
David King has served as our Senior Vice President, Sales, and Marketing & Services since March 2006. Prior to joining us, Mr. King was the Chief Executive Officer for Visual Wireless AB from 2004 to 2006. From 1999 to 2004, Mr. King was with Ericsson AB, initially as Vice President, Sales and other executive officers.(1)Marketing for Wireline Systems, then as Vice President, Product Management & Marketing and held the position of Vice President and General Manager, Wireline Systems from 2002 to 2004. From 1996 through 1999 Mr. King was with PriceWaterhouse as a principal consultant and from 1992 to 1996 Mr. King was a senior consultant with Omega Partners. Mr. King was Chairman and non-executive board director for Ascade AB, Stockholm from 2001 to 2004. Mr. King served as an officer in the Royal Marines from 1985 to 1989. He holds a BSc in Electrical Engineering from Liverpool University, and an MBA from the London Business School.
Viraj Patel has served as our Vice President, Corporate Controller and Chief Accounting Officer since November 2005. Prior to joining us, Mr. Patel was Vice President of Finance for Celera Group from July 2005 to October 2005. Mr. Patel also served as Vice President of Finance for Nektar Therapeutics from March 2004 until June 2005. From November 2003 to March 2004, Mr. Patel served as an interim Corporate Controller for Extreme Networks. From 1999 to 2002, Mr. Patel was the Chief Financial Officer of Avanti Corporation. Prior to joining Avanti Corporation Mr. Patel worked for Pall
Corporation from 1989 through 1999 where he served as the Chief Accounting Officer. Mr. Patel began his career at PricewaterhouseCoopers in 1982. Mr. Patel holds a BBA from Pace University, New York. He is a Certified Public Accountant from the State of New York and is a member of the New York State Society of CPAs and a member of the American Institute of Certified Public Accountants.
COMPENSATION DISCUSSION AND ANALYSIS
Governance of Executive Officer Compensation Program
Role and Members of the Compensation Committee
The Compensation Committee of the Board of Directors (the "Compensation Committee" or the "Committee") determines compensation for the Company's executive officers. The Committee is currently comprised of four members of the Board of Directors, Messrs. Clarke, Horner, Lenzmeier and Toy, all of whom are independent, non-employee directors. Mr. Toy acted as chairperson of the Committee through April 27, 2007, at which time Mr. Lenzmeier assumed the role. Mr. Clarke was appointed to the Committee on April 27, 2007.
The Committee is responsible for:
The Compensation Committee operates according to a charter that details its specific duties and responsibilities. For additional information with respect to the Compensation Committee, please refer to the section entitled "Compensation Committee" at page 13 of this Proxy Statement.
In 2007, the Compensation Committee delegated authority to a designated management committee (the "Awards Committee") to review and approve equity awards to certain employees and service providers below the corporate vice-president level, in accordance with the Company's Equity Award Granting Policy and Procedures discussed below.
Named Executive Officers
Our principal executive officer, our principal financial officer and our three most highly compensated executive officers (other than our principal executive officer and principal financial officer) for fiscal year 2007 (our "Named Executive Officers" or "NEOs") are as follows: Hong Liang Lu, Chief Executive Officer; Francis P. Barton, Executive Vice President and Chief Financial Officer; Peter Blackmore, President and Chief Operating Officer; Philip Christopher, President of UTStarcom Personal Communications LLC; and David King, Senior Vice President, International Sales and Marketing. In addition, Ying Wu, our former Chairman and Chief Executive Officer of our China subsidiary, is considered an NEO for 2007 since he would have otherwise been named an NEO based on his total compensation in 2007 but for the fact that he was not serving as an executive officer of the Company at the end of fiscal year 2007. Mr. Wu's employment with us terminated on June 1, 2007.
Process for Evaluating Named Executive Officer Performance and Compensation
The Compensation Committee generally holds at least four scheduled meetings during the year and holds additional meetings periodically to review and discuss executive compensation issues. The Compensation Committee may also consider and take action by written consent. In 2007, the Compensation Committee met twelve times and acted twice by written consent.
In the first quarter of each fiscal year, generally in February, the Compensation Committee (i) considers any changes to executive officer base salaries, (ii) makes a determination whether any bonuses will be paid to our executive officers and to what extent, if any, (iii) reviews and approves annual equity grants for our executive officers in accordance with the Company's Equity Award Grant Policy, and (iv) reviews the level of perquisites and benefits provided to each executive officer. As part of its annual process, the Compensation Committee meets to review and evaluate (i) Company performance, (ii) individual performance of each executive officer, and (iii) data related to market practices for executive compensation for each of our executive officers. During these meetings, our CEO reviews and discusses with the Committee the performance and contribution of each executive officer other than himself and each executive officer's achievement of strategic operational and financial goals. While the Compensation Committee may discuss our CEO's performance and compensation package with him, it meets in executive session without him present to determine his compensation. The Committee also has the opportunity to meet with each executive officer to discuss his or her performance during the prior fiscal year as well as goals for the current year.
The Company's Human Resources department supports the Compensation Committee in its work. The Compensation Committee also has the authority to engage the services of outside advisors, experts and others for assistance. The Compensation Committee did not retain an outside advisor prior to April 2007.
Engagement of and Role of Independent Compensation Consultant
In April 2007, the Compensation Committee engaged an independent compensation consulting firm, Compensia, Inc., to advise the Compensation Committee and the Board on executive and equity compensation matters. The consulting firm reports directly to the Compensation Committee, and the Compensation Committee has sole authority to hire, fire and direct the work of the advisor. Compensia, Inc. assisted the Compensation Committee in selecting an appropriate peer group to assess executive pay levels, developed compensation "tally sheets" for each NEO, conducted a market pay assessment for each officer, and provided input to the Committee on equity compensation and market trends. Representatives from Compensia attend Compensation Committee meetings at the Committee's invitation.
Role of Executive Management in Compensation Evaluation Process
Our Chief Executive Officer plays a significant role in the compensation setting process. The key aspects of our Chief Executive Officer's role include (i) evaluating employee performance; (ii) assisting in the establishment of business performance targets and objectives; and (iii) recommending salary levels and equity awards other than for himself. The Compensation Committee considers, but is not bound to and does not always accept, our Chief Executive Officer's recommendations with respect to executive compensation. The Compensation Committee typically follows the Chief Executive Officer's recommendations which are based on the same measurements the Compensation Committee uses for all executives (i.e., market data and individual performance objectives). Our Chief Executive Officer rarely recommends extraordinary adjustments for his direct reports.
While the Compensation Committee seeks input primarily from our Chief Executive Officer, the Committee consults with other executives, including our Chief Financial Officer and our Senior Vice President, Global Human Resources, to obtain recommendations with respect to Company compensation programs, practices and packages for executives and other employees. The Compensation
Committee also has the opportunity to meet with each executive officer and discuss his or her individual performance, upon request. Other than participating in an annual evaluation process with our Chief Executive Officer and discussions with the Compensation Committee if and as requested, the other NEOs do not play a role in their own compensation determinations.
Executive Compensation Philosophy and Framework
Compensation Objectives
UTStarcom's compensation program is designed to achieve three primary objectives:
Target Pay Position
We use three primary pay components to support our compensation objectives: (i) base salary, (ii) annual cash incentive/bonus and (iii) equity. Each is discussed in greater detail below under "Evaluation of Named Executive Officer Compensation." For each of these elements, the Compensation Committee examines peer group compensation practices and targets direct compensation, including base salary, incentive bonus and equity, at approximately the 50th percentile of our primary peer group (as defined in the "Compensation Benchmarking" section below). These target pay positions are the same for all employees in the Company. While equity compensation is generally targeted at 50% of market value, during the Company's February 2008 equity grant process the decreased value of shares of our Common Stock affected our ability to target the 50th percentile of market in value without substantially depleting the pool of shares available for grant to all employees under the 2006 Equity Incentive Plan. Targeting the 50th percentile would have also negatively impacted our equity burn rate. For these reasons, the value of our equity grants for fiscal year 2008 was generally between the 25th and 50th percentile of market practices.
The Compensation Committee has approved compensation levels for officers above and below the target pay position, based on individual and Company performance, to ensure an appropriate pay-for-performance alignment. This pay-for-performance alignment is further supported by our use of variable, or at-risk, compensation, which is designed to provide that executives receive target or above-target total compensation only to the extent that Company and individual performance objectives have been achieved or exceeded.
While our pay-for-performance philosophy remains a central part of our compensation objectives, the Company's lack of profitability over a number of years has led to increased concern about our ability to recruit and retain qualified senior management personnel to lead our return to profitability. As a result, the Compensation Committee has taken into consideration recruiting and retention concerns as well as pay-for-performance during its evaluation of executive compensation in fiscal years 2007 and 2008.
Compensation Benchmarking
We use two peer groups to assess the competitiveness of executive officer compensation practices and levels, as described below. We assess the compensation levels of our NEOs and other executive officers against both peer groups, and we use the secondary peer group to assess compensation levels of all other officers and employees.
During fiscal year 2007, our "primary" peer group included 107 high technology companies with between $1 billion and $3 billion in revenue, as reported in Radford's High-Technology Executive Survey. The profile of the primary peer group aligned with UTStarcom in terms of size. Our "secondary" peer group included 21 telecom companies with more than $1 billion in annual revenue and was likewise pulled from the Radford High-Technology Executive Survey. The secondary peer group was used as an additional reference point, and is composed of the following companies:
• Alcatel, USA | • Ericsson | • Samsung Telecom America | ||
• Alltel | • Level 3 Communications | • Scientific—Atlanta | ||
• AT&T/SBC | • Motorola | • Sprint Nextel | ||
• Avaya | • NII Holdings | • T-Mobile | ||
• Corning | • Nokia—US | • Tellabs | ||
• DirecTV | • Qualcomm | • Verizon Wireless | ||
• Embarq | • Qwest Communications | • Virgin Mobile |
In October 2007, the Compensation Committee conducted its annual review of the Company's peer groups and made certain adjustments to ensure that the peer groups continued to reflect the market in which UTStarcom competes for talent. For fiscal year 2008, the Compensation Committee determined that, rather than using components of the Radford High-Technology Executive Survey as our primary peer group, our primary peer group would be composed of 21 companies with similar revenue (~0.5x-2.0x) and similar market capitalization (~0.5x-2.0x) as UTStarcom, as set forth below:
• ADC Telecommunications Inc. | • Brocade Communications Systems, Inc. | • JDS Uniphase | ||
• Adaptec, Inc. | • Cohu, Inc. | • LSI Logic Corporation | ||
• Altera Corporation | • Cypress Semiconductor Corporation | • NetGear | ||
• Andrew Corporation | • EMS Technologies, Inc. | • TEKELEC | ||
• Atmel Corporation | • Extreme Networks Inc. | • Tellabs, Inc. | ||
• Black Box Network Services | • Harmonic, Inc. | • Viasat, Inc. | ||
• Brightpoint, Inc. | • Harris Stratex Networks | • Xilinx, Inc. |
The Compensation Committee then determined that our secondary peer group for fiscal year 2008 would be composed of 115 high technology companies with between $1 billion and $3 billion in revenue, as reported in Radford's High-Technology Executive Survey.
Evaluation of Named Executive Officer Compensation
Base Salary
Base salary is the primary fixed compensation in our executive pay program and is used to attract, motivate and retain highly qualified executives. An individual's initial base salary is determined by his or her levels of expertise, experience and responsibility, as well as competitive conditions in the industry. Annual base salary increases, if any, are a reflection of the executive's performance for the preceding year, anticipated future contributions and pay level relative to similar positions in our peer group. We also take into consideration internal equity with respect to the entire executive team and competitive conditions in the industry, as measured against our peer groups.
2007 Base Salary Actions
In February and March of 2007, and as part of its annual process, the Compensation Committee met to evaluate Company performance, individual performance and data related to market practices for executive compensation for each of our executive officers (other than Mr. Blackmore who joined the Company on July 2, 2007 and thus was not part of the 2007 base salary evaluation process). During these meetings, our CEO presented to the Committee his recommendations with respect to executive base salaries other than his own. The base salaries for 2007 as approved by the Compensation
Committee, the percentage increase from 2006 (if any) and the effective date of each increase is as follows:
Named Executive Officer | 2006 Base Salary | 2007 Base Salary | % Increase from 2006 | Effective date | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Hong Liang Lu | $ | 700,000 | $ | 700,000 | 0 | % | N/A | |||
Francis P. Barton | $ | 500,000 | $ | 750,000 | 50 | % | January 1, 2007 | |||
Philip Christopher | $ | 530,000 | $ | 550,000 | 3.6 | % | March 1, 2007 | |||
David King | $ | 340,000 | $ | 355,000 | 4.2 | % | March 1, 2007 | |||
Ying Wu* | $ | 500,000 | $ | 550,000 | 10 | % | February 1, 2007 |
After a review of Company performance and our peer group market data, the Committee did not increase Mr. Lu's base salary for 2007. Mr. Barton's base salary was increased by 50% in light of (i) his assumption of substantially greater duties, including responsibility for the Legal and Business Development departments and (ii) the Compensation Committee's assessment of his criticality to ongoing Company success. Mr. King and Mr. Christopher received merit increases which reflected market data for their positions as well as recognition of their individual performance against targets set forth them in 2006. Mr. King's base salary increase was within budgeted base salary increase guidelines and kept him at the 50th percentile of the market. While Mr. Christopher's base salary increase brought him near the 75th percentile of the market, his increase was in recognition of sustained performance and his Division's contributions to the Company. Mr. Wu's salary was increased to align his compensation with that paid to executives with similar responsibilities who are employed by peer companies with revenue comparable to ours. This increase placed Mr. Wu's cash compensation between the 50th and 75th percentile of our primary peer group for 2007, but below the 50th percentile of our secondary peer group for 2007.
In May 2007, the Compensation Committee reviewed and considered compensation arrangements for a Chief Operating Officer candidate, taking into consideration the Company's current management structure and the probability that the Chief Operating Officer candidate would be considered as a successor to Hong Liang Lu, the Company's current Chief Executive Officer. In crafting the offer, the Committee considered the appropriate initial base salary level, whether or not a signing bonus would be an incentive to increase the candidate's interest in the position, a restricted cash award since the Company was not able to issue equity at that time, the appropriate performance bonus target as a percentage of annual salary and proposed terms of a change of control agreement. Subsequently, on May 27, 2007, the Company entered into an offer letter agreement with Mr. Peter Blackmore (the "Blackmore Agreement"), pursuant to which Mr. Blackmore was offered the position of President and Chief Operating Officer of the Company. Mr. Blackmore's salary was initially set at $800,000 per year and his target bonus was set at 100% of his base salary. The Compensation Committee took into consideration the probability that Mr. Blackmore would succeed Mr. Lu as CEO of the Company when it established his initial base salary at a level that was over the 75th percentile of our peer group for a COO candidate but was between the 50th and 75th percentile for a CEO candidate. In addition, the Company entered into a Change of Control/Involuntary Termination Severance Agreement with Mr. Blackmore, effective July 2, 2007 (the "Blackmore Severance Agreement"). See "Employment Contracts and Severance Agreements with Named Executive Officers" in the "Potential Payments Upon Termination and Change of Control" section of this Proxy Statement for a description of the material terms of the Blackmore Agreement and the Blackmore Severance Agreement.
2008 Base Salary Actions
Similar to the process undertaken for 2007, our CEO presented to the Compensation Committee his 2008 base salary recommendations for the NEOs other than himself in February 2008. After a
review of individual and Company performance, as well as market practices for executive compensation within our peer groups, the Compensation Committee made no adjustments to base salaries for our NEOs other than for Mr. King, whose base salary was increased from $355,000 to $366,000 per year (an increase of 3.1% from 2007), effective March 1, 2008, in order to maintain his targeted market position relative to our peer groups. During its deliberations, the Committee proposed an increase to Mr. Lu's base salary in light of its review of our peer group compensation data and taking into consideration the fact that Mr. Lu had not had an increase in base salary since 2004. Mr. Lu subsequently declined any increase in his base salary in light of the Company's financial performance and management's implementation of an effective cost-reduction strategy. In making its other salary assessments, the Committee determined that salaries for Messrs. Barton and Christopher were aligned with the compensation of executives with similar responsibilities within our peer groups and that, in light of his recent hire date, Mr. Blackmore's base salary would not be adjusted in connection with this review.
Bonus
Discretionary Bonus Program
UTStarcom's annual bonus program is a discretionary, variable cash incentive program designed to reward executives (as well as all employees) for achieving key operational goals. The use of a discretionary bonus program provides the Compensation Committee with the flexibility needed to address pay-for-performance goals as well as recruiting and retention concerns in a "turnaround" environment. The target annual incentive percentage for each executive represents the percentage of his or her base salary that may be paid if the Company's actual performance equals an income target established at the beginning of the year. Once the Committee establishes that payouts will occur, as determined by actual company performance at year-end, the Committee may apply negative or positive discretion to adjust the actual award. In addition, at the beginning of each fiscal year, the Compensation Committee approves specific goals for each executive officer that reflect the process of "management by objective" (the "MBOs") and which are also used to measure performance in the upcoming year for the purpose of determining bonus and equity awards. MBO goals include financial performance goals with a focus on returning the Company to profitability, as well as other operating goals for each executive. Metrics for non-CEO executive officers are set by the CEO and approved by the Compensation Committee.
Non-Discretionary Bonus Awards
Several of our executive officers have bonus arrangements that are set forth in employment or other agreements with the executive officer. Mr. Christopher's annual bonus is nondiscretionary and equals 2% of the after-tax operating profits of our Personal Communications Division of which he is President. Fifty percent of Mr. King's bonus is nondiscretionary and consists of sales commissions. Any amounts paid by us in connection with such agreements are disclosed in the "Long Term Non-Equity Incentive Compensation" column of the Summary Compensation TableTable.
2008 Bonus Payouts for 2007 Performance
In February 2008, Mr. Lu, our CEO, presented recommendations to the Compensation Committee for bonus payments to the NEOs other than himself, based on operating income results and his assessment of their performance during the 2007 fiscal year. The Compensation Committee retained the authority to assess Mr. Lu's performance in connection with the bonus payout process. Fifty percent of Mr. Lu's MBOs are based on his meeting or exceeding targets for profit, bookings, revenue, gross margin, cash flow and inventory turns, and his remaining MBOs involve corporate level and role specific goals. Eighty percent of Mr. Barton's MBOs relates to his oversight of the finance, legal, compliance, treasury and internal audit functions, and the remaining MBOs are corporate and
development specific goals. Fifty percent of Mr. King's target bonus is contingent upon his achievement of MBOs which are discussed below and the remainder is comprised of sales commissions. Messrs. Blackmore and Christopher did not participate in the discretionary bonus program during 2007, as discussed below.
In connection with this review, the Compensation Committee determined that no bonuses would be paid to the NEOs for 2007, other than bonuses that were nondiscretionary. Mr. Wu was not eligible to receive a bonus for fiscal year 2007 since he was not employed by the Company at the end of the fiscal year. The amounts paid as nondiscretionary bonuses are as follows:
Named Executive Officer | 2007 Annual Bonus Target as a Percent of Base Salary (unless otherwise noted) | 2007 Bonus Paid | Bonus Paid as Percentage of Target | ||||
---|---|---|---|---|---|---|---|
Peter Blackmore | 100% | $ | 400,000 | (1) | Per offer letter agreement (see discussion below) | ||
Philip Christopher | 2% of Personal Communications Division profit | $ | 821,181 | (2) | 100% | ||
David King | 33.5% of annual salary as sales commission | $ | 72,234 | (3) | 61% |
Based on the Company's financial performance for 2007, the Compensation Committee determined that no bonuses would be paid to the executive officers for 2007, other than as set forth above. Instead, as part of the Company's strategic recovery plan, the Committee restructured the bonus program to provide for a bonus payable to Mr. King as follows: (i) 50% of the target discretionary bonus for which Mr. King would be eligible (i.e., 33.5% of his base salary) would be paid in March 2008 if he met certain strategic operating goals during the fourth quarter of 2007, and (ii) the remaining 50% of the target bonus would be paid in the fourth quarter of 2008 if (a) he met specific performance goals in the first three quarters of 2008 and (b) the Company met its operating income goals for that period. In addition, if the Company succeeds in achieving within 25% of its budgeted income targets as measured at the end of the third quarter of 2008, a multiplier may be applied to Mr. King's bonus calculation. For example, if Mr. King meets 80% of his goals for the first three quarters of 2008 and the Company exceeds its budgeted operating income by 20% (i.e., 120% of target), his bonus for this program would be calculated as follows: bonus = base salary × applicable target bonus as percentage of annual salary × 80% × 120% × 50%. Participants in this bonus program include certain executive officers and vice-presidents of the Company.
In February 2008, the Compensation Committee assessed Mr. King's performance against his strategic operating goals for the fourth quarter of 2007 and determined that he would be paid $59,108 (50% of his target percentage, or 17% of his base salary) based on his achievement of those strategic operating goals. The Compensation Committee plans to evaluate achievement of the 2008 strategic operating goals as soon as practicable upon the completion of the last measurement period.
Equity Compensation
Equity compensation is the largest component of UTStarcom's executive officer compensation program. We believe this is an effective way to align the interests of our executive officers with those of our stockholders in order to achieve long-term stockholder value. In designing the equity program, we take into account stockholder concerns about stock usage and dilution. The Compensation Committee limits annual net issuances of stock-based awards, subject to extraordinary events (e.g., acquisitions). The Compensation Committee adjusts this target rate year-to-year based on performance and retention issues, also taking into account market practices. Officers and other employees of the Company are eligible to participate in the 2006 Plan, which was adopted by the Board of Directors and approved by the stockholders in July of 2006. They are also eligible to participate in the Company's Employee Stock Purchase Plan, as described below.
Both time and performance-based stock awards were granted to the NEOs in 2007 and 2008 based on Company and individual performance. Performance for equity awards is generally measured against the same criteria as discussed in the "Bonus" section above.
2007 Focal Awards
On November 30, 2007, in connection with the Company's annual focal award process for 2007 which had been postponed from February 2007 due to the Company's failure to timely file periodic reports with the Securities and Exchange Commission, the Compensation Committee granted certain of the NEOs shares of restricted stock and RSUs under the Company's 2006 Plan, as set forth below. Certain of the awards vest over time, as noted below, but the performance-based awards vest over a period of two years, with the additional requirement of achieving predetermined performance metrics as described below.
Hong Liang Lu | — | 4-year time based 100% on November 30, 2008 Performance based | |||||||||||||||||
Francis P. Barton | RSUs RSUs | 44,781 — | — 89,562 | 4-year time based Performance based | |||||||||||||||
Peter Blackmore | RSUs RSUs | 0 — | — 0 | 4-year time based Performance based | |||||||||||||||
Philip Christopher | RSUs RSUs | 35,712 — | — 71,249 | 4-year time based Performance based | |||||||||||||||
David King | RSUs RSUs | 95,238 — | — 229,885 | 4-year time based Performance based |
Except as noted above, the time-based awards vest over four years as follows: 25% on each of February 29, 2008, February 27, 2009, February 26, 2010, and February 28, 2011, subject to the NEO remaining a service provider (as defined in the 2006 Plan) through each such date. The number of shares to be earned by each NEO with respect to the performance-based awards was to be determined by the Compensation Committee as soon as practicable following the 2007 fiscal year end, based on
each executive's achievement of certain management performance objectives including (i) achievement of corporate financial measures such as bookings, gross margin, revenue, operating profit, cash flow, inventory turns, contribution margin, cost reduction and cash collections, (ii) achievement of certain corporate objectives, and (iii) achievement by such NEO of additional individualized performance objectives reviewed and approved by the Compensation Committee. Mr. Blackmore did not participate in the program for 2007 because he had received an equity grant in connection with his initial employment and was not an employee for all of fiscal year 2007. Mr. Wu was not eligible to participate in this program since he was not an employee at the time of grant of the performance-based RSUs.
At its meeting on February 26, 2008, the Committee measured each NEO's performance against the objectives established in November 2007 as described above and determined that the number of performance-based RSUs earned by each NEO was as follows:
Named Executive Officer | Actual RSU Award | Percentage of Actual Award versus Target | |||
---|---|---|---|---|---|
Hong Liang Lu | 133,543 | 50 | % | ||
Francis P. Barton | 67,172 | 75 | % | ||
Peter Blackmore | — | — | |||
Philip Christopher | 71,429 | 100 | % | ||
David King | 206,897 | 90 | % |
The earned RSUs will vest 50% on each of February 29, 2008 and February 27, 2009, subject to the NEO being a service provider (as defined in the 2006 Plan) on each such date. The RSUs that were not earned were forfeited.
2008 Focal Awards
In February and March 2008, and in connection with the Company's annual focal award process, the Compensation Committee granted certain of the NEOs shares of restricted stock, RSUs and performance shares under the Company's 2006 Plan, as set forth below. Certain of the awards vest over time, as noted below, but vesting of a majority of the awards is performance-based. The number of shares to be earned by each NEO with respect to the performance-based awards is to be determined by the Compensation Committee as soon as practicable following the 2008 fiscal year end, based on each executive's achievement of certain management performance objectives as described below.
Named Executive Officer | Type of Award | Number of Shares | Target Performance Share Award | Vesting Schedule | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Hong Liang Lu | RSUs RSUs Performance Shares Restricted Stock | 200,000 33,333 — — | — 300,000 | ||||||||||||||||
RSUs | — | — | 4-year time based | ||||||||||||||||
RSUs | 85,000 | — 170,000 | 4-year time based | ||||||||||||||||
Philip Christopher | RSUs RSUs | 50,000 — | — 100,000 | 4-year time based | |||||||||||||||
David King | RSUs | 55,000 — | — | 4-year time based | |||||||||||||||
Except as noted above, the time-based awards vest over four years as follows: 25% on each of February 29, 2009, February 26, 2010, February 28, 2011, and February 29, 2012, subject to the NEO remaining a service provider (as defined in the 2006 Plan) through each such date.
The performance-based awards will be earned with respect to each NEO based on management performance objectives established and tailored for each NEO by the Committee for the Company's 2008 fiscal year, including (i) achievement of corporate financial measures such as bookings, gross margin, revenue, operating profit, net income, cash flow, inventory turns, contribution margin, cost reduction and cash collections, and (ii) achievement by such NEO of additional individualized performance objectives reviewed and approved by the Committee. Performance will be measured against the established objectives and, to the extent the established objectives have been achieved, the number of performance-based RSUs, performance shares or shares of restricted stock earned by each NEO shall be determined by the Committee, in its sole discretion, provided that such NEO remains a service provider (as defined in the 2006 Plan) of the Company on the date of determination. Following the determination of the number of RSUs, performance shares or shares of restricted stock earned by each NEO, 50% of the earned awards shall vest on each of February 27, 2009 and February 26, 2010, provided that such NEO remains a service provider of the Company (as defined in the 2006 Plan) on those dates. Performance-based awards that are not earned will be forfeited.
Retention Program/Equity Incentive for Our Chief Financial Officer
In November 2007, the Compensation Committee approved the terms of a retention plan for our CFO, Francis P. Barton, after taking into consideration: (i) Mr. Barton's performance during a challenging year, including completing the Company's previously disclosed stock option and historical sales contract investigations, bringing the Company current in its SEC filings and improving the Company's Section 404 compliance process; (ii) the critical nature of Mr. Barton's current and future role in light of anticipated management transitions in fiscal year 2008; and (iii) increasing competition in the market for experienced financial professionals. The Committee also determined that, while the retention incentive described below could be awarded in equity and/or cash, the Committee's intent was to grant equity to the extent possible under the terms of the 2006 Plan in order to increase Mr. Barton's incentive as an owner and shareholder to drive the Company toward profitability.
The agreement between Mr. Barton joinedand the Company (the "Barton Retention Agreement") provides that the Company will provide a retention incentive to Mr. Barton with a total value of $10,000,000 (the "Retention Incentive"), consisting of a combination of restricted stock, RSUs, performance shares and performance units (together, "Equity") to be granted under the 2006 Plan and/or cash, in August 2005.
Employee Stock Purchase Plan
Our executive officers are eligible to participate in the Company's Executive Vice President and Chief Operating Officer in May 2006.
Benefits, Perquisites and Other Compensation
We provide medical and other benefits to executives that are generally available to other full-time employees, including group term life insurance, expatriate remuneration for those employees who are assigned overseas and who qualify under the terms of our expatriate remuneration plan, tuition reimbursement and a 401(k) plan. The 401(k) plan is a defined contribution plan and, after one year of service, employees are eligible to receive a matching contribution from the Company of up to $5,500. Our NEOs other than Messrs. Blackmore and King participated in Item 402(a)(3) of Regulation S-K.
We also provide the NEOs and certain other executives with additional perquisites including financial planning services (including, in some instances, a housing allowance of $48,000 in 2005 paidtax gross-up with respect thereto), tax assistance payments in connection with Mr. Wu's international work assignment, (ii) a tax assistance payment of $2,581,275 in 2005 paid in connection with the Company'sour tax equalization policy whereby the Company provideswe provide qualified employees with tax assistance to mitigate the tax differential arising from an employee's international work assignment, (iii)business travel accident insurance, a housing allowance and children's educationrelocation expenses for certain executives who have been asked to relocate to conduct business on behalf of the Company, disability insurance and car/transportation allowances. In addition, in accordance with the terms of Mr. Christopher's initial employment with us, we pay premiums on a term life insurance policy for his benefit.
The Compensation Committee reviews the perquisites provided to executive officers as part of its overall review of executive compensation. The Compensation Committee has determined the type and amount paid in perquisites to be within the appropriate range of competitive compensation practices. Details about the NEO's perquisites, including the fiscal year 2007 cost to the Company, are shown in the Summary Compensation Table under the "All Other Compensation" column and the accompanying footnotes.
Post-Employment Obligations
During 2007, the Company was party to change of control and involuntary termination severance agreements with certain of its NEOs. For a description of the material terms of these agreements, please see "Employment Contracts and Severance Agreements with Named Executive Officers" in the section entitled "Potential Payments Upon Termination and Change on Control" included in this Proxy Statement. The Compensation Committee believes these agreements are in the best interest of the Company's stockholders. As with any public company, the possibility of change of control exists for UTStarcom. Such a change of control typically means a degree of ambiguity for executives about the stability of their employment. The Compensation Committee believes these agreements help to ensure that executives will remain focused on, and committed to, the interests of the business throughout the process of exploring and/or executing a change of control.
In June 2006, the Compensation Committee adopted the Executive Involuntary Termination Severance Pay Plan (the "Executive Severance Plan"), which extends certain change of control and severance benefits to some of the Company's executive officers, including Mr. King, who do not have individual agreements with the Company. Please see "Employment Agreements and Change of Control Arrangements with Executive Officers Other Than Named Executive Officers" in this Proxy Statement for a description of the material terms of the plan. The Compensation Committee believes that the plan is in the best interests of the Company and its stockholders in that the plan, like the agreements with certain of our NEOs described above, helps to ensure the focus and commitment of our executive team during the process of exploring and/or executing a change of control.
Reasonableness of Compensation
The Compensation Committee believes it is fulfilling UTStarcom's compensation objectives and in particular, rewarding executive officers in a manner that supports our strong pay-for-performance
philosophy. Executive compensation is tied to our performance and is structured to ensure that there is an appropriate balance between our long-term and short-term performance, and also a balance between our operational performance and stockholder return. On average, the target total direct pay position for the NEOs in 2007 was between the 50th and 75th percentile of the primary peer group. The Compensation Committee believes the average target pay position relative to market and pay mix are reasonable and appropriate and are necessary to address recruiting and retention concerns in a "turnaround" environment. Mr. Barton's base salary remains high relative to our peer group; however as discussed earlier, his salary reflects (i) his assumption of substantially greater duties, including responsibility for the Legal and Business Development departments after the departure of the Company's previous Chief Financial Officer, (ii) the Compensation Committee's assessment of his criticality to ongoing Company success and (iii) Mr. Barton's extensive senior finance experience.
Other Considerations
Equity Grant Practices
The Compensation Committee approves all equity grants to our executive officers. During fiscal year 2007, the Company's equity award pool for awards (including new hire grants and any merit or focal awards) to be made during that period was approved by the Board of Directors. A percentage of this total approved pool was designated for distribution to the company executives. Functional Vice Presidents recommended annual equity grants to their supervised employees based on individual performance, with our Chief Executive Officer making recommendations for his direct reports. The Company's Human Resources department then compiled the list of recommendations and presented those recommendations to the Compensation Committee for approval. Any recommendation with respect to equity grants for our Chief Executive Officer was made by the Compensation Committee.
On April 10, 2007, the Compensation Committee adopted the UTStarcom, Inc. Equity Award Grant Policy and Procedures, which applies to all equity awards from that date forward. In accordance with the Company's equity award grant policy, equity awards to executive officers are considered and approved as follows:
Compensation Committee meetings may be held at any time to consider the approval of equity awards proposed to be provided to new executive officers (including new executive officers resulting from either new hires or promotions, but other than annual focal awards, as described below), but equity awards granted by the Compensation Committee shall become effective as of the last trading day of the month of grant.
Compensation Committee meetings to consider the approval of annual focal awards to executive officers shall be held during the last two weeks of February of each year, if reasonably practicable and subject to compliance with applicable laws, rules and regulations. If a meeting cannot be held and/or equity awards cannot be granted in accordance with applicable laws, rules and regulations during this time period, the Compensation Committee shall determine the meeting date for the consideration and
approval of focal awards. The Compensation Committee shall meet to approve focal equity awards during an open trading window as such term is defined in the Company's Insider Trading Policy.
Equity grants made to employees who are not executive officers or corporate vice presidents may be made by the Awards Committee, a management committee duly formed and authorized by the Compensation Committee and consisting of the Company's Chief Financial Officer, Senior Vice President of Human Resources, General Counsel and Chief Accounting Officer. The Awards Committee may grant stock options or restricted stock units and only then in accordance with specific guidelines set by the Compensation Committee. Any award grants approved by the Awards Committee are effective as of the last trading day of the month of grant. Equity grants are made subject to an annual equity pool approved by the Compensation Committee. The approval pool to be awarded by the Awards Committee consisted of 1,000,000 shares in 2007 and will consist of 2,000,000 shares in 2008. This increase to the equity pool reflects the additional authority granted by the Compensation Committee to the Awards Committee to review and award all focal and new hire awards to employees and service providers below the corporate vice president level and within certain established guidelines. The Human Resources Department provides quarterly updates to the Compensation Committee regarding equity usage.
Tax Considerations
Section 162(m) of the Internal Revenue Code states that public companies cannot deduct compensation paid to certain of its top executive officers in excess of $1 million per officer per year, but excludes from the calculation of the $1 million limit certain elements of compensation, including performance-based compensation, provided that certain requirements are met. We believe it is in our best interest, to the extent practical, to have executive officer compensation be fully deductible under Section 162(m). However, the Compensation Committee also retains the discretion, for competitive reasons, to provide compensation that may not be fully deductible. In a few instances, a portion of our annual bonus payments to certain of our executive officers does not currently qualify as deductible under Section 162(m). The Compensation Committee will continue to evaluate whether it is in the Company's best interest to qualify future incentive awards under Section 162(m). While stock options granted under our 1997 Stock Plan (the "1997 Plan") did not meet the requirements of Section 162(m), future equity awards will be granted under our 2006 Plan, which was approved by our stockholders and therefore meets the requirements under Section 162(m).
Section 409A of the Internal Revenue Code
Section 409A imposes additional significant taxes in the event an NEO, director or other service provider receives "deferred compensation" that does not satisfy the requirements of Section 409A. Although we do not maintain a traditional nonqualified deferred compensation plan, Section 409A applies to certain severance arrangements and equity awards. Consequently, to assist in avoiding additional tax under 409A, we developed the severance arrangements described above in "Post-Employment Obligations" in a manner intended to either avoid the application of Section 409A or, to the extent doing so is not possible, comply with the applicable Section 409A requirements.
Stock Ownership Guidelines
Effective January 1, 2006, by the decision of the Nominating and Governance Committee of the Board, the Company imposed minimum stock ownership guidelines for certain executive officers as well as non-executive directors of the Company. Each executive officer is expected to acquire the required number of shares of Common Stock as set forth by the guidelines (which range from 10,000 shares to 50,000 shares, depending on the level of responsibility of the officer) before the later of (i) four years after the effective date of the guidelines or (ii) four years after an officer's appointment to such executive office. All executives required to comply with these guidelines currently meet the ownership
requirements. See the section entitled "Stock Ownership Guidelines" in this Proxy Statement for additional information with respect to this program.
REPORT OF THE COMPENSATION COMMITTEE
The following is the report of the Compensation Committee. The information contained in this report shall not be deemed to be "soliciting material" or to be "filed" with the SEC, or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Securities Exchange Act, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates the information by reference in any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
The Compensation Committee of the Board of UTStarcom, Inc. was established on January 31, 1997 and is currently comprised of four members: Messrs. Clarke, Horner, Lenzmeier and Toy. Mr. Lenzmeier, the Chairman of the Compensation Committee, and Messrs. Horner and Toy served on the Committee throughout 2007. Mr. Clarke was appointed to serve on the Compensation Committee on April 27, 2007.
During 2007, 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 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 2008, the Committee will continue to be comprised of directors who meet these same standards.
The Compensation Committee has reviewed and discussed the "Compensation Discussion and Analysis" section of this Proxy Statement with management, including UTStarcom's Chief Executive Officer and Chief Financial Officer. Based on this review and discussion, the Compensation Committee recommended to the Board that the "Compensation Discussion and Analysis" section be included in this Proxy Statement.
The Compensation Committee | |
Allen Lenzmeier, Chairman Larry D. Horner Thomas J. Toy Jeff Clarke |
Summary Compensation Table for Fiscal Year 2007
The following table presents information concerning the total compensation of (i) our principal executive officer, (ii) our principal financial officer, (iii) our three most highly compensated executive officers, other than our principal executive officer and principal financial officer, who were serving as executive officers at the end of our 2007 fiscal year, and (iv) a former executive officer for whom disclosure would have been provided but for the fact that he was not serving as an executive officer at the end of the 2007 fiscal year (the "Named Executive Officers"). No disclosure is provided for fiscal year 2006 for those persons who were not Named Executive Officers in 2006.
Name and principal position | Year | Salary ($) | Bonus ($)(1) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Hong Liang Lu Chief Executive Officer | 2007 2006 | 700,000 700,000 | 0 315,000 | 312,010 930,549 | (2) (3) | 295,238 1,376,655 | (4) (5) | — — | 198,567 18,345 | (6) (7) | 1,505,815 3,340,549 | |||||
Francis P. Barton Executive Vice President and Chief Financial Officer | 2007 2006 | 750,000 500,000 | 0 750,000 | 3,039,375 586,326 | (2) (3) | 538,592 823,294 | (4) (5) | — — | 84,983 101,769 | (8) (9) | 4,412,950 2,761,389 | |||||
Peter Blackmore* President and Chief Operating Officer | 2007 | 400,000 | 500,000 | (15) | 500,000 | (2) | 150,000 | (4) | — | — | 1,550,000 | |||||
Philip Christopher** President, Personal Communications Division | 2007 | 548,333 | 0 | 48,106 | (2) | 531,469 | (4) | 821,181 | 84,864 | (10) | 2,033,953 | |||||
David King*** Senior Vice President, International Sales and Marketing | 2007 | 358,742 | 59,108 | 257,625 | (2) | 41,764 | (4) | 72,246 | 29,797 | (11) | 819,282 | |||||
Ying Wu**** Former Executive Vice President and Chairman | 2007 2006 | 346,175 500,000 | 0 320,000 | (318,136 318,136 | )(14) (3) | (316,092 604,808 | )(14) (5) | — — | 1,504,639 290,038 | (12) (13) | 1,216,586 2,032,982 |
compensation cost for such awards is adjusted to reflect the fair value at the time the Compensation Committee determines the ultimate number of awards earned. For a discussion on the Compensation Committee's final award determinations based upon the performance-based vesting conditions and the cumulative dollar amount recognized for financial statement reporting in accordance with SFAS 123(R), please see footnotes 1 and 3 to the table entitled "Grants of Plan-Based Awards in Fiscal year 2007" contained in this Proxy Statement. A discussion of the valuation assumptions used for purposes of the SFAS 123(R) calculation is included under Note 14 to our 2007 Consolidated Financial Statements that are part of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Mr. Blackmore's annual base salary for fiscal years 2007 and 2008 is currently set at $800,000 per year. Please see "2008 Base Salary Actions" in 2001. While U.S. tax regulations require that these amounts be recorded as income, due to general limitation rules,the Compensation Discussion and Analysis included in this Proxy Statement for a portiondescription of Mr. Chou's paid foreign tax has been recoveredthe actions taken by the Company pursuantCompensation Committee with respect to salaries of our Named Executive Officers for fiscal year 2008.
For a description of the Company's tax equalization policy.process for determining the payment of discretionary bonuses to certain of its executive officers and the payment of long-term, non-equity incentive compensation to Messrs. Christopher and King, please see the section entitled "Bonus" in the Compensation Discussion and Analysis included in this Proxy Statement.
From time to time, we enter into offer letters and other agreements with our executive officers. For a description of the material terms of such offer letter agreements and a description of severance and change of control agreements entered into with certain of our executive officers, please see the section entitled "Employment Contracts and Severance Agreements with Named Executive Officers" in the "Potential Payments Upon Termination and Change of Control" section included in this Proxy Statement.
For a description of material modifications made to certain of the Named Executive Officers' outstanding equity awards, please see the section entitled "Modifications to Outstanding Equity Awards" included in this Proxy Statement.
Grants of Plan-Based Awards
The following table presents information concerning grants of plan-based awards to each of the Named Executive Officers during the fiscal year ended December 31, 2007.
| | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Grant Date Fair Value of Stock and Option Awards ($) | |||||||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#)(4) | Target (#) | Maximum (#) | ||||||||||||||||
Hong Liang Lu | 11/30/2007 11/30/2007 11/30/2007 | 0 | — — 267,086 | (1) | — — 267,086 | (1) | 40,000 133,543 — | (7) (7) | 116,000 387,275 774,549 | (3) | |||||||||||||
Francis P. Barton | 11/30/2007 11/30/2007 11/30/2007 11/30/2007 11/30/2007 11/30/2007 | 0 | — — — — — 89,562 | (1) | — — — — — 89,562 | (1) | 44,781 165,657 254,000 300,000 689,655 — | (8) (9) (9) (9) (9) | 129,865 480,405 736,600 870,000 2,000,000 259,730 | (3) | |||||||||||||
Peter Blackmore | 10/31/2007 10/31/2007 10/31/2007 | 900,000 — 350,000 | (10) (10) | — 750,000 — | (2)(10) | — 3.20 — | 2,880,000 1,200,000 1,120,000 | ||||||||||||||||
Philip Christopher | — 11/30/2007 11/30/2007 | 0 | 821,121 | (5) | 821,121 | (5) | 0 | — 71,429 | (1) | — 71,429 | (1) | 35,714 — | (11) | 103,571 207,144 | (3) | ||||||||
David King | — 11/30/2007 11/30/2007 | 0 | 118,925 | (6) | 118,925 | (6) | 0 | — 229,885 | (1) | — 229,885 | (1) | 114,943 — | (12) | 333,335 666,667 | (3) | ||||||||
Ying Wu* | — | — | — | — | — | — |
Stock Ownership Guidelines
Effective January 1, 2006,stock award earned by Messrs. Lu, Barton, Christopher, and King was $399,294, $200,843, $213,570, and $618,621, respectively, reflecting the decision ofgrant date fair value on February 26, 2008, the Nominating and Corporate Governancedate the Compensation 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 acquiredetermined the number of shares of Common Stock as set forth below byearned, and all the Guidelines beforeconditions required for a "grant date" to occur under SFAS 123(R) have been met. Total recognized compensation cost for such awards will be based on the later"grant date" (as defined in SFAS 123(R)) fair value over the vesting period. Pursuant to SEC regulations, the amounts shown exclude the impact of (i) 4 years after the effective dateestimated forfeitures related to service-based vesting conditions. A discussion of the Guidelines and (ii) 4 years after an officer's appointmentvaluation assumptions used for purposes of the SFAS 123(R) calculation is included under Note 14 to such office orour 2007 Consolidated Financial Statements that are part of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Pension Benefits for Fiscal year 2007
The Named Executive Officers did not receive any benefits from the Company under defined pension or defined contribution plans, other than our tax-qualified 401(k) Plan, during the fiscal year ended December 31, 2007.
Nonqualified Deferred Compensation for Fiscal year 2007
The Company will review compliance withdoes not have any non-qualified deferred compensation plan that allows the Guidelines annually. FailureNamed Executive Officers 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.defer their compensation.
Option GrantsOutstanding Equity Awards at Fiscal Year-End 2007
The following table sets forth certain information with respectthe outstanding equity awards for each Named Executive Officer as of December 31, 2007.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2007
| OPTION AWARDS | STOCK AWARDS | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(1) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested(1) ($) | |||||||||
Hong Liang Lu | 400,000 150,000 100,000 100,000 150,000 75,000 120,000 250,000 234,000 — | — — — — — — — — — — | — — — — — — — — — — | 4.50 13.00 15.00 12.50 22.93 20.82 19.04 37.46 6.25 — | (2) (3) | 8/31/2009 2/3/2010 10/17/2010 12/20/2010 2/27/2012 7/24/2012 2/2/2013 1/19/2014 2/27/2016 — | — — — — — — — — — 40,000 133,543 | (10) (11) | — — — — — — — — — 110,000 367,243 | — — — — — — — — — — — 267,086 | (20) | — — — — — — — — — — — 734,487 | ||||||
Francis P. Barton | 233,334 92,000 — — | 166,666 — — | (4) | — — — | 8.82 6.25 — | 7/31/2015 2/27/2016 — | — — 50,000 44,781 127,586 254,000 165,657 | (12) (13) (14) (15) (16) | — — 137,500 123,148 350,862 698,500 455,557 | — — — — — — — 89,562 | (20) | — — — — — — — 246,296 | ||||||
Peter Blackmore | — | 750,000 | (5) | — | 3.20 | 10/31/2014 | — 900,000 350,000 | (17) (18) | — 2,475,000 962,500 | — — | — — | |||||||
Phillip Christopher | 154,167 52,084 34,375 | 45,833 47,916 40,625 | (6) (7) (8) | — — — | 17.87 6.61 6.25 | 11/4/2014 11/7/2015 2/27/2016 | — — — — 35,714 — | (13) | — — — — 98,214 — | — — — — — 71,429 | (20) | — — — — — 196,430 | ||||||
David King | 20,834 | 29,166 | (9) | 6.92 | 4/6/2016 | — 37,500 114,943 | (19) (13) | — 103,125 316,093 | — 229,885 | (20) | — — — 632,184 | |||||||
Ying Wu* | 80,000 75,000 55,000 55,000 100,000 50,000 85,000 200,000 80,000 | — — — — — — — — — | — — — — — — — — — | 4.50 13.00 15.00 12.50 22.93 20.82 19.04 37.46 6.25 | (2) (3) | 4/25/2009 2/3/2010 10/17/2010 12/20/2010 2/27/2012 7/24/2012 2/2/2013 1/19/2014 2/27/2016 | — — — — — — — — — | — — — — — — — — — | — — — — — — — — — | — — — — — — — — — |
exercisable for a period of 12 months following Mr. Wu's last day of employment of June 1, 2007 (but in no event will an option be exercisable for a longer period than the original term of the option).
Option Exercises and Stock Vested in Fiscal year 2007
The following table presents all stock options exercised and value realized upon exercise, and all stock awards vested and value realized upon vesting, by the Named Executive Officers during the fiscal year ended December 31, 2005.2007.
Option Grants in Last Fiscal YearOPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2007
| | | | | 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 |
| OPTION AWARDS | STOCK AWARDS | ||||||
---|---|---|---|---|---|---|---|---|
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(1) | ||||
Hong Liang Lu | — | — | 117,000 | 339,300 | ||||
Francis P. Barton | — | — | 933,069 | 2,722,119 | ||||
Peter Blackmore | — | — | — | — | ||||
Philip Christopher | — | — | — | — | ||||
David King | — | — | 12,500 | 42,234 | ||||
Ying Wu | — | — | — | — |
Option Exercises and Values
The following table sets forth information for the Company's executive officers relating to the number and value of securities underlying exercisable and unexercisable options they held at December 31, 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, 2005 by the executive officers.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
| | | 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 | — | — | — |
Modifications to Outstanding Equity Awards
In connection with our voluntary review of our historical equity award grant practices, each of our independent directors, Messrs. Clark, Horner, Lenzmeier and Toy, elected to amend any of his previously granted stock options that may in the future be determined to be discounted stock options under Section 409A of the option.(2)TheInternal Revenue Code of 1986, as amended ("
Additionally, certain of our Named Executive Officers, including Messrs. Lu, Barton and Wu, executed a Protective Amendment Election Form that amends any stock option agreements previously entered into by and between us and each of Messrs. Lu, Barton and Wu, in the event any such stock option agreements may in the future be determined to have resulted in the above individuals holding discounted stock options under Section 409A. In the event any such previously granted stock option is determined to be a discounted stock option under Section 409A, the affected stock option agreement will be automatically amended to provide for an exercise price not less than the fair market value of the Common Stock subject to option on the effective date of grant.
Each of Messrs. Lu and Wu also executed an Amendment Election Form that amends the terms of various stock option agreements entered into by and between us and Messrs. Lu and Wu in February and July of 2002. Each Amendment Election Form provides for an adjustment to the exercise price of the applicable stock options, to the extent such options remained unexercised in-the-moneyat the time of the election and may constitute discounted stock options is calculatedunder Section 409A, based on the difference between the closingpreliminary estimates made solely for tax purposes in order to avoid potential adverse tax consequences to Messrs. Lu and Wu and us associated with discounted stock options under Section 409A. The exercise price of $8.06applicable stock options granted under the Option Agreements executed in February 2002 was
increased from $20.25 per share as quoted on The Nasdaq National Market on December 31, 2005,to $22.93 per share, and the exercise price of grants under the Option Agreements executed in July 2002 was increased from $15.72 per share to $20.82 per share.
POTENTIAL PAYMENTS UPON TERMINATION AND CHANGE OF CONTROL
Employment Contracts and Severance Agreements with Named Executive Officers
Hong Liang Lu. On November 30, 2007, we entered into an Amended and Restated Change of Control/Involuntary Termination Severance Agreement with Hong Liang Lu, the Company's Chief Executive Officer (the "Lu Severance Agreement"), which was subsequently amended and restated on January 30, 2008 to bring the agreement into compliance with Section 409A. The Lu Severance Agreement, as amended and restated, amends Mr. Lu's previous Change of Control Severance Agreement with the Company dated January 17, 2003, as previously filed with the SEC. The Lu Severance Agreement has a term of three (3) years from January 30, 2008. Following the expiration of the three (3)-year term, Mr. Lu and the Company may, but are not obligated to, enter into a new agreement. If Mr. Lu's employment continues following the expiration of the three (3)-year term and the Company and Mr. Lu do not enter into a new agreement, Mr. Lu's then current benefits arrangements shall continue in accordance with the terms of the Lu Severance Agreement until the parties agree otherwise.
The Lu Severance Agreement provides that if Mr. Lu's employment with the Company is terminated as a result of an "involuntary termination" by the Company or terminated by Mr. Lu for "good reason" (as both terms are defined in the Lu Severance Agreement) at any time within eighteen (18) months after a change of control, he shall be entitled to the following severance benefits: (i) twenty-four (24) months of base salary as in effect as of the date of such termination, (ii) two hundred percent (200%) of his full annual performance target bonus for the year in which termination occurs, less applicable withholding, (iii) all equity awards including, without limitation, option grants, restricted stock and stock purchase rights, granted to Mr. Lu prior to the change of control will become fully vested or released from the Company's repurchase right (if any shares date of termination to the extent such equity awards are outstanding and unexercisable or unreleased at the time of such termination, (iv) such equity awards shall be exercisable until the earliest of (a) twelve (12) months from Mr. Lu's date of termination, (b) the latest date the equity award could have expired by its original terms under any circumstances, (c) the tenth (10th) anniversary of the original date of grant of the equity award, or (d) the date provided for under the equity plan under which the award was granted, and (v) an amount equal to twelve (12) months of health insurance premiums for continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("multipliedof stock purchased by or granted to Mr. Lu prior to the numberchange of shares underlyingcontrol remain subject to that repurchase right) and exercisable as of the option.Equity Compensation Plan InformationCOBRA"), at the same level of health (i.e., medical, vision and dental) coverage and benefits in effect for Mr. Lu on the day preceding the date of his termination of employment.
The Lu Severance Agreement also provides that if Mr. Lu's employment with the Company is terminated as a result of an "involuntary termination" by the Company or terminated by Mr. Lu for "good reason" (both as defined in the Lu Severance Agreement) during the term of the Lu Severance Agreement, apart from a change of control, he shall be entitled to the following table sets forth information,severance benefits: (i) twenty-four (24) months of base salary as in effect as of December 31, 2005*, aboutthe date of such termination, (ii) one hundred percent (100%) of his full annual performance target bonus for the year in which termination occurs, less applicable withholding, (iii) all equity awards, including without limitation option grants, restricted stock and stock purchase rights, granted to Mr. Lu will become fully vested or released from the Company's repurchase right (if any shares of stock purchased by or granted to Mr. Lu remain subject to such repurchase right) and exercisable to the extent such equity awards are outstanding and unexercisable or unreleased at the time of such termination, (iv) such equity awards shall be exercisable until the earliest of (a) twelve (12) months from his date of termination, (b) the latest date the equity
award could have expired by its original terms under any circumstances, (c) the tenth (10th) anniversary of the original date of grant of the equity award, or (d) the date provided for under the equity plan under which the award was granted, and (v) an amount equal to twelve (12) months of health insurance premiums for continuation coverage pursuant to COBRA, at the same level of health (i.e., medical, vision and dental) coverage and benefits in effect for Mr. Lu on the day preceding the date of his termination of employment.
Severance benefits payable under the terms of the Lu Severance Agreement are payable in a lump sum within thirty (30) days of the date of termination; however, if Mr. Lu is a "specified employee" ("Specified Employee") within the meaning of Section 409A at the time of his termination, then the severance and benefits payable to Mr. Lu pursuant to the Agreement (other than due to death), if any, and any other severance payments or separation benefits which may be considered deferred compensation under Section 409A (together, the "Deferred Compensation Separation Benefits") and which are otherwise due to Mr. Lu on or within the six (6) month period following Mr. Lu's termination will accrue during such six (6) month period and will become payable in a lump sum on the date six (6) months and one (1) day following the date of his termination of employment or the date of his death, if earlier. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. As a condition to receiving severance benefits as described above, Mr. Lu is required to sign a waiver and release of all claims arising out of his termination of employment and a nondisparagement agreement.
Francis P. Barton. On July 29, 2005, we entered into an agreement with Francis P. Barton, our Executive Vice President and Chief Financial Officer of the Company (the "Barton Agreement") in connection with his initial employment. The Barton Agreement provides that Mr. Barton shall initially receive an annual salary of $500,000, a signing bonus of $250,000, an annual bonus for the 2005 calendar year of up to $250,000, an option to purchase 400,000 shares of Common Stock of the Company at fair market value on the date of grant and a share purchase right for the purchase of 100,000 shares of Common Stock of the Company at par value. Twenty-five percent of the shares subject to the option vested one year after the date of grant, with the remaining 75% vesting on a monthly basis thereafter, subject to Mr. Barton remaining a service provider of the Company (as defined in the 2006 Plan) through each such date. The shares subject to the share purchase right vest in equal installments of 25% per year on each of the first four anniversaries of the date of grant, subject to Mr. Barton remaining a service provider of the Company (as defined in the 2006 Plan) through each such date.
We entered into an Amended and Restated Change of Control Severance/Involuntary Termination Agreement with Mr. Barton dated August 23, 2006 (the "Barton Severance Agreement") which was subsequently amended and restated on January 30, 2008 to bring the agreement into compliance with Section 409A. The Barton Severance Agreement has a term of three (3) years from January 30, 2008. Following the expiration of the three (3)-year term, Mr. Barton and the Company may, but are not obligated to, enter into a new agreement. If Mr. Barton's employment continues following the expiration of the three (3)-year term and the Company and Mr. Barton do not enter into a new agreement, Mr. Barton's then current benefits arrangements shall continue in accordance with the terms of the Barton Severance Agreement until the parties agree otherwise.
The Barton Severance Agreement provides that if Mr. Barton's employment with the Company terminates as a result of an "involuntary termination" (as defined in the Barton Severance Agreement) at any time within eighteen (18) months after a change of control during the term of the Barton Severance Agreement, he shall be entitled to the following severance benefits: (i) twenty-four (24) months of base salary as in effect as of the date of such termination, (ii) one hundred percent (100%) of the bonus for the year in which termination occurs, (iii) all equity compensation plans:awards, including without limitation option grants, restricted stock and stock purchase rights, granted to Mr. Barton prior to the change of control will become fully vested and/or exercisable to the extent such equity awards are
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 | ||||
outstanding and/or unexercisable at the time of such termination, (iv) such equity awards shall be exercisable until the earliest of (a) twelve (12) months from Mr. Barton's date of termination, (b) the latest date the equity award could have expired by its original terms under any circumstances, (c) the tenth (10th) anniversary of the original date of grant of the equity award, or (d) the date provided for under the equity plan under which the award was granted, and (v) an amount equal to twelve (12) months of health insurance premiums for continuation coverage under COBRA at the same level of health (i.e., medical, vision and dental) coverage and benefits as in effect for Mr. Barton on the day immediately preceding the day of his termination of employment.
The Barton Severance Agreement also provides that if Mr. Barton's employment with the Company terminates as a result of a "regular involuntary termination" (as defined in the Barton Severance Agreement) during the term of the Barton Severance Agreement apart from a change of control, he shall be entitled to the following severance benefits: (i) twenty-four (24) months of base salary as in effect as of the date of such termination, (ii) one hundred percent (100%) of the bonus for the year in which termination occurs, (iii) all equity awards, including without limitation option grants, restricted stock and stock purchase rights, granted to Mr. Barton will become fully vested and/or exercisable to the extent such equity awards are outstanding and/or unexercisable at the time of such termination, (iv) such equity awards shall be exercisable until the earliest of (a) twelve (12) months from Mr. Barton's date of termination, (b) the latest date the equity award could have expired by its original terms under any circumstances, (c) the tenth (10th) anniversary of the original date of grant of the equity award, or (d) the date provided for under the equity plan under which the award was granted, and (v) an amount equal to twelve (12) months of health insurance premiums for continuation coverage under COBRA at the same level of health (i.e., medical, vision and dental) coverage and benefits as in effect for Mr. Barton on the day immediately preceding the day of his termination of employment.
Severance benefits payable under the terms of the Barton Severance Agreement are payable in a lump sum within thirty (30) days of the date of termination; however, if Mr. Barton is a Specified Employee within the meaning of Section 409A at the time of his termination, then the severance and benefits payable to Mr. Barton pursuant to the Barton Severance Agreement (other than due to death), if any, and any other severance payments or separation benefits which may be considered Deferred Compensation Separation Benefits and which are otherwise due to Mr. Barton on or within the six (6) month period following Mr. Barton's termination will accrue during such six (6) month period and will become payable in a lump sum on the date six (6) months and one (1) day following the date of his termination of employment or the date of his death, if earlier. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. As a condition to receiving benefits as described above, Mr. Barton is required to sign a waiver and release of March 31,all claims arising out of his termination of employment and a nondisparagement agreement.
On November 30, 2007, we entered into a retention plan with Mr. Barton, effective November 30, 2007 (the "Barton Retention Agreement"). The Barton Retention Agreement provides that the Company will provide a retention incentive to Mr. Barton with a total value of $10 million (the "Retention Incentive"), consisting of a combination of restricted stock, RSUs, performance shares and performance units (together, "Equity") to be granted under the 2006 Plan and/or cash, in the sole discretion of the Compensation Committee. Each installment of the Retention Incentive will be awarded in a combination of Equity, in the Committee's sole discretion, up to the annual maximum amounts permitted under the 2006 Plan after taking into account Mr. Barton's focal awards for each particular year. The first installment was awarded effective November 30, 2007, the second installment was awarded effective January 29, 2008, and the remaining installments are expected to be awarded each January thereafter. Because of limits on the maximum amount of Equity that can be granted to an individual in any calendar year under the 2006 Plan, the Company expects that the Retention
Incentive will be awarded over a number of sharesyears, so that as much of the Common Stock available for issuance but remained unissuedRetention Incentive can be awarded under existing plans whichthe 2006 Plan as possible. For purposes of determining the vested value, the value of Equity to vest will be rolled intobased on the Fair Market Value (as defined in the 2006 Plan) of the Company's common stock on the applicable date of grant.
In the event Mr. Barton's employment with the Company terminates in a manner that would trigger the payment of severance benefits under the Barton Severance Agreement, or as a result of his death or "disability" (as defined in the 2006 Plan), Mr. Barton would be entitled to a cash payment equal to the amount of the Retention Incentive that had not been granted in Equity as of the date of such termination of employment. The vesting of any Equity granted as part of the Retention Incentive Plan,may also accelerate pursuant to the terms of the Barton Severance Agreement. In addition, if adoptedMr. Barton's employment with the Company terminates as a result of his death or "disability" (as defined in the 2006 Plan), any Equity granted pursuant to the Barton Retention Agreement will vest in full as of the date of termination.
Peter Blackmore. On May 27, 2007, we entered into an offer letter agreement with Mr. Peter Blackmore (the "Blackmore Agreement"), pursuant to which Mr. Blackmore was offered the position of President and Chief Operating Officer of the Company. The Blackmore Agreement was subsequently amended by the Compensation Committee on October 25, 2007 and provides that Mr. Blackmore shall receive (i) an annual salary of $800,000, which shall never be reduced below the current level, (ii) a signing bonus of $100,000, (iii) an annual bonus equal to 100% of Mr. Blackmore's annual salary, based upon the Company's shareholders, was 3,933,333. Asperformance and achievement of March 31, 2006, options to purchase 22,848,484 sharesmutually agreed upon performance objectives (an annual bonus for the 2007 calendar year of 50% of Mr. Blackmore's annual salary is guaranteed), and (iv) upon approval of the Common Stock were outstanding underBoard of Directors of the existing plans. Such outstanding options hadCompany, a weighted average exercise pricegrant of $15.707 and an average remaining term of 7.5 years as of March 31, 2006. There were also 200,000(a) shares of restricted stock awards outstanding as of March 31, 2006.
Employment Contracts, Termination of Employment and Change of Control Arrangementsfull.
Change of Control Arrangements in Employment Contracts
The Company hasWe entered into Change of Control Severance Agreements with each of Messrs. Lu, Wu and Huang dated January 17, 2003, January 31, 2003 and January 31, 2003, respectively (collectively, the "Lu, Wu and Huang Employment Agreements") and a Change of Control/Involuntary Termination Severance Agreement with Mr. Barton dated September 6, 2005Blackmore, effective July 2, 2007 (the "BartonBlackmore Severance Agreement") which was subsequently amended and restated on January 30, 2008 to bring the agreement into compliance with Section 409A. The Blackmore Severance Agreement has a term of three (3) years from January 30, 2008. Following the expiration of the three (3)-year term, Mr. Blackmore and the Company may, but are not obligated to, enter into a new agreement. If Mr. Blackmore's employment continues following the expiration of the three (3)-year term and the Company and Mr. Blackmore do not enter into a new agreement, Mr. Blackmore's then current benefits arrangements shall continue in accordance with the terms of the Blackmore Severance Agreement until the parties agree otherwise.
The Blackmore Severance Agreement provides that if Mr. Blackmore remains employed with the Company through July 2, 2008 (the "Trigger Date") and he is not offered the position of Chief Executive Officer of the Company on or before the Trigger Date, he shall be entitled to the following benefits: (i) twelve (12) months of base salary as in effect as of the Trigger Date, less applicable withholding, payable in a lump sum within thirty (30) days of the Trigger Date; (ii) one hundred percent (100%) of his full annual performance target bonus for the year of the Trigger Date, payable in a lump sum within thirty (30) days of the Trigger Date; (iii) all equity awards, including without limitation stock option grants, restricted stock and stock purchase rights, granted to him by the
Company shall become fully vested, or, as applicable, released from the Company's repurchase right and exercisable as of the Trigger Date to the extent such equity awards are outstanding and unexercisable or unreleased at such date; and (iv) all Mr. Blackmore's outstanding restricted cash awards shall become fully vested, and payable in a lump sum within thirty (30) days of the Trigger Date. The Board and Mr. Blackmore may mutually agree in writing to extend the Trigger Date; provided, however, the Trigger Date cannot be extended beyond February 13, 2009.
The Blackmore Severance Agreement further provides that if Mr. Blackmore's employment with the Company is terminated as a result of an "involuntary termination" by the Company or terminated by Mr. Blackmore for "good reason" (as both terms are defined in the Blackmore Severance Agreement) at any time within eighteen (18) months after a change of control, he shall be entitled to the following severance benefits: (i) twenty-four (24) months of base salary as in effect as of the date of such termination, less applicable withholding, (ii) two hundred percent (200%) of his full annual performance target bonus and a monthly pro rated amount of his full annual performance bonus for the year in which the termination occurs, (iii) all equity awards, including without limitation stock option grants, restricted stock and stock purchase rights, granted to him by the Company prior to the change of control shall become fully vested, or, as applicable, released from the Company's repurchase right and exercisable as of the date of the termination to the extent such equity awards are outstanding and unexercisable or unreleased at the time of such termination, (iv) such equity awards shall be exercisable until the earliest of (a) twelve (12) months from his date of termination, (b) the latest date the equity award could have expired by its original terms under any circumstances, (c) the tenth (10th) anniversary of the original date of grant of the equity award, or (d) the date provided for under the equity plan under which the award was granted, (v) all Mr. Blackmore's outstanding restricted cash awards shall become fully vested, and (vi) an amount equal to twelve (12) months of health insurance premiums for continuation coverage under COBRA at the same level of health (i.e., medical, vision and dental) coverage and benefits as in effect for Mr. Blackmore on the day immediately preceding the day of his termination of employment.
In addition, the Blackmore Severance Agreement provides that if Mr. Blackmore's employment with the Company is terminated as a result of an "involuntary termination" by the Company or terminated by Mr. Blackmore for "good reason" (as both terms are defined in the Blackmore Severance Agreement) during the term of the Blackmore Severance Agreement apart from a change of control, he shall be entitled to the following severance benefits: (i) twelve (12) months of base salary as in effect as of the date of such termination, less applicable withholding, (ii) one hundred percent (100%) of his full annual performance target bonus for the year in which the termination occurs, (iii) all equity awards, including without limitation stock option grants, restricted stock and stock purchase rights, granted to him by the Company shall become fully vested, or, as applicable, released from the Company's repurchase right and exercisable as of the date of the termination to the extent such equity awards are outstanding and unexercisable or unreleased at the time of such termination, (iv) such equity awards shall be exercisable until the earliest of (a) twelve (12) months from his date of termination, (b) the latest date the equity award could have expired by its original terms under any circumstances, (c) the tenth (10th) anniversary of the original date of grant of the equity award, or (d) the date provided for under the equity plan under which the award was granted, (v) all Mr. Blackmore's outstanding restricted cash awards shall become fully vested, and (vi) an amount equal to twelve (12) months of health insurance premiums for continuation coverage under COBRA at the same level of health (i.e., medical, vision and dental) coverage and benefits as in effect for Mr. Blackmore on the day immediately preceding the day of his termination of employment.
Severance benefits payable under the terms of the Blackmore Severance Agreement are payable in a lump sum within thirty (30) days of the date of termination; provided, however, that if Mr. Blackmore is a Specified Employee within the meaning of Section 409A at the time of his termination, then the severance and benefits payable to Mr. Blackmore pursuant to the Blackmore
Severance Agreement (other than due to death), if any, and any other severance payments or separation benefits which may be considered Deferred Compensation Separation Benefits and which are otherwise due to Mr. Blackmore on or within the six (6)-month period following Mr. Blackmore's termination will accrue during such six (6)-month period and will become payable in a lump sum on the date six (6) months and one (1) day following the date of his termination of employment or the date of his death, if earlier. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. As a condition to receiving severance benefits as described above, Mr. Blackmore is required to sign a waiver and release of all claims arising out of his termination of employment and a nondisparagement agreement.
Philip Christopher. We entered into an employment agreement with Philip Christopher, President of UTStarcom Personal Communications LLC, in connection with our acquisition of Audiovox. Under the terms of the agreement with Mr. Christopher dated June 11, 2004 (the "Christopher Employment Agreement"), Mr. Christopher's employment is for a three year term commencing November 1, 2004, the effective date of the acquisition transaction, through November 1, 2007. His annual base salary was set at $500,000 per year and togetherhis target bonus opportunity during the term of the agreement was set at 2% of the annual earnings before taxes of the Company's Personal Communications Division, of which he is President. He was also entitled to receive a stock option grant for 200,000 shares of our Common Stock. Following the expiration of Mr. Christopher's Employment Agreement, he became an "at will" employee.
David King. Mr. King is a Covered Employee under the Company's Executive Involuntary Termination Severance Pay Plan. Please see the description of the plan set forth below for the material terms of Mr. King's severance benefits in the event of his termination of employment other than for "cause," death or "disability."
Ying Wu. On November 14, 2006, we entered into an Amended and Restated Change of Control/Involuntary Termination Severance Agreement with theLu,Ying Wu, our then Executive Vice President, Vice Chairman of the Board and Huang Employment AgreementsChairman and Chief Executive Officer of our subsidiary, UTStarcom China Co., theLtd. (the "Employment AgreementsWu Severance Agreement"). The Employment Agreements provideWu Severance Agreement provided that if the employee'sMr. Wu's employment with the Company terminatesus terminated as a result of an involuntary termination at any time within 1218 months after a change of control, (i) such employee willMr. Wu would 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,occurred, (ii) all equity awards, including without limitation option grants, restricted stock and (ii)stock purchase rights, granted to Mr. Wu prior to the Company willchange of control would become fully vested and/or exercisable, to the extent such equity awards were outstanding and/or unexercisable at the time of such termination, (iii) Mr. Wu would be permitted to exercise such vested equity awards for the shorter period of (a) 12 months from the date of termination and (b) the remaining term of the respective equity awards, and (iv) we would continue to provide such employeeMr. Wu the same level of health coverage as in effect on the day immediately preceding the termination date until the earlier of the date such employeehe is no longer eligible to receive continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended,COBRA, or 12 months from the termination date.
Additionally, in connectionThe Wu Severance Agreement also provided that if Mr. Wu's employment with any suchus terminated as a result of a regular involuntary termination followingduring the period of employment apart from a change of control, the Lu,(i) Mr. 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 Employment Agreements constitute "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's benefits under the Employment 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 Employment Agreements, "involuntary termination" includes (i) without the employee's express written consent, a significant reduction of the employee's duties, position or responsibilities relative to the employee'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, the Company's Chief Financial Officer is made the Chief Financial Officer of the acquiring entity), (ii) without the employee'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 the Company of the employee's base salary as in effect immediately prior to such reduction, (iv) a material reduction by the 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'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's express written consent, (vi) any purported termination of the employee by the Company which is not effected for cause or for which the grounds relied upon are not valid, or (vii) the Company's failure to obtain the assumption of the Change of Control Agreements by any successor to the Company.
"Change of Control" in the Employment Agreements is defined as (i) the approval by the Company's stockholders of a merger or consolidation with any other corporation, other than a merger or consolidation which would result in the 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 the Company's voting securities or such surviving entity outstanding immediately after such merger or consolidation, (ii) the approval by the 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 the Company's assets, (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becoming the "beneficial owner" (as defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of the Company's securities representing 50% or more of the total voting power represented by the 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 directors are incumbent directors.
Severance Payment Arrangements for Termination Apart from Change of Control
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)and 100% of histhe bonus for the year in which such termination occurs,occurred, (ii) all equity awards, including without limitation option grants, restricted stock and (iii) continued vesting in stock options and share purchase rights, granted to such employee priorMr. Wu would become fully vested and/or exercisable to the dateextent such equity awards were outstanding and/or unexercisable at the time of such termination, (iii) Mr. Wu would be permitted to exercise such vested equity awards for athe shorter period of (a) 12 months from the date of such termination withand (b) the rightremaining term of the respective
equity awards, and (iv) we would continue to exercise said stock options and share purchase rights within 90 daysprovide Mr. Wu the same level of health coverage as in effect on the day immediately preceding the termination date until the earlier of the date he is no longer eligible to receive continuation coverage pursuant to COBRA or 12 months from the end of said 12-month period. However, in the eventtermination date. If Mr. Wu's employment with us terminated other than as a result of a change of control or other involuntary termination, for Cause, the terminated employee shallMr. Wu would not be entitled to any ofreceive severance or other benefits under the foregoing benefits.Wu Severance Agreement.
"Cause" inMr. Wu's employment with the Barton Employment Agreement is defined as (i) any act of personal dishonesty taken by the employee inCompany and its subsidiaries terminated on June 1, 2007. In connection with his responsibilities as an employee which is intended to resulttermination of employment, Mr. Wu was paid severance benefits for involuntary termination without a change 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")control in connectionaccordance 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 Wu Severance Agreement as described above, in the amount of $998,768.83 (comprised of $550,000 in base salary, $440,000 in bonus, subject to applicable withholding, and $8,768.83 for the balance of his health care premiums).
Employment Agreements and Change of Control Arrangements with Executive Officers Other Than Named Executive Officers
Executive Involuntary Termination Severance Pay Plan. Effective June 20, 2006, the Compensation Committee of the Board of Directors adopted the Executive Involuntary Termination Severance Pay Plan which was subsequently amended and restated on January 30, 2008 to bring the plan into compliance with Section 409A (the "Executive Plan"). The Executive Plan extends certain change of control and severance benefits to certain of the Company's executive officers, including Mr. King, who do not have separate agreements with the Company. The Executive Plan is filed as Exhibit 10.30 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
The following description of the Executive Plan is qualified in its entirety by the actual language of the plan:
The Executive Plan, as amended and restated effective January 30, 2008, provides for the payment of severance benefits to certain eligible employees, as defined in the Executive Plan (each a "Covered Employee"). Covered Employees under the Executive Plan are designated by the Executive Plan administrator, but generally are Senior Vice President level or above.
The Executive Plan provides that if the Company paid Mr. Sophie(or any parent or subsidiary of the equivalent of 6 months of regular base salaryCompany) terminates a Covered Employee's employment for other than "cause," death or "disability," or a Covered Employee terminates his or her employment with the Company for "good reason" (as such terms are defined in the Executive Plan), the Covered Employee shall receive the following severance benefits: (i) a lump sum cash payment equal to one (1) year of $220,000, less applicable withholdings. Mr. Sophie also received paymentsbase pay plus one hundred percent (100%) of the Covered Employee's target bonus 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 equivalentyear of 6termination, (ii) an amount equal to twelve (12) months of Mr. Sophie'sthe premiums for continuation coverage under COBRA premiumsof each Covered Employee (and any eligible dependents) under the Company's medical, dental and vision plans at the same level of coverage in a lump sum of $6,000, lesseffect on the severance date, (iii) the Covered Employee shall fully vest in and, if 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 optionsall of his or her outstanding and unvested equity compensation awards, and (iv) all such equity awards (including awards that vest as a result of the Executive Plan) shall be exercisable until the earliest of (a) twelve (12) months from the Covered Employee's date of termination, (b) the latest date the equity award could have expired by its original terms under any circumstances, (c) the tenth (10th) anniversary of the original date of grant of the equity award, or (d) the date provided for under the equity plan under which the award was granted.
Severance benefits payable under the terms of the Executive Plan are payable in a lump sum within thirty (30) days of the date of termination; however, if the Covered Employee is a Specified Employee within the meaning of Section 409A at the time of such termination, then the severance and benefits payable to the Covered Employee pursuant to the Executive Plan (other than due to death), if any, timeand any other severance payments or separation benefits which may be considered Deferred Compensation Separation Benefits, which are otherwise due to the Covered Employee on or within 120 days after May 5, 2006, but no later than the option expiration date.
The Severance Agreement also provides forsix (6) month period following the Covered Employee's termination will accrue during such six (6) month period and will become payable in a mutuallump sum on the date six (6) months and one (1) day following the date of the Covered Employee's termination of employment or the date of the Covered Employee's death, if earlier. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. As a condition to receiving benefits under the Executive Plan, the Covered Employee is required to sign and not revoke a waiver and release of all claims arising out of the Covered Employee's termination of employment and a nondisparagement agreement. The benefits provided under the Executive Plan are in lieu of any other severance or retention plan benefits available to the Covered Employee and shall be reduced by the Company and Mr. Sophie.any severance paid to a Covered Employee under any other plan or arrangement.
Change of Control ArrangementsProvisions in Restricted Stock Agreement
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.Equity Compensation Plans
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.
Change of Control Arrangements in 2001 Director Option Plan and 1997 Stock PlanPlan.
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 Our 1997 Plan provides that, in the event of aour proposed dissolution or liquidation, of the Company, the Board must notify each optioneeparticipant 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 optioneeparticipant 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 aour merger of the Company with or into another corporation, or the sale of substantially all of theour 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 optioneeparticipant is notified of such refusal by the Board.
In addition, both the 1997 Plan and the Director Plan (collectively, the "Plans") provide,provides, in general, that an optioneea participant 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").disability. The 1997 Plan unlike the Director Plan, allows the Post-Termination Exercise Periodpost-termination exercise period to extend beyond the default term, if the stock option agreement entered into by the Companyus and the optioneeparticipant pursuant to the 1997 Plan provides for a longer term.
Change of Control Arrangements in Under the Officer and Director Option Agreements for Use under the 1997 Stock Plan
Prior to October 28, 2005, the Board hadAgreement approved a form of stock option agreement (the "Existing Option Agreement") for use under the 1997 Plan in connection with stock option grantsawards to the Company's (i) Service Providers (as definedour directors and officers beginning in the 1997 Plan), (ii) executive officers, and (iii) directors, which provides for the default Post-Termination Exercise Period designated in the 1997 PlanDecember 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'sparticipant's status as a Service Provider or director is terminated following a Changechange of Control (as defined below),control, the optioneeparticipant 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'sparticipant's status as a Service Provider or director.
ForThe 1997 Plan was terminated in July 2006 effective upon stockholder approval of our 2006 Plan.
The 2006 Equity Incentive Plan. Our 2006 Plan provides that in the purposeevent a participant in the 2006 Plan terminates service with us and our affiliates, any options which have become exercisable prior to the time of termination will remain exercisable for three months from the date of termination, unless a shorter or longer period of time is determined by the 2006 Plan administrator. If termination was caused by death or disability, any options which have become exercisable prior to the time of termination will remain exercisable for 12 months from the date of termination, unless a shorter or longer period of time is determined by the 2006 Plan administrator. In no event may a participant exercise the option after the expiration date of the Officeroption.
In the event of our change of control, each outstanding award will be assumed or substituted by the successor corporation. In the event the successor corporation refuses to assume or substitute awards
granted under the 2006 Plan, all options and Director Option Agreement,stock appreciation rights will fully vest and become 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 becomes fully vested and exercisable in lieu of assumption or substitution in the event of a "Changechange of control, the 2006 Plan 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 2006 Plan administrator in its sole discretion, and the option or stock appreciation right will terminate upon the expiration of such period.
The change of control provisions in the 1997 Plan and 2006 Plan apply to all executive officers.
Estimated Post-Employment Payments and Benefits
Assuming the termination of employment of the Named Executive Officers took place on December 31, 2007, and based upon the price per share of our Common Stock of $2.75, the closing market price as of December 31, 2007, the estimated payments and benefits that each of the Named Executive Officers would be eligible to receive under various circumstances are set forth in the following charts. Please see the section above entitled "Employment Contracts and Severance Agreements With Named Executive Officers" under "Potential Post-Employment Payments upon Termination and Change of Control" means (i) any "person" (as such term is usedcontained in Sections 13(d) and 14(d)this Proxy Statement for detailed descriptions of the Securities Exchange Actagreements with each of 1934,the Named Executive Officers that govern post-employment payments and benefits. No payments are due in the event of voluntary termination of employment or termination of employment for "Cause" as amended)defined in the agreements described above.
Hong Liang Lu
| Involuntary Without Cause Termination | Termination upon/following Change of Control | Disability(1) | Death(2) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Base Salary ($) | $ | 1,400,000 | $ | 1,400,000 | $ | 192,000 | $ | 500,000 | ||||
Bonus ($) | $ | 700,000 | (3) | 1,400,000 | (4) | — | — | |||||
Accelerated Shares Underlying Outstanding Options ($)(5) | 0 | 0 | — | — | ||||||||
Accelerated Stock Awards ($)(5) | $ | 1,211,739 | $ | 1,211,739 | — | — | ||||||
Health Care ($) | $ | 11,847 | $ | 11,847 | $ | 11,847 | — | |||||
TOTAL: | $ | 3,323,586 | $ | 4,023,586 | $ | 203,847 | $ | 500,000 |
Francis P. Barton
| Involuntary Without Cause Termination | Termination upon/following Change of Control | Disability(1) | Death(2) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Base Salary ($) | $ | 1,500,000 | $ | 1,500,000 | $ | 192,000 | $ | 500,000 | ||||
Bonus ($) | $ | 750,000 | (3) | $ | 750,000 | (3) | — | — | ||||
Accelerated Shares Underlying Outstanding Options ($)(4) | 0 | 0 | — | — | ||||||||
Accelerated Stock Awards ($)(4) | $ | 2,011,799 | $ | 2,011,799 | — | — | ||||||
Barton Retention Agreement ($)(5) | $ | 5,912,995 | $ | 5,912,995 | $ | 5,912,995 | $ | 5,912,995 | ||||
Health Care ($) | $ | 15,642 | $ | 15,642 | $ | 15,642 | — | |||||
TOTAL: | $ | 10,190,436 | $ | 10,190,436 | $ | 6,120,637 | $ | 6,412,995 |
Mr. Barton Change of Control/Involuntary Termination Severance Agreement, or are as a result of death or Disability (as defined in the consummationRetention Agreement).
Peter Blackmore
| Involuntary Without Cause/ Good Reason Termination | Termination upon/following Change of Control | Disability(1) | Death(2) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Base Salary ($) | $ | 800,000 | $ | 1,600,000 | $ | 192,000 | $ | 500,000 | ||||
Bonus ($) | $ | 800,000 | (3) | $ | 1,600,000 | (4) | — | — | ||||
Accelerated Shares Underlying Outstanding Options ($)(5) | 0 | 0 | — | — | ||||||||
Accelerated Stock Awards ($)(5) | $ | 3,437,500 | $ | 3,437,500 | — | — | ||||||
Health Care ($) | $ | 15,642 | $ | 15,642 | $ | 15,642 | — | |||||
TOTAL: | $ | 5,053,142 | $ | 6,653,142 | $ | 207,642 | $ | 500,000 |
Philip Christopher
| Involuntary Without Cause Termination | Termination upon/following Change of Control | Disability(1) | Death | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Base Salary ($) | — | — | $ | 192,000 | $ | 500,000 | (2) | ||||
Bonus ($) | — | — | — | — | |||||||
Accelerated Shares Underlying Outstanding Options ($) | — | — | — | — | |||||||
Accelerated Stock Awards ($) | — | — | — | — | |||||||
Health Care ($) | — | — | $ | 11,256 | — | ||||||
Insurance Proceeds ($) | — | — | — | $ | 5,000,000 | (3) | |||||
TOTAL: | — | — | $ | 203,256 | $ | 5,500,000 |
David King
| Involuntary Without Cause Termination | Termination upon/following Change of Control | Disability(1) | Death(2) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Base Salary ($) | $ | 355,000 | $ | 355,000 | $ | 192,000 | $ | 500,000 | ||||
Bonus ($) | $ | 237,850 | (3) | $ | 237,850 | (3) | — | — | ||||
Accelerated Shares Underlying Outstanding Options ($)(4) | 0 | 0 | — | — | ||||||||
Accelerated Stock Awards ($)(4) | $ | 1,051,355 | $ | 1,051,355 | — | — | ||||||
Health Care ($) | $ | 11,530 | $ | 11,530 | $ | 11,530 | — | |||||
TOTAL: | $ | 1,655,735 | $ | 1,655,735 | $ | 203,550 | $ | 500,000 |
Ying Wu. Mr. Wu's employment with the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iii) the dateand its subsidiaries terminated on June 1, 2007. In connection with his termination 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"employment, Mr. Wu was paid severance benefits for involuntary termination without a change in this Proxy Statement.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consisted of Messrs. Toy and Horner throughout the 2005 fiscal year, and 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 2005 were independent directorscontrol in accordance with the applicable independence requirementsterms of the Nasdaq Marketplace Rules,Wu Severance Agreement as described above, in the amount of $998,768.83 (comprised of $550,000 in base salary, $440,000 in bonus, subject to applicable withholding, and none$8,768.83 for the balance of his health care premiums).
Indemnification Agreements
During 2007, we were employeesparty to indemnification agreements with each of our Named Executive Officers other than Messrs. Christopher and King. The form of indemnification agreement is filed as Exhibit 10.1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Policies with Respect to Review, Approval or officersRatification of Transactions with Related Persons
Our Audit Committee is responsible for review, approval or former employeesratification of "related-person transactions" between us or our subsidiaries and related persons. Under SEC rules, a related person is a director, officer, nominee for director, or 5% stockholder of UTStarcom since the beginning of the Company.last fiscal year, and his or her immediate family members. We have adopted written policies and procedures that apply to any transaction or series of related transactions in which our company or a subsidiary is a participant, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest. Pursuant to our policy, the following transactions will not be deemed to be related person transactions that require Audit Committee approval:
does not exceed the greater of $1,000,000 or two percent of that company's total annual revenues.
Related Party Transactions
During 2005, no2007, we were party to the following related party transactions under the relevant standards:
SOFTBANK CORP.
SOFTBANK CORP. is an affiliate of SOFTBANK America, Inc., one of our stockholders holding 10% or more of our Common Stock. Since the beginning of the 2007 fiscal year, we engaged, continue to engage or propose to engage in the following transactions with entities affiliated with SOFTBANK CORP.:
Audiovox
Philip Christopher, an executive officer of the Company, served onalso serves as a director of Audiovox Corporation ("Audiovox"). During 2007, the compensation committee (or equivalent) or boardCompany paid approximately $2.1 million for information technology services provided by Audiovox.
The Audit Committee reviewed and ratified each of directors of another entity whose executive officer(s) served on the Company's Compensation Committee or Board.transactions described above.
Stock Ownership Guidelines
Effective January 1, 2006, by the decision of the Nominating and Governance Committee of the Board, the Company put in place 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 pursuant to the Guidelines and as described below before the later of four years after (i) January 1, 2006 or (ii) an officer's appointment to such office or a non-employee director's appointment to the Board.
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 reviews 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 Governance Committee expects that such instances will be rare.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company'sour directors and executive officers, and persons who own more than 10% of a registered class of the Company'sour equity securities ("Section 16 Filers"), to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock and other equity securities of the Company.Stock. Such Section 16 Filers are required by SEC regulations to furnish the Companyus with copies of all Section 16(a) forms they file.
To the Company'sour knowledge, based solely on itsour review of the copies of such reports furnished to the Companyus and written representations that no other reports were required, during the fiscal year ended December 31, 2005,2007, all Section 16 Filers complied with all Section 16(a) filing requirements exceptrequirements.
10b5-1 Trading Plans
Each of our officers and directors may enter into a written plan for the following inadvertent late filings: (i) Mr. Horner filed a Form 4 on November 2, 2005 reporting one transaction late; (ii) Mr. Toy filed a Form 4 on November 2, 2005 reporting one transaction late; (iii) Mr. Clarke filed an amendment to a previously filed Form 4 on November 2, 2005 reporting one transaction late; and (iv) Mr. Wu filed a Form 5 on December 29, 2005 reporting one transaction late.
REPORT OF THE COMPENSATION COMMITTEE
Introduction
The Compensation Committeeautomatic trading 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 2005, and Mr. Lenzmeier joined the Compensation Committee on April 11, 2005.
During 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 Director for purposes of Rule 16b-3 of the Securitiessecurities in accordance with Exchange Act Rule 10b5-1. The Company may also enter into a written plan for the automatic trading of 1934, as amended, and (iii) an outside director for purposes of Section 162(m) of the Internal Revenue Code. During 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 Board of Directors relating to all compensation, including equity compensation, of the Company'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 systemsecurities in which employee compensation is tied to the performance of the Company, thereby promoting stockholder value. The Company'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'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 commensurateaccordance with the performance of both the Company as a whole and the individual executive in question. For this reason, the Company'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's profitability, the individual performance and measurable contribution to the Company'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's philosophy by providing for moderation in fixed elements of compensation, such as base salary and benefits. Base salary decisions are made as part of the Company's formal annual review process.
The amount of an executive's annual bonus generally depends on the financial performance of the Company relative to profit targets and the executive's individual performanceRule 10b5-1 with respect to any stock repurchase plan.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics ("Code of Ethics"), which applies to all employees including our principal executive officers. The Code of Ethics is designed to promote: (i) honest and ethical conduct, including the successful completionethical handling of objectivesactual or apparent conflicts of interest between personal and goals deemed by the Compensation Committeeprofessional relationships, (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we are required to be important in maximizing long-term returnfile to the Company's stockholders. The Compensation Committee reviews these targets, objectivesSEC and goals at least annually to meetin other public communications, (iii) compliance with applicable laws, rules and regulations, (iv) the changing nature of the Company'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.prompt internal
Equity-based Compensation
The Compensation Committee administers the Company's equity incentive program, pursuant to which membersreporting of management, including the Company's executive officers, may receive annual stock option grants and/or restricted stock purchase rights from a pool of shares set aside by the Company on an annual basis. The purposeviolations of the equity incentive program isCode of Ethics to provide additional incentive to executivesan appropriate person or entity, and other key employees of the Company to work to maximize long-term return(v) accountability for adherence to the Company's stockholders. The allocationCode of stock options and restricted stock purchase rightsEthics.
As a supplement to the Company's employees, other than the President and Chief Executive Officer, are recommended by the President and Chief Executive OfficerCode of Ethics, we have also adopted a Code of Ethics for approval by the Compensation Committee. The allocation of stock options and restricted stock purchase rights to the President and Chief Executive Officer is determined solely by the Compensation Committee. In granting equity 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's position and responsibilities at the Company, such executive's past and anticipated individual performance, current market survey data with respect to equity compensation practices at other peer companies in the Company's industry and the level of achievement by such executive of the performance objectives (as described below) set by the Compensation Committee. Options and restricted stock purchase rights generally vest over a four-year period to encourage executive 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's common stock increases relative to the market price at the date of grant. The restricted stock purchase rights entitle the executive 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 cash collections, (ii) achievement of corporate objectives relating to quality and organization, including improvement as to the Company's compliance efforts under Section 404 of the Sarbanes-Oxley Act of 2002, and (iii) achievement by executive officers of additional individualized performance objectives reviewed and approved by the 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 ChairmanSenior Financial Officers ("Code of Ethics for Financial Officers"), which is designed to highlight the Board. Duringlegal and ethical obligations of the fiscal year ended December 31, 2005, Mr. Lu received a base salary of $700,000 for serving as the President, Chief Executive Officer and Chairmanfinancial officers. The Code of Ethics for Financial Officers imposes upon applicable officers certain additional internal reporting requirements for acts committed in violation of the BoardCode of Ethics and/or the securities laws.
Copies of the Company. No bonus was awarded to Mr. Lu with respect toCode of Ethics and the fiscal year ended December 31, 2005. As with the other executivesCode of Ethics for Financial Officers are available on our website athttp://investorrelations.utstar.com/governance. Any waiver of the Company, Mr. Lu's compensation was determined by the Compensation Committee, based on the achievementCode of certain performance objectivesEthics or Code of the Company. Criteria considered in the determinationEthics for Financial Officers pertaining to a member of Mr. Lu's compensation included such factors as (i) the compensation provided to
chiefour Board or one of our 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'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's compensation philosophy.
will be disclosed on our website atCompliance with Internal Revenue Code Section 162(m)http://investorrelations.utstar.com/governance.
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'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 gain realized upon exercise of stock options and the vesting of restricted stock. The Company's policy is to qualify, to the extent reasonable, its executive 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's success because the Compensation Committee feels such objective is in the best interest of the Company's stockholders. Consequently, the Compensation Committee recognizes that the loss of a tax deduction may be necessary in some circumstances.
Subsequent to the annual stockholder meeting of 2004, awards granted under the Stock Plan no longer qualify as performance-based compensation for 162(m) purposes and therefore are subject to the $1,000,000 limit. Assuming the stockholders approve the 2006 Equity Incentive Plan, the Company will again be able to issue options and other forms of equity compensation that qualify as performance-based compensation for 162(m) 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's success. The Compensation Committee intends to review this program on an ongoing basis to evaluate its continued effectiveness.
The following is the report of the Audit Committee with respect to the Company's audited financial statements for the fiscal year ended December 31, 2005.2007. The information contained in this report shall not be deemed to be "soliciting material" or to be "filed" with the SEC, nor shallor subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically requests that such information be incorporatedtreated as soliciting material or specifically incorporates the information 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.1934.
Established on January 31, 1997, the Audit Committee is currently comprised of fourfive Non-Employee Directors. Mr. Horner, the Chairman of the Audit Committee, and Mr.Messrs. Clarke, Lenzmeier and Toy served on the Audit Committee throughout 2005.2007. Mr. Clarke joinedRyan was appointed to 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" and has accounting or related financial management expertise. The Board also determined that each of Messrs. Horner, Clarke and Lenzmeier is an "audit committee financial expert" as defined by SEC rules through his business and professional experience.
effective April 25, 2008. The purpose of the Audit Committee is to assist the Board of Directors in its general oversight of the Company'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's independent registered public accounting firm.
The Audit Committee reviews the results and scope of audit and other services provided by the Company's independent auditorsregistered public accounting firm and reviews the accounting principles and auditing practices and procedures to be used in the Company'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's independent registered public accounting firm for the last fiscal year, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), is responsible for performing an independent audit of those financial statements. As more fully explained in the Audit Committee's charter, the Audit Committee'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'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's financial statements.
The Audit Committee held 30 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, 2005. The Audit Committee hasand 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's financial statements, PricewaterhouseCoopers has the responsibility for auditing management'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's assessment of the Company'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's internal control over financial reporting. The Audit Committee reviewed this report of management and Item 9A, "Control and Procedures," contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20052007 filed with the SEC, as well as PricewaterhouseCoopers' report of independent registered public accounting firm (included in the Company's Annual Report on Form 10-K) relating to its audit of (i) the consolidated financial statements (ii) management's and the independent 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's completed, current and planned initiatives to remediate material weaknesses in the Company'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's Chief Executive Officer and Chief Financial Officer that are required by the SEC and the Sarbanes-Oxley Act to accompany the Company's periodic filings with the SEC.
In addition, the Audit Committee has reviewed and discussed the audited financialsfinancial statements with PricewaterhouseCoopers, including such items as Statement on Auditing Standards No. 61, and PCAOB Auditing Standard No. 2, "An"Communication with Audit of Internal Control Over Financial Reporting Conducted in Conjunction with an Audit of Financial Statements.Committees," as adopted by the Public Company Accounting Oversight Board. The Audit Committee has also received from the independent registered public accounting firm,
PricewaterhouseCoopers, a letter and otherthe written disclosures and the letter required underby Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees," as adopted by the Public Company Accounting Oversight Board, and the Audit Committee has had discussionsdiscussed with PricewaterhouseCoopers regarding the independence of PricewaterhouseCoopers as the Company'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 ended December 31, 2007 be included in the Company's Annual Report on Form 10-K.
The Audit Committee*
Larry D. Horner,Chairman
Jeff Clarke
Allen Lenzmeier
Thomas J. Toy
PROPOSAL NO. 2APPROVAL OF THE 2006 EQUITY INCENTIVE PLAN
The stockholders are being asked to approve a new employee equity incentive plan, the 2006 Equity Incentive Plan (the "Incentive Plan"). The Company's 1997 Plan is set to expire in January 2007. The Company also maintains the Director Plan and the 2003 Nonstatutory Stock Option Plan (the "2003 Plan"). The Board has approved the Incentive Plan, subject to approval from the stockholders at the Annual Meeting. If 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.
The Board believes that long-term incentive compensation programs align the interests of management, employees and the stockholders to 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, by allowing for several different forms of long-term incentive awards, which the Board believes will help the Company to recruit, reward, motivate and retain talented personnel. The recent changes in the equity compensation accounting rules, which became effective for the Company on January 1, 2006, also make it important for the Company 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 equity compensation vehicles other than stock options.
The Board believes strongly that the approval of the Incentive Plan is essential to the Company's continued success. In particular, the Company believes that its employees are its most valuable assets and that the awards permitted under the Incentive Plan are vital to the Company's ability to attract and retain outstanding and highly skilled individuals in the extremely competitive labor markets in which it competes. Such awards also are crucial to the Company's ability to motivate employees to achieve the Company's goals.
Vote Required; Recommendation of the Board of Directors
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.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE ADOPTION OF THE 2006 EQUITY INCENTIVE PLAN AND THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER.
Summary of the 2006 Equity Incentive Plan
The following is a summary of the principal features of the Incentive Plan and its operation. The summary is qualified in its entirety by reference to Incentive Plan itself set forth in Annex A.
The Incentive Plan provides for the grant of the 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 "Award," collectively, "Awards"). Those 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 have 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 or 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 Administrator determines the number of shares 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 option to purchase up to an additional 2,000,000 shares.
The Administrator determines the exercise price of options granted under the Incentive 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. The Administrator will be able to grant stock appreciation 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 granted under the Incentive Plan, provided, however, that the exercise price may not be less than 100% of the fair market value of a share on the date of grant and the term 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 an employee with the Company.
After termination of service with 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 following his or her termination due to death or disability. In no event will a stock appreciation right be exercised later than the expiration of its term.
Restricted Stock. Awards of restricted stock are rights to acquire or purchase shares of the Common Stock, which vest in accordance with the terms 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 generally grant the Company a right to repurchase or reacquire the shares upon the termination of the participant's service with the Company for any reason (including death or disability). The Administrator will determine the number of shares 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 Company.
Restricted Stock Units. Awards of restricted stock units result in a payment to a participant only if the 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 Administrator, 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 forfeited to the Company. The Administrator determines the number of restricted
stock units granted to any participant, but during any fiscal year of the Company, 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. Performance shares will have an initial value equal to the fair market value of a share of the Common Stock on the grant date.
Performance Goals. Awards of restricted stock, restricted stock units, performance shares, performance units and other incentives under the Incentive 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 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 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
marital 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. The Administrator will have the authority to amend, alter, suspend or terminate the Incentive Plan, except that stockholder approval will be required for any 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 will terminate in June 2016, unless the Board terminates it earlier.
Number of Awards Granted to Employees, Consultants, and Directors
Number of Awards Employees, Directors or Consultants Would Have Received since January 2005 to March 2006 under the Incentive Plan
If the Incentive Plan were in place last year, its terms would not have resulted in a different number of Awards being granted between the beginning of 2005 to March 31, 2006. The following table sets forth (i) the aggregate number of shares of Common Stock subject to options granted under the 1997 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 1997 Plan during this period, and (iv) the dollar value of such shares based on $7.64 per share.
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 | — | — |
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.
Number of Awards Non-Employee Directors May Receive in 2006 under the Incentive Plan
The number of Awards that an employee or consultant may receive under the Incentive Plan in 2006 is in the discretion of the Administrator and therefore cannot be determined in advance.
Federal Tax Aspects
The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of Awards granted under the Incentive Plan. Tax consequences for any particular individual may be different.
Nonstatutory Stock Options. No taxable income is reportable when a nonstatutory stock option 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 excess of the fair market value (on the exercise 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 any later disposition of the shares would be capital gain or loss.
Incentive Stock Options. 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 participant 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 participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two- or one-year holding periods described above, he or she generally will have 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.
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 recognized upon any later disposition of the shares would be capital gain or loss.
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares. A participant generally will not have taxable income at the time an Award of restricted stock, restricted stock units, performance shares or performance units 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 he or she receives the Award in an amount equal to the fair market value of the shares underlying the Award (less any cash paid for the shares) on the date the Award is granted.
Tax Effect for the Company. The Company generally will be entitled to a tax deduction in connection with an Award under the Incentive Plan in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to the Company's Chief Executive Officer and to each of its four most highly compensated executive officers. Under Section 162(m) of the Internal Revenue Code, the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, the Company can preserve the deductibility of certain compensation in 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 Awards that any individual may receive and for Awards other than certain stock options, establishing performance criteria that must be met before the Award actually will vest or be paid. The Incentive Plan has been designed to permit the Administrator to grant Awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m),
thereby permitting the Company to continue to receive a federal income tax deduction in connection with such Awards.
Section 409A. Section 409A of the Internal Revenue Code, which was added by the American Jobs Creation Act of 2004, provides certain new requirements on non-qualified deferred compensation arrangements. These include new requirements with respect to an individual's election to defer compensation and the individual's selection of the timing 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 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 granted under the Plan with a deferral feature will be subject to the requirements of Section 409A. If an Award is subject to and fails to satisfy 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, accordingly, the requirements of Section 409A (and the application of those requirements to Awards issued under the Plan) are not entirely clear.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT 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 INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
PROPOSAL NO. 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, to audit the financial statements of the Company for the fiscal year ending December 31, 20062008 and recommends that the stockholders ratify this selection. PricewaterhouseCoopers LLP also audited the Company's financial statements for its fiscal year ended December 31, 2005.2007. 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's Independent Public Accounting Firm is not required by the Company's 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 the Company's independent registered public firm, the Audit Committee and the Board will consider whether to retain that firm for the year ended December 31, 2006.2008. 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 anytimeany time 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 the Fiscal YearYears Ended December 31, 20052007 and 2006
Audit Fees
FeesThe aggregate fees billed for professional accounting services by PricewaterhouseCoopers LLP 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 $8,424,000.
Audit-Related Fees
Audit-related fees were $1,000,000 and $773,000 for fiscal years ended December 31, 20052007 and December 31, 2004, respectively. Such2006 are as follows:
| Fiscal Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
Audit Fees(1) | $ | 11,029,000 | $ | 16,253,000 | |||
Audit-Related Fees(2) | 274,000 | 0 | |||||
Tax Fees(3) | 22,000 | 26,000 | |||||
All Other Fees(4) | 3,000 | 3,000 | |||||
Total Fees | $ | 11,328,000 | $ | 16,282,000 | |||
Tax Fees
During the fiscal year ended December 31, 2005, fees related tobilled for professional services for tax compliance, tax advice compliance and planning were $275,000. For the fiscal year ended December 31, 2004tax planning.
All Other Fees
Other fees during the year ended December 31, 2005 totaled $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 to us by PricewaterhouseCoopers LLP of non-audit services to us in 2005as listed above is compatible with PricewaterhouseCoopers LLP maintaining its independence.
Audit Committee Pre-Approval Policies and Procedures
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.us. 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'sour independent registered public accountantsaccounting firm in amounts not to exceed $50,000 per engagement. Non-audit services to be performed by the Company'sour independent registered public accounting firm in amounts to exceed $50,000 per engagement will be approved by the Audit Committee. For the fiscal year 2005,2007, 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" 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, 20062008 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.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.FIRM.
COMPANY'SPROPOSAL NO. 3
APPROVAL OF A STOCK PERFORMANCEOPTION EXCHANGE PROGRAM FOR EMPLOYEES
(EXCLUDING EXECUTIVE OFFICERS AND DIRECTORS)
Set forth below is a line graph comparing the annual percentage change The Board of Directors has determined that it would be in the cumulativebest interests of the Company and our stockholders to implement a one-time stock option exchange program, as described in detail below, subject to stockholder approval. The option exchange program would permit eligible employees to exchange their outstanding options issued under our 1997 Stock Plan with exercise prices equal to or greater than $6.00 per share for a lesser number of new options to be granted under our 2006 Equity Incentive Plan (the "2006 Plan"). The new options would have an exercise price equal to the closing sales price of our common stock as quoted by NASDAQ on the date of the new grant, or "fair market value." Our executive officers and directors would not be eligible to participate in the exchange program and do not stand to gain from the program other than in their general capacity as stockholders.
In order to alleviate possible concerns of stockholders regarding the number of shares of our common stock that may become available for future grants of equity awards under our 2006 Plan as a result of the option exchange program, contingent upon stockholder approval of the program, the Board has approved:
The Board believes the option exchange program would enhance long-term stockholder value by improving our ability to incentivize and retain our non-executive employees, as well as reducing the Company's equity award "overhang" (that is, the number of shares subject to outstanding equity awards relative to the total number of shares of our common stock outstanding) through the cancellation of outstanding options that currently provide no meaningful retention or incentive value to our employees.
Stockholder approval is required for the option exchange program under the listing rules of the NASDAQ Global Select Market. Therefore, the Company is seeking stockholder approval to allow for this one-time option exchange under the 1997 Stock Plan and the 2006 Plan. We would seek stockholder approval for any future option exchange or similar program before implementing it.
Required Vote
We must receive an affirmative vote of a majority of the total number of shares present in person or represented by proxy and entitled to vote on the proposal at the Annual Meeting in order for this proposal to be approved.
Reasons for the Option Exchange Program
Equity awards have been, and continue to be, a key part of our incentive compensation and retention programs and are designed to motivate and reward employees' efforts. We believe that to develop and market our products, we need to maintain competitive employee compensation and incentive programs.
Prior to 2005, over 90% of the Company's Common Stockrevenues and profits were derived from sales in China of a second generation ("2G") wireless technology system. In the latter half of 2004, it was widely believed by companies engaged in the Chinese telecommunications market that the Chinese government would begin issuing licenses for the sale of third generation ("3G") wireless technologies in early 2005. In anticipation of such action by the Chinese government, our operator customers dramatically reduced their 2G capital expenditures. At the same time, with the cumulative returnintention of replacing our 2G revenues, we developed a full suite of 3G products to sell in China and also initiated a capital intensive strategy of global diversification. The Chinese government, however, never issued the expected 3G licenses, thus preventing us from selling any of our 3G products, and our global diversification has yet to yield results sizeable enough to offset the decline in China. We believe our stock price, which has fallen significantly over the past few years, reflects, among other things, the dramatic reduction in our China sales.
As a result of our stock price decline, most of our employees who have been granted stock options are holding options that are substantially "underwater" (meaning the exercise prices of the Nasdaq composite (U.S. and foreign) index andoptions are higher than the S&P Wireless Telecommunication Services index for the period commencing on December 29, 2000 and ending on December 31, 2005. The information contained in the performance graph shall not be deemed to be "soliciting material" or to be "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 was invested on December 29, 2000 in the Company's Common Stock and in each index (based on the sales closingcurrent market price of $15.50 per share on December 29, 2000), and that all dividends were reinvested. No cash dividends have been declared or paid on the Company's Common Stock. Stockholder returns over the indicated period should not be considered indicativeour common stock). The weighted average exercise price of future stockholder returns. The Company operates on a 52-week fiscal year that ended on Friday, December 31, 2005. Under the assumptions stated above, over the period from December 29, 2000 to December 31, 2005 the total return on an investment in the Company would have been -48.00%options held by our non-executive employees was $14.47 as compared to 4.53%a $2.69 closing price on March 26, 2008 for the Nasdaq composite (U.S. and foreign) index and -10.05% for the S&P Wireless Telecommunication Services index shown below.
STOCK PRICE PERFORMANCE GRAPH FORUTSTARCOM, INC.COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*AMONG UTSTARCOM, INC., THE NASDAQ STOCK MARKET (U.S. & FOREIGN) INDEXAND THE S & P WIRELESS TELECOMMUNICATION SERVICES INDEX
| 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 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indemnification Agreements
During 2005, the Company was party to indemnification agreements with certain of its directors and executive officers.
SOFTBANK CORP. is an affiliate of SOFTBANK America, Inc., oneMarch 26, 2008, approximately 99% of the Company's significantoutstanding options held by non-executive employees were underwater. These underwater options do not currently provide meaningful retention or incentive value to our employees, while nevertheless creating an overhang to our stockholders of approximately 10 million shares.
When considering how best to retain and provide incentives to our employees holding underwater options, we considered several alternatives, including increasing cash compensation and/or granting additional equity awards. Increasing cash compensation would substantially increase our compensation expenses and reduce our cash flow from operations. Granting additional stock options at current market prices or restricted stock units would substantially increase our overhang and cause dilution to our stockholders. Since
We then considered a stock option exchange program. We determined that a program under which non-executive employees could exchange underwater options for a lesser number of options with an exercise price equal to the beginningcurrent fair market value of the 2005 financial year,shares covered by the Company has engaged, continues to engage or proposes to engage inoptions was most attractive for a number of reasons, including the following transactions with entities affiliated with SOFTBANK CORP.:following:
substantially underwater options do not have sufficient impact on employee motivation and retention, and that for our employee stock options to serve their intended purposes, they need to be exercisable at least near the current price of our common stock. The failure to address the underwater option issue in the near to medium term will make it more difficult for us to retain our key employees. If we cannot retain these employees, our business, results of operations and future stock price could be adversely affected.
Starcom Products, Inc.
Yulan Wu,Furthermore, in connection with the spouseoption exchange program we are able to correct certain 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 2005
and during the period from January 2006 to March 2006, the Company paid Starcom Products approximately $0.7 million for engineering consulting and employee placement services.
Acoustek Int'l Corp.
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.
2006 Executive Officer Equity Grants
On February 28, 2006, the Compensation Committee granted stockoutstanding 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 |
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 equalslower than 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.
2006 Director Compensation
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 offair 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 |
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 |
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 pricevalue of the Company's common stock on the Nasdaq Stock Marketdates the options were granted. These "discount options," if not corrected, possibly could subject some of our U.S. employees to adverse federal tax consequences under Section 409A of the Internal Revenue Code of 1986, as amended ("Section 409A") and possibly other state tax laws. Among the underwater options held by our non-executive employees as of March 26, 2008, options covering approximately 1 million shares had been granted at a discount to fair market value. As part of the option exchange program, non-executive employees with discount options would be permitted to amend their outstanding options to correct the exercise prices (that is, increase the exercise price of the discount option to the fair market value of the underlying shares on April 27, 2006. The restricted stock purchase rights, as preapproved by the Board, will entitledate of grant), thus eliminating the Non-Employee Directorspotential Section 409A issue. Corrected discount options would then be eligible to purchasebe exchanged for new options.
Description of 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.Option Exchange Program
Eligible Employees
Effective January 1, 2007, Mr. Toy, currently a Non-Employee DirectorFor purposes of the option exchange program, we refer to all employees of the Company and its subsidiaries (but excluding our executive officers and directors), residing in a country in which the Company has employees holding underwater options covering 100,000 or more shares in the aggregate, as "eligible employees." Participation in the program would be voluntary. As of March 26, 2008, there were approximately 2,470 eligible employees. The Compensation Committee will assumehave the positionauthority to exclude employees in the non-U.S. jurisdictions if it determines that local law or other constraints makes the participation of Chairmanemployees in a certain country infeasible or impractical.
Eligible Options
The only options that eligible employees may exchange in the option exchange program are those outstanding options granted prior to July 15, 2006 and having an exercise price greater than or equal to $6.00 per share. As of the Board. To promoteMarch 26, 2008, eligible employees were holding eligible options (including discount options) to purchase approximately 10 million shares of our common stock, with a weighted average exercise price of $14.64 per share and facilitate a smooth transitionweighted average remaining term 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 addition6.2 years. Notwithstanding anything 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.
Severance Benefits
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 describedcontrary above, in the Severance Agreement).event that our 52-week common stock closing price high exceeds $6.00 at the time we commence the tender offer, the Compensation Committee will increase the price threshold for stock options eligible for the option exchange program to exclude
outstanding options with an original exercise price lower than then current 52-week stock price high. In addition, the Company paidprogram will require an employee holding a discount option to first elect to amend the approximate equivalentoption to correct the exercise of six (6) months of Mr. Sophie's COBRA premiums in a lump sum of $6,000, less applicable withholdings.
Pursuantprice before then allowing the employee to elect to exchange the amended option pursuant to the terms of the Severance Agreement, Mr. Sophie'sprogram. All eligible options that are not exchanged will remain outstanding and in effect in accordance with their existing terms.
Exchange Ratio
The option exchange program is not a one-for-one exchange. Participants surrendering outstanding options will receive new options covering a lesser number of shares than are covered by the surrendered options. The number of shares underlying an eligible option that is surrendered in the exchange in order to receive 1 share underlying the new option is referred to as the "exchange ratio." The proposed exchange ratio for a surrendered option, including any discount option, would depend on the original exercise price of the surrendered option, with the result rounded to the nearest whole number.
Shown in the table below are the exchange ratios that we intent to use in the option exchange program based upon assumptions and various calculations, described in more detail below, performed on March 27, 2008, using data available as of March 26, 2008:
If the Exercise Price of an Eligible Option is: | The Exchange Ratio is: | |
---|---|---|
$ 6.00-10.00, then | 2.4-for-1 | |
$10.01-15.00, then | 5.3-for-1 | |
$15.01-20.00, then | 7.8-for-1 | |
$20.01-25.00, then | 13.0-for-1 | |
Greater than $25.00, then | 15.0-for-1 |
For example, if an employee surrenders an eligible option to purchase 5,000 shares with an exercise price of $20.00 per share, that employee would receive a new option to purchase 641 shares (that is, 5,000 divided by 7.8, with the result rounded to the nearest whole number, equals 641).
The exchange ratios shown in the table above were designed to result in the issuance of new options with a fair value for financial accounting purposes approximately equal to the fair value of the options surrendered in the exchange. We calculated the fair value of the eligible options using the Black-Scholes option valuation model. For this purpose, we used the following factors:
(i) original exercise price,
(ii) assumed value of $2.69 per share of our common stock (the closing price as of March 26, 2008),
(iii) expected volatility of our common stock of 62.9%,
(iv) a term equal to the lesser of (A) the remaining contractual life of the stock option and (B) a fixed expected term of 3.5 years,
(v) risk-free rates between 0.37% and 3.34%, and
(vi) no expected dividends.
We then established the five exchange ratios set forth above based on the average Black-Scholes value of the eligible options having exercise prices within a specified range for each ratio, as compared to the Black-Scholes value of one share of our common stock underlying an option to be issued in the option exchange program.
The following table summarizes information regarding the options eligible for exchange in the program, as of March 26, 2008:
Exercise Price of Eligible Options | Number of Shares Underlying Eligible Options | Weighted Average Price of Eligible Options ($) | Weighted Average Remaining Term of Eligible Options (Years) | Exchange Ratio | Maximum Number of New Options that May be Granted Upon Surrender of Eligible Options | |||||
---|---|---|---|---|---|---|---|---|---|---|
Greater than or equal to $6.00 per share, but less than $10.01 per share | 4,304,231 | 6.56 | 7.2 | 2.4-for-1 | 1,793,414 | |||||
Greater than or equal to $10.00 per share, but less than $15.01 per share | 1,568,115 | 12.05 | 5.5 | 5.3-for-1 | 295,891 | |||||
Greater than or equal to $15.01 per share, but less than $20.01 per share | 980,467 | 18.31 | 4.8 | 7.8-for-1 | 125,686 | |||||
Greater than or equal to $20.01 per share, but less than $25.01 per share | 821,306 | 21.16 | 3.5 | 13.0-for-1 | 63,155 | |||||
Greater than or equal to $25.01 | 2,243,931 | 27.95 | 5.4 | 15.0-for-1 | 149,569 | |||||
TOTAL: | 9,918,050 | 14.64 | 6.2 | 2,427,715 |
If the market price of our common stock prior to the commencement of the option exchange program has increased or decreased such that the exchange ratios set forth above would no longer result in the issuance of new options with an aggregate fair value for financial accounting purposes approximately equal to the aggregate fair value of the options eligible for exchange, the Compensation Committee will have the discretion to adjust the exchange ratios accordingly.
Term and Vesting Schedule
The new options will expire on the same dates as the options they replace, subject to a maximum term of 7 years. The new options will have a vesting schedule that depends upon the remaining term of the original eligible option being surrendered as shown in the table below:
If the Remaining Term of the Original Eligible Option is: | Then Vesting for the New Option is: | |
---|---|---|
More than 2 years from the date of the option exchange | 50% of the shares covered by the new option will vest on the first anniversary of the option exchange, and the remaining 50% of the shares covered by the new option will vest on the second anniversary of the option exchange, assuming continued service to the Company through the vesting dates. | |
Less than 2 years from the date of the option exchange | 100% of the shares covered by the new option will vest on the first anniversary of the option exchange, assuming continued service to the Company through the vesting date. |
Notwithstanding the foregoing, in no event will a new option vest sooner than provided in the vesting schedule of the original eligible option it replaces. As of March 26, 2008, approximately 77% of the shares covered by the eligible options already were vested.
Implementing the Option Exchange Program
We have not commenced the option exchange program and will not do so unless our stockholders approve this proposal. If the Company receives stockholder approval of the program, the program may commence at a time determined by the Company, with terms expected to be materially similar to those described in this proposal. However, even if the stockholders approve the program, the Board may still later determine not to implement the program. It is currently anticipated that the program will commence as promptly as practicable following approval of this proposal by our stockholders; provided, however, that if the program does not commence within six months of stockholder approval, the Company will not commence the program without again seeking and receiving stockholder approval.
Upon the commencement of the option exchange program, employees holding eligible options would receive written materials explaining the precise terms and timing of the program (an "offer to exchange"). Employees would be given at least 20 business days to elect to exchange some or all of their eligible options. Employees with discount options would be required to first elect to have the exercise prices of their outstanding options corrected before being permitted to exchange their current options for new options. Employees would make these elections by filling out an election form which would be distributed to them as part of the offer to exchange and submitting the form to the Company's designated representative within the 20 business day period (or such longer period as we choose to keep the offer open). After the offer to exchange is closed, discount options submitted for the exchange would be amended to correct the original exercise price and then all eligible options that were not vestedsurrendered for exchange would be cancelled, and the Compensation Committee would approve the grants of the new, replacement options in accordance with the applicable exchange ratio. All new options will be granted under the 2006 Plan, as amended according to this proposal. Regardless of May 5,the type of option being surrendered, all new options granted pursuant to the option exchange program will be non-qualified stock options.
At or before commencement of the option exchange program, we would file the offer to exchange with the Securities and Exchange Commission (the "SEC") as part of the tender offer statement on Schedule TO. Employees, as well as stockholders and members of the public, would be able to obtain the offer to exchange and other documents we file with the SEC free of charge from the SEC's website at www.sec.gov.
Amendments to the 2006 were canceledPlan
Currently, the 2006 Plan provides that all shares subject to cancelled or terminated. Mr. Sophiesurrendered options under the 1997 Stock Plan would become available for future grants under the 2006 Plan. In the event that the stockholders approve the option exchange program, the Board will haveamend the 2006 Plan to provide that no more than 3.2 million shares of our common stock would return to the 2006 Plan share reserve as a direct result of the surrender of outstanding options pursuant to the option exchange program. This amendment would limit the potential future dilution to the stockholders as a result of shares being returned to the share reserve as a result of the cancellation of surrendered eligible options pursuant to the program.
Also, in the event that the stockholders approve the option exchange program, the Board will amend the 2006 Plan to provide that shares subject to awards granted, after the time of the amendment, with an exercise price less than the fair market value on the date of grant (such as restricted stock unit awards) will count against the share reserve as 1.33 shares for every one share subject to such an award. To the extent that a share that was subject to an award that counted as 1.33 shares against the plan share reserve pursuant to the preceding sentence is returned to the plan, the plan reserve will be credited with 1.33 shares that will thereafter be available for issuance under the plan. Currently, all grant types count against the share reserve as 1 share for every 1 share subject to the award. This amendment would limit the potential future dilution to stockholders as a result of the
Company granting certain awards (such as restricted stock units) as opposed to stock options granted with exercise prices equal to fair market value.
Lastly, the 2006 Plan would be amended to provide that any grant of a stock appreciation right to exercise vested options at any time within 120 days after May 5, 2006, but("SAR") will expire no later than 7 years after the date of grant. Currently, the 2006 Plan places no expiration date limit on the plan's administrator with respect to grants of SARs. There are no SARs currently outstanding under the 2000 Plan.
Burn Rate Policy
In the event that the stockholders approve the option expiration date.exchange program, the Board will adopt a burn rate policy committing us to limit the number of shares of our common stock that we may use for equity compensation over our next three fiscal years (that is, fiscal 2008, 2009 and 2010). For this three-year period, we would be required to limit the number of shares that we grant subject to equity awards to an average of 4.80% of our outstanding common stock. Thus, while we may exceed the 4.80% burn rate in a given year, the policy would require that our three-year average not exceed 4.80%. Awards that are settled in cash, awards sold under our employee stock purchase plan, awards assumed in acquisitions and any awards granted in connection with our option exchange program will be excluded from our burn rate calculation. For purposes of our calculation, each share subject to a full value award (such as a restricted stock unit, performance share, performance unit and any other award that does not have an exercise price per share equal to the per share fair market value of our common stock on the grant date) will be counted as 1.5 shares.
U.S. Federal Income Tax Consequences
The Severance Agreementfollowing is a summary of the anticipated material United States federal income tax consequences of participating in the option exchange program. A more detailed summary of the applicable tax considerations to participants will be provided in the offer to exchange. The tax consequences of the program are not entirely certain, however, and the Internal Revenue Service is not precluded from adopting a contrary position, and the law and regulations themselves are subject to change. All holders of eligible options are urged to consult their own tax advisors regarding the tax treatment of participating in the program under all applicable laws prior to participating in the program. We believe the exchange of eligible options for new options pursuant to the program should be treated as a non-taxable exchange and neither we nor any of our employees should recognize any income for U.S. federal income tax purposes upon the surrender of eligible options and the grant of new options. Additionally, as all new options will be non-qualified stock options, an individual's tax treatment upon exercise of the new options may differ from the treatment otherwise applicable to the surrendered eligible options. The tax consequences for participating non-U.S. employees may differ from the U.S. federal income tax consequences described in the preceding sentences.
Potential Modification to Terms of Option Exchange Program to Comply with Governmental Requirements
The terms of the option exchange program will be described in an offer to exchange that will be filed with the SEC. Although we do not anticipate that the SEC would require us to materially modify the program's terms, it is possible that we will need to alter the terms of the program to comply with comments from the SEC. Changes in the terms of the program may also providesbe required for tax purposes for participants in the United States as the tax treatment of the program is not entirely certain. In addition, we intend to make the program available to our employees who are located in certain countries outside of the U.S. where permitted by local law and where we determine it is feasible and practical to do so. It is possible that we may need to make modifications to the terms offered to employees in countries outside the U.S. to comply with local requirements, or for tax or accounting reasons. The Compensation Committee will retain the discretion to make any such necessary or
desirable changes to the terms of the program for purposes of complying with comments from the SEC or optimizing the U.S. or foreign tax consequences.
Potential Modification to Terms of Option Exchange Program Due to Changing Circumstances
The Board authorized its Compensation Committee to adjust the threshold for options eligible to participate in the option exchange program if there is a mutual releasesignificant change in the market price for our common stock preceding the commencement of claimsthe program to ensure the intent of the program is realized; however, any changes will preserve the general terms and eligibility requirements of the program discussed in this proposal. Our Compensation Committee will retain the discretion to adjust the exchange ratios if there is a significant change in the market price of our common stock preceding the commencement of the program in comparison to the market price used in determining the exchange ratios set forth in the table in this proposal. If our Compensation Committee does adjust the exchange ratios, it will do so with the intent of causing the offer to exchange to result in the issuance of new options having a fair value approximating the fair value of the stock options surrendered, determined using the same valuation methodologies as were used to determine the exchange ratios set forth in this proposal.
Financial Accounting Consequences
Effective January 1, 2006, we adopted the provisions of Financial Accounting Standards Board Statement No. 123 (Revised), "Share-Based Payment," ("SFAS 123(R)") for our share-based compensation plans. Under SFAS 123(R), to the extent the fair value of each award of stock options granted pursuant to the option exchange program exceeds the fair value of the surrendered options, such excess is considered incremental compensation. This excess, in addition to any remaining unrecognized expense for the eligible options surrendered in exchange for the new options, will be recognized by the Company as an expense for compensation. This expense will be recognized ratably over the vesting period of the new options in accordance with the requirements of SFAS 123(R). In the event that any awards of new options are forfeited prior to their vesting due to termination of an employee's service, the compensation cost related to the forfeited stock options will not be recognized.
Program Participation
Because the decision whether to participate in the option exchange program is completely voluntary, we are not able to predict who or how many eligible employees will elect to participate, how many stock options will be surrendered for exchange or the number of new options that may be issued.
Effect on Stockholders
We are unable to predict the precise impact of the option exchange program on our stockholders because we are unable to predict how many or which eligible employees will exchange their eligible options. The program was designed in aggregate to be substantially value neutral to our stockholders and Mr. Sophie.to reduce the dilution in ownership from outstanding equity awards. The following table
summarizes the effect of the program, assuming all eligible options were exchanged, as of March 26, 2008:
| Prior to the Exchange: | Following the Exchange: | ||
---|---|---|---|---|
Shares of Common Stock Outstanding | 124,799,129 | 124,799,129 | ||
Shares Covered by All Outstanding Options (including options held by all employees, executive officers and directors) | 16,647,643 with a weighted average exercise price of $13.36 and a weighted average remaining term of 6.07 years | 9,157,308 with a weighted average exercise price of $9.20 (assuming an exercise price of $2.69 for the new options granted in the exchange) and a weighted average remaining term of 5.80 years | ||
Shares Covered by All Outstanding Full Value Awards (that is, outstanding restricted stock units and unvested restricted stock awards) | 9,682,018 | 9,682,018 | ||
Shares Available for Future Award Grants Under the 2006 Plan* | 2,441,671 | 5,641,671 |
If you are both a stockholder and an employee holding eligible options, please note that voting to approve the option exchange program does not constitute an election to participate in the program.
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THE APPROVAL OF THE OPTION EXCHANGE PROGRAM.
TheTo the knowledge of the Company, knows of no other mattersaction is to be submittedtaken on any matter not specifically referred to in this Proxy Statement at 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/FRANCIS P. BARTON Francis P. Barton Executive Vice President and Chief Financial Officer | ||
Dated: |
ANNEX A
Proxy—UTSTARCOM, INC.2006 EQUITY INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Plan are:
The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares and other stock or cash awards as the Administrator may determine.
2. Definitions. As used herein, the following definitions will apply:
(a) "Administrator" 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's or a business unit's net sales for the Performance Period, determined in accordance with generally accepted accounting principles; provided, however, that prior to the Performance Period, the Administrator shall determine whether any significant item(s) shall be excluded or included from the calculation of Annual Revenue with respect to one or more Participants.
(d) "Applicable Laws" means the requirements relating to the administration of equity-based awards 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.
(e) "Award" means, individually or collectively, a grant under the Plan of Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares and other stock or cash awards as the Administrator may determine.
(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.
(g) "Board" 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" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities;
(ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company's assets;
(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" 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) "Code" 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) "Committee" 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 Company.
(m) "Company" means UTStarcom, Inc., a Delaware corporation, or any successor thereto.
(n) "Consultant" means any person, including an advisor, engaged by the Company or its 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 by 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.
(r) "Disability" 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.
(s) "Earnings Per Share" means as to any Performance Period, the Company's Net Income or a business unit's Pro Forma Net Income, divided by a weighted average number of Shares outstanding and dilutive common equivalent Shares deemed outstanding.
(t) "Employee" means any person, including Officers and Directors, employed by the Company or its Affiliates. Neither service as a Director nor payment of a director's fee by the Company will be sufficient to constitute "employment" by the Company.
(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 as 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, the value of the Common Stock will be determined by the Administrator in good 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 Performance Period, the income after taxes of the Company determined in accordance with generally accepted accounting principles, provided that prior to the 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.
(z) "New Orders" means as to any 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'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) "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.
(cc) "Operating Profit" means as to any Performance Period, the difference between revenue and related costs and expenses, excluding income derived from sources other than regular activities and before income deductions.
(dd) "Option" means a stock option granted pursuant to the Plan.
(ee) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code.
(ff) "Participant" means the holder of an outstanding Award.
(gg) "Performance Goals" will have the meaning set forth in Section 11 of the Plan.
(hh) "Performance Period" means any Fiscal Year of the Company or such other period as determined by the Administrator in its sole discretion.
(ii) "Performance Share" means an Award denominated 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.
(jj) "Performance Unit" means an Award which 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 combination of the foregoing pursuant to Section 10.
(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.
(ll) "Plan" means this 2006 Equity Incentive Plan.
(mm) "Pro Forma Net Income" means as to any 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 Performance Period.
(oo) "Restricted Stock" means Shares issued pursuant to an Award of Restricted Stock under Section 8 of the Plan, or issued pursuant to the early exercise of an Option.
(pp) "Restricted Stock Unit" means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 9. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.
(qq) "Return on Designated Assets" means as to any 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.
(rr) "Return on Equity" means, as to any Performance Period, the percentage equal to the value of the Company's or any business unit's common stock investments at the end of such Performance Period, divided by the value of such common stock investments at the start of such Performance Period, excluding any common stock investments so designated by the Administrator.
(ss) "Return on Sales" means as to any Performance Period, the percentage equal to the Company's Net Income or the business unit's Pro Forma Net Income, divided by the Company's or the business unit's Annual Revenue.
(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.
(uu) "Section 16(b)" means Section 16(b) of the Exchange Act.
(vv) "Service Provider" means an Employee, Director or Consultant.
(ww) "Share" means a share of the Common Stock, as adjusted in accordance with Section 14 of the Plan.
(xx) "Stock Appreciation Right" means an Award, granted alone or in connection with an Option, that pursuant to Section 7 is designated as a Stock Appreciation Right.
(yy) "Subsidiary" means a "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.
(a) Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of Shares that may be awarded and sold under the Plan is 4,500,000 Shares plus (i) any Shares that, as 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 (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) any Shares subject to stock options or similar awards granted under the 1997 Plan, the 2001 Plan, and the 2003 Plan that expire or otherwise terminate without having been exercised in full and Shares issued pursuant to awards granted under the 1997 Plan,
the 2001 Plan, and the 2003 Plan that are forfeited to or repurchased by the 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 or Performance Units, is forfeited to or 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 under any Award will not be returned to the 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 will not become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding the foregoing and, subject to adjustment provided in Section 14, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 3(a), plus, to the extent allowable under Section 422 of the Code, any Shares that become available for issuance under the Plan under this Section 3(b).
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative 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 to qualify Awards granted hereunder as "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" within the meaning of Section 162(m) of the Code.
(iii) Rule 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.
(iv) Other 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.
(b) Powers of the 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 terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder;
(iv) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(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;
(vi) to modify or amend each Award (subject to Section 19(c) of the Plan). Notwithstanding the previous sentence, the Administrator may not modify or 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;
(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;
(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 pursuant to such procedures as the Administrator may determine; and
(ix) to make all other determinations deemed necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards.
5. Eligibility. Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares and such other cash or stock awards as the Administrator determines may be granted to Service Providers. Incentive Stock Options may be granted only to employees of the Company or any Parent or Subsidiary of the Company.
6. Stock Options.
(a) Limitations. 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) Number of Shares. The Administrator will have complete discretion to determine the number of Options granted to any Participant, provided that during any Fiscal Year, no Participant will be granted Options 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 Options covering up to an additional 2,000,000 Shares.
(c) Term of Option. The Administrator will determine the term of each Option in its sole discretion. Any Option granted under the Plan will not be exercisable after the expiration of 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.
(d) Option Exercise Price and Consideration.
(i) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by the Administrator, but will be no less than 100% of the Fair Market Value per Share on the date of grant. 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 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. Notwithstanding the foregoing provisions of this Section 6(c), Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code. The Administrator may not modify or amend an Option to reduce the exercise price of such Option after it has been granted (except for adjustments made pursuant to Section 14 of the Plan) nor may the Administrator 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 Company's stockholders.
(ii) Waiting Period and Exercise 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.
(iii) Form of Consideration. The Administrator will determine the acceptable form(s) of consideration for exercising an Option, including the method of payment, to the extent permitted by Applicable Laws.
(e) Exercise of Option.
(i) Procedure for Exercise; Rights as a 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: (i) notice of exercise (in such form as the Administrator specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with an applicable withholding taxes). 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 14 of the Plan.
(ii) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant'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'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 within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
(iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant'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'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 within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
(iv) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant'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 option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant's designated beneficiary, provided such beneficiary has been designated prior to Participant'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's estate or by the person(s) to whom the Option is transferred pursuant to the Participant'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 Participant's death. Unless otherwise provided by the Administrator, if at the time of death 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 within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
(v) 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.
(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. 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. 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. 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. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
(e) Removal of 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.
(f) Voting 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.
(g) Dividends and Other 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.
(h) Return of Restricted Stock to 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 Units.
(a) Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. Each Restricted Stock Unit grant will be evidenced by an Award Agreement that will specify such other terms and conditions as the Administrator, in its sole discretion, will 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 reduce or waive any restrictions for such Restricted Stock Units. Each Award of Restricted Stock Units will be evidenced by an Award Agreement that will specify the vesting criteria, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
(c) Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as specified in the Award Agreement. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
(d) Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) set forth in the Award Agreement. The Administrator, in its sole discretion, may pay earned Restricted Stock Units in cash, Shares, or a combination thereof.
Shares represented by Restricted Stock Units that are fully paid in cash again will be available for grant under the Plan.
(e) Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.
10. Performance Units and Performance Shares.
(a) Grant of Performance Units/Shares. 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/Shares granted to each 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. 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. 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 Administrator may set performance objectives based upon the achievement of 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.
(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. Payment of earned Performance Units/Shares will be made as soon as practicable after the expiration of the applicable Performance 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.
(f) Cancellation of Performance Units/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, Restricted Stock Units, Performance 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 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 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). Prior to the Determination Date, the Administrator will determine whether any significant element(s) will be included in or excluded from the calculation of any Performance Goal with respect to any Participant.
12. Leaves of 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 approved by the Company or (ii) transfers between locations of the 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 ninety-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. 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. With the approval of the Administrator, a Participant may, in a manner specified by the Administrator, (a) 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 marital property rights, and (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 a tenant or employee).
14. Adjustments; Dissolution or Liquidation; Merger or Change in Control.
(a) 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, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, may (in its sole discretion) adjust the number and class of Shares that may be delivered under the Plan and/or the number, class, and price of Shares covered by each outstanding Award, and the numerical Share limits set forth in Sections 3, 6, 7, 8, 9 and 10.
(b) Dissolution or 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. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.
(c) Change in Control. In the event of a Change in Control, 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 (the "Successor Corporation"). In the event that 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 and 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 the Successor Corporation refuses to assume or substitute an Option or Stock Appreciation Right in the event of a Change in 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.
For the purposes of this subsection (c), an Award will 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, 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, the Administrator may, with the consent of the Successor Corporation, provide for the consideration to be received upon 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 subject to such Award (or in the case of an Award settled in cash, the number of implied shares determined by dividing the value of the 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 equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control.
Notwithstanding anything in this Section 14(c) 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.
15. Tax Withholding
(a) Withholding Requirements. Prior to the 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 such Award (or exercise thereof).
(b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in 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 tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.
16. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing 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.
17. Date of 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.
18. Term of 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 19 of the Plan.
19. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.
(c) Effect of Amendment or 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'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.
20. Conditions Upon Issuance of Shares.
(a) Legal 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. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise 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.
21. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company'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. 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.
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 and return your proxy in the enclosed postage paid envelope.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
UTStarcom, Inc.
UTSTARCOM, INC.
1275 Harbor Bay Parkway
Alameda, California 94502
SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoint(s) Hong Liang Lu and Francis P. Barton and Keith San Felipe, or any one of the two, with the power to appoint their respective substitutes, and hereby authorize(s) them as proxies to represent and vote as designated on the reverse side, all shares of common stockCommon Stock of the UTStarcom, Inc. (the"Company") held of record by the undersigned on May 25, 2006April 29, 2008 at the Annual Meeting of Stockholders to be held on July 21, 2006June 27, 2008 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 SIDE | CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE | SEE REVERSE SIDE |
Telephone and InternetElectronic Voting Instructions
You can vote by telephone OR Internet! Internet or telephone!
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.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted by the Internet or telephone must be received by 1:00 a.m., Central Time on June 27, 2008.
• | Log on to the Internet and go to www.investorvote.com. | • | Call toll free 1-800-652-VOTE (8683) | ||
• | Follow the | • | Follow the instructions provided by the recorded message. | ||
VALIDATION DETAILS ARE LOCATED ON THE FRONT OF THIS FORM IN THE COLORED BAR.
If you vote by telephone or the Internet, please DO NOT mail back 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
Using a black ink pen, mark your votes with an X as shown in this example. Please do not write outside the designated areas. | |||||||
MR A SAMPLE DESIGNATION (IF ANY) ADD 1 ADD 2 ADD 3 ADD 4 ADD 5 ADD 6 | |||||||
o | Mark this box with an X if you have made changes to your name or address details above. |
Annual Meeting Proxy Card | 123456 | C0123456789 | 12345 | |||
Annual Meeting Proxy Card 123456 C0123456789 12345The Board of Directors recommends a vote FOR the nominees listed and FOR Proposals 2 and 3.
A. | |||||||||||||
1. | Election of Directors | ||||||||||||
B. Proposals
For | Withhold | ||||||||||||
01—Larry D. Horner | o | o | |||||||||||
02—Allen Lenzmeier | o | o | |||||||||||
For | Against | Abstain | |||||||||||
2. | Ratify the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm. | o | o | o | |||||||||
3. | Approve a stock option exchange program for employees (excluding executive officers and directors) pursuant to which eligible employees will be offered the opportunity to exchange their eligible options to purchase shares of common stock outstanding under the Company's existing equity incentive plans, for a smaller number of new options at a lower exercise price. | o | o | o | |||||||||
In their discretion, the Proxies are authorized to vote upon such other business that may properly come before the meeting. | |||||||||||||
B. | Nonvoting Items. | ||||||||||||
Change of address.—Please print new address below. | |||||||||||||
C. | Authorized Signatures—Sign Here—This section must be completed for your vote to be counted. Date and Sign Below. | ||||||||||||
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. |
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.
Date (mm/dd/yyyy)—please print date below. | Signature 1—Please keep signature within the box | Signature 2—Please keep signature within the box | ||||
/ / | ||||||