Fees Paid to
stockholder approval, the exchange of certain outstanding stock options held by current employees, including our employees in the Philippines and executive officers (“Eligible Employees”), for new options to purchase fewer shares with an exercise price equal to at least the fair market value of our common stock on the date of grant of the new options. The options included in the proposed stock option exchange program are those options that have an exercise price greater than $4.00 per share (the “Eligible Options”). Participation in the stock option exchange program by Eligible Employees will be voluntary. Former employees, consultants and non-employee directors will not be eligible to participate in the stock option exchange program. The exchange ratio for the stock option exchange program is 3.5:1; that is, each 3.5 shares subject to an Eligible Option will be exchanged for a new option to purchase one share of common stock, with the aggregate number of shares subject to the new option rounded down to the nearest share.Stockholder approval of the stock option exchange program applies only to the stock option exchange program described in this proxy statement. If we were to implement a different stock option exchange program in the future, we would plan to seek stockholder approval for such other exchange program.
Reasons for the Stock Option Exchange Program
Stock option grants are a critical component of our compensation philosophy, the focal point of which is to increase long-term stockholder value. We believe stock options help us achieve this objective in several important ways: by aligning the employees’ interests with those of our stockholders, by motivating employees’ performance toward our long term success and by encouraging our executives and employees who have received option grants to continue their employment with us.
Despite our corporate achievements during the past fiscal year, our stock price has declined. Presently, almost all of our outstanding stock options are “underwater”, meaning the exercise price of those options is greater than our current stock price. This means that the vast majority of our historically granted stock options have little or no perceived value to the employees who hold them and are therefore no longer effective as incentives to motivate and retain these employees.
Our Board believes that it is critical to our future success to revitalize the incentive value of our stock option program to retain employees and recreate a personal stake in the long term financial success of the Company. The Board believes that without the proper balance between the long term components of our compensation structure (i.e., equity awards) and its short term components (i.e., salary and bonus), key employees are not properly motivated to align their interests with those of the stockholders and work toward reward for their contributions based upon increases in share value. The Board also recognizes our competition’s ability to attract and recruit top talent. The Board believes that it has a responsibility to address these issues and to properly incentivize our employees. Consequently, the Board has proposed the stock option exchange program described below.
Eligible Options
The Eligible Options are those outstanding options held by the Eligible Employees that have an exercise price greater than $4.00 per share. As of , 2013, these options were held by 93 Eligible Employees and covered 3,712,437 shares, representing % of the Company’s total outstanding stock options. Of the total number of shares subject to Eligible Options, shares, or % of the Eligible Options, were held by our named executive officers. Some of the Eligible Options have exercise prices as high as $11.68 per share.
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Of the Eligible Options, 577,960 were granted under our 2006 Equity Incentive Plan, 2,349,477 were granted under our 2007 Omnibus Incentive Plan and 785,000 were granted under the 2007 New Employee Incentive Plan.
Exchange Ratios
The exchange ratio will be 3.5:1; that is, each 3.5 shares subject to an Eligible Option will be exchanged for a new option to purchase one share of common stock. Under the proposed stock option exchange program, Eligible Employees will be given the opportunity to exchange their Eligible Options for new stock options to purchase a fewer number of shares with an extended vesting period. Assuming that 100% of Eligible Employees participate in the stock option exchange program, Eligible Options covering 3,712,437 shares would be surrendered and cancelled, while new options covering 1,060,696 shares would be issued, resulting in a net reduction of 2,651,741shares subject to outstanding options, or approximately % of all outstanding options as of , 2013.
The table below provides an example of the exchange of an Eligible Option based on the exchange ratio:
| | | | | | | | |
Original Strike Price | | Options to be Exchanged | | Exchange Rate | | New Options Issued | | Net Reduction in Overhang |
$5.00 | | 35,000 | | 3.5:1 | | 10,000 | | 25,000 |
Stock Option Exchange Program Participation
Because the decision whether to participate in the stock option exchange program is completely voluntary, we are not able to predict who or how many Eligible Employees will elect to participate, how many Eligible Options will be surrendered for exchange, or the number of new options that may be issued.
Implementing the Stock Option Exchange Program
If stockholders approve the stock option exchange program, the program may be commenced at any time within six (6) months following stockholder approval, as determined by the Board. Even if the stockholders approve the stock option exchange program, the Board will retain the authority, in its sole discretion, to terminate or postpone the stock option exchange program at any time prior to the closing of the actual exchange offer to Eligible Employees (described below), or to exclude certain Eligible Options or Eligible Employees from participating in the stock option exchange program due to tax, regulatory or accounting reasons or because their participation would be inadvisable or impractical.
Upon commencement of the stock option exchange program, Eligible Employees will be offered the opportunity to participate in the exchange under a Tender Offer Statement to be filed by us with the SEC and distributed to all Eligible Employees. Employees will be given at least 20 business days in which to accept the offer of the new options in exchange for the surrender of their Eligible Options. The surrendered Eligible Options will be cancelled on the first business day following this election period. The new options will be granted on the date of cancellation of the surrendered Eligible Options and will have an exercise price at least equal to the fair market value of our common stock on the date of grant of such new options. Surrendered options from the 2006 Equity Incentive Plan, the 2007 Omnibus Incentive Plan and the 2007 New Employee Incentive Plan will be returned to the plan, as applicable, and will be available for future grant under such plan.
If on the date that the stock option exchange program commences, an Eligible Employee is no longer an employee of the Company for any reason (including layoff, termination, voluntary resignation, death or disability), that person will not be entitled to participate in the stock option exchange program. An Eligible Employee who elects to participate in the stock option exchange program must also continue to be employed with the Company on the date of the new grant in order to participate in the stock option exchange program and receive the new options.
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A vote by an Eligible Employee in favor of this proposal at the Annual Meeting does not constitute an election to participate in the stock option exchange program.
Description of New Options Issued in Exchange
Exercise Price of New Options. All new options issued in the stock option exchange program will be granted with an exercise price at least equal to the fair market value of our common stock on the date of grant of the new options.
Vesting of New Options. New options granted in the stock option exchange program will vest beginning one year from the date of grant of the new options. This means that Eligible Employees who elect to participate in the stock option exchange program must complete an additional year of service to the Company before their new options would be exercisable, regardless of whether the old Eligible Options surrendered were partially or fully vested. All new options granted under the stock option exchange program will vest 25% on the first anniversary of the date of the grant of the new option and in 36 equal monthly installments thereafter.
Term of New Options. Each of the new options will have an expiration date that is ten years from the date of grant of the new option.
Other Conditions of New Options. The new options will be granted under and subject to the terms and conditions of the Company’s 2007 Omnibus Incentive Plan. New option grants calculated according to the exchange ratio will be rounded down to the nearest whole share on a grant-by-grant basis. New options will not be issued for fractional shares.
U.S. Federal Income Tax Consequences
The exchange of options pursuant to the stock option exchange program should be treated as a non-taxable event for U.S. federal income tax purposes. No income should be recognized for U.S. federal income tax purposes by either the Company or participating employees upon the cancellation of surrendered options and the grant of new options in the exchange. All new options granted under the stock option exchange program will be incentive stock options for U.S. federal income tax purposes.
Independent Registered Public Accounting Impact
The stock option exchange program may result in additional share-based compensation expense for the Company depending on the number of shares tendered and our stock price at the time of the exchange. The unamortized compensation expense from the surrendered options and incremental compensation expense associated with the new options granted under the stock option exchange program will be recognized over the service period of the new options. If any portion of the new options granted is forfeited prior to the completion of the service condition due to termination of employment, the compensation cost for the forfeited portion of the award will not be recognized.
Potential Modification to Terms to Comply with Governmental Requirements
The terms of the stock option exchange program will be described in a Tender Offer Statement that we will file with the SEC. Although we do not anticipate that the SEC would require us to modify the terms materially, it is possible that we will need to alter the terms of the stock option exchange to comply with potential SEC comments.
Effect on Stockholders
The stock option exchange program is designed to reduce the number of shares currently subject to outstanding options and provide renewed incentives to motivate Eligible Employees to continue to create
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stockholder value. While we cannot predict which or how many employees will elect to participate in the stock option exchange program, please see the “Exchange Ratios” section above for the approximate reduction of the number of shares underlying options outstanding assuming that 100% of Eligible Options are exchanged and replacement option grants are made in accordance with the exchange ratio described above.
Stockholder Approval
The affirmative vote of the holders of a majority of the shares present or represented by proxy and entitled to vote at the Annual Meeting is being sought to approve the stock option exchange program.
Recommendation of Our Board
Our Board of Directors recommends that the stockholders vote “FOR” the approval of the stock option exchange program.
FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Firm
Audit Fees. Audit fees consisted of fees billed by Deloitte & Touche LLPRSM for professional services rendered in connection with the audit and quarterly reviews of our consolidated financial statements. For