EXHIBIT 4.4
FORM OF STOCK AWARD TAX NOTICE
TAX ISSUES RELATED TO EXERCISE OF STOCK OPTIONS
This memorandum reviews the tax effects upon the exercise of "Non-Incentive
Stock Options" ("NSOs") (those options awarded to non-employee directors and
perhaps to some officers) and "Incentive Stock Options" ("ISOs") (those options
generally awarded to officers and employees).
A. Exercise of an NSO
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Upon the exercise of an NSO, the amount by which the fair market value of
the shares on the date of exercise exceeds the exercise price will be taxed to
the optionee as ordinary income. The Company will be entitled to a deduction in
the same amount, provided it makes all required withholdings on the compensation
element of the exercise. In general, the optionee's tax basis in the shares
acquired by exercising an NSO is equal to the fair market value of such shares
on the date of exercise. Upon a subsequent sale of any such shares in a taxable
transaction, the optionee will realize capital gain or loss (long-term or
short-term, depending on whether the shares were held for more than 12 months
before the sale) in an amount equal to the difference between his or her basis
in the shares and the sale price.
Special rules apply if an optionee pays the exercise price upon exercise of
NSOs with previously acquired shares of stock. Except as described below with
respect to shares acquired pursuant to ISOs, such a transaction is treated as a
tax-free exchange of the old shares for the same number of new shares. To that
extent, the optionee's basis in the new shares is the same as his or her basis
in the old shares, i.e., there is a carryover of basis, and the capital gain
holding period runs without interruption from the date when the old shares were
acquired. The value of any new shares received by the optionee in excess of the
number of old shares surrendered less any cash the optionee pays for the new
shares will be taxed as ordinary income. The optionee's basis in the additional
shares is equal to the fair market value of such shares on the date the shares
were transferred, and the capital gain holding period commences on the same
date. The effect of these rules is to defer the date when any gain in the old
shares that are used to buy new shares must be recognized for tax purposes.
Stated differently, these rules allow an optionee to finance the exercise of an
NSO by using shares of stock that he or she already owns, without paying current
tax on any unrealized appreciation in the value of all or a portion of those old
shares.
B. Exercise of an ISO
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The holder of an ISO will not be subject to federal income tax upon the
exercise of the ISO, and the Company will not be entitled to a tax deduction by
reason of such exercise, provided that the holder is still employed by the
Company (or terminated employment no longer than three months before the
exercise date). Additional exceptions to this exercise timing requirement apply
upon the death or disability of the optionee. A sale of the shares received upon
the exercise of an ISO which occurs both more than one year after the exercise
of the ISO and more than two years after the grant of the ISO will result in the
realization of long-term capital gain or loss in the amount of the difference
between the amount realized on the sale and
the exercise price for such shares. Generally, upon a sale or disposition of the
shares prior to the foregoing holding requirements (referred to as a
"disqualifying disposition"), the optionee will recognize ordinary income, and
the Company will receive a corresponding deduction equal to the lesser of (i)
the excess of the fair market value of the shares on the date of transfer to the
optionee over the exercise price, or (ii) the excess of the amount realized on
the disposition over the exercise price for such shares. Currently, ISO
exercises are exempt from FICA and FUTA taxes and a disqualifying disposition is
exempt from employer withholding.
A special rule applies if an optionee pays all or part of the exercise
price of an ISO by surrendering shares of stock that he or she previously
acquired by exercising any other ISO. If the optionee has not held the old
shares for the full duration of the applicable holding periods before
surrendering them, then the surrender of such shares to exercise the new ISO
will be treated as a disqualifying disposition of the old shares. As described
above, the result of a disqualifying disposition is the loss of favorable tax
consequences with respect to the acquisition of the old shares pursuant to the
previously exercised ISO.
Where the applicable holding period requirements have been met, the use of
previously acquired shares of stock to pay all or a portion of the exercise
price of an ISO may offer significant tax advantages, particularly a deferral of
the recognition of any appreciation in the surrendered shares in the same manner
as discussed above with respect to NSOs.
C. Alternative Minimum Tax
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The "alternative minimum tax" is paid when such tax exceeds a taxpayer's
regular federal income tax. The alternative minimum tax is calculated based on
alternative minimum taxable income, which is taxable income for federal income
tax purposes, modified by certain adjustments and increased by tax preference
items.
The spread under an ISO - i.e., the difference between (a) the fair market
value of the shares at exercise and (b) the exercise price - is classified as
alternative minimum taxable income for the year of exercise. Alternative minimum
taxable income may be subject to the alternative minimum tax. However, a
disqualifying disposition of the shares subject to the ISO during the same year
in which the ISO was exercised will generally cancel the alternative minimum
taxable income generated upon exercise of the ISO.
When a taxpayer sells stock acquired through the exercise of an ISO,
generally only the difference between the fair market value of the shares on the
date of exercise and the date of sale is used in computing the alternative
minimum tax. The portion of a taxpayer's minimum tax attributable to certain
items of tax preference (including the spread upon the exercise of an ISO) can
be credited against the taxpayer's regular liability in later years to the
extent that liability exceeds the alternative minimum tax.