Exhibit 10.19
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Senior Officer Stock Exercise Loan Program
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(Adopted by the Board of Directors on November 13, 2001)
The Share Value Options ("SVOs") granted to certain employees of the
Company, including five of the Company's executive officers--Stephen A. Block,
Richard A. Goldstein, D. Wayne Howard, Carlos A. Lobbosco and Douglas J.
Wetmore--have a unique feature that may require these executive officers to
exercise their SVOs in their entirety prior to the expiration of the seven-year
option period. It is Company policy that executive officers align their
interests with those of shareholders generally by owning significant amounts of
IFF Common Stock. To accomplish this objective will require that these executive
officers be able to pay for their exercised SVOs without having to sell all or
the great majority of the shares resulting from the exercise to pay the purchase
price and the tax liability due on the exercise. The need to deal with this
issue now arises because holders of SVOs are required to exercise those SVOs in
their entirety within six months and one day after the closing price of the
Company's Common Stock reaches the "weighted average exercise price" of the
holder's options outstanding on November 14, 2000 prior to the SVO grant. Mr.
Howard will reach that deadline on November 23, 2001. Mr. Block, Mr. Howard, Mr.
Lobbosco and Mr. Wetmore (to the extent that, when they elect to exercise
options, Mr. Lobbosco and Mr. Wetmore are not directors of the Company and Mr.
Lobbosco is still an executive officer of the Company1), and any other person
who holds an unexercised SVO and who hereafter becomes an executive officer of
the Company are hereinafter referred to as the "Eligible Executive Officers."
Under the New York Business Corporation Law, loans (or guarantees of loans) to
Company directors are prohibited. As a result, the Program will not be
applicable to any Eligible Executive Officer who is serving on the Board,
including Richard A. Goldstein. Management is exploring other avenues that will
allow Mr. Goldstein and any other executive officer-directors to keep the
largest number of shares possible after exercise.
Senior management explored mechanisms that will enable Eligible
Executive Officers to keep their exercised shares concluded that the only
reasonable approach is the institution of a Company loan program to allow the
Eligible Executive Officers to exercise their SVOs and hold the purchased shares
(the "Program"). The Compensation Committee of the Board (the "Committee") and
the other non-employee directors have agreed and have determined that the
Program have the following features.
o Subject to the approval of the Committee, which will have sole
discretion in any case to decide whether to approve a loan to
any Eligible Executive Officer, the Company will loan to
Eligible Executive Officers exercising their SVOs an amount up
to the aggregate price of the option shares being exercised.
For example, assuming that an Eligible Executive Officer was
exercising an option to purchase 100,000 shares at an exercise
price of $17.9375--which is the exercise price of the
SVOs--the Company would loan that Eligible Executive Officer
up to $1,793,750, the total purchase price of those option
shares./2/
o The Program could provide loans covering both the exercise
price of the SVO and the income tax liability of the Eligible
Executive Officer in connection with the exercise of an SVO
(that tax liability is the difference between the market price
of IFF Common Stock on the date of exercise and the exercise
price (the "Spread")). Management recommended and the
Committee agreed, however, that the Program not authorize
loans for the payment of taxes, but that, to the extent the
Eligible Executive Officer is not able or elects not to pay
applicable income taxes on the Spread from his or her personal
funds, he or she sell a sufficient number of shares from the
SVO exercise to fulfill the tax obligation. In the example
above, assuming a total tax liability (Federal and State) of
45% of the Spread, and assuming that the average of the high
and low market prices on the date of exercise (the price at
which the tax liability would be determined) were $28 per
share, the tax liability would be 45% of $10.0625 per share,
or $452,812, which would result in the Eligible Executive
Officer's selling 16,172 of the shares, which would still
leave him or her with 83,828 shares, clearly a significant
ownership position.
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/1/Under the July 25, 2001 agreement between Mr. Lobbosco and the Company, Mr.
Lobbosco will resign as Executive Vice President, Global Business Development
effective May 2002. Thereafter, because he will no longer be an executive
officer of the Company, he will no longer be eligible to participate in the
Program. Mr. Wetmore will not stand for re-election as a director in May 2002 so
that after the 2002 Annual Meeting of Shareholders Mr. Goldstein will be the
only employee member of the Board of the Company.
/2/Shares issued on the exercise of options paid for with funds borrowed from
the Company under the Program will all be Treasury shares, so long as the
Company has sufficient Treasury shares to cover the exercise and other
applicable obligations. Using Treasury shares will avoid officers' having to pay
the $.125 (the par value of IFF common stock) per share on the issuance of the
shares, which by law would have to be paid on newly issued shares.
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o Without the Program or other assistance, upon exercise of the
SVO option the Eligible Executive Officer would owe to the
Company the $1,793,750 and would have an additional $452,812
in tax obligations, and would thereby have to come up with
$2,246,562 in cash to cover both. He would then have to sell
80,235 of the 100,000 shares to raise that cash, leaving him
with only 19,765 shares.
o In order to provide Eligible Executive Officers with the
incentive to hold their IFF shares for the long-term and to
give them a reasonable time to repay the loans without having
to sell the shares purchased with the borrowed funds, loans
under the Program will have the following features:
1. Loans approved by the Committee will have a maturity
date of between five and ten years from the loan date.
The Committee will establish the actual maturity
period. No principal will have to be repaid until the
maturity date, except that, if any Eligible Executive
Officer ceases to be an Eligible Executive Officer,
including but not limited to a change in his employment
status with the Company or the termination of his
Company employment for any reason, the loan will have
to be repaid at the time of termination. The Company
will have full recourse against Eligible Executive
Officers for payment of all interest and repayment of
loan principal under the Program. The purchased shares
will be pledged to the Company to secure the loans, but
the Eligible Executive Officers will have voting rights
and will receive dividends. Neither the principal nor
any interest payable on loans under the Program will be
forgivable by the Company.
2. To assure that the Program is cost neutral to the
Company and does not give rise to a charge to the
profit and loss statement of the Company, the interest
rate on Program loans must be a "market" rate, that is
a rate that would be charged for such a loan by a third
party lender. Management recommended and the Committee
agreed that the rate to be charged by the Company be
the higher of (a) such a "market" rate and (b) the
Company's weighted average cost of borrowed funds on
the date the loans are extended. Management will inform
the Committee of the appropriate rate at the time the
Committee is considering a loan to an Eligible
Executive Officer. The interest rate will be adjusted
quarterly to continue to reflect the higher of the two
measurement standards.
3. Interest will be payable quarterly, in arrears, on
the unpaid balance. Dividends on the shares purchased
with funds borrowed under the Program will be credited
automatically to offset the interest expense. Moreover,
for tax purposes the interest cost can be used to
offset the dividend income, thereby substantially
reducing any tax impact of the dividend on the
executive officer.
4. In the event that, for a period of seven (7) out of
twenty (20) consecutive trading days, the market value,
as determined by the closing price of the Company's
common stock on the New York Stock Exchange, of the SVO
shares pledged to secure the loan is less than 110% of
the outstanding principal balance of the loan, the loan
will become immediately due and payable. Unless the
Eligible Executive Officer pays the principal of, and
all interest due on, the loan within five business days
after the applicable date, the Company will be
authorized to sell the pledged shares on behalf of the
Eligible Executive Officer. Proceeds of the sale will
be applied first to cover (in the following order) all
interest and principal due on the loan, all fees in
respect of the sale transaction, and all withholding
taxes for which the Eligible Executive Officer is
responsible as a result of the sale of the pledged
shares. The Company will pay to the Eligible Executive
Officer any balance. To the extent that the sale price
of the pledged shares is not sufficient to cover fully
all principal, interest, fees and withholding taxes,
any deficiency will remain the sole responsibility of
the Eligible Executive Officer.
Loans to Eligible Executive Officers will be required to be
disclosed in the Company's proxy statement, most likely in the
Stock Options Grant Table and in the Committee's report. The
loan documentation will be filed as exhibits to the Company's
Forms 10-Q and 10-K. Because the loans will be issued under a
stock option plan--the 2000 Stock Award and Incentive
Plan--that had been approved by shareholders, these loans will
not be subject to any margin limitations.
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