CY » Topics » Why does the Company want to gain approval of a stock option exchange provision?

This excerpt taken from the CY DEF 14A filed Apr 8, 2009.

Why does the Company want to gain approval of a stock option exchange provision?

The Company wants to implement a stock option exchange provision in the 1994 Stock Plan to reduce dilution from our outstanding equity awards, or our “overhang”, and to restore the retention and incentive benefits of our equity awards. The authority to exchange low incentive value stock options for equity awards with future value will also better align the value associated with the compensation expense the Company has booked and will continue to book in the future for these awards. Our stock price, like that of many other companies in the technology industry, has fluctuated over the past few years. In addition, the spin-out of our former subsidiary, SunPower Corporation, also created additional volatility. We and other technology companies have been impacted by the downturn in the economy and declining consumer confidence, as well as other macro-economic factors. We believe the decline in the markets as reflected in the stock prices of our peer companies and in stock indices such as the Philadelphia Semiconductor Sector Index (SOXX), reflect investor concerns over the current economic crisis.

As a result of these factors, some of our employees hold options with exercise prices significantly higher than the current market price of our common stock and may in the future. These underwater awards may not be sufficiently effective to retain and motivate our employees to enhance long-term stockholder value. We believe the ability to exchange low incentive value stock options for a lesser number of restricted stock units, restricted stock or other equity awards would provide employees a meaningful incentive that is directly aligned with the interest of our stockholders and would restore the lost retention value of the equity compensation of such employees.

The exchange authority will also have the benefit of reducing the overhang represented by the outstanding employee equity awards. Further, the exchange authority will help to remedy the fact that we are obligated to recognize compensation expense for all awards, even if they are not providing their intended incentive and retention benefits, which we feel is not an efficient use of the Company’s resources. Since the exchange authority the Company is seeking is structured to replace such low incentive value stock option awards with restricted stock units or other awards of similar or lesser value, the Company should recognize no, or only immaterial, additional compensation expense. The only compensation expense we may incur would result from fluctuations in our stock price during the period that an exchange is open (that is, during the period between the time the exchange ratios are set, shortly before the exchange begins, and when the exchange actually occurs), which we expect to be immaterial. As a result, the exchange authority we are seeking in this proposal will allow the Company to realize incentive and retention benefits from the replacement awards issued, while recognizing essentially the same amount of compensation expense as we would have recognized for the eligible awards.

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