UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Exchange Act of 1934

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Orion Energy Systems, Inc.

 

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Orion Energy Systems, Inc.
2210 Woodland Drive
Manitowoc, Wisconsin 54220
(877) 204-7540

 

NOTICE OF 2010 ANNUAL MEETING OF SHAREHOLDERS

 

To the Shareholders of Orion Energy Systems, Inc.:

 

We cordially invite you to attend our 2010 Annual Meeting of Shareholders on October 27, 2010, at 1:00 p.m., Central Time, at the Capitol Civic Center, 913 S. 8th Street, Manitowoc, Wisconsin 54220.

 

At the annual meeting, as we describe in the accompanying proxy statement, we will ask you to vote on the following matters:

 

1. the election of three directors;

 

2. the ratification of Grant Thornton, LLP to serve as our independent registered public accounting firm for our fiscal year 2011;

 

3. the amendment of our 2004 Stock and Incentive Awards Plan to increase the number of shares authorized for issuance thereunder; and

 

4. such other business as may properly come before the annual meeting, or any adjournment or postponement thereof.

 

You are entitled to vote at the annual meeting only if you were a shareholder of record at the close of business on September 1, 2010. A proxy statement and proxy card are enclosed. Whether or not you expect to attend the annual meeting, it is important that you promptly complete, sign, date and mail the proxy card in the enclosed envelope so that you may vote your shares. If you hold your shares in a brokerage account, you should be aware that, due to recent rule changes, your broker will no longer be permitted to vote your shares for the election of directors if you do not instruct your broker how to vote. Therefore, you must affirmatively take action to vote your shares at the annual meeting. If you do not, your shares will not be voted in the election of directors.

 

By order of the Board of Directors:

 

 

Neal R. Verfuerth

Chief Executive Officer

 

Manitowoc, Wisconsin

September 10, 2010

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on October 27, 2010. The Orion Energy Systems, Inc. proxy statement for the 2010 Annual Meeting of Shareholders and the 2010 Annual Report to Shareholders are available at https://www.proxydocs.com/oesx.

 

Our Annual Report on Form 10-K is enclosed with this notice and proxy statement.

 

 

 

PROXY STATEMENT

 

 

 

 

FOR THE 2010 ANNUAL MEETING OF SHAREHOLDERS
To be Held October 27, 2010

 

This proxy statement and accompanying form of proxy are being furnished to our shareholders beginning on or about September 10, 2010, in connection with the solicitation of proxies by our board of directors for use at our 2010 Annual Meeting of Shareholders to be held on Wednesday, October 27, 2010, at 1:00 p.m., local time, at the Capitol Civic Center, 913 S. 8th Street, Manitowoc, Wisconsin 54220, and at any adjournment or postponement thereof (which we refer to collectively as our “annual meeting”), for the purposes set forth in the attached Notice of 2010 Annual Meeting of Shareholders and as described herein.

 

Execution of a proxy will not affect your right to attend the annual meeting and to vote in person, nor will your presence revoke a previously submitted proxy. You may revoke a previously submitted proxy at any time before it is exercised by giving written notice of your intention to revoke the proxy to our Board Secretary, by notifying the appropriate personnel at the annual meeting in writing or by voting in person at the annual meeting. Unless revoked, the shares represented by proxies received by our board of directors will be voted at the annual meeting in accordance with the instructions thereon. If no instructions are specified on a proxy, the votes represented thereby will be voted: (1) for the board’s three director nominees set forth below; (2) for ratification of Grant Thornton, LLP to serve as our independent registered public accounting firm for our fiscal year 2011; (3) for the amendment of our 2004 Stock and Incentive Awards Plan to increase the number of shares authorized for issuance thereunder; and (4) on such other matters that may properly come before the annual meeting in accordance with the best judgment of the persons named as proxies.

 

IMPORTANT: If you hold your shares in a brokerage account, you should be aware that, due to recent rule changes, your broker will no longer be permitted to vote your shares for the election of directors if you do not instruct your broker how to vote. Therefore, you must affirmatively take action to vote your shares at our annual meeting. If you do not, your shares will not be voted in the election of directors.

 

The three nominees receiving the highest vote totals of the eligible shares of our common stock, no par value per share (“Common Stock”), will be elected as our directors. With regard to the election of directors, votes may be cast in favor or withheld; votes that are withheld will be excluded entirely from the vote and will have no effect.

 

The appointment of Grant Thornton, LLP to serve as our independent registered public accounting firm for our fiscal year 2011 and the amendment of our 2004 Stock and Incentive Awards Plan to increase the number of shares authorized for issuance thereunder will be ratified if the votes cast in favor of ratification exceed the votes cast against ratification. Abstentions will be counted for purposes of determining the presence of a quorum but will be disregarded in the calculation of votes cast.

 

Only holders of record of shares of our Common Stock as of the close of business on September 1, 2010 (the “Record Date”) are entitled to vote at the annual meeting. As of the Record Date, we had 22,669,668 shares of Common Stock outstanding and entitled to vote. The record holder of each share of Common Stock outstanding on the Record Date is entitled to one vote per share on each matter submitted for shareholder consideration at the annual meeting.

 

In order for us to validly transact business at the annual meeting, we must have a quorum present. A majority of the votes of the shares of Common Stock entitled to be cast, or shares representing at least 11,334,835 votes, will represent a quorum for the purposes of electing directors, ratifying Grant Thornton, LLP to serve as our independent registered public accounting firm, amending our 2004 Stock and Incentive Awards Plan and conducting any other business that may properly come before the annual meeting.

 

WE INTEND TO BEGIN MAILING THIS PROXY STATEMENT ON OR ABOUT SEPTEMBER 10, 2010.

 

PROPOSAL ONE:

 

ELECTION OF DIRECTORS

 

We maintain a staggered board of directors divided into three classes. Currently, there are three directors in each of Class I and Class III, and two directors in Class I. Each director serves for a term ending on the date of the third annual shareholders’ meeting following the annual shareholders’ meeting at which such director’s class was most recently elected and until his or her successor is duly elected and qualified. At the annual meeting, the terms of all three of our current Class III directors will expire, and all three of these directors are nominees for re-election at the annual meeting. As a result, at the annual meeting, our shareholders will elect three Class III directors to serve until the 2013 annual meeting of shareholders and until their successors are duly elected and qualified.

 

The board’s nominees for election as Class III directors for terms expiring at the 2013 annual meeting are Neal R. Verfuerth, James R. Kackley and Thomas N. Schueller, each of whom is currently serving as a director of our company. Mr. Kackley is also non-executive chairman of our board. Mr. Schueller was appointed to our board of directors on April 28, 2010 and has not previously been elected by our shareholders. The individuals named as proxy voters in the accompanying proxy, or their substitutes, will vote for the board’s nominees with respect to all proxies we receive unless instructions to the contrary are provided. If any nominee becomes unavailable for any reason, the votes will be cast for a substitute nominee designated by our board. Our directors have no reason to believe that any of the nominees named below will be unable to serve if elected.

 

The following sets forth certain information, as of September 1, 2010, about each of the board’s nominees for election at the annual meeting, each director of our company whose term will continue after our annual meeting, and each current director not standing for re-election at the annual meeting.

 

Nominees For Election at the Annual Meeting

 

Class III Directors — Terms Expiring 2013

 

Neal R. Verfuerth, 51, has been a director since 1998 and our chief executive officer since 2005. From 1998 until July 2009, Mr. Verfuerth also served as our president, and from 2009 until August 25, 2010, he served as chairman of our board. He co-founded our company in 1996 and served until 1998 as our vice president. From 1993 to 1996, he was employed as director of sales/marketing and product development of Lights of America, Inc., a manufacturer and distributor of compact fluorescent lighting technology. Prior to that time, Mr. Verfuerth served as president of Energy 2000/Virtus Corp., a solar heating and energy efficient lighting business. Mr. Verfuerth has invented many of our products, principally our Compact Modular energy efficient lighting system, and other related energy control technologies used by our company. We believe that Mr. Verfuerth’s role as founder of our company and inventor of many of our products and his experience in leadership positions in the energy management industry qualify him for service as a director of our company.

 

James R. Kackley, 67, has been a director since 2005 and the non-executive chairman of our board since August 25, 2010, and served as our president and chief operating officer from July 2009 until May 2010. Mr. Kackley practiced as a public accountant for Arthur Andersen, LLP from 1963 to 1999. From 1974 to 1999, he was an audit partner for the firm. In addition, in 1998 and 1999, he served as chief financial officer for Andersen Worldwide. From June 1999 to May 2002, Mr. Kackley served as an adjunct professor at the Kellstadt School of Management at DePaul University. Mr. Kackley serves as a director, a member of the executive committee and the audit committee chairman of Herman Miller, Inc. From 2004 until 2010, Mr. Kackley served as a director and member of the management resources and compensation committee and audit committee of PepsiAmericas, Inc. prior to its sale, and from February 2007 to October 2007 he also served as a director and a member of the nominating and governance committee and the audit committee of Ryerson, Inc. prior to its sale. We believe that Mr. Kackley’s background as an accountant and chief financial officer, his public company audit committee service, his role as our president and chief operating officer and his experience in leadership positions in business qualify him for service as a director of our company.

 

Thomas N. Schueller, 67, was appointed to our board of directors on April 28, 2010. From 2007 until his retirement in 2009, Mr. Schueller was chief credit officer and managing director of Lake Shore Wisconsin Corporation, a commercial banking enterprise headquartered in Sheboygan, Wisconsin. Prior to his position at Lake

Shore Wisconsin Corporation, Mr. Schueller served as president and senior loan review officer of Community Bank and Trust of Sheboygan, a commercial bank headquartered in Sheboygan, Wisconsin, from 1990 to 2007. From 1970 to 1989, Mr. Schueller served in a variety of positions, including senior vice president and regional senior lender, for Citizens Bank and Trust in Sheboygan. We believe that Mr. Schueller’s career in the commercial finance industry and his experience in helping to finance many growth companies qualify him for service as a director of our company.

 

Directors Continuing in Office

 

Class II Directors — Terms Expiring 2012

 

Mark C. Williamson, 56, has served as a director since April 2009 and has been our lead independent director since October 2009. Mr. Williamson has been a partner of Putnam Roby Williamson Communications of Madison, Wis., a strategic communications firm specializing in energy utility matters, since 2008. He has more than 20 years of executive-level utility experience. Prior to joining Putnam Roby Williamson Communications, Mr. Williamson was vice president of major projects for American Transmission Company from 2002 to 2008, served as executive vice president and chief strategic officer with Madison Gas and Electric Company from 1986 to 2002 and, prior to 1986, was a trial attorney with the Madison firm Geisler and Kay S.C. We believe that Mr. William’s background in the energy utility industry and in management positions qualify him for service as a director of our company.

 

Michael W. Altschaefl, 51, has served as a director since October 2009. Mr. Altschaefl is an owner and chief executive officer of Albany-Chicago Company LLC, a custom die cast and machined components company. Mr. Altschaefl has also been an owner and president of Mid-America Bag LLC, a manufacturer and supplier of consumer trash bags, food storage bags and waste management solutions, since 2010. Mr. Altschaefl is a certified public accountant. Prior to joining Albany-Chicago Company LLC in 2008, Mr. Altschaefl served as a partner with Grant Thornton, LLP, an independent registered public accounting firm, for six years. We believe that Mr. Altschaefl’s experience in leadership positions at machining and manufacturing companies and his background as an accountant qualify him for service as a director of our company.

 

Class I Directors — Terms Expiring 2011

 

Thomas A. Quadracci, 61, has served as a director since 2006, and was chairman of our board from 2006 until 2009. Mr. Quadracci was executive chairman of Quad/Graphics, Inc., one of the United States’ largest commercial printing companies which he co-founded in 1971, until January 1, 2007, where he also served at various times as executive vice president, president and chief executive officer, and chairman and chief executive officer. Mr. Quadracci also founded and served as President of Quad/Tech, Inc., a manufacturer and marketer of industrial controls, until 2002. We believe that Mr. Quadracci’s experiences in co-founding, growing and leading Quad/Graphics and Quad/Tech qualify him for service as a director of our company.

 

Michael J. Potts, 46, became our president and chief operating officer on July 21, 2010. Prior to becoming our president and chief operating officer, Mr. Potts served as our executive vice president since 2003 and has served as a director since 2001. Mr. Potts joined our company as our vice president — technical services in 2001. From 1988 through 2001, Mr. Potts was employed by Kohler Co., one of the world’s largest manufacturers of plumbing products. From 1990 through 1999 he held the position of supervising engineer — energy in Kohler’s energy and utilities department. In 2000, Mr. Potts assumed the position of supervisor — energy management group of Kohler’s entire corporate energy portfolio, as well as the position of general manager of its natural gas subsidiary. Mr. Potts is licensed as a professional engineer in Wisconsin. We believe that Mr. Potts’ experiences as our executive vice president and in leadership roles in the energy industry and his public affairs experience and engineering background qualify him for service as a director of our company.

 

Elizabeth Gamsky Rich, 51, was appointed to our board of directors on June 23, 2010. Since January 2009, Ms. Rich has been the owner of and an attorney with Elizabeth Gamsky Rich & Associates S.C., a law firm offering legal services in the areas of energy law, environmental law, land use, real estate law and business law. From September 2007 to January 2009, Ms. Rich was a principal shareholder of Petrie & Stocking S.C., supervising a general legal practice and practicing in the areas of energy, environmental and real estate law and related litigation. From 2000 to 2007, Ms. Rich was the sole member of the Law Office of Elizabeth Gamsky Rich LLC, a law firm

offering legal services in the areas of energy law, environmental law, land use, real estate law and business law. Ms. Rich has served as a member of the board of directors for Outpost Natural Foods, Gateway 2 Center Inc., the Wisconsin State Bar Board of Governors and the Plymouth Arts Foundation, and she currently serves on the board of directors for the Farm-to-Consumer Legal Defense Foundation. We believe that Ms. Rich’s background in advising companies in the energy and environmental sectors and her experience as a director for various entities qualify her for service as a director of our company.

 

Roland G. Stephenson, who had served as a director since 2008, resigned from our board effective August 25, 2010. Mr. Stephenson resigned from the board in order to avoid any appearance of conflict of interest or concern over the proper application of the corporate opportunity doctrine due to increasingly direct competition between our business and the business of Faith Technologies, Inc., of which he is chief executive officer, as a result of Faith Technologies, Inc.’s continuing evolution into providing more energy efficient lighting, solar, wind and other products and solutions directly to its customers.

 

We strongly encourage our directors to attend the annual meeting of shareholders. At the 2009 annual meeting of shareholders, all of our directors then serving attended.

 

RECOMMENDATION OF THE BOARD: The board recommends a vote for Messrs. Verfuerth, Kackley and Schueller for election as Class III directors at the annual meeting to serve until the 2013 annual meeting of shareholders and until their successors are duly elected and qualified.

 

CORPORATE GOVERNANCE

 

Board of Directors — General

 

Our board met eight times during fiscal 2010. All of the directors attended at least seventy-five percent of the aggregate of (a) the total number of meetings of the board and (b) the total number of meetings held by all committees of the board on which such director served during the fiscal year.

 

Our board has determined that each of Ms. Rich and Messrs. Altschaefl, Quadracci, Schueller and Williamson is independent under listing standards of the NYSE Amex LLC (which we refer to as the “NYSE Amex”). Our board generally uses the director independence standards set forth by the NYSE Amex as its subjective independence criteria for directors, and then makes an affirmative determination as to each director’s independence by taking into account other, objective criteria as applicable.

 

Board Committees

 

Our board of directors has established an audit and finance committee, a compensation committee and a nominating and corporate governance committee, and has adopted charters for each committee describing their respective responsibilities. The charters are available on our website at www.oriones.com.

 

Our audit and finance committee is currently comprised of Messrs. Altschaefl, Quadracci, Schueller and Williamson, with Mr. Altschaefl acting as the chair. Mr. Altschaefl is an audit committee financial expert, as defined under rules of the Securities and Exchange Commission (which we refer to as the “SEC”) implementing Section 407 of the Sarbanes-Oxley Act of 2002 (which we refer to as the “Sarbanes-Oxley Act”). The principal responsibilities and functions of our audit and finance committee are to (i) oversee the reliability of our financial reporting, the effectiveness of our internal control over financial reporting, and the independence of our internal and external auditors and audit functions and (ii) oversee the capital structure of our company and assist our board of directors in assuring that appropriate capital is available for operations and strategic initiatives. In carrying out its accounting and financial reporting oversight responsibilities and functions, our audit and finance committee, among other things, oversees and interacts with our independent auditors regarding the auditors’ engagement and/or dismissal, duties, compensation, qualifications and performance; reviews and discusses with our independent auditors the scope of audits and our accounting principles, policies and practices; reviews and discusses our audited annual financial statements with our independent auditors and management; and reviews and approves or ratifies (if appropriate) related party transactions. Our audit and finance committee also is directly responsible for the appointment, compensation, retention and oversight of our independent auditors. Our audit and finance committee met eight times in fiscal 2010. Our audit and finance committee meets the requirements for independence under the current rules of the NYSE Amex and the SEC, as Messrs. Altschaefl, Quadracci, Schueller and Williamson are all independent directors for such purposes.

 

Our compensation committee is currently comprised of Ms. Rich and Messrs. Quadracci and Williamson, with Mr. Williamson acting as the chair. The principal functions of our compensation committee include (i) administering our incentive compensation plans; (ii) establishing performance criteria for, and evaluating the performance of, our executive officers; (iii) annually setting salary and other compensation for our executive officers; and (iv) annually reviewing the compensation paid to our non-employee directors. Our compensation committee met three times in fiscal 2010. Our compensation committee meets the requirements for independence under the current NYSE Amex and SEC rules, as Ms. Rich and Messrs. Quadracci and Williamson are independent directors for such purposes. In connection with making executive compensation decisions at the beginning of fiscal 2010, our compensation committee engaged Towers Watson to provide general advice and guidance as to then recent executive compensation market trends and practices of public companies in general, and the recent executive long-term incentive compensation practices in particular. In late fiscal 2010, our compensation committee again engaged Towers Watson to provide the committee with Towers Watson’s market assessment, based on its published survey sources, of the base salary, total cash compensation and total direct compensation of our executive officers to assist the committee in determining fiscal 2011 compensation. Separately, our company engaged Towers Watson to conduct a market assessment of 40 of our employment positions (not including our named executive officers (as described below)) and provide our management team with comparative benchmarking compensation data for such

positions based on its published survey sources with respect to base salary and total cash compensation. The aggregate fees for this engagement did not exceed $120,000 during fiscal 2010.

 

Our nominating and corporate governance committee is comprised of Ms. Rich and Messrs. Quadracci and Schueller, with Mr. Quadracci acting as the chair. The principal functions of our nominating and corporate governance committee are, among other things, to (i) establish and communicate to shareholders a method of recommending potential director nominees for the committee’s consideration; (ii) develop criteria for selection of director nominees; (iii) identify and recommend persons to be selected by our board of directors as nominees for election as directors; (iv) plan for continuity on our board of directors; (v) recommend action to our board of directors upon any vacancies on the board; and (vi) consider and recommend to our board other actions relating to our board of directors, its members and its committees. Our nominating and corporate governance committee met twice in fiscal 2010. Our nominating and corporate governance committee meets the requirements for independence under the current NYSE Amex and SEC rules, as Ms. Rich and Messrs. Quadracci and Schueller are independent directors for such purposes.

 

Board Leadership Structure and Role in Risk Oversight

 

Our board does not have a policy on whether or not the roles of chief executive officer and chairman should be separate. Our board reserves the right to assign the responsibilities of the chief executive officer and chairman in different individuals or in the same individual if the board’s judgment a combined chief executive officer and chairman position is in the best interest of our company. In the circumstance where the responsibilities of the chief executive officer and chairman are vested in the same individual, the Board will designate a lead independent director from among the independent directors to preside at the meetings of the non-employee director executive sessions.

 

The positions of chief executive officer and chairman have been separate since August 25, 2010. Prior to that time, the positions were combined from 2009 until August 25, 2010 in Mr. Verfuerth, our chief executive officer. On August 25, 2010, our board elected Mr. Kackley as non-executive chairman to permit Mr. Verfuerth to further focus on executing our business strategy. Our board retains the authority to modify this structure to best address our company’s unique circumstances as and when appropriate.

 

To supplement our non-executive chairman position, our board has created a lead independent director role. Mr. Williamson currently serves as our lead independent director. Our lead independent director is an independent director who works closely with the chairman. The principal duties of the lead independent director are the following:

 

 

Our full board is responsible for the oversight of our operational risk management process. Our board has assigned responsibility for addressing certain risks, and the steps management has taken to monitor, control and report such risk, to our audit and finance committee, including risks relating to execution of our growth strategy, the effects of the recessionary global economy on customer purchases, component inventory supply, our ability to expand our partner network, communication with investors, certain actions of our competitors, the protection of our intellectual property, sufficiency of our capital, inventory investment and risk of obsolescence, security of information systems and data, integration of new information systems, credit risk, product liability, costs of reliance on external advisors and addition of new renewable energy technologies, with appropriate reporting of these risks to be made to the full board. Our board relies on our compensation committee to address significant risk exposures facing our company with respect to compensation, including risks relating to retention of key employees, protection of partner relationships, management succession and benefit costs, also with appropriate reporting of these risks to be made to the full board. Our board’s role in the oversight of our risk management has not affected our

board’s determination that separate chief executive officer and chairman positions constitute the most appropriate leadership structure for our company at this time. Our audit and finance committee and our full board review and comment on the draft risk factors for disclosure in our annual and quarterly reports and use the receipt of such draft risk factors to initiate discussions with appropriate members of our senior management if such risk factors raise questions or concerns about the status of operational risks then facing our company.

 

Nominating and Corporate Governance Committee Procedures

 

Our nominating and corporate governance committee will consider shareholder recommendations for potential director nominees, which should be sent to the Nominating and Corporate Governance Committee, c/o Board Secretary, Orion Energy Systems, Inc., 2210 Woodland Drive Road, Manitowoc, Wisconsin 54220. The time by which such recommendations must be received in order to be timely is set forth below under “Shareholder Proposals.” The information to be included with recommendations is set forth in our Amended and Restated Bylaws, and factors that our nominating and corporate governance committee will consider in selecting director nominees are set forth in our Corporate Governance Guidelines. Our nominating and corporate governance committee evaluates all potential nominees in the same manner, and may consider, among other things, a candidate’s strength of character, mature judgment, career specialization, relevant technical skills or financial acumen, industry knowledge and experience and geographic, gender, age, and ethnic diversity. Our nominating and corporate governance committee believes that directors should display the highest personal and professional ethics, integrity and values and sound business judgment. The committee also believes that, while diversity and variety of experiences and viewpoints represented on our board should always be considered, a director nominee should not be chosen nor excluded solely or largely because of geographic, gender, age or ethnic diversity. Our nominating and corporate governance committee evaluates each incumbent director to determine whether he or she should be nominated to stand for re-election, based on the types of criteria outlined above as well as the director’s contributions to the Board during their current term. As part of its periodic self-assessment, our nominating and corporate governance committee assesses the effectiveness of its director selection policy described in this paragraph, including its provisions relating to the consideration of diversity.

 

Code of Conduct

 

We have adopted a Code of Conduct that applies to all of our directors, employees and officers, including our principal executive officer, our principal financial officer, our controller and persons performing similar functions. Our Code of Conduct is available on our web site at www.oriones.com. Future material amendments or waivers relating to the Code of Conduct will be disclosed on our web site referenced in this paragraph within four business days following the date of such amendment or waiver.

 

EXECUTIVE OFFICERS

 

The following table sets forth information as of September 1, 2010 regarding our current executive officers:

 

 

The following biographies describe the business experience of our executive officers. (For biographies of Messrs. Verfuerth and Potts, see “Proposal One: Election of Directors” above.)

 

Stuart L. Ralsky became our Senior Vice President of Human Resources in September 2009. Prior to joining our company, Mr. Ralsky served as a principal of SLR Consulting, a Chicago-based organization and human resource consulting firm specializing in leadership and management assessment and development, for more than 20 years. As a principal of SLR Consulting, Mr. Ralsky completed a number of engagements for clients with a

primary focus on leadership and executive assessment and development. He performed numerous executive evaluations covering a wide range of positions and industries, served as an executive coach for individuals from mid-level managers to senior executives and designed and implemented leadership development and behaviorally based interview training programs for many clients. Mr. Ralsky has a Ph.D. in Industrial Organizational Psychology.

 

Scott R. Jensen has been our chief financial officer and treasurer since July 2008. Prior to being appointed our chief financial officer and treasurer, Mr. Jensen served as our controller and vice president of corporate finance since 2007, and as our director of finance from 2004 to 2007. From 2002 to 2004, Mr. Jensen was the manager of financial planning and analysis at the Mirro Co. (a division of Newell Rubbermaid). Mr. Jensen is a certified public accountant.

 

Daniel J. Waibel has been president of our Orion Asset Management Division since July 2008. Prior to being appointed president of the Orion Asset Management Division, Mr. Waibel served as our chief financial officer and treasurer since 2001. Mr. Waibel has over 19 years of financial management experience, and is a certified public accountant and a certified management accountant. From 1998 to 2001, he was employed by Radius Capital Partners, LLC, a venture capital and business formation firm, as a principal and chief financial officer. From 1994 through 1998, Mr. Waibel was chief financial officer of Ryko Corporation, an independent recording music label. From 1992 to 1994, Mr. Waibel was controller and general manager of Chippewa Springs, Ltd., a premium beverage company. From 1990 to 1992, Mr. Waibel was director of internal audit for Musicland Stores Corporation, a music retailer. Mr. Waibel was employed by Arthur Andersen, LLP from 1982 to 1990 as an audit manager.

 

John H. Scribante became president of our newly-formed division called Orion Engineered Systems in August 2009, after serving as our senior vice president of business development since 2007. Mr. Scribante served as our vice president of sales from 2004 until 2007. Prior to joining our company, Mr. Scribante co-founded and served as chief executive officer of Xe Energy, LLC, a distribution company that specialized in marketing energy reduction technologies, from 2003 to 2004. From 1996 to 2003, he co-founded and served as president of Innovize, LLC, a company that provided outsourcing services to mid-market manufacturing companies.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This compensation discussion and analysis describes the material elements of compensation awarded to, earned by, or paid to each of our named executive officers, whom we refer to as our “NEOs,” during fiscal 2010 and describes our policies and decisions made with respect to the information contained in the following tables, related footnotes and narrative for fiscal 2010. The NEOs are identified below in the table titled “Summary Compensation Table for Fiscal 2010.” In this compensation discussion and analysis, we also describe various actions regarding NEO compensation taken before or after fiscal 2010 when we believe it enhances the understanding of our executive compensation program.

 

Overview of Our Executive Compensation Philosophy and Design

 

We believe that a skilled, experienced and dedicated senior management team is essential to the future performance of our company and to building shareholder value. We have sought to establish competitive compensation programs that enable us to attract and retain executive officers with these qualities. The other objectives of our compensation programs for our executive officers are the following:

 

 

In light of these objectives, we have sought to reward our NEOs for achieving financial performance goals, creating value for our shareholders, and for loyalty and dedication to our company. We also seek to reward initiative,

innovation and creation of new products, technologies, business methods and applications, since we believe our future success depends, in part, on our ability to continue to expand our revenue, product and market opportunities.

 

At the beginning of fiscal 2010, as a result of the then recessionary economic and industry market conditions and their adverse impact on our fiscal 2009 financial results and fiscal 2010 prospects, our compensation committee, with the concurrence and support of our chief executive officer, determined to take the following actions with respect to the compensation of our NEOs and other executive officers:

 

 

At the beginning of fiscal 2011, our compensation committee, with the concurrence and support of our chief executive officer, took the following actions with respect to the compensation of our NEOs and other executive officers:

 

 

Our compensation committee also increased Mr. Potts’ annual base salary in August 2010 to reflect his increased duties and responsibilities as president and chief operating officer as described below.

 

The actions summarized above are analyzed further below. Our compensation committee has reserved the right and discretion to make exceptions to the foregoing actions, including as any such exception may apply to the determination of any and/or all of the relative base salaries, annual cash bonuses, long-term incentive compensation and/or total direct compensation of our executives, for outstanding contributions to the overall success of our company and the creation of shareholder value, as well as in cases where it may be necessary or advisable to attract and/or retain executives who our compensation committee believes are or will be key contributors to creating and sustaining shareholder value, as determined by our compensation committee based on the recommendations of our chief executive officer (in all cases other than our chief executive officer’s own compensation).

 

Setting Executive Compensation

 

Our board of directors, our compensation committee and our chief executive officer each play a role in setting the compensation of our NEOs. Our board of directors appoints the members of our compensation committee and delegates to the compensation committee the direct responsibility for overseeing the design and administration of our executive compensation program. During the first quarter of fiscal 2010, our compensation committee was comprised of Messrs. Quadracci, Flaum and Stephenson. Mr. Williamson, the committee’s current chair, became a member of our compensation committee on July 15, 2009. Mr. Flaum did not stand for re-election at our 2009 annual shareholder meeting and his term as a director and his service on our compensation committee therefore

ended on October 28, 2009, and, as described above, Mr. Stephenson resigned from our board on August 25, 2010. As a result, our current compensation committee consists of Messrs. Williamson (Chair) and Quadracci and Ms. Rich. Each prior and current member of our compensation committee was and/or is an “outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, which we refer to as the “Code,” and a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act.

 

Our compensation committee has primary responsibility for, among other things, determining our compensation philosophy, evaluating the performance of our executive officers, setting the compensation and other benefits of our executive officers, and administering our incentive compensation plans. Our chief executive officer makes recommendations to our compensation committee regarding the compensation of other executive officers and attends meetings of our compensation committee at which our compensation committee considers the compensation of other executives. Our compensation committee considers these recommendations, but has the final discretionary responsibility for determining the compensation of all of our executive officers.

 

In connection with making executive compensation decisions at the beginning of fiscal 2010, our compensation committee obtained the general advice and guidance of Towers Watson as to then recent executive compensation market trends and practices of public companies in general, and then recent executive long-term incentive compensation practices in particular. Because of the general recessionary economic and industry conditions and their adverse impact on our fiscal 2009 financial performance and fiscal 2010 prospects, the compensation committee, with the concurrence and support of our chief executive officer, determined in the beginning of fiscal 2010 that it would (i) not pay our executives any annual bonuses for fiscal 2009; (ii) freeze our executives’ fiscal 2010 base salaries and potential target bonus awards at their respective fiscal 2009 levels; (iii) set corporate financial performance targets for the achievement of up to 80% of each NEO’s fiscal 2010 target bonus award based on our achieving our stretch revenue and operating income budget goals for fiscal 2010; and (iv) substantially reduce (and, in some cases, eliminate) our NEOs’ long-term equity incentive stock option grants for fiscal 2010. As a result of these factors and actions, the committee decided it did not need to obtain from Towers Watson or any other source any specific compensation benchmarking or comparable company information in order to make such decisions with respect to fiscal 2010 compensation.

 

In late fiscal 2010, our compensation committee again engaged Towers Watson to provide the committee with Towers Watson’s market assessment, based on its published survey sources, of the base salary, total cash compensation and total direct compensation of our executive officers to assist the committee in determining fiscal 2011 compensation. Separately, our company engaged Towers Watson to conduct a market assessment of 40 of our employment positions (not including our NEOs) and provide our management team with comparative benchmarking compensation data for such positions based on its published survey sources with respect to base salary and total cash compensation.

 

Because of the general recessionary economic and industry conditions and their adverse impact on our fiscal 2010 financial performance and fiscal 2011 prospects, the compensation committee, with the concurrence and support of our chief executive officer, determined in the beginning of fiscal 2011 that it would (i) pay no annual bonuses for fiscal 2010; (ii) continue to freeze base salaries for fiscal 2011 at their respective fiscal 2010 levels (in most cases at fiscal 2009 levels), except for new hires and certain limited exceptions; (iii) implement a new annual cash bonus program with threshold corporate financial performance criteria requiring at least a 20% year over year increase in our revenue and a minimum of a $4 million operating profit; and (iv) grant long-term equity incentive awards to our NEOs at substantially lower levels than past practice.

 

Pursuant to its engagement by our compensation committee in determining fiscal 2011 compensation, Towers Watson provided the committee with certain benchmarking data for salaries, annual bonuses, long-term incentive compensation and total direct compensation. In compiling the benchmarking data, Towers Watson relied on the Towers Perrin 2009 Long-Term Incentive Survey, the Watson Wyatt 2009/2010 Top Management Compensation Survey and the Watson Wyatt 2009/2010 Middle Management Compensation Survey. To approximate our labor market, Towers Watson used market results corresponding to the participating companies in the surveys who are in the electrical equipment and supplies industry or, to the extent such results were not available for a position, results corresponding to participating companies in the durable goods manufacturing industry. Towers Watson used regression analysis to adjust the survey data to compensate for differences among the revenue sizes of the

companies in the survey and our revenue size. In making its fiscal 2011 compensation decisions, however, our compensation committee did not receive or review, and was not aware of, the identities of the individual participating companies in the surveys on which Towers Watson relied, which information is proprietary and confidential to Towers Watson. Accordingly, our compensation committee did not have access to, or rely upon, the individual companies comprising such confidential and proprietary general market survey data in determining the compensation of our NEOs.

 

Changes to NEOs’ Compensation Arrangements in Fiscal 2010 and 2011

 

Mr. Kackley, one of our directors, became our president and chief operating officer on July 22, 2009, assuming Mr. Verfuerth’s duties as president. Mr. Verfuerth’s compensation arrangements were not affected by these changes in our management structure. We reached agreement with Mr. Kackley on his initial compensation arrangements following an arm’s length negotiation in connection with his appointment as our president and chief operating officer on July 22, 2009. As previously disclosed, Mr. Kackley retired as our president and chief operating officer effective May 14, 2010, which resulted in the termination of his employment agreement. Mr. Kackley’s annualized base salary for our fiscal 2010 was $300,000. While he was eligible to receive a potential cash incentive award with a target payout equal to 75% of his base salary, we did not meet our financial targets in fiscal 2010, so no bonus was paid to Mr. Kackley. Mr. Kackley received an automobile allowance and reimbursement for certain commuting costs and temporary housing expenses and was entitled to participate in incentive plans and programs and other employee benefit plans that were generally provided to our senior executives. He also received a grant of an option to purchase 35,000 shares of our common stock on August 3, 2009 at an exercise price per share equal to the closing share price of our Common Stock on the grant date. These options became fully vested pursuant to their terms upon Mr. Kackley’s retirement.

 

On August 27, 2009, Mr. Scribante, one of our NEOs, assumed the new position of President, Orion Engineered Systems, a then newly formed division that markets advanced energy technologies. Previously, Mr. Scribante had been our senior vice president of business development. In connection with this promotion, we amended our existing employment agreement with Mr. Scribante to set forth various terms relating to Mr. Scribante’s leadership of Orion Engineered Systems. We also granted Mr. Scribante an option to purchase 250,000 shares of our Common Stock under our 2004 Stock and Incentive Awards Plan. The option vests based on Mr. Scribante’s continuous employment and the trading price levels of our Common Stock. Specifically, the option vests and becomes exercisable in 50,000 share increments when our Common Stock’s average closing price over five consecutive trading days equals or exceeds $4.00, $5.00, $6.00, $7.00 and $8.00 per share. As of the date of this proxy statement, the first two tranches of Mr. Scribante’s stock option grant have vested.

 

In fiscal 2009, we promoted Mr. Jensen to chief financial officer and treasurer from his prior position as our controller. In connection with his promotion, the committee increased Mr. Jensen’s salary from $115,000 to $165,000 in order to reflect Mr. Jensen’s significant increased responsibilities. Despite this substantial increase, the committee recognized at the time that this level of base salary for Mr. Jensen in his new position was significantly below the median level for similarly-situated chief financial officers based on benchmarking data previously provided by Towers Watson and, at the time, determined that it would revisit Mr. Jensen’s base salary level after having had the opportunity to evaluate Mr. Jensen’s performance in his new role. For this reason, although the committee determined generally to freeze executive officer base salaries in fiscal 2010, in December 2009, the committee increased Mr. Jensen’s base salary to $200,000 effective as of January 1, 2010, based on the recommendation of our chief executive officer and our president and chief operating officer, in recognition of what the committee considered to be Mr. Jensen’s exceptional performance as our chief financial officer and to bring Mr. Jensen’s salary closer to the median level for similarly situated chief financial officers. The committee set Mr. Jensen’s target bonus award at 30% of his new annual base salary and approved a grant to him of a non-qualified stock option to purchase 100,000 shares of our Common Stock with a vesting schedule of 20% per year while employed and an exercise price per share equal to the closing sale price of our stock price on the grant date.

 

In fiscal 2011, to reflect Mr. Potts’ increased duties and responsibilities as president and chief operating officer, our compensation committee increased his annual base salary from $225,000 to $275,000, which is consistent with the median of market salaries paid to similarly situated executives as determined by the committee as indicated in the benchmarking data provided by Towers Watson.

Our compensation committee approved these modified arrangements based on the subjective judgment of its members, input from our management and arm’s length negotiation with Messrs. Kackley, Scribante, Jensen and Potts to reflect their new or modified responsibilities and their expected future contributions to our company.

 

Elements of Executive Compensation

 

Our current executive compensation program for our NEOs consists of the following elements:

 

 

Base Salary

 

We pay our NEOs a base salary to compensate them for services rendered and to provide them with a steady source of income for living expenses throughout the year. In fiscal 2010, as a result of the then recessionary economic and industry market conditions and their adverse impact on our fiscal 2009 financial results and fiscal 2010 prospectus, our compensation committee froze the base salaries of all of our NEOs (other than Messrs. Jensen and Kackley) at fiscal 2009 levels. In December 2009, for the reasons discussed above, our compensation committee increased Mr. Jensen’s annual base salary to $200,000 effective as of January 1, 2010 and, when Mr. Kackley became our president and chief operating officer in July 2009, set his annual base salary for fiscal 2010 at $300,000.

 

The fiscal 2010 annual base salaries for our NEOs, as modified mid-year with respect to Mr. Jensen, were as follows:

 

 

 

 

In early fiscal 2011, management recommended, and our compensation committee approved, again freezing the base salaries of our NEOs for fiscal 2011 at fiscal 2010 levels (and, in most cases, also at fiscal 2009 levels) due to continued challenging economic conditions and the financial performance of our company in fiscal 2010. Accordingly, the salaries shown in the table above are our NEOs’ salaries for fiscal 2011 as well, with the exception of Mr. Potts. As discussed above, to reflect Mr. Potts’ increased duties and responsibilities as president and chief operating officer, on August 25, 2010, our compensation committee increased his annual base salary from $225,000 to $275,000, which is consistent with the median of market salaries paid to similarly situated executives as determined by the committee as indicated in the benchmarking data provided by Towers Watson.

Annual Cash Bonus Incentive Compensation

 

We intend our annual cash bonus program to reward executives with annual cash bonuses based on a broad combination of factors, including our corporate financial performance and the executive’s individual performance.

 

Fiscal 2010 Annual Cash Incentive Program

 

For fiscal 2010, our compensation committee approved an Executive Fiscal Year 2010 Annual Cash Incentive Program, which we refer to as our “Fiscal 2010 Cash Incentive Program,” under our 2004 Stock and Incentive Awards Plan. In establishing the target potential bonus levels for our NEOs for fiscal 2010 under our Fiscal 2010 Cash Incentive Program, as described above, as a result of the recessionary economic and industry market conditions and their adverse impact on our fiscal 2009 financial results and fiscal 2010 prospects, our compensation committee, with the concurrence and support of our chief executive officer, determined to freeze potential bonus awards for fiscal 2010 at their respective fiscal 2009 levels. The threshold, target and maximum potential payout levels are indicated in the “Grants of Plan-Based Awards for Fiscal 2010” table below.

 

Fiscal 2010 target bonus awards under our Fiscal Year 2010 Cash Incentive Program, as adopted by our compensation committee early fiscal 2010, were to be determined as follows:

 

 

Under our Fiscal 2010 Cash Incentive Program, (i) 40% of each NEO’s fiscal year target bonus award was based on our achieving a targeted revenue goal of $84.4 million (with a minimum threshold target of approximately $67.5 million and up to $105.5 million as a maximum target); (ii) 40% of each NEO’s fiscal year target bonus award was based on our achieving a target operating income goal of $3.4 million (with a threshold target operating income goal of $2.6 million and an operating income goal of $4.3 million as a target for the maximum award); and (iii) 20% of each NEO’s fiscal year target bonus award was based on subjective individual performance criteria to be determined by our compensation committee in its discretion based on the recommendations of our chief executive officer (other than respecting himself).

 

Because our fiscal 2010 revenue was below the applicable revenue threshold, and we incurred an operating loss, no bonuses tied to the achievement of these goals were payable for fiscal 2010. Additionally, as described above, although we did not pre-establish any objective individual performance goals for our NEOs for fiscal 2010,

based on the subjective judgment of our compensation committee and with the concurrence and support of our chief executive officer, our compensation committee determined not to award any bonus payments to our NEOs under our Fiscal 2010 Cash Incentive Program for fiscal 2010 based on the individual performance of our NEOs. In making this determination, no specific individual performance criteria or factors were identified or otherwise used in evaluating the performance of the individual NEOs or in determining not to make any individual performance bonus payments to our NEOs. The members of our compensation committee subjectively evaluated the individual performance of our NEOs as a whole within the context of our fiscal 2010 corporate financial performance compared to our goals and objectives for the fiscal year, and without consideration of any specifically identifiable individual performance criteria or factors.

 

Fiscal 2011 Bonus Program

 

In early fiscal 2011, our management proposed, and our compensation committee approved, the adoption of a new fiscal 2011 bonus program in which all of our active, full-time employees (including our NEOs) participate. Under the program, bonuses will be paid out of a bonus pool established primarily on the basis of our achievement of significantly increased revenue from fiscal 2010, as well as achieving significant operating income. Our management and compensation committee selected increased revenue as the primary performance measure for the bonus pool because they view revenue as the most critical element to increasing the value of our Common Stock and, therefore, to our company’s enterprise value.

 

For the bonus pool to be established, two threshold requirements must be met: our total revenues for fiscal 2011 must increase by at least 20% over our fiscal 2010 level, and our operating income for fiscal 2011 must exceed $4 million. If we achieve these threshold levels, a bonus pool will be established in an amount equal to 4% of the amount of our total revenue increase in fiscal 2011 over 2010. The bonus pool will be adjusted by a percentage equal to the percentage improvement or decline in our revenue per employee in fiscal 2011 compared to fiscal 2010. Our management and compensation committee included this element to emphasize the goal of improved efficiency of our employee base. The fiscal 2011 pool will also be reduced by all significant quantifiable mistakes made by any employees as tracked and reported by our management team and our chief executive officer and as related to, and approved by, our compensation committee.

 

The threshold requirements described above are not a prediction of how we will perform during fiscal year 2011. The purpose of the requirements is to determine whether a bonus pool will be established under our fiscal 2011 bonus program. The requirements are not intended to serve, and should not be relied upon, as guidance or any other indication of our expected future performance.

 

The amount of individual bonus payouts under the fiscal 2011 bonus program, if the pool is established, will be based 80% on company-wide performance and 20% on personal performance for all employees except our two business unit leaders, Mr. Scribante and Daniel J. Waibel. For Messrs. Scribante and Waibel, the amount of their bonuses will be based 40% on company-wide performance, 40% on their respective business unit performance and 20% on personal performance. The amount of the portion of the business unit performance for Messrs. Scribante and Waibel and the individual bonus payouts based personal performance for all participants will be determined by our management with respect to all employees other than our CEO and, for our CEO, by our compensation committee, in their respective subjective judgment. No performance objectives will be pre-determined for purposes of determining the amounts of the business unit performance for Messrs. Scribante and Waibel or the individual bonuses.

Our management and our compensation committee allocated the fiscal 2011 bonus program pool among our employees by employment and/or position category. Our current NEOs’ targeted bonus payment amounts, if we achieve a total revenue target of $85 million and operating income of at least $4 million (and all business unit and individual performance satisfy their targets), are as follows:

 

 

Mr. Kackley retired as our president and chief operating officer effective May 14, 2010 and therefore is not a participant in our fiscal 2011 bonus program.

 

Long-Term Equity Incentive Compensation

 

We provide the opportunity for our NEOs to earn long-term equity incentive awards under our 2004 Stock and Incentive Awards Plan. Our employees, officers, directors and consultants are eligible to participate in this plan. Our compensation committee believes that long-term equity incentive awards enhance the alignment of the interests of our NEOs and the interests of our shareholders and provide our NEOs with incentives to remain in our employment.

 

Our compensation committee generally awards long-term equity incentives to our executives on an annual basis at the beginning of each fiscal year. We also grant some stock options under our informal program of providing small amounts of options to new employees celebrating their first anniversary of employment and some based on our chief executive officer’s discretion (for new recruits, new job responsibilities, exceptional performance, etc.). From time to time, our compensation committee also makes special option grants, as it did for Messrs. Kackley, Scribante and Jensen last fiscal year. We have historically granted long-term equity incentive awards solely in the form of options to purchase shares of our Common Stock, which are initially subject to forfeiture if the executive’s employment terminates for any reason. The options generally vest and become exercisable ratably over five years, contingent on the executive’s continued employment. In the past, we granted both incentive stock options and non-qualified stock options to our NEOs; however, beginning in fiscal 2009, our compensation committee decided to grant only non-qualified stock options to our NEOs and all other employees because of the related tax benefits of non-qualified stock options to our company. We generally use time-vesting stock options as our sole source of long-term equity incentive compensation to our NEOs because we believe that (i) stock options help to align the interests of our NEOs with the interests of our shareholders by linking their compensation with the increase in value of our Common Stock over time; (ii) stock options conserve our cash resources for use in our business; and (iii) vesting requirements on our stock options provide our NEOs with incentive to continue their employment with us which, in turn, provides us with retention benefits and greater stability.

 

Our compensation committee seeks to base a significant portion of the total direct compensation payable to our executives on the creation of shareholder value in order to link executive pay to increased shareholder value, and also to reward executives for increasing shareholder value. Our compensation committee also believes that this emphasis on long-term equity-based incentive compensation may help facilitate executive retention and loyalty and motivate our executives to achieve strong financial performance.

For the reasons described above with respect to salary freezes, at the beginning of fiscal 2010 and in determining the relative dollar amount of our fiscal 2010 annual option grants as reflected in the table below, our compensation committee decided to reduce substantially (or, in some cases, eliminate) the level of fiscal 2010 annual stock option grants to our executive officers compared to their fiscal 2009 levels. The specific relative dollar amounts of the reduced fiscal 2010 grants were determined subjectively by our committee for the reasons described above and without any further reference to any specific benchmarking or survey data. The number of option shares represented by such fiscal 2010 grants was determined based on a fiscal 2009 fair value of $4.2522 per option share. The fair value of the option shares on the date of grant is reflected in the table below titled “Grants of Plan-Based Awards for Fiscal 2010.”

 

 

Mr. Kackley’s option grant relating to 35,000 shares was determined through arm’s length negotiations in connection with his appointment as our president and chief operating officer in July 2009, and Mr. Scribante’s and Mr. Jensen’s special additional option grants, relating to 250,000 and 100,000 shares, respectively, were determined based on changes in their circumstances as described above and our management’s and our compensation committee’s subjective views of the levels of compensation and incentives appropriate for such circumstances.

 

In May 2010, our management proposed, and our compensation committee approved, a long-term incentive award program for fiscal 2011. In order to promote key employee retention, give executives “skin in the game” and reward continuous strong corporate performance, our management recommended, and our compensation committee approved, the establishment of a pool of stock options covering 2% of our then outstanding shares, or 470,000 shares, for key employees. We have allocated these option grants by category of employee and/or position, with a total of 183,333 option shares granted to so-called “rainmakers,” including, among the NEOs, Messrs. Verfuerth and Scribante, and a total of 36,667 option shares granted to other executives, a group that includes Messrs. Potts and Jensen, and a total of 250,000 option shares available for award to other key employees.

 

The individual awards within each category and/or position of employee were allocated proportionately according to base salary within the applicable group. As a result of this apportionment, the fiscal 2011 option awards to our NEOs in May 2010 were as follows:

 

 

The number of shares resulting from the dollar amount of the option grants set forth in the table above are based on a fiscal 2010 fair value of $2.26 per option share. The options were granted with an effective date of the third business day after our fiscal 2010 earnings release with an exercise price equal to the closing price of a share of our Common Stock on such date. Mr. Kackley retired as our president and chief operating officer effective May 14, 2010 and therefore did not participate in the fiscal 2011 executive stock option grants.

Retirement and Other Benefits

 

Welfare and Retirement Benefits.  As part of a competitive compensation package, we sponsor a welfare benefit plan that offers health, life and disability insurance coverage to participating employees. In addition, to help our employees prepare for retirement, we sponsor the Orion Energy Systems, Inc. 401(k) Plan and match employee contributions at a rate of 3% of the first $5,000 of an employee’s contributions (i.e., capped at $150). Our NEOs participate in the broad-based welfare plans and the 401(k) Plan on the same basis as our other employees. We also provide enhanced life and disability insurance benefits for our NEOs. Under our enhanced life insurance benefit, we pay the full cost of premiums for life insurance policies for our NEOs. The amounts of the premiums are reflected in the Summary Compensation Table below. Our enhanced disability insurance benefit includes a higher maximum benefit level than under our broad-based plan, cost of living adjustments and a portability feature.

 

Perquisites and Other Personal Benefits.  We provide perquisites and other personal benefits that we believe are reasonable and consistent with our overall compensation program to better enable our executives to perform their duties and to enable us to attract and retain employees for key positions. We provide Messrs. Verfuerth and Potts with a car allowance of $1,000 per month, and we provided Mr. Kackley with a similar car allowance until his retirement in May 2010. Mr. Scribante participates in a program for our sales group under which we provide mileage reimbursement for business travel. We lease a corporate aircraft primarily for business travel by our executive officers and certain other employees to enable them to conduct business efficiently and securely during business flights and to eliminate some of the time inefficiencies associated with commercial travel, particularly given that our headquarters is not located in proximity to any major airports. During fiscal 2010, on a limited basis, we also permitted certain of our NEOs to use the aircraft for personal travel. We provided this limited benefit to enhance their ability to conduct business during personal travel, to increase their safety and security and to lessen the amount of time they must allocate to travel and away from company business.

 

Severance and Change of Control Arrangements

 

We provide certain protections to our NEOs in the event of certain terminations of their employment, including enhanced protections for certain terminations that may occur after a change of control of our company. However, our NEOs will only receive the enhanced severance benefits following a change in control if their employment terminates without cause or for good reason. We describe this type of severance arrangement as being subject to a “double trigger.” All payments, including any double trigger severance payments, to be made to our NEOs in connection with a change of control under their employment agreements and any other of our agreements or plans will be subject to a potential “cut-back” in the event any such severance payments or other benefits become subject to non-deductibility or excise taxes as “excess parachute payments” under Code Section 280G or 4999. The cut-back provisions have been structured such that all amounts payable under their employment agreements and other of our agreements or plans that constitute change of control payments will be cut back to one dollar less than three times the executive’s “base amount,” as defined by Code Section 280G, unless the executive would retain a greater amount by receiving the full amount of the payment and paying the related excise taxes (a so-called “valley provision”).

 

Our 2003 Stock Option Plan and our 2004 Stock and Incentive Awards Plan also provide potential protections to our NEOs in the event of certain changes of control. Under these plans, our NEOs’ stock options that are unvested at the time of a change of control may become vested on an accelerated basis in the event of certain changes of control.

 

We selected these triggering events to afford our NEOs some protection in the event of a termination of their employment, particularly after a change of control of our company. We believe these types of protections better enable our NEOs to focus their efforts on behalf of our company without undue concern over the impact on their employment or financial security of a change of control of our company. We also provide severance benefits in order to obtain from our NEOs certain concessions that protect our interests, including their agreement to confidentiality, intellectual property rights waiver, non-solicitation and non-competition provisions. See below under the heading “Payments upon Termination or Change of Control” for a description of the specific circumstances that would trigger payment or the provision of other benefits under these arrangements, as well as a description, explanation and quantification of the payments and benefits under each circumstance.

Other Policies

 

Policies On Timing of Option Grants.  Our compensation committee and board of directors have adopted a policy on the timing of option grants, under which our compensation committee generally will make annual option grants beginning effective as of the date three business days after our next quarterly (or year-end) earnings release following the decision to make the grant, regardless of the timing of the decision. Our compensation committee has elected to grant and price option awards shortly following our earnings releases so that options are priced at a point in time when the most important information about our company then known to management and our board is likely to have been disseminated in the market.

 

Our board of directors has also delegated limited authority to our chief executive officer, acting as a subcommittee of our compensation committee, to grant equity-based awards under our 2004 Stock and Incentive Awards Plan. Our chief executive officer may grant awards covering up to 250,000 shares of our Common Stock per fiscal year to certain non-executive officers in connection with offers of employment, promotions and certain other circumstances. Under this delegation of authority, any options or stock appreciation rights granted by our chief executive officer must have an effective grant date on the first business day of the month following the event giving rise to the award.

 

Our 2004 Stock and Incentive Awards Plan does not permit awards of stock options or stock appreciation rights with an effective grant date prior to the date our compensation committee or our chief executive officer takes action to approve the award.

 

Executive Officer Stock Ownership Guidelines.  One of the key objectives of our executive compensation program is alignment of the interests of our executive officers with the interests of our shareholders. We believe that ensuring that executive officers are shareholders and have a significant financial interest in our company is an effective means to accomplish this objective. In early fiscal 2011, our compensation committee recommended and our board of directors approved amended guidelines that fixed the number of shares required to be held.

 

The number of shares now required to be held by our executive officers is as follows:

 

 

Executive officers are permitted to satisfy these ownership guidelines with shares of our Common Stock that they acquire through the exercise of stock options or other similar equity-based awards, through retention upon vesting of restricted shares or other similar equity-based awards and through direct share purchases. Our executive officers who were executive officers at the time of the adoption of the amended guidelines have until the fifth anniversary of the adoption to satisfy the ownership requirement. Newly appointed executive officers will have until the fifth anniversary of their appointment as executive officers to satisfy the ownership requirement. All of our executive officers have either satisfied the ownership requirement or have additional time to do so.

 

Tax Considerations.  In setting compensation for our NEOs, our compensation committee considers the deductibility of compensation under the Code. Section 162(m) of the Code prohibits us from taking a tax deduction for compensation in excess of $1.0 million that is paid to our chief executive officer and our NEOs, excluding our chief financial officer, and that is not considered “performance-based” compensation under Section 162(m). However, certain transition rules of Section 162(m) permit us to treat as performance-based compensation that is not subject to the $1.0 million cap on the following: (i) the compensation resulting from the exercise of stock options that we granted prior to our initial public offering; (ii) the compensation payable under bonus arrangements that were in place prior to our initial public offering; and (iii) compensation resulting from the exercise of stock options, or the vesting of restricted stock, that we may grant during the period that began after the closing of our

initial public offering and generally ends on the date of our annual shareholders meeting that occurs in 2011. Our 2004 Stock and Incentive Awards Plan provides for the grant of performance-based compensation under Section 162(m). Our compensation committee may, however, approve compensation that will not meet the requirements of Section 162(m) in order to ensure competitive levels of total compensation for our executive officers.

 

In past years, we granted incentive stock options to our NEOs under our equity-based plans. We have also granted non-qualified stock options under our equity-based plans. Because our company does not receive an income tax deduction with respect to incentive stock options unless there is a disqualifying disposition of the stock acquired under the option, our compensation committee decided in fiscal 2009 to discontinue the grant of incentive stock options to our NEOs and other employees.

 

We maintain certain deferred compensation arrangements for our employees and non-employee directors that are potentially subject to Code Section 409A. If such an arrangement is neither exempt from the application of Code Section 409A nor complies with the provisions of Code Section 409A, then the employee or non-employee director participant in such arrangement is considered to have taxable income when the deferred compensation vests, even if not paid at such time, and such income is subject to an additional 20% income tax. In such event, we are obligated to report such taxable income to the IRS and, for employees, withhold both regular income taxes and the 20% additional income tax. If we fail to do so, we could be liable for the withholding taxes and interest and penalties thereon. Stock options with an exercise price lower than the fair market value of our Common Stock on the date of grant are not exempt from coverage under Code Section 409A. We believe that all of our stock option grants are exempt from coverage under Code Section 409A. Our deferred compensation arrangements are intended to either qualify for an exemption from, or to comply with, Code Section 409A.

 

Compensation Committee Report

 

Our compensation committee has reviewed and discussed the “Compensation Discussion and Analysis” contained in this proxy statement with management. Since Ms. Rich first joined our compensation committee on June 23, 2010, she did not participate in the compensation decisions of the committee described herein nor did she review and discuss this “Compensation Discussion and Analysis” contained in this proxy statement with management. Mr. Stephenson resigned from our board on August 25, 2010, but, prior to his resignation, participated in such decisions and discussions. Based on our compensation committee’s review and discussions with management, our compensation committee recommended to our board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

Mark A. Williamson, Chair

Thomas A. Quadracci

Roland G. Stephenson

 

Summary Compensation Table for Fiscal 2010

 

The following table sets forth for our NEOs the following information for each of the past three fiscal years or for such shorter period as the NEO has been an NEO: (i) the dollar amount of base salary earned; (ii) the dollar value of bonuses and non-equity incentive plan compensation earned; (iii) the grant date fair value, determined under Accounting Standards Codification Topic 718 (“ASC Topic 718”), for all equity-based awards held by our NEOs; (iv) all other compensation; and (v) the dollar value of total compensation.

 

 

 

 

 

Grants of Plan-Based Awards for Fiscal 2010

 

As described above in the Compensation Discussion and Analysis, under our 2004 Stock and Incentive Awards Plan and employment agreements with certain of our NEOs, we granted stock options and non-equity incentive awards (i.e., cash bonuses) to certain of our NEOs in fiscal 2010. The following table sets forth information regarding all such stock options and awards.

 

 

 

 

Outstanding Equity Awards at Fiscal 2010 Year End

 

The following table sets out information on outstanding stock option awards held by our NEOs at the end of our fiscal 2010 on March 31, 2010, including the number of shares underlying both exercisable and unexercisable portions of each stock option, as well as the exercise price and expiration date of each outstanding option.

 

 

 

 

 

Option Exercises for Fiscal 2010

 

The following table sets forth information regarding the exercise of stock options that occurred during fiscal 2010 on an aggregated basis for each of our NEOs.

 

 

 

 

Payments Upon Termination or Change of Control

 

Employment Agreements

 

Under their current employment agreements, our NEOs (other than Mr. Kackley, who retired as our president and chief operating officer effective May 14, 2010) are entitled to certain severance payments and other benefits

upon a qualifying employment termination, including certain enhanced protections under such circumstances occurring after a change in control of our company. If the executive’s employment is terminated without “cause” or for “good reason” prior to the end of the employment period, the executive will be entitled to a lump sum severance benefit equal to a multiple (indicated in the table below) of the sum of his base salary plus the average of the prior three years’ bonuses; a pro rata bonus for the year of the termination; and COBRA premiums at the active employee rate for the duration of the executive’s COBRA continuation coverage period. To receive these benefits, the executive must execute and deliver to us (and not revoke) a general release of claims.

 

“Cause” is defined in the new employment agreements as a good faith finding by our board of directors that the executive has (i) failed, neglected, or refused to perform the lawful employment duties related to his position or that we assigned to him (other than due to disability); (ii) committed any willful, intentional, or grossly negligent act having the effect of materially injuring our interests, business, or reputation; (iii) violated or failed to comply in any material respect with our published rules, regulations, or policies; (iv) committed an act constituting a felony or misdemeanor involving moral turpitude, fraud, theft, or dishonesty; (v) misappropriated or embezzled any of our property (whether or not an act constituting a felony or misdemeanor); or (vi) breached any material provision of the employment agreement or any other applicable confidentiality, non-compete, non-solicit, general release, covenant not-to-sue, or other agreement with us.

 

“Good reason” is defined in the new employment agreements as the occurrence of any of the following without the executive’s consent: (i) a material diminution in the executive’s base salary; (ii) a material diminution in the executive’s authority, duties or responsibilities; (iii) a material diminution in the authority, duties or responsibilities of the supervisor to whom the executive is required to report; (iv) a material diminution in the budget over which the executive retains authority; (v) a material change in the geographic location at which the executive must perform services; or (vi) a material breach by us of any provision of the employment agreement.

 

The severance multiples, employment and renewal terms and restrictive covenants under the employment agreements, prior to any change of control occurring, are as follows:

 

 

Mr. Kackley retired as our president and chief operating officer effective May 14, 2010, terminating his employment agreement. He did not receive any severance, retirement or similar compensation under his employment agreement in connection with this retirement. Mr. Kackley continues to serve as a director of our company.

 

We set the severance multiples, employment and renewal terms and restrictive covenants under the new employment agreements based on advice from Towers Watson received prior to our initial public offering that such multiples and terms were then consistent with general public company practice and our subjective belief at the time that these amounts and terms were necessary to provide our NEOs with compensation arrangements that will help us to retain and attract high-quality executives in a competitive job market. The severance multiples and employment and renewal terms vary among our individual NEOs based on the advice of Towers Watson received prior to our initial public offering that such multiples and terms were then consistent with general public company practice and our subjective judgment. We did not ascertain the basis or support for Towers Watson’s advice that such multiples and other terms are consistent with general public company practice.

 

Our NEOs’ employment agreements also provide enhanced benefits following a change of control of our company. Upon a change of control, the executive’s employment term is automatically extended for a specified period, which varies among the individual executives as shown in the chart below. Following the change of control, the executive is guaranteed the same base salary and a bonus opportunity at least equal to 100% of the prior year’s

target award and with the same general probability of achieving performance goals as was in effect prior to the change of control. In addition, the executive is guaranteed participation in salaried and executive benefit plans that provide benefits, in the aggregate, at least as great as the benefits being provided prior to the change of control.

 

The severance provisions remain the same as in the pre-change of control context as described above, except that the multiplier used to determine the severance amount and the post change of control employment term increases, as is shown in the table below. The table also indicates the provisions in the employment agreements regarding triggering events and the treatment of payments under the agreements if the non-deductibility and excise tax provisions of Code Sections 280G and 4999 are triggered, as discussed below.

 

 

Prior to our initial public offering, we set the post change of control severance multiples and employment terms under our NEOs’ employment agreements based on our belief at the time that these amounts and terms would provide appropriate levels of protection for our NEOs to enable them to focus their efforts on behalf of our company without undue concern for their employment or financial security following a change in control. In making this determination, our compensation committee considered information provided by Towers Watson prior to our initial public offering indicating that the proposed change of control severance multiples and employment terms were then generally consistent with the practices of Towers Watson’s surveyed companies.

 

A change of control under the employment agreements generally occurs when a third party acquires 20% or more of our outstanding stock, there is a hostile board election, a merger occurs in which our shareholders cease to own 50% of the equity of the successor, we are liquidated or dissolved, or substantially all of our assets are sold. We have agreed to treat these events as triggering events under the employment agreements because such events would represent significant changes in the ownership of our company and could signal potential uncertainty regarding the job or financial security of our NEOs. Specifically, we believe that an acquisition by a third party of 20% or more of our outstanding stock would constitute a significant change in ownership of our company because we have a relatively diverse, widely-dispersed shareholder base. We believe the types of protections provided under our employment agreements better enable our executives to focus their efforts on behalf of our company during such times of uncertainty.

 

The employment agreements contain a “valley” excise tax provision to address Code Sections 280G and 4999 non-deductibility and excise taxes on “excess parachute payments.” Code Sections 280G and 4999 may affect the deductibility of, and impose additional excise taxes on, certain payments that are made upon or in connection with a change of control. The valley provision provides that all amounts payable under the employment agreement and any other of our agreements or plans that constitute change of control payments will be cut back to one dollar less than three times the executive’s “base amount,” as defined by Code Section 280G, unless the executive would retain a greater amount by receiving the full amount of the payment and personally paying the excise taxes. Under the employment agreements, we are not obligated to gross up executives for any excise taxes imposed on excess parachute payments under Code Section 280G or 4999.

 

Equity Plans

 

Our equity plans provide for certain benefits in the event of certain changes of control. Under both our existing 2003 Stock Option Plan and our 2004 Stock and Incentive Awards Plan, if there is a change of control, our compensation committee may, among other things, accelerate the exercisability of all outstanding stock options

and/or require that all outstanding options be cashed out. Our 2003 Stock Option Plan defines a change of control as the occurrence of any of the following:

 

 

A change of control under our 2004 Stock and Incentive Awards Plan generally occurs when a third party acquires 20% or more of our outstanding stock, there is a hostile board election, a merger occurs in which our shareholders cease to own 50% of the equity of the successor, or we are liquidated or dissolved or substantially all of our assets are sold.

Payments Upon Termination

 

The following table summarizes the estimated value of payments and other benefits to which our NEOs would have been entitled under the employment agreements and equity plans described above upon certain terminations of employment, assuming, solely for purposes of such calculations, that (i) the triggering event or events occurred on March 31, 2010 and (ii) in the case of a change of control, the vesting of all stock options held by our NEOs was accelerated.

 

 

Payments Upon Change of Control (No Termination)

 

If a change of control had occurred at the end of our fiscal 2010 on March 31, 2010, and our compensation committee had cashed out all of the stock options then held by our NEOs, whether or not vested, for a payment equal to the product of (i) the number of shares underlying such options and (ii) the excess, if any, of the closing price per share of our Common Stock on such date and the exercise price per share of such options, our NEOs would have received approximately the following benefits:

 

 

RISK ASSESSMENT OF OUR COMPENSATION POLICIES AND PRACTICES

 

We believe that we have designed a balanced approach to our compensation programs that rewards both our NEOs and other key employees for achieving our annual and longer-term strategic objectives and financial and business performance goals that we believe will help us achieve sustained growth and success over the long term. We believe that our compensation committee has structured our total executive compensation to ensure that there is a focus on incentivizing and rewarding both near-term financial performance and sustained long-term shareholder appreciation. While it is possible that the pursuit of our strategic objectives and our annual financial performance targets that determine our annual bonus payouts may lead to employee behavior that may increase certain risks to our company, we believe that we have designed our compensation programs to help mitigate against such concerns and to help ensure that our compensation practices and decisions are consistent with our strategic business plan and our enterprise risk profile.

 

At its meetings in April, May and June 2010, our compensation committee conducted a review of our compensation policies and practices to assess whether any risks arising from such policies and practices are reasonably likely to materially adversely affect our company. In this regard, our compensation committee took the following actions:

 

 

As part of its review of our compensation policies and practices, our compensation committee identified the following attributes that it believes help to mitigate against the potential for excessive or unnecessary risks to be realized by our company as a result of our compensation policies and practices:

 

 

 

Subsequent to fiscal 2010, our board of directors decided that it would be prudent to adopt a so-called “clawback” policy as an additional risk mitigation provision. As a result, our new clawback policy calls on our board of directors to require reimbursement from any officer of an amount equal to the amount of any overpayment or overrealization of any incentive compensation paid to, or realized by, the officer if:

 

 

DIRECTOR COMPENSATION

 

Our compensation committee retained Towers Watson to provide it with recommendations regarding our compensation program for non-employee directors subsequent to our initial public offering. Based on Towers Watson’s recommendations, our compensation committee then recommended that our board of directors adopt, and our board of directors then did adopt, the following compensation program for our non-employee directors which became effective upon the closing of our initial public offering: (a) an annual retainer of $40,000, payable in cash or shares of our Common Stock at the election of the recipient; (b) an annual stock option grant, vesting ratably over three years, with a grant date fair value of $45,000; (c) an annual retainer of $15,000 for each of the independent chairman of our board of directors, the independent lead director and the chairman of the audit and finance committee of our board of directors, payable in cash or shares of Common Stock at the election of the recipient; and (d) an annual retainer of $10,000 for each of the chairmen of the compensation committee and the nominating and corporate governance committee of our board of directors, payable in cash or shares of Common Stock at the election of the recipient. In order to attract potential new independent directors in the future, our board of directors has retained the flexibility to make an initial stock option or other form of equity-based grant or a cash award to any such new non-employee directors upon joining our board. In connection with Mr. Kackley’s election as non-executive chairman of our board on August 25, 2010, we modified our existing compensation program to provide for an annual retainer of $20,000 for his role as non-executive chairman.

 

In fiscal 2010, our compensation committee recommended and our board of directors approved amended guidelines that fixed the number of shares required to be held at 25,000 shares. Directors are permitted to satisfy these ownership guidelines with shares of our Common Stock that they acquire through the exercise of stock options

or other similar equity-based awards, through retention upon vesting of restricted shares or other similar equity-based awards and through direct share purchases. Our directors who were directors at the time of the adoption of the amended guidelines have until the fifth anniversary of the adoption to satisfy the ownership requirement. Newly elected directors will have until the fifth anniversary of their election to satisfy the ownership requirement. All of our directors have either satisfied the ownership requirement or have additional time to do so.

 

Director Compensation for Fiscal 2010

 

The following table summarizes the compensation of our non-employee directors for fiscal 2010. As employee directors, none of Messrs. Verfuerth, Kackley or Potts received any compensation for their service as directors, and they are therefore omitted from the table. Ms. Rich and Mr. Schueller are omitted from the table because they were not directors in fiscal 2010. We reimbursed each of our directors, including our employee directors, for expenses incurred in connection with attendance at meetings of our board and its committees.

 

 

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of September 1, 2010, by:

 

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes any shares over which a person exercises sole or shared voting or investment power. Under these rules, beneficial ownership also includes any shares as to which the individual or entity has the right to acquire beneficial ownership of within 60 days of September 1, 2010, through the exercise of any warrant, stock option or other right. Except as noted by footnote, and subject to community property laws where applicable, we believe that the shareholders named in the table below have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

 

Except as set forth below, the address of all shareholders listed under “Directors and executive officers” is c/o Orion Energy Systems, Inc. 2210 Woodland Drive, Manitowoc, WI 54220.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own more than ten percent of our Common Stock, to file initial statements of beneficial ownership (Form 3), and statements of changes in beneficial ownership (Forms 4 or 5) of our Common Stock with the SEC. The SEC requires executive officers, directors and greater than ten percent shareholders to furnish us with copies of all these forms filed with the SEC.

 

To our knowledge, based solely upon our review of the copies of these forms received by us, or written representations from certain reporting persons that no additional forms were required for those persons, we believe that all of our executive officers and directors complied with their reporting obligations during fiscal 2010, except that a Form 4 reporting Mr. Stephenson’s receipt of Common Stock on August 7, 2009 as part of his fiscal 2010 retainer was not filed within two business days.

 

Policies and Procedures Governing Related Person Transactions

 

Our policy is to enter into transactions with related persons on terms that, on the whole, are no less favorable to us than those available from unaffiliated third parties. Our board of directors has adopted written policies and procedures regarding related person transactions. For purposes of these policies and procedures:

 

 

 

Each of our executive officers, directors or nominees for director is required to disclose to our audit and finance committee certain information relating to related person transactions for review, approval or ratification by our audit and finance committee. In making a determination about approval or ratification of a related person transaction, our audit and finance committee will consider the information provided regarding the related person transaction and whether consummation of the transaction is believed by the committee to be in our best interests. Our audit and finance committee may take into account the effect of a director’s related person transaction on the director’s status as an independent member of our board of directors and eligibility to serve on committees of our board under SEC rules and the listing standards of the NYSE Amex. Any related person transaction must be disclosed to our full board of directors.

 

Related Person Transactions

 

Set forth below are certain related person transactions that occurred in our fiscal year 2010. Based on our experience in the business sectors in which we participate and the terms of our transactions with unaffiliated third persons, we believe that all of the transactions set forth below (i) were on terms and conditions that were not materially less favorable to us than could have been obtained from unaffiliated third parties and (ii) complied with the terms of our policies and procedures regarding related person transactions. All of the transactions set forth below have been ratified by our audit and finance committee.

 

Thomas A. Quadracci

 

During fiscal 2010, we received an aggregate of $29,000 for products and services we sold to Quad/Graphics, Inc. In addition, during fiscal 2010, we purchased an aggregate of $30,000 of products and services from Quad/Graphics, Inc. Thomas A. Quadracci, who has been one of our directors since 2006, was the executive chairman of Quad/Graphics, Inc. until January 1, 2007 and is a shareholder of Quad/Graphics, Inc.

 

Roland G. Stephenson

 

During fiscal 2010, we received an aggregate of $86,000 for products and services we sold to Faith Technologies, Inc. In addition, during fiscal 2010, we purchased an aggregate of $171,000 of products and services from Faith Technologies, Inc. Roland G. Stephenson, who was one of our directors from 2008 until August 25, 2010, is the chief executive officer and a significant shareholder of Faith Technologies, Inc. Mr. Stephenson resigned from our board in order to avoid any appearance of conflict of interest or concern over the proper application of the corporate opportunity doctrine due to increasingly direct competition between our business and the business of Faith Technologies, Inc. as a result of Faith Technologies, Inc.’s continuing evolution into providing more energy efficient lighting, solar, wind and other products and solutions directly to its customers.

 

James R. Kackley

 

In February 2009, we entered into a charitable gift and corporate stock repurchase agreement with James R. Kackley, who was at the time one of our directors and who served as our president and chief operating officer during part of fiscal 2010. Pursuant to the agreement, we became obligated to purchase from a charitable organization shares of our Common Stock worth $500,000 to be gifted to the organization by Mr. Kackley. The purchases were to take place on five advance specified dates, all of which have since occurred. The dollar amount that we paid for the shares was fixed at an aggregate of $500,000, and the number of shares repurchased varied according to the closing price of our Common Stock on the day prior to the specified purchase dates.

 

Neal R. Verfuerth

 

In fiscal 2009, Josh Kurtz and Zach Kurtz, two of our national account managers, received $156,103 and $145,260, respectively, of compensation from us in their capacities as employees. Messrs. Kurtz and Kurtz are the sons of Neal R. Verfuerth, our chief executive officer.

 

REPORT OF THE AUDIT AND FINANCE COMMITTEE

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933, as amended, or the Exchange Act.

 

Our audit and finance committee has adopted certain pre-approval categories for each fiscal year. These categories relate to auditor assistance with periodic filings with the SEC, auditor assistance with board approved capital raising or debt financing, auditor assistance with board approved acquisitions, auditor assistance with due diligence, required responses to SEC comment letters, and auditor assistance with routine tax matters.

 

We, the members of the audit and finance committee, represent the following:

 

1. As required by our charter, we reviewed the company’s financial statements for the fiscal year 2010 and met with management, as well as representatives of Grant Thornton, LLP, the company’s independent registered public accounting firm (which we refer to as “GT”), to discuss the financial statements.

 

2. We also discussed with members of GT the matters required to be discussed by the Statement on Auditing Standards 61, Communications with Audit Committees, as amended.

 

3. In addition, we received the written disclosures and the letter from GT required by applicable requirements of the Public Company Accounting Oversight Board regarding GT’s communications with the audit and finance committee concerning independence, and discussed with members of GT their independence from management and the company.

 

4. Based on these discussions, the financial statement review and other matters we deemed relevant, we recommended to the company’s board of directors that the company’s audited financial statements for the fiscal year 2010 be included in the company’s Annual Report on Form 10-K for the year ended March 31, 2010.

 

Respectfully submitted by the audit and finance committee:

 

Michael W. Altschaefl, Chair
Thomas A. Quadracci
Thomas N. Schueller
Mark C. Williamson

 

PROPOSAL TWO:

 

RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Grant Thornton, LLP (which we refer to as “GT”) has been our independent registered public accounting firm for the past several years and audited our consolidated balance sheets as of March 31, 2010 and March 31, 2009, and the consolidated statements of operations, shareholders’ equity, income (loss) and cash flows for each of years in the three-year period ended March 31, 2010, as stated in their report appearing in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010. Our audit and finance committee has selected GT to be our independent registered public accounting firm for the fiscal year 2011. In doing so, the committee considered the results from its review of GT’s independence, including (i) all relationships between GT and our company and any disclosed relationships or services that may impact their objectivity and independence; (ii) GT’s performance and qualification as an independent registered public accounting firm; and (iii) the fact that the GT engagement audit partner is rotated on a regular basis as required by applicable laws and regulations.

 

Our audit and finance committee charter does not require that our shareholders ratify the selection of GT as our independent registered public accounting firm. We are doing so because we believe it is a matter of good corporate governance practice. If our shareholders do not ratify the selection, our audit and finance committee may reconsider whether to retain GT, but still may retain the firm. Even if the selection is ratified, our audit and finance committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interests of us and our shareholders.

Representatives of GT will be present at our annual meeting. They will have the opportunity to make a statement if they so desire and to respond to appropriate questions.

 

The following table presents fees billed for professional services rendered for the audit of our annual financial statements for fiscal 2010 and fiscal 2009 and fees billed for other services rendered during fiscal 2010 and fiscal 2009 by GT:

 

 

 

 

The audit and finance committee has considered whether the provision of these services not related to the audit of the financial statements acknowledged above was compatible with maintaining the independence of GT and is of the opinion that the provision of these services were compatible with maintaining GT’s independence.

 

The audit and finance committee, in accordance with its charter, must pre-approve all non-audit services provided by our independent registered public accountants. The audit and finance committee generally pre-approves specified services in the defined categories of audit services, audit related services and tax services up to specified amounts. Pre-approval may also be given as part of our audit and finance committee’s approval of the scope of the engagement of the independent registered public accountants or on an individual, explicit case-by-case basis before the independent auditor is engaged to provide each service.

 

RECOMMENDATION OF THE BOARD: The board recommends a vote FOR the approval of the ratification of Grant Thornton, LLP as our independent registered public accounting firm for our fiscal year 2011.

 

PROPOSAL THREE:

 

AMENDMENT TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK THAT MAY BE

ISSUED UNDER THE ORION ENERGY SYSTEMS 2004 STOCK AND INCENTIVE AWARDS PLAN

 

We are requesting that our shareholders approve an amendment to our 2004 Stock and Incentive Awards Plan, which we refer to as the “Plan,” to increase the number of shares of Common Stock authorized for issuance under the Plan by 1,500,000 shares. The proposed amendment will enable us to continue to provide equity awards to employees, directors and consultants as part of a competitive compensation program.

 

Reasons for the Plan Amendment.  A summary of our reasons for seeking the plan amendment is as follows:

 

 

 

The total number of shares that are authorized to be issued under the Plan prior to the proposed amendment is 3,500,000 shares, plus the total number of shares granted under our 2003 Stock Option Plan that are exchanged for new shares under the Plan or that are cancelled under the 2003 Plan. To allow for additional equity-based awards to be made under the Plan, our board has unanimously approved the proposed amendment to increase the number of shares of Common Stock authorized for issuance under the Plan by 1,500,000 shares contingent upon shareholder approval of the amendment and the Plan as amended at the annual meeting. The following summary description of the Plan as amended by such amendment is qualified in its entirety by reference to the full text of the Plan, as amended, which is attached to this proxy statement as Appendix A.

 

Purpose.  The Plan has two complementary purposes: (i) to attract and retain outstanding individuals to serve as officers, directors, employees, consultants and advisors and (ii) to increase shareholder value. The Plan is intended to enhance our ability to attract, retain and motivate persons who make or are expected to make important contributions to our company, our subsidiaries and our affiliates by providing such persons with equity ownership opportunities and performance-based incentives, thereby better aligning the interests of such persons with those of our shareholders.

 

Eligibility and Participation.  All of our and our affiliates’ employees and directors and all consultants or advisors who provide services to us or our affiliates are eligible to be granted awards under the Plan. Our compensation committee designates individuals to become participants in the Plan. Awards are granted exclusively as compensation for the performance of those services a participant is already performing or reasonably may be expected to perform in his or her respective position. Our compensation committee’s designation of a participant in any year does not require the committee to designate the person to receive an aware in any other year.

 

Awards Under the Plan; Available Shares.  As of June 30, 2010, there were 3,769,282 shares subject to outstanding options granted under the Plan. The total number of shares that are authorized to be issued under the Plan prior to the proposed amendment is 3,500,000 shares, plus the total number of shares granted under our 2003 Stock Option Plan that are exchanged for new shares under the Plan or that are cancelled under the 2003 Plan. As of June 30, 2010, 177,226 shares remained available for grant under the Plan prior to the proposed amendment, before subtracting the shares reserved for grant to non-executive officers by our chief executive officer acting as a subcommittee of our compensation committee. The proposed amendment would increase the number of shares that may be issued in connection with awards under the Plan by 1,500,000. This share limitation is subject to adjustment as described below.

 

The shares to be delivered under the Plan may consist, in whole or in part, of authorized but unissued shares or treasury shares. Our Articles of Incorporation authorize the issuance of 200,000,000 shares of Common Stock, and as of June 30, 2010, there were 22,595,903 shares of Common Stock issued and outstanding. The closing price of our Common Stock on September 1, 2010 was $2.63.

 

If any shares subject to an award granted under the Plan, or to which any award relates, are forfeited; an award otherwise terminates, expires or is canceled prior to the delivery of all of the shares or of other consideration issuable or payable pursuant to the award; or an award is settled in cash, then the number of shares subject to the award will again be available for the granting of additional awards under the Plan.

Administration.  The Plan is administered by our compensation committee, which has full power and discretionary authority to grant awards under the Plan; determine the type, terms and conditions of such awards and the number of shares to which such awards relate; interpret and administer the Plan and any instrument or agreement relating to, or made under, the Plan; establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and make any other determination and take any other action that the committee deems necessary or desirable for the administration of the Plan.

 

Our compensation committee’s decisions and determinations under the Plan need not be uniform and may be made selectively among eligible individuals, whether or not they are similarly situated. Some delegation is permitted. All decisions, interpretations and other actions of the committee shall be final and binding on all participants and any other individual with a right under the Plan.

 

Our board of directors has also delegated limited authority to our chief executive officer, acting as a subcommittee of our compensation committee, to grant equity-based awards under the Plan. Our chief executive officer may grant awards covering up to 250,000 shares of our Common Stock per fiscal year to certain non-executive officers in connection with offers of employment, promotions and certain other circumstances.

 

Types of Awards.  Awards under the Plan may consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, shares in lieu of cash, other stock-based awards, annual incentive awards or long-term incentive awards as determined by our compensation committee. Subject to adjustment as described below, no more than 1,000,000 shares of Common Stock may be issued pursuant to the exercise of incentive stock options.

 

No participant may be granted awards under the Plan that could result in such participant:

 

 

Each of these limitations is subject to adjustment as described below.

 

All awards granted under the Plan are evidenced by a written award agreement specifying the type of award granted, the duration of the award, the number of shares to which the award pertains, if applicable, and such other provisions as our compensation committee determines.

 

Options.  Subject to the terms of the Plan, our compensation committee has complete discretion under the Plan in determining: (i) the eligible individuals to be granted an option to purchase shares of our Common Stock; (ii) the number of shares to be subject to the option; (iii) whether the option is to be an incentive stock option or a nonqualified stock option (provided that incentive stock options may be granted only to employees); and (iv) any other terms and conditions of the option as determined by our compensation committee in its sole discretion, although stock options must be exercisable at purchase prices of not less than fair market value of the underlying shares on the date of grant and must be exercisable over not more than ten years after date of grant.

For purposes of the Plan, the fair market value of a share of Common Stock on the relevant date is generally the closing price of a share of Common Stock on such date as reported in The Wall Street Journal.

 

Our compensation committee determines the methods and the forms for payment of the purchase price of options, including, but not limited to by cash, by delivery of other shares or securities of our company having a fair market value equal to the purchase price of the shares (including by attestation), or by any combination of the foregoing; by having us withhold a number of shares otherwise deliverable pursuant to the exercise of the option having a fair market value on the date of exercise equal to some or all of the purchase price (including tax withholding obligations); or through a broker-facilitated cashless exercise procedure.

 

Our board of directors has also delegated limited authority to our chief executive officer, acting as a subcommittee of our compensation committee, to grant equity-based awards under the Plan. Our chief executive officer may grant awards covering up to 250,000 shares of our Common Stock per fiscal year to certain non-executive officers in connection with offers of employment, promotions and certain other circumstances.

 

Stock Appreciation Rights.  We may also grant stock appreciation rights, whereby the recipient will have the right to receive payment equal to the difference between the grant price of the right and the fair market value of our Common Stock on the date on which the right is exercised. A stock appreciation right may relate to an option, or may be granted independently of any option granted under the Plan. Subject to the terms of the Plan, our compensation committee will determine for each award of stock appreciation rights the grant price (provided that the grant price shall not be less than the fair market value of the shares subject to the stock appreciation right as determined on the date of grant), term, methods of exercise, methods of settlement and any other terms and conditions. To date, we have not granted stock appreciation rights under the Plan.

 

Performance and Stock Awards.  Our compensation committee has the authority under the Plan to grant awards of shares of restricted stock, restricted stock units, performance shares, performance units, shares in lieu of cash and other stock-based awards. Restricted stock means shares of Common Stock that are subject to such terms and conditions as our compensation committee determines appropriate, including restrictions on sale or other disposition and rights of our company to reacquire the restricted stock upon termination of the participant’s employment or service within specified periods. Restricted stock unit means the right to receive cash and/or shares of Common Stock, as determined by our compensation committee, the value of which is equal to the fair market value of one share to the extent conditions established by our compensation committee are met. The terms and conditions determined by our compensation committee may provide that restricted stock or restricted stock units are subject to forfeiture if we and/or the participant fails to achieve one or more performance goals established by our compensation committee over a designated period of time. Performance shares means the right to receive shares of Common Stock to the extent one or more performance goals established by our compensation committee over a designated period of time consisting of one or more full fiscal years of our company, a subsidiary or an affiliate are met. Performance units means the right to receive cash and/or shares of Common Stock valued in relation to a unit that has a designated dollar value or the value of which is equal to the fair market value of one or more shares of Common Stock, to the extent one or more performance goals established by our compensation committee over a designated period of time consisting of one or more full fiscal years of our company, a subsidiary or an affiliate are met. Shares may be granted under the Plan in lieu of all or a portion of any cash bonuses under any incentive compensation programs and/or increases in base compensation, if any, or with respect to non-employee directors, in lieu of fees for services as a director, as in effect from time to time.

 

Our compensation committee will determine all terms and conditions of the awards. If the committee determines that the restrictions imposed on restricted stock or restricted stock units lapse on the basis of the passage of time, the minimum ratable period of restriction must be three years from the date of grant of the award. If the committee determines that the restrictions lapse upon the achievement of one or more performance goals, the performance period must be a minimum of one year; provided that our compensation committee may provide in any award agreement or as determined in any individual case, that the restrictions may lapse or be waived in whole or part in the event of terminations resulting from specified causes (such as death, disability or retirement) or upon a change of control.

 

Unless otherwise determined by our compensation committee, during the period of restriction, participants holding shares of restricted stock granted under the Plan may exercise full voting rights with respect to those shares

(if applicable) and are entitled to receive all dividends and other distributions paid or made with respect to those shares while they are so held. Under the Plan, participants generally do not have a right to receive dividend payments or dividend equivalent payments with respect to unearned shares of Common Stock under a performance share, performance unit or restricted stock unit award.

 

To date, we have not granted restricted stock, restricted stock units, performance shares or performance units under the Plan.

 

Other Stock-Based Awards.  Other awards, valued in whole or in part by reference to, or otherwise based on, shares of our Common Stock, may be granted under the Plan either alone or in addition to or in conjunction with other awards for such consideration, if any, and in such amounts and having such terms and conditions as our compensation committee may determine. Our compensation committee also has the right to provide types of benefits under the Plan in addition to those specifically listed, if the committee believes that such benefits would further the purposes for which the Plan was established. Grants of such other awards that are considered “full value” awards, such as grants of shares of our Common Stock, and that become vested on the basis of the passage of time, must have a minimum ratable vesting period over three years from the date of grant, or if the award is earned based upon the attainment of one or more performance goals, then the performance period must be a minimum of one year from the date of grant; provided that no minimum vesting period shall be required for the grant of other stock-based awards if the number of shares subject to such awards does not exceed five percent of the aggregate number of shares reserved for issuance under the Plan.

 

Incentive Awards.  Our compensation committee has the authority to grant annual and long-term incentive awards under the Plan. An incentive award is the right to receive a cash payment to the extent performance goals established by our compensation committee over a designed period of time are met. The committee determines all terms and conditions of annual or long-term incentive awards, including the performance goals, performance period, the potential amount payable, the timing of payment and the consequences of a termination during the performance period.

 

The performance period for an incentive award must relate to a period of at least one of our fiscal years, and the performance period for a long-term incentive award must relate to a period of more than one of our fiscal years, except that, in each case, if the award is made at the time of commencement of employment with us or on the occasion of a promotion, then the award may relate to a shorter period.

 

Performance Goals.  For purposes of the Plan, performance goals mean any goals our compensation committee establishes that relate to one or more of the following with respect to our company or any one or more of our subsidiaries, affiliates or other business units: net sales; cost of sales; revenue; gross income; net income; operating income; income from continuing operations; earnings (including before taxes, and/or interest and/or depreciation and amortization); earnings per share (including diluted earnings per share); price per share; cash flow; net cash provided by operating activities; net cash provided by operating activities less net cash used in investing activities; net operating profit; ratio of debt to debt plus equity; return on shareholder equity; return on capital; return on assets; operating working capital; average accounts receivable; economic value added; customer satisfaction; operating margin; profit margin; sales performance; sales quota attainment; new sales; cross/integrated sales; customer engagement; internal revenue growth; and client retention. In addition, in the case of awards that the Committee determines will not be considered “performance-based compensation” under Code Section 162(m), our compensation committee may establish other performance goals not listed in the Plan.

 

As to each performance goal, the relevant measurement of performance shall be computed in accordance with generally accepted accounting principles, if applicable, but our compensation committee may, at the time of establishing the performance goals exclude the effects of (i) extraordinary, unusual and/or non-recurring items of gain or loss, (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws, or (iv) the effect of a merger or acquisition.

 

Effect of a Change of Control.  In order to preserve a participant’s rights under an award in the event of a change of control of our company, our compensation committee in its discretion may, at the time an award is made or at anytime thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period, or the deemed achievement of any performance goals, relating to the exercise or realization of the award;

(ii) provide for the purchase of the award for an amount of cash or other property that could have been received upon the exercise or realization of the award had the award been currently exercisable or payable; (iii) adjust the terms of the award in the manner determined by the committee to reflect the change of control; (iv) cause the award to be assumed, or new right substituted therefor, by another entity; or (v) make such other provision as our compensation committee may consider equitable and in the best interests of our company.

 

Except as otherwise expressly provided in any agreement between a participant and our company or an affiliate, if the receipt of any payment by a participant under the circumstances described above with respect to awards granted on or after our initial public offering, would result in the payment by the participant of any excise tax provided for in Section 280G and Section 4999 of the Code, then the amount of such payment will be reduced to the extent required to prevent the imposition of such excise tax.

 

Under the Plan, a “change in control” is generally deemed to have occurred if:

 

 

Transferability.  Awards are not transferable other than by will or the laws of descent and distribution, unless our compensation committee allows, with respect to awards other than incentive stock options, a participant to (i) designate in writing a beneficiary to exercise the award or receive payment under the award after the participant’s death, (ii) transfer an award.

 

Adjustments.  If (i) we are involved in a merger or other transaction in which shares of Common Stock are changed or exchanged, (ii) we subdivide or combine shares of Common Stock or declare a dividend payable in shares of Common Stock, other securities (other than stock purchase rights issued pursuant to the terms of any rights agreement) or other property, (iii) we effect a cash dividend that exceeds 10% of the trading price of the shares of Common Stock or any other dividend or distribution in the form of cash or a repurchase of shares of Common Stock that our board determines is special or extraordinary or that is in connection with a recapitalization or reorganization, or (iv) any other event shall occur which, in the case of this clause (iv), in the judgment of our committee requires an adjustment to prevent dilution or enlargement of the benefits intended to be made available under the Plan, then our compensation committee will, in a manner it deems equitable, adjust any or all of (A) the number and type of shares of Common Stock subject to the Plan and which may, after the event, be made the subject of awards; (B) the per participant limits under the Plan; (C) the number and type of shares of Common Stock subject to outstanding awards; (D) the grant, purchase or exercise price with respect to any award; and (E) to the extent such discretion does not cause an award that is intended to qualify as performance-based compensation under Code Section 162(m) to lose its status as such, the performance goals of an award. In any such case, our compensation committee may also provide for a cash payment to the holder of an outstanding award in exchange for the cancellation of all or a portion of the award.

 

In the case of a stock dividend (other than a stock dividend declared in lieu of an ordinary cash dividend) or subdivision or combination of our Common Stock (including a reverse stock split), if no action is taken by our compensation committee, adjustments described above that are proportionate will automatically be made as of the date of such stock dividend or subdivision or combination of our Common Stock.

 

Repricing and Backdating Prohibited.  Except for the adjustments provided for in the Plan, neither our compensation committee nor any other person may decrease the exercise price for any outstanding stock option or stock appreciation right after the date of grant nor allow a participant to surrender an outstanding option or stock appreciation right to us as consideration for the grant of a new option or stock appreciation right with a lower

exercise price. In addition, our compensation committee may not make a grant of an option or a stock appreciation right with a grant date that is effective prior to the date our compensation committee takes action to approve such award.

 

Term of Plan.  Unless earlier terminated by our board, the Plan will terminate on, and no awards may be issued after, September 29, 2014.

 

Termination and Amendment.  Our board or the compensation committee may amend, alter, suspend, discontinue or terminate the Plan at any time, subject to the following limitations:

 

 

Our compensation committee may at any time amend any outstanding award agreement, but any amendment that decreases or impairs the rights of a participant under such agreement will not be effective unless consented to by the participant, except that consent shall not be required in the event an award is amended, adjusted or cancelled in connection with an adjustment in capitalization or change of control as contemplated by the Plan, and consent is not necessary for modifications of award granted after our initial public offering to the extent deemed necessary to comply with any applicable law, the listing requirements of any principal securities exchange or market on which our Common Stock is then traded, or to preserve favorable accounting or tax treatment of any award.

 

Our committee’s authority to amend, alter, adjust, suspend, discontinue or terminate any award, waive any conditions or restrictions with respect to any award, and otherwise administer the Plan and any award and the authority of our board and our committee to amend the Plan, shall extend beyond the date of the Plan’s termination. Termination of the Plan shall not affect the rights of participants with respect to awards previously granted to them, and all unexpired awards will continue in force and effect after termination of the Plan except as they may lapse or be terminated by their own terms and conditions.

 

Certain U.S. Federal Income Tax Consequences.  The following summarizes certain U.S. federal income tax consequences relating to the Plan under current tax law.

 

Tax Consequences of Stock Options.  The grant of a stock option will create no income tax consequences to us or the recipient. A participant who is granted a non-qualified stock option will generally recognize ordinary compensation income at the time of exercise in an amount equal to the excess of the fair market value of the Common Stock at such time over the exercise price. We will generally be entitled to a deduction in the same amount and at the same time as ordinary income is recognized by the participant. Upon the participant’s subsequent disposition of the shares of Common Stock received with respect to such stock option, the participant will recognize a capital gain or loss (long-term or short-term, depending on the holding period) to the extent the amount realized from the sale differs from the tax basis, i.e., the fair market value of the Common Stock on the exercise date.

 

In general, a participant will recognize no income or gain as a result of exercise of an incentive stock option (except that the alternative minimum tax may apply). Except as described below, the participant will recognize a long-term capital gain or loss on the disposition of the Common Stock acquired pursuant to the exercise of an incentive stock option and we will not be allowed a deduction. If the participant fails to hold the shares of Common Stock acquired pursuant to the exercise of an incentive stock option for at least two years from the grant date of the incentive stock option and one year from the exercise date, then the participant will recognize ordinary compensation income at the time of the disposition equal to the lesser of (a) the gain realized on the disposition, or (b) the excess of the fair market value of the shares of Common Stock on the exercise date over the exercise price. We will generally be entitled to a deduction in the same amount and at the same time as ordinary income is recognized by the

participant. Any additional gain realized by the participant over the fair market value at the time of exercise will be treated as a capital gain.

 

In the past, we have granted both incentive stock options and non-qualified stock options under the Plan; however, beginning in fiscal 2009, our compensation committee decided to grant only non-qualified stock options under the Plan because of the related tax benefits of non-qualified stock options to our company.

 

Restricted Stock.  Generally, a participant will not recognize income and we will not be entitled to a deduction at the time an award of restricted stock is made, unless the participant makes the election described below. A participant who has not made such an election will recognize ordinary income at the time the restrictions on the stock lapse in an amount equal to the fair market value of the restricted stock at such time (less the amount, if any, the participant paid for such restricted stock). We will generally be entitled to a corresponding deduction in the same amount and at the same time as the participant recognizes income. Any otherwise taxable disposition of the restricted stock after the time the restrictions lapse will result in a capital gain or loss (long-term or short-term, depending on the holding period) to the extent the amount realized from the sale differs from the tax basis, i.e., the fair market value of the Common Stock on the date the restrictions lapse. Dividends paid in cash and received by a participant prior to the time the restrictions lapse will constitute ordinary income to the participant in the year paid and we will generally be entitled to a corresponding deduction for such dividends. Any dividends paid in stock will be treated as an award of additional restricted stock subject to the tax treatment described herein.

 

A participant may, within 30 days after the date of the award of restricted stock, elect to recognize ordinary income as of the date of the award in an amount equal to the fair market value of such restricted stock on the date of the award (less the amount, if any, the participant paid for such restricted stock). If the participant makes such an election, then we will generally be entitled to a corresponding deduction in the same amount and at the same time as the participant recognizes income. If the participant makes the election, then any cash dividends the participant receives with respect to the restricted stock will be treated as dividend income to the participant in the year of payment and will not be deductible by us. Any otherwise taxable disposition of the restricted stock (other than by forfeiture) will result in a capital gain or loss. If the participant who has made an election subsequently forfeits the restricted stock, then the participant will not be entitled to deduct any loss. In addition, we would then be required to include as ordinary income the amount of any deduction we originally claimed with respect to such shares.

 

Performance Shares.  The grant of performance shares will create no income tax consequences for us or the participant. Upon the participant’s receipt of shares at the end of the applicable performance period, the participant will recognize ordinary income equal to the fair market value of the shares received, except that if the participant receives shares of restricted stock in payment of performance shares, recognition of income may be deferred in accordance with the rules applicable to restricted stock as described above. We will generally be entitled to a deduction in the same amount and at the same time as income is recognized by the participant. Upon the participant’s subsequent disposition of the shares, the participant will recognize capital gain or loss (long-term or short-term, depending on the holding period) to the extent the amount realized from the disposition differs from the shares’ tax basis, i.e., the fair market value of the shares on the date the participant received the shares.

 

Performance Units and Restricted Stock Units.  The grant of a performance unit or restricted stock unit will create no income tax consequences to us or the participant. Upon the participant’s receipt of cash and/or shares at the end of the applicable performance or vesting period, the participant will recognize ordinary income equal to the amount of cash and/or the fair market value of the shares received, and we will be entitled to a corresponding deduction in the same amount and at the same time. If performance units are settled in whole or in part in shares, upon the participant’s subsequent disposition of the shares the participant will recognize a capital gain or loss (long-term or short-term, depending on the holding period) to the extent the amount realized upon disposition differs from the shares’ tax basis, i.e., the fair market value of the shares on the date the employee received the shares.

 

Incentive Awards.  A participant who is paid an incentive award will recognize ordinary income equal to the amount of cash paid, and we will be entitled to a corresponding deduction in the same amount and at the same time.

 

Withholding.  In the event we are required to withhold any federal, state or local taxes or other amounts in respect of any income recognized by a participant as a result of the grant, vesting, payment or settlement of an award or disposition of any shares of Common Stock acquired under an award, we may deduct from any payments of any

kind otherwise due the participant cash, or with the consent of our compensation committee, shares of Common Stock otherwise deliverable or vesting under an award, to satisfy such tax obligations. Alternatively, we may require such participant to pay to us or make other arrangements satisfactory to us regarding the payment to our company of the aggregate amount of any such taxes and other amounts. If shares of Common Stock are deliverable on exercise or payment of an award, then our compensation committee may permit a participant to satisfy all or a portion of the federal, state and local withholding tax obligations arising in connection with such award by electing to (i) have us withhold shares otherwise issuable under the award, (ii) tender back shares received in connection with such award, or (iii) deliver other previously owned shares, in each case having a fair market value equal to the amount to be withheld. However, the amount to be withheld may not exceed the total minimum tax withholding obligations associated with the transaction to the extent needed for us to avoid an accounting charge.

 

Additional Taxes Under Section 409A.  If an award under the Plan is considered non-qualified deferred compensation and such award is neither exempt from nor compliant with the requirements of Code Section 409A, then the participant will be subject to an additional 20% income tax on the value of the award when it is no longer subject to a substantial risk of forfeiture, as well as interest on the income taxes that were owed from the date of vesting to the date such taxes are paid.

 

No Guarantee of Tax Treatment.  Notwithstanding any provision of the Plan, we do not guarantee that (i) any award intended to be exempt from Code Section 409A is so exempt, (ii) any award intended to comply with Code Section 409A or Section 422 does so comply, or (iii) any award will otherwise receive a specific tax treatment under any other applicable tax law, nor in any such case will we or any of our affiliates indemnify, defend or hold harmless any individual with respect to the tax consequences of any award.

 

Section 162(m) Limit on Deductibility of Compensation.  Code Section 162(m) limits the deduction we can take for compensation it pays to our chief executive officer and the three other highest paid officers other than our chief financial officer (determined as of the end of each year) to $1 million per year per individual. However, certain performance-based compensation that meets the requirements of Code Section 162(m) does not have to be included when determining whether the $1 million limit has been met. The Plan is designed so that awards granted to the covered individuals may meet the Code Section 162(m) requirements for performance-based compensation.

 

New Plan Benefits.  The compensation of our non-employee directors currently includes the annual award of options with a grant date fair value of $45,000, as described under “Director Compensation” above. Other than such director equity compensation, we cannot currently determine the awards that may be granted under the Plan in the future to the executive officers named in this Proxy Statement, other officers or other persons. Our compensation committee will make such determinations from time to time.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table represents shares outstanding under our 2003 Stock Option Plan and the Plan as of March 31, 2010.

 

Equity Compensation Plan Information

 

 

 

 

 

RECOMMENDATION OF THE BOARD: The board recommends a vote FOR the amendment to the 2004 Stock and Incentive Awards Plan to increase the number of shares of Common Stock authorized for issuance under the Plan by 1,500,000 shares.

 

ANNUAL REPORT ON FORM 10-K

 

We will provide without charge to each person to whom a copy of this Proxy Statement has been delivered, upon written or oral request, a copy of our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 filed on June 14, 2010. Requests should be made to our Board Secretary at our principal executive offices located at 2210 Woodland Drive, Manitowoc, Wisconsin 54220; telephone number (877) 204-7540.

 

SHAREHOLDER PROPOSALS

 

We did not receive any shareholder proposals for inclusion in this year’s Proxy Statement. All shareholder proposals pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (“Rule 14a-8”) for presentation at the 2011 annual meeting of shareholders must be received at our offices located at 2210 Woodland Drive, Manitowoc, Wisconsin 54220, by May 13, 2011, for inclusion in the proxy statement for our 2011 annual meeting.

 

A shareholder who intends to present business, other than a shareholder proposal pursuant to Rule 14a-8, or nominate a director at the 2011 annual meeting must comply with the requirements set forth in our bylaws. Among other things, a shareholder must give written notice to our Board Secretary on or before December 31, 2010, unless our 2011 annual meeting is on or after May 1, 2011, in which case notice must be received not later than the close of business on the day which is determined by adding to December 31, 2010 the number of days starting with May 1, 2011 and ending on the date of the 2011 annual meeting. By way of example, if our 2011 annual meeting takes place on October 27, 2011, then such notice to be timely must be received not later than the close of business on June 28, 2011.

 

If the notice is not timely received in accordance with the foregoing, then we are not required to present such proposal at the 2011 annual meeting because the notice will be considered untimely. If our board of directors chooses to present such a shareholder proposal submitted after its due date at the 2011 annual meeting, then the persons named in proxies solicited by our board of directors for the 2011 annual meeting may exercise discretionary voting power with respect to such proposal.

 

SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS

 

Shareholders who wish to communicate with our board or with particular directors may send correspondence to our Board Secretary at Orion Energy Systems, Inc., 2210 Woodland Drive, Manitowoc, Wisconsin 54220. Our Board Secretary will forward all appropriate communications to our board or to particular directors as directed or as appropriate. Shareholders may also communicate directly with non-management directors of our board by directing communications to Orion Energy Systems, Inc., 2210 Woodland Drive, Manitowoc, Wisconsin 54220, Attn: Chairman of the Board.

 

MAILINGS TO HOUSEHOLDS

 

To reduce duplicate mailings, we are now sending only one copy of any Proxy Statement or annual report to multiple shareholders sharing an address unless we receive contrary instructions from one or more of the shareholders. Upon written request, we will promptly deliver a separate copy of any annual report or Proxy Statement to a shareholder at a shared address.

 

If you wish to receive separate copies of each Proxy Statement and annual report please notify us by writing or calling our Board Secretary at 2210 Woodland Drive, Manitowoc, Wisconsin 54220, telephone number (877) 204-7540. If you are receiving duplicate mailings, you may authorize us to discontinue mailings of multiple Proxy Statements and annual reports. To discontinue duplicate mailings, notify us by writing or calling our Board Secretary.

 

PROXY SOLICITATION

 

We will bear the costs of solicitation of proxies for our annual meeting. In addition to solicitation by mail, directors, officers and our regular employees may solicit proxies from stockholders by telephone, telegram, in person or otherwise. These directors, officers and employees will not receive additional compensation, but may be reimbursed for out-of-pocket expenses in connection with the solicitation. In addition to potential solicitation by our directors, officers and employees, we have engaged a professional proxy solicitation firm, D.F. King & Co., Inc., to assist in soliciting proxies for the meeting. We will bear the costs of the fees of D.F. King & Co., Inc., which we expect to be approximately $7,500, plus its expenses. Brokers, nominees, fiduciaries and other custodians who are requested to forward soliciting material to the beneficial owners of our Common Stock held of record by them will be reimbursed for their reasonable expenses.

 

 

 

APPENDIX A

 

ORION ENERGY SYSTEMS, INC.
2004 STOCK AND INCENTIVE AWARDS PLAN
As Amended and Restated Effective December 24, 2007
and Amended October 27, 2010

 

Section 1.  Purpose

 

This 2004 Stock and Incentive Awards Plan, previously called the Equity Incentive Plan (the “Plan”), has been established by Orion Energy Systems, Inc. to advance two complementary purposes: (i) to attract and retain outstanding individuals to serve as officers, directors, employees, consultants and advisors and (ii) to increase shareholder value. The Plan is intended to enhance the Company’s ability to attract, retain and motivate persons who make or are expected to make important contributions to the Company, its Subsidiaries or Affiliates, by providing such persons with equity ownership opportunities and performance-based incentives, thereby better aligning the interests of such persons with those of the Company’s shareholders.

 

Section 2.  Definitions

 

“409A Subsidiary” means any corporation or other entity in an unbroken chain of corporations or other entities, beginning with the Company, in which each corporation or other entity (other than the last corporation or entity in the chain) has a controlling interest (within the meaning of Treasury regulation § 1.414(c)-2(b)(2)(i) except that the phrase “at least 50 percent” shall be used in place of “at least 80 percent” each place it appears therein) in the corporation or other entity; provided that the phrase “at least 20 percent” may be used in place of “at least 50 percent” with respect to the grant of non-qualified stock options or stock appreciation rights made to eligible individuals based on legitimate business criteria of the Company within the meaning of Code section 409A.

 

“Act” means the Securities Act of 1933, as amended from time to time. Any reference to a specific provision of the Act shall include any successor provision thereto.

 

“Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations of the Act;

 

“Award” means any award granted under the Plan.

 

“Board” means the Board of Directors of the Company.

 

“Beneficial Owner” means a Person, with respect to any securities which:

 

(i) such Person or any of such Person’s Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase;

 

(ii) such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has “beneficial ownership” of (as determined pursuant to Rule l3d-3 of the General Rules and Regulations under the Act), including pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this clause (ii) as a result of an agreement, arrangement or understanding to vote such security if the agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Act and (B) is not also then reportable on a Schedule l3D under the Act (or any comparable or successor report); or

 

(iii) are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person’s Affiliates or Associates has any agreement, arrangement or understanding for the purpose of

acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (ii) above) or disposing of any voting securities of the Company.

 

“Change of Control” means, unless specified otherwise in an award agreement, the occurrence of any of the following:

 

(i) any Person (other than (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock in the Company (“Excluded Persons”)) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after the IPO Date, pursuant to express authorization by the Board that refers to this exception) representing twenty percent (20%) or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding voting securities; or

 

(ii) the following individuals cease for any reason to constitute a majority of the number of directors of the Company then serving: (A) individuals who, on the IPO Date, constituted the Board and (B) any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Act) whose appointment or election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the IPO Date, or whose appointment, election or nomination for election was previously so approved (collectively the “Continuing Directors”); provided, however, that individuals who are appointed to the Board pursuant to or in accordance with the terms of an agreement relating to a merger, consolidation, or share exchange involving the Company (or any direct or indirect subsidiary of the Company) shall not be Continuing Directors for purposes of this Agreement until after such individuals are first nominated for election by a vote of at least two-thirds (2/3) of the then Continuing Directors and are thereafter elected as directors by the shareholders of the Company at a meeting of shareholders held following consummation of such merger, consolidation, or share exchange; and, provided further, that in the event the failure of any such persons appointed to the Board to be Continuing Directors results in a Change of Control, the subsequent qualification of such persons as Continuing Directors shall not alter the fact that a Change of Control occurred; or

 

(iii) the consummation of a merger, consolidation or share exchange of the Company with any other corporation or the issuance of voting securities of the Company in connection with a merger, consolidation or share exchange of the Company (or any direct or indirect subsidiary of the Company), in each case, which requires approval of the shareholders of the Company, other than (A) a merger, consolidation or share exchange which would result in the voting securities of the Company outstanding immediately prior to such merger, consolidation or share exchange continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger, consolidation or share exchange, or (B) a merger, consolidation or share exchange effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after the IPO Date, pursuant to express authorization by the Board that refers to this exception) representing twenty percent (20%) or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding voting securities; or

 

(iv) the consummation of a plan of complete liquidation or dissolution of the Company or a sale or disposition by the Company of all or substantially all of the Company’s assets (in one transaction or a series of related transactions within any period of 24 consecutive months), in each case, which requires approval of the

shareholders of the Company, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity at least seventy-five percent (75%) of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale.

 

Notwithstanding the foregoing, no “Change of Control” shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to own, directly or indirectly, in the same proportions as their ownership in the Company, an entity that owns all or substantially all of the assets or voting securities of the Company immediately following such transaction or series of transactions.

 

Notwithstanding the foregoing, if an Award is considered deferred compensation subject to the provisions of Code section 409A, and if a payment under such Award is triggered upon a “Change of Control,” then the foregoing definition shall be deemed amended as necessary to comply with Code section 409A.

 

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and all regulations promulgated thereunder. Any reference to a specific provision of the Code shall include any successor provision thereto.

 

“Committee” means a committee appointed by the Board to administer the Plan. On and after the IPO Date, “Committee” means the compensation committee of the Board, each member of which shall qualify as a “nonemployee director” within the meaning of Rule 16b3 and as an “outside director” within the meaning of Code section 162(m).

 

“Company” means Orion Energy Systems, Inc., a Wisconsin corporation, and any successor thereto.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time. Any reference to a specific provision of the Exchange Act shall include any successor provision thereto.

 

“Fair Market Value” means the value of a share of Stock on the relevant date as determined by the Committee in good faith. In determining Fair Market Value, the Committee may, but shall not be required to, rely on the most recent valuation determined by an independent appraiser. On the IPO Date, “Fair Market Value” shall mean the price at which a share of common stock of the Company is first sold to the public on the IPO Date. After the IPO Date, “Fair Market Value” shall mean the closing price of a share of Stock on the relevant date on the principal exchange on which the Stock is then traded, as reported in the Wall Street Journal, or if no sale shall have been made on such date, then on the last preceding day on which there was such a sale; provided that in the event a share of Stock is sold on the principal exchange, “Fair Market Value” in such case shall mean the actual sale price obtained for the share being sold.

 

“IPO Date” means the date on which the shares of the Company’s voting Common Stock are first sold to the public pursuant to an effective registration statement filed by the Company under the Act.

 

“Participant” means any eligible individual who is granted an Award hereunder.

 

“Performance Goals” means any goals the Committee establishes that relate to one or more of the following with respect to the Company or any one or more of its Subsidiaries, Affiliates or other business units: net sales; cost of sales; revenue; gross income; net income; operating income; income from continuing operations; earnings (including before taxes, and/or interest and/or depreciation and amortization); earnings per share (including diluted earnings per share); price per share; cash flow; net cash provided by operating activities; net cash provided by operating activities less net cash used in investing activities; net operating profit; ratio of debt to debt plus equity; return on shareholder equity; return on capital; return on assets; operating working capital; average accounts receivable; economic value added; and customer satisfaction; operating margin; profit margin; sales performance; sales quota attainment; new sales; cross/integrated sales; customer engagement; internal revenue growth; and client retention. As to each Performance Goal, the relevant measurement of performance shall be computed in accordance with generally accepted accounting principles, if applicable; provided that, the Committee may, at the time of establishing the Performance Goal(s), exclude the effects of (i) extraordinary, unusual and/or non-recurring items of gain or loss, (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws,

or (iv) the effect of a merger or acquisition. In the case of Awards that the Committee determines will not be considered performance-based compensation under Code section 162(m), or for purposes of exercising discretion to reduce the amount payable under any Award that is considered performance-based compensation under Code section 162(m), the Committee may establish other Performance Goals not listed in this Plan, including subjective, individual goals. Where applicable, the Performance Goals may be expressed, without limitation, in terms of attaining a specified level of the particular criterion or the attainment of an increase or decrease (expressed as absolute numbers or a percentage) in the particular criterion or achievement in relation to a peer group or other index. The Performance Goals may include a threshold level of performance below which no payment will be made (or no vesting will occur), levels of performance at which specified payments will be paid (or specified vesting will occur), and a maximum level of performance above which no additional payment will be made (or at which full vesting will occur).

 

“Person” means any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert.

 

“Rule 16b3” means Rule 16b-3 under the Exchange Act.

 

“Stock” means the Common Stock of the Company, no par value.

 

“Subsidiaries” means any corporate entity of which at least fifty percent (50%) of the equity interest is held directly or indirectly by the Company.

 

Section 3.  Effective Date of Plan

 

The Plan shall become effective on September 30, 2004, subject, however, to the approval of the Plan by the shareholders of the Company at the next annual meeting of shareholders within twelve months following the date of adoption of the Plan by the Board. Awards granted under the Plan prior to its approval by shareholders shall be contingent on such shareholder approval. The Plan, as amended and restated, shall become effective on the IPO Date, subject, however, to the approval of the amended and restated Plan by the shareholders of the Company at the next annual meeting of shareholders within twelve months following the date of adoption of the Plan by the Board.

 

Section 4.  Administration

 

4.1.  Committee Authority.  The Plan shall be administered by the Committee. If at any time the Committee shall not be in existence, the Board shall administer the Plan. Subject to the terms of the Plan and applicable law, the Committee shall have full power and discretionary authority to: (a) grant Awards to eligible individuals under the Plan and to determine the type, terms and conditions of such Awards and the number of shares of Stock to which such Awards shall relate; (b) interpret and administer the Plan and any instrument or agreement relating to, or made under, the Plan; (c) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (d) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. The Committee’s decisions and determinations under the Plan need not be uniform and may be made selectively among eligible individuals, whether or not they are similarly situated.

 

4.2.  Delegation to Other Committees.  To the extent applicable law permits, the Board may delegate to another committee of the Board or to one or more officers of the Company, or the Committee may delegate to a sub-committee or to one or more officers of the Company, any or all of the authority and responsibility of the Committee under the Plan; provided that no such delegation is permitted with respect to Stock-based Awards made to individuals who are subject to Rule 16b3 or Code section 162(m) at the time any such delegated authority or responsibility is exercised unless the delegation is to another committee of the Board consistently entirely of “nonemployee directors” within the meaning of Rule 16b3 and as an “outside director” within the meaning of Code section 162(m). If the Board or the Committee has made such a delegation, then all references to the Committee in this Plan include such other committee, sub-committee or one or more officers to the extent of such delegation.

 

4.3.  Decisions Binding.  All decisions, interpretations and other actions of the Committee shall be final and binding on all Participants and any other individual with a right under the Plan.

4.4.  Waiver of Conditions.  The Committee may, in whole or in part, waive any conditions or other restrictions with respect to any Award granted under the Plan.

 

Section 5.  Eligibility and Participation

 

All employees and directors of the Company, its Subsidiaries and Affiliates and all consultants or advisors who provide services to the Company, its Subsidiaries and Affiliates, are eligible to be granted Awards under the Plan. The Committee shall designate each individual who will become a Participant. An Award shall be granted exclusively as compensation for the performance of those services the Participant is already performing or reasonably may be expected to perform in his or her respective position within or for the Company, a Subsidiary or an Affiliate. The Committee’s designation of a Participant in any year shall not require the Committee to designate such person to receive an Award in any other year.

 

Section 6.  Stock Subject to Plan; Limits on Awards

 

6.1.  Number.  Subject to adjustment as provided in Section 6.3, the total number of shares of Stock which may be issued under the Plan shall be Five Million (5,000,000) shares, plus the total number of shares granted under the Company’s 2003 Stock Option Plan which are exchanged for new shares under the Plan or which are cancelled under the Company’s 2003 Plan. The shares to be delivered under the Plan may consist, in whole or in part, of authorized but unissued Stock or treasury Stock.

 

6.2.  Unused Stock; Unexercised Rights.  If (a) any shares of Stock subject to an Award granted under the Plan, or to which any Award relates, are forfeited, (b) an Award otherwise terminates, expires or is canceled prior to the delivery of all of the shares of Stock or of other consideration issuable or payable pursuant to such Award, or (c) an Award is settled in cash, then the number of shares of Stock subject to such Award shall again be available for the granting of additional Awards under the Plan.

 

6.3.  Limits on Awards.  Subject to adjustment as provided in Section 6.4, the Company may issue only an aggregate of one million (1,000,000) shares of Stock upon the exercise of incentive stock options (within the meaning of Code section 422), and, after the IPO Date, no Participant may be granted Awards that could result in such Participant:

 

(a) receiving options for, and/or stock appreciation rights with respect to, more than 300,000 shares of Stock during any fiscal year of the Company;

 

(b) receiving Awards of restricted stock and/or restricted stock units relating to more than 150,000 shares of Stock during any fiscal year of the Company;

 

(c) receiving Awards of performance shares, and/or Awards of performance units the value of which is based on the Fair Market Value of shares of Common Stock, for more than 150,000 shares of Stock during any fiscal year of the Company;

 

(d) receiving Awards of performance units the value of which is not based on the Fair Market Value of shares of Stock, for more than $2,000,000 during any fiscal year of the Company;

 

(e) receiving other Stock-based Awards pursuant to Section 13.1 relating to more than 100,000 Shares during any fiscal year of the Company;

 

(f) receiving an annual incentive award in any single fiscal year of the Company that would pay more than $2,000,000; or

 

(g) receiving a long-term incentive award in any single fiscal year of the Company that would pay more than $2,000,000.

 

In all cases, determinations under this Section 6.3 should be made in a manner that is consistent with the exemption for performance-based compensation that Code section 162(m) provides.

 

6.4.  Adjustment in Capitalization.  If: (a) the Company shall at any time be involved in a merger or other transaction in which the Shares are changed or exchanged; (b) the Company shall subdivide or combine the Stock or the Company shall declare a dividend payable in Stock, other securities (other than stock purchase rights issued

pursuant to the terms of any rights agreement that the Company may authorize and issue in the future) or other property; (c) the Company shall effect a cash dividend the amount of which, on a per share of Stock basis, exceeds ten percent (10%) of the Fair Market Value of a share of Stock at the time the dividend is declared, or the Company shall effect any other dividend or other distribution on the Stock in the form of cash, or a repurchase of Stock, that the Board determines by resolution is special or extraordinary in nature or that is in connection with a transaction that the Company characterizes publicly as a recapitalization or reorganization involving the Shares; or (d) any other event shall occur, which, in the case of this clause (d), in the judgment of the Board or Committee necessitates an adjustment to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, then the Committee shall, in such manner as it may deem equitable to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, adjust as applicable: (i) the number and type of shares of Stock subject to the Plan and which thereafter may be made the subject of Awards under the Plan; (ii) the per Participant Award limitations set forth in Section 6.3; (iii) the number and type of shares of Stock subject to outstanding Awards; (iv) the grant, purchase or exercise price with respect to any Award; and (v) to the extent such discretion does not cause an Award that is intended to qualify as performance-based compensation under Code section 162(m) to lose its status as such, the Performance Goals of an Award; or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award in exchange for cancellation of such Award or in lieu of any such adjustment; provided, however, in each case, that with respect to awards of incentive stock options no such adjustment shall be authorized to the extent that such authority would cause such options to cease to be treated as incentive stock options; and provided further, however, that the number of shares of Stock subject to any Award payable or denominated in Stock shall always be a whole number.

 

Notwithstanding the foregoing, in the case of a stock dividend (other than a stock dividend declared in lieu of an ordinary cash dividend) or subdivision or combination of the Stock (including a reverse stock split), if no action is taken by the Committee, adjustments contemplated by this subsection that are proportionate shall nevertheless automatically be made as of the date of such stock dividend or subdivision or combination of the Stock.

 

Section 7.  Awards

 

All Awards granted under the Plan shall be evidenced by a written award agreement that shall specify the type of Award granted, the duration of the Award, the number of shares of Stock to which the Award pertains and such other provisions as the Committee shall determine.

 

Section 8.  Stock Options

 

8.1.  Grant of Options.  Subject to any limitations set forth in the Plan, the Committee shall have complete discretion in determining: (a) the eligible individuals to be granted an option to purchase Stock; (b) the number of shares of Stock to be subject to the option, and all other terms and conditions of the option; (c) whether the option is to be an incentive stock option within the meaning of Code section 422 or a nonqualified stock option; provided that, incentive stock options may be granted only to employees of the Company or a Subsidiary; and further provided that if an option is granted to an individual who is not providing services to the Company or a 409A Subsidiary at the date of grant, such option shall be considered a deferred compensation arrangement subject to Code section 409A to the extent provided therein; and (d) any other terms and conditions of the option as determined by the Committee in its sole discretion.

 

8.2.  Incentive Stock Options.  Incentive stock options shall be exercisable at purchase prices of not less than one hundred percent (100%) of the Fair Market Value of the Stock on the date of grant. Incentive stock options shall be exercisable over not more than ten (10) years after date of grant and shall terminate not later than three (3) months after termination of employment for any reason other than death or disability, except as otherwise provided by the Committee. If the Participant should terminate employment as a result of a disability (within the meaning of Code section 22(e)(3)), then the right of the Participant to exercise an incentive stock option shall terminate not later than twelve (12) months after the date of such termination of employment, except as otherwise provided by the Committee. In all other respects, the terms of any incentive stock option granted under the Plan shall comply with the provisions of Code section 422.

 

8.3.  Nonqualified Stock Options.  Nonqualified stock options will be exercisable at purchase prices           of not less than one hundred percent (100%) of the Fair Market Value of the Stock on the date of

grant. Nonqualified stock options will be exercisable over the period or on the date as determined by the Committee, which may not be later than ten (10) years after the date of grant, and shall terminate at such time as the Committee shall determine.

 

8.4.  Payment.  The Committee shall determine the methods and the forms for payment of the purchase price of options, including, but not limited to: (a) by cash; (b) by delivery of other shares or securities of the Company having a then Fair Market Value equal to the purchase price of such shares (including by attestation); (c) by any combination of the foregoing; (d) by having the Company withhold a number of shares otherwise deliverable pursuant to the exercise of the option having a Fair Market Value on the date of exercise equal to some or all of the purchase price; or (e) after the IPO Date, through a broker-facilitated cashless exercise procedure. Upon receipt of the payment of the entire purchase price for the shares so purchased (plus any taxes required by the Company to satisfy its withholding obligations pursuant to Section 18), certificates for such shares shall be delivered to the Participant (or beneficiary). The number of shares of Stock reserved for issuance under the Plan shall be reduced only by the number of shares issued.

 

8.5.  Limits on Incentive Stock Options.  To the extent the aggregate Fair Market Value of Stock (as determined on the date of grant), with respect to which incentive stock options granted under the Plan, or any other plan of the Company or its Subsidiaries, are exercisable by a Participant for the first time during any calendar year exceeds $100,000, then such option as to the excess shall be treated as a nonqualified stock option.

 

Section 9.  Stock Appreciation Rights

 

9.1.  Grant of Stock Appreciation Rights.  The Committee shall have the discretion to grant stock appreciation rights to any eligible individual; provided that if a stock appreciation right is granted to an individual who is not providing services to the Company or a 409A Subsidiary at the date of grant, such stock appreciation right shall be considered a deferred compensation arrangement subject to Code section 409A to the extent provided therein. A stock appreciation right may relate to an option, or may be granted independently of any option granted under the Plan. Subject to the terms of the Plan, the grant price (provided that the grant price shall not be less than the Fair Market Value of the shares subject to the stock appreciation right as determined on the date of grant), term, methods of exercise, methods of settlement and any other terms and conditions of any stock appreciation right shall be as determined by the Committee.

 

9.2.  Exercise or Maturity of Stock Appreciation Rights.  The Committee may impose such conditions or restrictions on the exercise of any stock appreciation right as it may deem appropriate. Unless otherwise determined by the Committee, stock appreciation rights that relate to a specific option granted under the Plan shall be exercisable or shall mature at such time or times, on the conditions and to the extent and in the proportion, that any related option is exercisable and may be exercised or mature for all or part of the shares of Stock subject to the related option.

 

9.3.  Effect of Exercise on Related Option.  Upon exercise of any number of stock appreciation rights, the equivalent number of shares subject to any related option shall be reduced and such shares may not again be subjected to an Award under the Plan. The exercise of any number of options shall result in an equivalent reduction in the number of shares covered by the related stock appreciation right and such shares may not again be subject to an Award under this Plan; provided, however, that if a stock appreciation right was granted for less than all of the shares covered by any related option, any such reduction shall be made at such time as, and only to the extent that, the number of shares exercised under the related option exceeds the number of shares not covered by the stock appreciation right.

 

Section 10.  Restricted Stock and Restricted Stock Units

 

10.1.  Awards.  The Committee shall have discretion to issue restricted stock or restricted stock units to any eligible individual, with or without payment therefor. Restricted stock shall be subject to such terms and conditions as the Committee determines appropriate, including, without limitation, restrictions on sale or other disposition and rights of the Company to reacquire such restricted stock upon termination of the Participant’s employment or service within specified periods. Restricted stock units shall be subject to such terms and conditions as the Committee determines appropriate, including, without limitation, whether such units shall be settled in cash or with shares of Stock. Without limitation, such terms and conditions may provide that restricted stock or restricted stock

units shall be subject to forfeiture if the Company and/or the Participant fails to achieve one or more Performance Goals established by the Committee over a designated period of time. The Committee shall certify in writing as to the degree of achievement after completion of the performance period. Notwithstanding the foregoing, if the restrictions imposed on restricted stock or restricted stock units lapse on the basis of the passage of time, the minimum ratable period of restriction shall be three (3) years from the date of grant of the Award, or if the restrictions lapse upon the achievement of one or more Performance Goals, the performance period must be a minimum of one year; provided that the Committee may provide in any award agreement or as determined in any individual case, that the restrictions shall lapse or be waived in whole or part in the event of terminations resulting from specified causes (such as death, disability or retirement) or upon a Change of Control.

 

10.2.  Registration.  Any restricted stock granted under the Plan to a Participant may be evidenced in such manner as the Committee may deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of shares of restricted stock granted under the Plan to a Participant, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend (as determined by the Committee) referring to the terms, conditions and restrictions applicable to such restricted stock.

 

10.3.  Other Rights.  Unless otherwise determined by the Committee, during the period of restriction, Participants holding shares of restricted stock granted hereunder may exercise full voting rights with respect to those shares (if applicable) and shall be entitled to receive all dividends and other distributions paid or made with respect to those shares while they are so held; provided, however, that the Committee may provide in any grant of shares of restricted stock that payment of dividends thereon may be deferred until termination of the period of restriction and may be made subject to the same restrictions regarding forfeiture as apply to such shares of restricted stock. If any such dividends or distributions are paid in shares of Stock, the shares shall be subject to the same restrictions on transferability as the shares of restricted stock with respect to which they were paid.

 

10.4.  Forfeiture.  Except as otherwise determined by the Committee or as set forth in an award agreement, upon termination of employment or service of a Participant for any reason during the applicable period of restriction, all shares of restricted stock and restricted stock units still subject to restriction shall be forfeited by the Participant to the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to shares of restricted stock or restricted stock units held by a Participant at such time.

 

Section 11.  Performance Shares and Performance Units

 

11.1.  Issuance.  The Committee shall have discretion to grant performance shares or performance units to any eligible individual and shall have complete discretion in determining the number of performance units or performance shares granted to a Participant.

 

11.2.  Performance Shares.  The Committee may grant performance shares that the Participant may earn in whole or in part if one or more Performance Goals established by the Committee over a designated period of time consisting of one or more full fiscal years of the Company, Subsidiary or Affiliate are met. The Committee shall certify in writing as to the degree of achievement after completion of the performance period. The Committee shall have the discretion to satisfy an obligation to deliver a Participant’s performance shares by delivery of less than the number of shares of Stock earned together with a cash payment equal to the then Fair Market Value of the shares not delivered. The number of shares of Stock reserved for issuance under the Plan shall be reduced only by the number of shares delivered in respect of earned performance shares. At the time of making an Award of performance shares, the Committee shall set forth the consequences of the termination of a Participant’s employment or service prior to the expiration of the designated performance period in respect of which the performance shares are awarded.

 

11.3.  Performance Units.  The Committee may grant performance units to any eligible individual that consist of monetary units that the Participant may earn in whole or in part if one or more Performance Goals established by the Committee over a designated period of time consisting of one or more full fiscal years of the Company, Subsidiary or Affiliate are met. The Committee shall certify in writing as to the degree of achievement after completion of the performance period. Payment of a performance unit earned may be in cash or in shares of Stock or in a combination of both, as the Committee in its sole discretion determines. The number of shares of Stock

reserved for issuance under this Plan shall be reduced only by the number of shares delivered in payment of performance units. At the time of making an Award of performance units, the Committee shall set forth the consequences of the termination of a Participant’s employment or service prior to the expiration of the designated performance period in respect of which the performance units are awarded.

 

Section 12.  Shares in Lieu of Cash

 

The Committee is authorized to provide eligible individuals the opportunity to elect to receive shares of Stock in lieu of all or a portion of any cash bonuses under any incentive compensation programs and/or increases in base compensation, if any, or with respect to non-employee directors, in lieu of fees for services as a director, as in effect from time to time. Such shares shall be issued in an amount equal to (a) the equivalent dollar amount of compensation a Participant has elected to receive in Stock (subject to limits prescribed by the Committee) divided by (b) the Fair Market Value of a share of Stock (as determined by the Committee in advance or on the date the cash compensation to which the bonus shares relate would otherwise be payable) and shall be subject to such terms and conditions as the Committee deems appropriate, including, without limitation, restrictions on sale or other disposition. Notwithstanding the provisions of Section 6.1, if the Company satisfies its obligations to issue shares of Stock under this Section 12 by purchasing such shares on the principal exchange on which the Stock is then traded, such purchased shares shall not reduce the total number of shares reserved for issuance under the Plan as described in Section 6.1.

 

Section 13.  Other Awards

 

13.1.  Other Stock-Based Awards.  Other Awards, valued in whole or in part by reference to, or otherwise based on, shares of Stock, may be granted either alone or in addition to or in conjunction with other Awards for such consideration, if any, and in such amounts and having such terms and conditions as the Committee may determine.

 

13.2.  Other Benefits.  The Committee shall have the right to provide types of benefits under the Plan in addition to those specifically listed, if the Committee believes that such benefits would further the purposes for which the Plan was established.

 

13.3.  Limitations.  Grants of other awards pursuant to this Section 13 that are considered “full value” awards, such as grants of Stock, and that become vested on the basis of the passage of time, must have a minimum ratable vesting period over three (3) years from the date of grant, or if the award is earned based upon the attainment of one or more Performance Goals, then the performance period must be a minimum of one year from the date of grant; provided that no minimum vesting period shall be required for the grant of other stock-based awards if the number of shares of Stock subject to such awards does not exceed five percent (5%) of the aggregate number of shares reserved for issuance under Section 6.1.

 

Section 14.  Annual Incentive Awards

 

Subject to the terms of this Plan, the Committee is authorized to grant an annual incentive award to eligible individuals, which award will provide for a cash payment if one or more Performance Goals established by the Committee over a designated period of time consisting of one full fiscal years of the Company, Subsidiary or Affiliate are met; provided that if the Award is made in the year in which the IPO Date occurs, at the time of commencement of employment with the Company or on the occasion of a promotion, then the Award may relate to a period shorter than one fiscal year. At the time of making an annual incentive award, the Committee shall set forth the potential amount payable, the timing of payment, and the consequences of the termination of a Participant’s employment or service prior to the expiration of the designated performance period in respect of which the annual incentive award is made. The Committee shall certify in writing as to the degree of achievement after completion of the performance period.

 

Section 15.  Long-Term Incentive Awards

 

Subject to the terms of this Plan, the Committee is authorized to grant a long-term incentive award to eligible individuals, which award will provide for a cash payment if one or more Performance Goals established by the Committee over a designated period of time consisting of more than one full fiscal years of the Company, Subsidiary or Affiliate are met. At the time of making a long-term incentive award, the Committee shall set forth the potential amount payable, the timing of payment, and the consequences of the termination of a Participant’s

employment or service prior to the expiration of the designated performance period in respect of which the incentive award is made. The Committee shall certify in writing as to the degree of achievement after completion of the performance period.

 

Section 16.  Transferability

 

Each Award granted under the Plan shall not be transferable other than by will or the laws of descent and distribution, except that a Participant may, to the extent allowed by the Committee and in a manner specified by the Committee (a) designate in writing a beneficiary to exercise the Award after the participant’s death; or (b) transfer any Award; provided, however, that an incentive stock option may only be exercised by the Participant during the life of the Participant, and may not be transferred other than by will or the laws of descent and distribution.

 

Section 17.  Rights of Participants

 

Nothing in the Plan shall interfere with or limit in any way the right of the Company, Subsidiary or Affiliate to terminate any Participant’s employment or service at any time nor confer upon any Participant any right to continue in the employ or service of the Company, Subsidiary or Affiliate.

 

Section 18.  Change of Control

 

18.1.  Effect of Change of Control.  In order to preserve a Participant’s rights under an Award in the event of a Change of Control, the Committee in its discretion may, at the time an Award is made or at anytime thereafter, take one or more of the following actions: (a) provide for the acceleration of any time period, or the deemed achievement of any Performance Goals, relating to the exercise or realization of the Award; (b) provide for the purchase of the Award for an amount of cash or other property that could have been received upon the exercise or realization of the Award had the Award been currently exercisable or payable; (c) adjust the terms of the Award in the manner determined by the Committee to reflect the Change of Control; (d) cause the Award to be assumed, or new right substituted therefor, by another entity; or (e) make such other provision as the Committee may consider equitable and in the best interests of the Company.

 

Except as otherwise expressly provided in any agreement between a Participant and the Company or an Affiliate, if the receipt of any payment by a Participant under the circumstances described above with regards to Awards granted on or after the IPO Date, would result in the payment by the Participant of any excise tax provided for in Section 280G and Section 4999 of the Code, then the amount of such payment shall be reduced to the extent required to prevent the imposition of such excise tax.

 

18.2.  Amendment or Rescission.  Notwithstanding anything contained in this Section 18, the Board may, in its sole and absolute discretion, amend, modify or rescind the provisions of this Section 18 if it determines that the operation of this Section 18 may prevent a transaction in which the Company, a Subsidiary or any Affiliate is a party from receiving desired tax treatment, including without limitation requiring that each Participant receive a replacement or substitute Award issued by the surviving or acquiring corporation.

 

18.3.  Issuance or Assumption.  Notwithstanding any other provision of this Plan, and without affecting the number of Shares otherwise reserved or available under this Plan, in connection with any merger, consolidation, acquisition of property or stock, or reorganization, the Committee may authorize the issuance or assumption of awards under this Plan upon such terms and conditions as it may deem appropriate.

 

Section 19.  Amendment, Modification and Termination of Plan

 

19.1.  Amendments and Termination.  The Board or Committee may at any time amend, alter, suspend, discontinue or terminate the Plan, subject to the following limitations:

 

(a) the Board must approve any amendment of this Plan to the extent the Company determines such approval is required by: (i) action of the Board, (ii) applicable corporate law, or (iii) any other applicable law;

 

(b) shareholders must approve any amendment of this Plan to the extent the Company determines such approval is required by: (i) Section 16 of the Exchange Act, (ii) the Code, (iii) the listing requirements of any principal securities exchange or market on which the Shares are then traded, or (iv) any other applicable law; and

(c) shareholders must approve any of the following Plan amendments: (i) an amendment to materially increase any number of Shares specified in Section 6.1 or the limits set forth in Section 6.3) (except as permitted by Section 6.4), or (B) an amendment that would diminish the protections afforded by Section 19.4.

 

The Committee may at any time amend any outstanding Award agreement; provided, however, that any amendment that decreases or impairs the rights of a Participant under such agreement shall not be effective unless consented to by the Participant in writing, except that Participant consent shall not be required in the event an Award as amended, adjusted or cancelled under Section 6.4 or Section 18, and effective for Awards made on or after the IPO Date, the Committee need not obtain Participant (or other interested party) consent for modification of an Award to the extent deemed necessary to comply with any applicable law, the listing requirements of any principal securities exchange or market on which the Shares are then traded, or to preserve favorable accounting or tax treatment of any Award for the Company.

 

19.2.  Term of Plan.  Unless terminated earlier by the Board pursuant to Section 19.1, the Plan shall terminate on, and no Award shall be granted under the Plan after, September 29, 2014.

 

19.3.  Survival Following Termination.  Notwithstanding the foregoing, to the extent provided in the Plan, the authority of (a) the Committee to amend, alter, adjust, suspend, discontinue or terminate any Award, waive any conditions or restrictions with respect to any Award, and otherwise administer the Plan and any Award and (b) the Board or Committee to amend the Plan, shall extend beyond the date of the Plan’s termination. Termination of the Plan shall not affect the rights of Participants with respect to Awards previously granted to them, and all unexpired Awards shall continue in force and effect after termination of the Plan except as they may lapse or be terminated by their own terms and conditions.

 

19.4.  Repricing and Backdating Prohibited.  Notwithstanding anything in this Plan to the contrary, and except for the adjustments provided in Section 6.4, neither the Committee nor any other person may decrease the exercise price for any outstanding Option or SAR after the date of grant nor allow a Participant to surrender an outstanding Option or SAR to the Company as consideration for the grant of a new Option or SAR with a lower exercise price. In addition, the Committee may not make a grant of an Option or SAR with a grant date that is effective prior to the date the Committee takes action to approve such Award.

 

19.5.  Foreign Participation.  To assure the viability of Awards granted to Participants employed or residing in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements or alternative versions of, this Plan as it determines is necessary or appropriate for such purposes. Any such amendment, restatement or alternative versions that the Committee approves for purposes of using this Plan in a foreign country will not affect the terms of this Plan for any other country. In addition, all such supplements, amendments, restatements or alternative versions must comply with the provisions of Section 19.1.

 

19.6.  Code section 409A.  The provisions of Code section 409A are incorporated herein by reference to the extent necessary for any Award that is subject to Code section 409A to comply therewith.

 

Section 20.  Taxes

 

20.1.  Withholding.  The Company shall be entitled to withhold from any payment made hereunder or from any payment otherwise owing to the holder of an Award, the amount of any tax attributable to any amount payable, or shares of Stock deliverable, under the Plan, after giving the person entitled to receive such amount or shares of Stock notice as far in advance as practicable, and the Company may defer making payment or delivery under such Award if any such tax may be pending unless and until indemnified to its satisfaction. The Committee may, in its discretion, permit a Participant to pay all or a portion of the federal, state and local withholding taxes arising in connection with the payment, realization or vesting of an Award by electing to (a) have the Company withhold shares of Stock, (b) tender back shares of Stock received in connection with such benefit, or (c) deliver other previously owned shares of Stock, having a Fair Market Value equal to the amount to be withheld; provided, however, that the amount to be withheld shall not exceed the Participant’s statutory minimum total federal, state and local tax obligations associated with the transaction. The election must be made on or before the date as of which the

amount of tax to be withheld is determined and otherwise as required by the Committee. The Fair Market Value of fractional shares of Stock remaining after payment of the withholding taxes shall be paid to the Participant in cash.

 

20.2.  Cash Bonus.  The Committee may, in its discretion, grant a cash bonus to a Participant to enable the Participant to pay all or a portion of the federal, state or local tax liability incurred by the Participant upon the vesting, exercise, payment or settlement of any Award. The Company shall deduct from any cash bonus such amount as may be required for the purpose of satisfying the Company’s obligation to withhold federal, state or local taxes.

 

20.3.  No Guarantee of Tax Treatment.  Notwithstanding any provisions of the Plan, the Company does not guarantee to any Participant or any other Person with an interest in an Award that (a) any Award intended to be exempt from Code section 409A shall be so exempt, (b) any Award intended to comply with Code section 409A or Code section 422 shall so comply, (c) any Award shall otherwise receive a specific tax treatment under any other applicable tax law, nor in any such case will the Company or any Affiliate indemnify, defend or hold harmless any individual with respect to the tax consequences of any Award.

 

Section 21.  Stock Transfer Restrictions

 

21.1.  Restriction on Transfer.  Shares of Stock issued under the Plan may not be sold or otherwise disposed of except (a) pursuant to an effective registration statement under the Act, or in a transaction which, in the opinion of counsel for the Company, is exempt from registration under the Act; and (b) in compliance with state securities laws. Further, as a condition to issuance of shares of Stock under the Plan, the Participant, his beneficiary or his heirs, legatees or legal representatives, as the case may be, shall execute and deliver to the Company a restrictive stock transfer agreement in such form, and subject to such terms and conditions, as shall be reasonably determined or approved by the Committee, which agreement, among other things, may impose certain restrictions on the sale or other disposition of any shares of Stock acquired under the Plan. The Committee may waive the foregoing restrictions, in whole or in part, in any particular case or cases or may terminate such restrictions whenever the Committee determines that such restrictions afford no substantial benefit to the Company.

 

21.2.  Additional Restrictions; Legends.  All shares delivered under the Plan pursuant to any Award shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the Plan and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any certificates for Shares to make appropriate references to such restrictions.

 

Section 22.  Miscellaneous

 

22.1.  Other Terms.  The grant of any Award under the Plan may also be subject to other provisions (whether or not applicable to the benefit awarded to any other participant) as the Committee determines appropriate, including, without limitation, provisions for (a) the purchase of Stock under options in installments; (b) the financing of the purchase of Stock under the options in the form of a promissory note issued to the Company by a Participant on such terms and conditions as the Committee determines; (c) restrictions on resale or other disposition; and (d) compliance with federal or state securities laws and stock exchange or market requirements.

 

22.2.  No Fractional Shares.  No fractional shares or other securities shall be issued or delivered pursuant to the Plan, and the Committee shall determine (except as otherwise provided in the Plan) whether cash, other securities or other property shall be paid or transferred in lieu of any fractional shares or other securities, or whether such fractional shares or other securities or any rights thereto shall be canceled, terminated or otherwise eliminated.

 

22.3.  General Restrictions.  Notwithstanding any other provision of the Plan, the Company shall have no liability to deliver any shares of Stock under the Plan or make any payment unless such delivery or payment would comply with all applicable laws and the applicable requirements of any securities exchange or similar entity.

 

22.4.  Issuance of Certificate.  To the extent the Plan provides for the issuance of shares of Stock, the issuance may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.

 

22.5.  Employment and Service.  The issuance of an Award shall not confer upon a Participant any right with respect to continued employment or service with the Company or any Affiliate, or the right to continue as a director,

consultant or advisor. Unless determined otherwise by the Committee, for purposes of the Plan and all Awards, the following rules shall apply:

 

(a) a Participant who transfers employment between the Company and its Affiliates, or between Affiliates, will not be considered to have terminated employment;

 

(b) a Participant who ceases to be a non-employee director because he or she becomes an employee of the Company or an Affiliate shall not be considered to have ceased service as a director with respect to any Award until such Participant’s termination of employment with the Company and its Affiliates;

 

(c) a Participant who ceases to be employed by the Company or an Affiliate and immediately thereafter becomes a non-employee director of the Company or an Affiliate, or a consultant or advisor to the Company or any Affiliate shall not be considered to have terminated employment until such Participant’s service as a director of, or consultant or advisor to, the Company and its Affiliates has ceased; and

 

(d) a Participant employed by an Affiliate will be considered to have terminated employment when such entity ceases to be an Affiliate.

 

Notwithstanding the foregoing, for purposes of an Award that is subject to Code section 409A, if a Participant’s termination of employment or service triggers the payment of compensation under such Award, then the Participant will be deemed to have terminated employment or service upon his or her “separation from service” within the meaning of Code section 409A.

 

Section 23.  Legal Construction

 

23.1.  Requirements of Law.  The granting of Awards under the Plan and the issuance of shares of Stock in connection with an Award, shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

 

23.2.  Governing Law.  The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Wisconsin, without reference to any conflict of law principles thereof. Any legal action or proceeding with respect to this Plan, any Award or any award agreement, or for recognition and enforcement of any judgment in respect thereof, may only be brought and determined in a court sitting in the County of Sheboygan in the State of Wisconsin.

 

23.3.  Limitations on Actions.  With regard to Awards granted on or after the IPO Date, any legal action or proceeding with respect to this Plan, any Award or any award agreement, must be brought within one year (365 days) after the day the complaining party first knew or should have known of the events giving rise to the complaint.

 

23.4.  Severability.  If any provision of the Plan or any award agreement or any Award (a) is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any person or Award, or (b) would disqualify the Plan, any award agreement or any Award under any law deemed applicable by the Committee, then such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, award agreement or Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan, such award agreement and such Award shall remain in full force and effect.