2. Stock Appreciation Rights
i. Generally, stock appreciation rights (“SARs”) consist of the right of the individual to elect (within a certain period of time set forth in the award) to acquire cash (or an equivalent value of company stock) equal to the value of the stock on the date the SAR is granted in excess of the value of the stock on the date the SAR is granted (the “base value”). SARs may be granted in the form of freestanding SARs, tandem SARs (which are “tied” to stock options and, to the extent exercised, will reduce, on a share-for-share basis, the number of shares that may be acquired under the related stock option) or a combination of the two. The base value of a freestanding SAR is equal to the fair market value of one share of the company’s stock on the date of grant multiplied by the number of shares of stock covered under the SAR. The base value of a tandem SAR shall be equal to the exercise price of the related option.
ii. Freestanding SARs may be exercised upon terms and conditions that are imposed by the company and set forth under the award. A tandem SAR may be exercised only with respect to the shares of stock of the company for which its related option is exercisable. Tandem SARs granted in connection with an option expire no later than the expiration of the related option, and may be exercised only when the fair market value of the shares subject to the option exceeds the option exercise price.
iii. As stated above, upon the exercise of an SAR, an individual will receive the difference between the fair market value of a share of the company’s stock on the date of exercise and the base value multiplied by the number of shares with respect to which the SAR is exercised. Payment due upon exercise may be in cash, in shares of the company's stock having a fair market value equal to the cash amount, or in a combination of cash and shares, as determined by the company.
iv. Each SAR award agreement should specify the individual’s (and his or her beneficiary’s) rights in the event of death or other termination of employment.
b. Federal Income Tax Implications:
i. Impact on the Individual:
1. Grant. There is no federal income tax impact on the individual solely by reason of the grant of an SAR.
2. Exercise. Upon the exercise of an SAR, the individual will generally recognize ordinary income in an amount equal to the excess of the fair market value of the cash or shares of stock received at the time of exercise over the base amount. The individual’s tax basis in the shares acquired pursuant to the exercise of an SAR option will be the amount of ordinary income recognized by the individual upon exercise.
3. Disposition. If an individual disposes of shares of stock acquired upon exercise of an SAR in a taxable transaction, the individual will recognize capital gain or loss in an amount equal to the difference between his or her basis (as discussed above) in the shares sold and the amount realized upon disposition. Any capital gain or loss will be long‑term or short‑term depending on whether the shares of stock were held for more than one year from the date the shares were transferred to the individual.
ii. Impact on the Company:
1. At the time the individual recognizes ordinary income from the exercise of an SAR, the company will be entitled to a federal income tax deduction in the amount of the ordinary income so recognized.