sec document
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant /X/
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Check the appropriate box:
/_/ Preliminary Proxy Statement
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/X/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
FALCONSTOR SOFTWARE, INC.
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(Name of Registrant as Specified in Charter)
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(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/_/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)and 0-11.
(1) Title of each class of securities to which transaction applies:
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previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
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FALCONSTOR SOFTWARE, INC.
April 12, 2006
To Our Stockholders:
We invite you to attend our annual stockholders' meeting on Wednesday,
May 17, 2006 at our worldwide headquarters located at 2 Huntington Quadrangle,
Suite 2S01, Melville, New York at 9:00 a.m.
At the meeting, you will hear an update on our operations, have a
chance to meet our directors and executives, and will be asked to elect two
directors, approve an incentive stock plan, and ratify the appointment of our
independent registered public accounting firm. Your Board of Directors
recommends a vote "FOR" each of the nominees and proposals.
This booklet includes a formal notice of the meeting and the proxy
statement. The proxy statement tells you more about the agenda and procedures
for the meeting. It also describes how our Board of Directors operates and gives
personal information about our director nominees.
Only stockholders of record at the close of business on March 29, 2006
will be entitled to vote at the annual meeting. Even if you only own a few
shares, we want your shares to be represented at the annual meeting. I urge you
to complete, sign, date, and return your proxy card promptly in the enclosed
envelope.
Sincerely yours,
ReiJane Huai
Chairman and Chief Executive Officer
FALCONSTOR SOFTWARE, INC.
2 HUNTINGTON QUADRANGLE
MELVILLE, NY 11747
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2006
----------------
To Our Stockholders:
The 2006 Annual Meeting of Stockholders ("Annual Meeting") of
FalconStor Software, Inc. (the "Company"), a Delaware corporation, will be held
at the Company's headquarters at 2 Huntington Quadrangle, Suite 2S01, Melville,
NY, commencing at 9:00 a.m. (EDT) on Wednesday, May 17, 2006, to consider and
vote on the following matters described in this notice and the accompanying
Proxy Statement:
1) To elect two directors to the Company's Board of Directors to
three-year terms and until the directors' successors are
elected and qualified;
2) To approve the FalconStor Software, Inc., 2006 Incentive Stock Plan;
3) To ratify the appointment of KPMG LLP as our independent
registered public accounting firm for fiscal 2006 and
4) Any other matters that properly come before the meeting.
At the Annual Meeting, the Company intends to nominate Steven L. Bock
and Patrick B. Carney for election to the Board of Directors. Mr. Bock and Mr.
Carney are currently members of the Company's Board of Directors. For more
information concerning Mr. Bock and Mr. Carney, please see the Proxy Statement.
The Board of Directors has fixed the close of business on March 29,
2006 as the record date for determination of stockholders entitled to vote at
the Annual Meeting or any adjournment thereof, and only recordholders of common
stock at the close of business on that day will be entitled to vote. At the
record date, 48,139,902 shares of common stock were outstanding.
TO ASSURE REPRESENTATION AT THE ANNUAL MEETING, STOCKHOLDERS ARE URGED
TO RETURN A PROXY AS PROMPTLY AS POSSIBLE BY SIGNING, DATING AND RETURNING THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. ANY STOCKHOLDER
ATTENDING THE ANNUAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE PREVIOUSLY
RETURNED A PROXY.
If you plan to attend the Annual Meeting in person, we would appreciate
your response by indicating so when returning the proxy.
By Order of the Board of Directors,
Seth R. Horowitz
SECRETARY
Melville, NY
April 12, 2006
FALCONSTOR SOFTWARE, INC.
2 HUNTINGTON QUADRANGLE
MELVILLE, NEW YORK 11747
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2006 PROXY STATEMENT
GENERAL INFORMATION
This proxy statement contains information related to the annual meeting
of stockholders of FalconStor Software, Inc. to be held on Wednesday, May 17,
2006, beginning at 9:00 a.m. (EDT), at the Company's headquarters at 2
Huntington Quadrangle, Suite 2S01, Melville, New York, and at any postponements
or adjournments thereof.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING
At the Company's annual meeting, stockholders will hear an update on
the Company's operations, have a chance to meet some of its directors and
executives and will act on the following matters:
1) To elect two directors to the Company's Board of Directors to
three-year terms and until the directors' successors are
elected and qualified;
2) To approve the FalconStor Software, Inc., 2006 Incentive Stock
Plan;
3) To ratify the appointment of KPMG LLP as our independent
registered public accounting firm for fiscal 2006 and
4) Any other matters that properly come before the meeting.
WHO MAY VOTE
Stockholders of FalconStor Software, Inc., as recorded in our stock
register on March 29, 2006 (the "Record Date"), may vote at the meeting. As of
this date, we had 48,139,902 shares of common stock eligible to vote. We have
only one class of voting shares. All shares in this class have equal voting
rights of one vote per share.
HOW TO VOTE
You may vote in person at the meeting or by proxy. We recommend that
you vote by proxy even if you plan to attend the meeting. You can always change
your vote at the meeting.
HOW PROXIES WORK
Our Board of Directors is asking for your proxy. Giving us your proxy
means you authorize us to vote your shares at the meeting in the manner you
direct. You may vote for or against the proposals or abstain from voting.
Proxies submitted will be voted by the individuals named on the proxy
card in the manner you indicate. If you give us your proxy but do not specify
how you want your shares voted, they will be voted in accordance with the Board
of Directors recommendations, I.E., in favor of our director nominees, in favor
of the FalconStor Software, Inc., 2006 Incentive Stock Plan, and in favor of the
ratification of the appointment of KPMG LLP as our independent registered public
accounting firm.
You may receive more than one proxy or voting card depending on how you
hold your shares. If you hold shares through someone else, such as a
stockbroker, you may get materials from them asking how you want to vote. The
latest proxy card we receive from you will determine how we will vote your
shares.
REVOKING A PROXY
There are three ways to revoke your proxy. First, you may submit a new
proxy with a later date up until the existing proxy is voted. Second, you may
vote in person at the meeting. Last, you may notify our Chief Financial Officer
in writing at 2 Huntington Quadrangle, Suite 2S01, Melville, New York 11747.
QUORUM
In order to carry on the business of the meeting, we must have a
quorum. This means at least a majority of the outstanding shares eligible to
vote must be represented at the meeting, either by proxy or in person. Shares
that we own are not voted and do not count for this purpose.
VOTES NEEDED
The director nominees receiving a majority of the votes cast during the
meeting will be elected to fill the seats of our directors. For the other
proposals to be approved, we require the favorable vote of a majority of the
votes cast. Only votes for or against a proposal count. Votes which are withheld
from voting on a proposal will be excluded entirely and will have no effect in
determining the quorum or the majority of votes cast. Abstentions and broker
non-votes count for quorum purposes only and not for voting purposes. Broker
non-votes occur when a broker returns a proxy but does not have the authority to
vote on a particular proposal. Brokers that do not receive instructions are
entitled to vote on the election of the directors and the ratification of the
auditors.
ATTENDING IN PERSON
Only stockholders, their proxy holders, and our invited guests may
attend the meeting. For security purposes, all persons attending the meeting
must bring an identification with photo. If you wish to attend the meeting in
person but you hold your shares through someone else, such as a stockbroker, you
must bring proof of your ownership to the meeting. For example, you could bring
an account statement showing that you owned FalconStor Software, Inc., shares as
of March 29, 2006 as acceptable proof of ownership.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of the
Common Stock of FalconStor Software, Inc., outstanding at March 29, 2006, by (i)
each person known by the Company to be the beneficial owner of more than five
percent of its Common Stock, (ii) each director and nominee for director, (iii)
each of the current officers named in the summary compensation table, and (iv)
all directors, nominees for director and executive officers of the Company as a
group.
Shares Beneficially Percentage
Name and Address of Beneficial Owner (1) Owned of Class (2)
----------------------------------------- ----- ------------
ReiJane Huai (3) 10,791,760 22.4%
c/o FalconStor Software, Inc.
2 Huntington Quadrangle
Melville, NY 11747
Barry Rubenstein (4) 6,548,512 13.6%
68 Wheatley Road
Brookville, NY 11545
Irwin Lieber (5) 4,580,189 9.5%
80 Cuttermill Road Suite 311
Great Neck, NY 11021
Eli Oxenhorn (6) 2,990,577 6.2%
56 The Intervale
Roslyn Estates, NY 11576
Barry Fingerhut (7) 3,157,664 6.6%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Seth Lieber (8) 3,022,474 6.3%
200 East 72 Street, PH N
New York, NY 10021
Jonathan Lieber (9) 2,955,352 6.0%
271 Hamilton Road
Chappaqua, NY 10514
Marilyn Rubenstein (10) 2,475,424 5.1%
c/o Barry Rubenstein
68 Wheatley Road
Brookville, NY 11545
Steven L. Bock (11) 16,500 *
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Patrick B. Carney (12) 59,615 *
Lawrence S. Dolin (13) 122,449 *
Steven R. Fischer (14) 86,949 *
Alan W. Kaufman (15) 16,500 *
Wayne Lam (16) 555,080 1.1%
James Weber (17) 191,729 *
Bernard Wu (18) 319,370 *
All Directors, Nominees for Director
and Executive Officers as a Group (19)
(9 persons) 12,159,952 24.7%
*Less than one percent
(1) A person is deemed to be the beneficial owner of voting securities that
can be acquired by such person within 60 days after the record date
upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options, warrants or convertible securities that are held by such
person (but not those held by any other person) and that are currently
exercisable (I.E., that are exercisable within 60 days from the date
hereof) have been exercised. Unless otherwise noted, we believe that
all persons named in the table have sole voting and investment power
with respect to all shares beneficially owned by them.
(2) Based upon shares of Common Stock outstanding at the Record Date of
48,139,902.
(3) Based upon information contained in a Form 5 and Forms 4 filed by Mr.
Huai and certain other information. Consists of (i) 10,750,760 shares
of Common Stock held by Mr. Huai and (ii) 41,000 shares of Common Stock
held by The 2002 ReiJane Huai Revocable Trust, of which Mr. Huai is a
trustee. Mr. Huai disclaims beneficial ownership of the securities held
by The 2002 ReiJane Huai Revocable Trust, except to the extent of his
equity interest therein.
(4) Based upon information contained in a Form 4 and a report on Schedule
13D, as amended (the "Wheatley 13D") filed jointly by Barry Rubenstein,
Brookwood Partners, L.P. ("Brookwood"), Seneca Ventures ("Seneca"),
Wheatley Associates III, L.P. ("Wheatley Associates"), Wheatley Foreign
Partners, L.P. ("Wheatley Foreign"), Wheatley Foreign Partners III,
L.P. ("Wheatley Foreign III"), Wheatley Partners, L.P. ("Wheatley"),
Wheatley Partners II, L.P. ("Wheatley II"), Wheatley Partners III, L.P.
("Wheatley III"), Woodland Partners, Woodland Venture Fund ("Woodland
Fund"), and certain other entities with the Securities and Exchange
Commission ("SEC"), as well as certain other information. Consists of
(i) 1,401,103 shares of Common Stock held by Mr. Rubenstein, (ii)
395,217 shares of common stock held by Brookwood, (iii) 642,453 shares
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of common stock held by Seneca, (iv) 299,809 shares of common stock
held by Wheatley Associates, (v) 41,008 shares of common stock held by
Wheatley Foreign, (vi) 293,012 shares of common stock held by Wheatley
Foreign III, (vii) 484,051 shares of common stock held by Wheatley,
(viii) 180,089 shares of common stock held by Wheatley II, (ix)
1,370,015 shares of common stock held by Wheatley III, (x) 698,242
shares of common stock held by Woodland Partners and (xi) 743,513
shares of common stock held by Woodland Venture. Does not include 1,258
shares of common stock held by Mr. Rubenstein's spouse, Marilyn
Rubenstein. Mr. Rubenstein disclaims beneficial ownership of the
securities held by Wheatley, Wheatley Foreign, Wheatley II, Wheatley
III, Wheatley Foreign III, Wheatley Associates, Seneca, Woodland Fund,
Woodland Partners and Brookwood, except to the extent of his respective
equity interest therein.
(5) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 1,907,205 shares of Common Stock held by
Irwin Lieber, (ii) 5,000 shares of Common stock held by Mr. Lieber's
daughter, (iii) 484,051 shares of Common Stock held by Wheatley, (iv)
41,008 shares of Common Stock held by Wheatley Foreign, (v) 180,089
shares of Common Stock held by Wheatley II, (vi) 1,370,015 shares of
Common Stock held by Wheatley III, (vii) 293,012 shares of Common Stock
held by Wheatley Foreign III, and (viii) 299,809 shares of Common Stock
held by Wheatley Associates. Mr. Lieber disclaims beneficial ownership
of the securities held by Wheatley, Wheatley Foreign, Wheatley II,
Wheatley III, Wheatley Foreign III and Wheatley Associates, except to
the extent of his respective equity interests therein.
(6) Based on information contained in a report on Schedule 13G filed
jointly on January 18, 2006 by Eli Oxenhorn and the Eli Oxenhorn Family
Limited Partnership (the "EOFLP"). Consists of (i) 2,749,500 shares of
Common Stock held by Mr. Oxenhorn (including 3,500 shares held by the
Eli Oxenhorn SEP IRA account and 8,000 shares held by the Eli Oxenhorn
Rollover IRA Account) and (ii) 241,077 shares of Common Stock held by
the EOFLP. Mr. Oxenhorn disclaims beneficial ownership of the
securities held by the EOFLP, except to the extent of his respective
equity interests therein.
(7) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 469,680 shares of Common Stock held by
Barry Fingerhut, (ii) 484,051 shares of Common Stock held by Wheatley,
(iii) 41,008 shares of Common Stock held by Wheatley Foreign, (iv)
180,089 shares of Common Stock held by Wheatley II, (v) 1,370,015
shares of Common Stock held by Wheatley III, (vi) 293,012 shares of
Common Stock held by Wheatley Foreign III, (vii) 299,809 shares of
Common Stock held by Wheatley Associates, and (viii) 20,000 shares held
by a partnership in which Mr. Fingerhut is a general partner. Mr.
Fingerhut disclaims beneficial ownership of the securities held by
Wheatley, Wheatley Foreign, Wheatley II, Wheatley III, Wheatley Foreign
III and Wheatley Associates, except to the extent of his respective
equity interests therein.
(8) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 79,622 shares of Common Stock held by Seth
Lieber, (ii) 15,000 shares of Common Stock held by the Irwin Lieber
1996 Grandfather Trust (the "Grandfather Trust") for which Seth Lieber
is a co-trustee, (iii) 484,051 shares of Common Stock held by Wheatley,
(iv) 41,008 shares of Common Stock held by Wheatley Foreign, (v)
180,089 shares of Common Stock held by Wheatley II, (vi) 1,370,015
shares of Common Stock held by Wheatley III, (vii) 293,012 shares of
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Common Stock held by Wheatley Foreign III, (viii) 299,809 shares of
Common Stock held by Wheatley Associates and (ix) 259,868 shares of
Common Stock held by Applegreen. Mr. Lieber disclaims beneficial
ownership of the securities held by the Grandfather Trust, Wheatley,
Wheatley Foreign, Wheatley II, Wheatley III, Wheatley Foreign III,
Wheatley Associates and Applegreen, except to the extent of his
respective equity interests therein.
(9) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 12,500 shares of Common Stock held by
Jonathan Lieber, (ii) 15,000 shares of Common Stock held by the
Grandfather Trust for which Jonathan Lieber is a co-trustee, (iii)
484,051 shares of Common Stock held by Wheatley, (iv) 41,008 shares of
Common Stock held by Wheatley Foreign, (v) 180,089 shares of Common
Stock held by Wheatley II, (vi) 1,370,015 shares of Common Stock held
by Wheatley III, (vii) 293,012 shares of Common Stock held by Wheatley
Foreign III, (viii) 299,809 shares of Common Stock held by Wheatley
Associates and (ix) 259,868 shares of Common Stock held by Applegreen
Partners. Mr. Lieber disclaims beneficial ownership of the securities
held by the Grandfather Trust, Wheatley, Wheatley Foreign, Wheatley II,
Wheatley III, Wheatley Foreign III, Wheatley Associates and Applegreen,
except to the extent of his respective equity interests therein.
(10) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 1,258 shares of Common Stock held by
Marilyn Rubenstein, (ii) 642,453 shares of Common Stock held by Seneca,
(iii) 743,513 shares of Common Stock held by Woodland Fund, (iv)
692,983 shares of Common Stock held by Woodland Partners and (v)
395,217 shares of Common Stock held by Brookwood. Mrs. Rubenstein
disclaims beneficial ownership of the securities held by Seneca,
Woodland Fund, Woodland Partners and Brookwood, except to the extent of
her respective equity interests therein. Does not include 1,401,103
shares of Common Stock held by Mrs. Rubenstein's spouse, Barry
Rubenstein.
(11) Based on information contained in a Form 3 and a Form 4 filed by Mr.
Bock and certain other information. Consists of 16,500 shares of Common
Stock issuable upon exercise of options that are currently exercisable
or will be exercisable within 60 days of March 29, 2006.
(12) Based on information contained in a Form 3 and Forms 4 filed by Mr.
Carney and certain other information. Consists of (i) 500 shares held
by Mr. Carney and (ii) 59,115 shares of Common Stock issuable upon
exercise of options that are currently exercisable or will be
exercisable within 60 days of March 29, 2006.
(13) Based on information contained in Forms 4 filed by Mr. Dolin and
certain other information. Consists of (i) 40,000 shares held by
Northern Union Club and (ii) 82,449 shares of Common Stock issuable
upon exercise of options that are currently exercisable or will be
exercisable within 60 days of March 29, 2006. Mr. Dolin is a general
partner of Mordo Partners, which is a general partner of Northern Union
Club. Mr. Dolin disclaims beneficial ownership of the securities held
by Northern Union Club, except to the extent of his equity interest
therein.
(14) Based on information contained in Forms 4 filed by Mr. Fischer and
certain other information. Consists of (i) 19,500 shares held by Mr.
Fischer and (ii) 67,449 shares of Common Stock issuable upon exercise
of options that are currently exercisable or will be exercisable within
60 days of March 29, 2006. Excludes 1,000 shares of Common Stock held
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by Mr. Fischer as a custodian for his daughter. Mr. Fischer disclaims
beneficial ownership of the securities held as a custodian for his
daughter, except to the extent of his equity interest therein.
(15) Based on information contained in a Form 3 and a Form 4 filed by Mr.
Kaufman and certain other information. Consists of 16,500 shares of
Common Stock issuable upon exercise of options that are currently
exercisable or will be exercisable within 60 days of March 29, 2006.
(16) Based on information contained in Forms 4 filed by Mr. Lam and certain
other information. Consists of (i) 48,003 shares held by Mr. Lam, (ii)
1,234 shares of Common Stock held by Mr. Lam's spouse, and (iii)
505,843 shares of Common Stock issuable upon exercise of options that
are currently exercisable or will be exercisable within 60 days of
March 29, 2006.
(17) Based on information contained in a Form 3 and a Form 4 filed by Mr.
Weber and certain other information. Consists of 191,729 shares of
Common Stock issuable upon exercise of options that are currently
exercisable or will be exercisable within 60 days of March 29, 2006.
(18) Based on information contained in a Form 3 and a Form 4 filed by Mr. Wu
and certain other information. Consists of (i) 212,020 shares held by
Mr. Wu and (ii) 107,350 shares of Common Stock issuable upon exercise
of options that are currently exercisable or will be exercisable within
60 days of March 29, 2006.
(19) Consists of (i) 11,113,017 shares held by all directors, nominees for
director and executive officers as a group and (ii) 1,046,935 shares of
Common Stock issuable upon exercise of options that are currently
exercisable or will be exercisable within 60 days of March 29, 2006.
BOARD OF DIRECTORS
INDEPENDENCE
In accordance with the Company's Corporate Governance Guidelines, and
the Nasdaq Stock Market corporate governance listing standards (the "Nasdaq
Standards"), a majority of the Company's directors must be independent as
determined by the Board. In making its independence determinations for
directors, the Board looks to the Nasdaq Standards.
Under the Nasdaq Standards, a director is independent if: the director
is not employed, nor is the director a family member of anyone employed, by the
Company or any parent or subsidiary; the director is not, and does not have a
family member who is, a partner of the Company's outside auditor or a former
partner or employee of the outside auditor who worked on the Company's audit
during the past three years; the director has not, and does not have a family
member who has, accepted more than $60,000 during the current or past three
fiscal years from the Company or any of its affiliates; the director is not, nor
is any family member of the director, a partner in, or a controlling stockholder
or an executive officer of, any organization to which the Company made, or from
which the Company received, payments for property or services that exceed five
percent of the recipient's consolidated gross revenues or $200,000, whichever is
more; and the director is not, and does not have any family member who is, an
executive officer of another company where any of the Company's executive
officers serve on the other company's compensation committee.
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The Board of Directors currently consists of six directors, five of
whom, Messrs. Bock, Carney, Dolin, Fischer, and Kaufman are independent. Mr.
Huai is a non-independent management director.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's bylaws authorize the Board of Directors to fix the number
of directors and provide that the directors shall be divided into three classes,
with the classes of directors serving for staggered, three-year terms.
Currently, the number of members of the Board of Directors is six.
On August 6, 2004, Steven Owings resigned from the Board of Directors
due to personal health issues. On January 6, 2005, Steven L. Bock was elected by
the Board of Directors to fill the remainder of Mr. Owings's term.
The Company's nominating procedures, including procedures for director
candidates proposed to be nominated by stockholders, and director
qualifications, are set forth below.
Steven L. Bock and Patrick B. Carney were nominated by the Company's
Nominating and Corporate Governance Committee as the Board of Directors'
nominees for director. Mr. Bock and Mr. Carney are currently directors of the
Company. Each would be elected for a full three-year term. It is proposed that
Mr. Bock and Mr. Carney be elected to serve until the Annual Meeting of
Stockholders to be held in 2009 and until their successors are elected and shall
have qualified.
Unless authority is specifically withheld, proxies will be voted for
the election of each of the nominees below to serve as a director of the Company
for a term which will expire at the Company's 2009 Annual Meeting of
Stockholders and until a successor is elected and qualified. If any one or more
of such nominees should for any reason become unavailable for election, the
persons named in the accompanying form of proxy may vote for the election of
such substitute nominees as the Board of Directors may propose. The accompanying
form of proxy contains a discretionary grant of authority with respect to this
matter.
Director
Name Position Age Since
---- -------- --- -----
Steven L. Bock Director Nominee 52 2005
Patrick B. Carney Director Nominee 41 2003
STEVEN L. BOCK has been CEO and President of Rotobrush International
LLC, a leading provider of air duct cleaning systems to a range of service
contractors, since October 2005. He is also a member of Rotobrush's Supervisory
Committee. Mr. Bock has also been Chairman of the Board and CEO of Unger
Software Corporation, a leading provider of financial planning and profiling
software for advisors and other finance industry professionals, since December
2002. He was also the President of Unger Software from October 2002 to October
2005. Prior to joining Unger Software, Mr. Bock was a consultant to early-stage
companies. He served as a Director and Interim Chief Operating Officer of
B2BVideo Network from November 2001 to May 2002. From December 1990 through July
2000, Mr. Bock was Chairman, Chief Executive Officer and President of Specialty
Catalog Corp., a direct marketer targeting niche consumer product categories
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through a variety of catalogs and E-commerce web sites. Prior to joining
Specialty Catalog, Mr. Bock was an officer at investment holding and management
firms and was a partner of a law firm. Mr. Bock holds a B.S. from the State
University of New York at Albany, and a J.D. from Harvard Law School. Mr. Bock
has been a Director of the Company since January 2005.
PATRICK B. CARNEY has been General Manager of Melillo Consulting, Inc.,
a solutions oriented systems integrator, since April 1, 2005. From November,
2004, through March, 2005, Mr. Carney was an independent consultant to senior
management and senior IT executives. From October 2003, through October, 2004,
Mr. Carney was the Chief Technology Officer for Barr Laboratories Inc., a
specialty pharmaceutical company. From August 2000 through July 2003 he served
as the Chief Information Officer for the North Shore - Long Island Jewish Health
System where he was responsible for strategic IS planning and managing the IS
and Telecommunications operations throughout the Health System. From 1995 to
July, 2000, Mr. Carney was the Vice President & Chief Information Officer for
Staten Island University Hospital. Mr. Carney's career also includes IT
management experience in other industries as he was also the Director of
Information Systems for ABB Power Generation Inc., a subsidiary of the
Zurich-based Asea Brown Boveri, and also held positions at KPMG Peat Marwick,
Wang Laboratories, and IBM Corporation. Mr. Carney received a BS degree from
Manhattan College. Mr. Carney has been a director of the Company since May 2003.
The names of the directors, whose terms expire at the 2007 and 2008
Annual Meetings of Stockholders of the Company, who are currently serving their
terms, are set forth below:
Director
Name Position Age Since
---- -------- --- -----
Lawrence S. Dolin Director 62 2001
Steven R. Fischer Director 60 2001
ReiJane Huai Director 47 2001
Alan W. Kaufman Director 67 2005
LAWRENCE S. DOLIN has been Chairman, President and Chief Executive
Officer of Noteworthy Medical Systems, Inc. ("Noteworthy"), a provider of
computerized patient record software, since January 2000. Since January 1996,
Mr. Dolin has been a general partner of Mordo Partners, an investment management
partnership. Since 1981, Mr. Dolin has served as a director of Morgan's Foods,
Inc., which owns, through wholly-owned subsidiaries, KFC restaurants, Taco Bell
restaurants and Pizza Hut restaurants. Mr. Dolin holds a B.A. from Case Western
Reserve University and a J.D. from Case Western Reserve University. Mr. Dolin
has been a director of the Company since August 2001, and his term as a director
of the Company expires in 2007.
STEVEN R. FISCHER has been President of North Fork Business Capital, a
provider of asset based and structured finance loans of up to $150 million for
corporate mergers and acquisitions, recapitalizations, and for general working
capital purposes, since July 2004. From February 2004 until July 2004, he was a
consultant to financial institutions. From 1992 to February, 2004, he held
multiple executive management and financial positions, including most recently
President, with Transamerica Business Capital Corporation, a member of the
Transamerica Finance Corporation family of companies, specializing in secured
9
lending for mergers, acquisitions and restructurings. From 1981 to 1992, he
served as Vice President and Regional Manager of Citibank, N.A. Since 1995, he
has served as a director of ScanSource, Inc., a value-added distributor of POS
and bar code products. Beginning in 2001 he served on the board of advisors of
Keltic Financial LLC., a privately held finance company that funds middle market
companies. He holds a B.S. in Economics and Accounting from Queens College and
an M.B.A. from Baruch College. Mr. Fischer has been a director of the Company
since August 2001, and his term as a director of the Company expires in 2008.
REIJANE HUAI has served as President and Chief Executive Officer of the
Company and its predecessor since December 2000 and has served as Chairman of
the Board of the Company since August 2001. Mr. Huai also served as a director
of the Company's predecessor from July 2000 to August 2001. Mr. Huai came to the
Company with a career in software development and management. As executive vice
president and general manager, Asia, for Computer Associates International,
Inc., he was responsible for sales, marketing and the development of strategic
joint ventures in the region. Mr. Huai joined Computer Associates in 1996 with
its acquisition of Cheyenne Software, Inc., where he was president and chief
executive officer. Mr. Huai joined Cheyenne Software, Inc., in 1985 as manager
of research and development of ARCserve, the industry's first storage management
solution for the client/server environment. Mr. Huai received a master's degree
in computer science from the State University of New York at Stony Brook in
1985. Mr. Huai has been a director of the Company since August, 2001, and his
term as a director of the Company expires in 2007.
ALAN W. KAUFMAN has been a director of NetIQ Corporation, a provider of
integrated systems and security management solutions, since August 1997. Mr.
Kaufman served as a director of QueryObject Systems Corp., a developer and
marketer of proprietary business intelligence software, from October 1997 to
March 2002. He also served as QueryObject Systems' Chairman of the Board from
May 1998 to October 1999, and as President and Chief Executive Officer from
October 1997 to December 1998, when he retired. From December 1996 to October
1997, Mr. Kaufman was an independent consultant. From April 1986 to December
1996, Mr. Kaufman held various positions at Cheyenne Software, most recently as
Executive Vice President of Worldwide Sales. Mr. Kaufman was the founding
president of, and currently serves on the Board of Directors of, the New York
Software Industry Association. He is on the Advisory Board of the CUNY (City
University of New York) Institute for Software Design and Development. Mr.
Kaufman holds a B.S. in electrical engineering from Tufts University. Mr.
Kaufman has been a director of the Company since May, 2005, and his term as a
director of the Company expires in 2008.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES.
MEETINGS
The Board of Directors met on ten occasions during the fiscal year
ended December 31, 2005. In addition to the meetings, the members of the Board
of Directors sometimes take action by unanimous written consent in lieu of a
meeting, which is permitted. All Directors attended at least 75% of the meetings
of the Board of Directors.
10
COMMITTEES
The Board of Directors currently has three committees: the Audit
Committee; the Compensation and Stock Option Committee; and the Nominating and
Corporate Governance Committee. The charter of each committee is available on
the Company's website at www.falconstor.com/en/company/?pg=Governance.
AUDIT COMMITTEE
The Audit Committee consists of Messrs. Bock, Dolin, and Fischer
(Chair). The Audit Committee is appointed by the Board to assist the Board in
monitoring (1) the integrity of the financial statements of the Company, (2) the
qualifications and independence of the independent registered public accounting
firm engaged to audit the Company's consolidated financial statements, (3) the
performance of the Company's internal audit function and independent auditors,
(4) the integrity of management and information systems and internal controls,
and (5) the compliance by the Company with legal and regulatory requirements.
Each member of the Audit Committee is required to be "independent" as
defined in the Nasdaq Standards and in Section 301of the Sarbanes-Oxley Act of
2002 (the "Act") and Rule 10A-3 of the Securities Exchange Act of 1934, as
amended. The Board has determined that each member of the Audit Committee is
"independent" under these standards. In addition, the Board has determined that,
as required by the Nasdaq Standards, each member of the Audit Committee was able
to read and to understand financial statements at the time of his appointment to
the Audit Committee.
The Board has further determined that Mr. Fischer meets the definition
of "audit committee financial expert," and therefore meets comparable Nasdaq
Standard requirements, because he has an understanding of financial statements
and generally accepted accounting principles ("GAAP"); has the ability to assess
GAAP in connection with the accounting for estimates, accruals, and reserves;
has experience in analyzing and evaluating financial statements that present a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably be
expected to be raised by the Company's financial statements; has an
understanding of internal controls and procedures for financial reporting; and
has an understanding of audit committee functions. Mr. Fischer acquired these
attributes through education and experience consistent with the requirements of
the Act.
The Audit Committee met four times during the fiscal year ended
December 31, 2005. All members of the Audit Committee attended at least 75% of
the meetings of the committee during the times they were members of the Audit
Committee.
The Company's Board of Directors has adopted, and annually reviews, an
Audit Committee Charter and Guidelines for Pre-Approval of Independent Auditor
Services.
COMPENSATION AND STOCK OPTION COMMITTEE
The Compensation and Stock Option Committee consists of Messrs. Carney,
Dolin (Chair) and Kaufman. From January 1, 2005 through May 10, 2005, the
Compensation and Stock Option Committee consisted of Messrs. Carney, Dolin and
Fischer. The Compensation and Stock Option Committee is appointed by the Board
(i) to discharge the responsibilities of the Board relating to compensation of
11
the Company's executives, (ii) to produce the annual report on executive
compensation that is required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy statement, and (iii) to
administer, and to approve awards under, the Company's equity-based compensation
plans for employees. Under the Compensation and Stock Option Committee Charter
adopted in January 2005, all members of the Compensation Committee are required
to be "independent" as defined in the Nasdaq Standards. The Board has determined
that all of the current members of the Compensation Committee are "independent"
under these standards.
The Compensation and Stock Option Committee met six times during the
fiscal year ended December 31, 2005. All members of the Compensation and Stock
Option Committee attended at least 75% of the meetings of the committee during
the times they were members of the Compensation and Stock Option Committee. The
Compensation and Stock Option Committee also took action by unanimous written
consent in lieu of a meeting five times during the fiscal year ended December
31, 2005.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The Nominating and Corporate Governance Committee consists of Messrs.
Bock, Carney (Chair), Fischer and Kaufman. From January 1, 2005, through May 10,
2005, it consisted of Messrs. Bock, Carney, Dolin and Fischer. The Nominating
and Corporate Governance Committee is appointed by the Board: (i) to identify
individuals qualified to become Board members, (ii) to recommend to the Board
director candidates for each annual meeting of stockholders or as necessary to
fill vacancies and newly created directorships and (iii) to perform a leadership
role in shaping the Company's corporate governance policies, including
developing and recommending to the Board a set of corporate governance
principles. Under the Nominating and Corporate Governance Committee Charter, all
members of the Nominating and Corporate Governance Committee are required to be
"independent" as defined in the Nasdaq Standards. The Board has determined that
all of the current members of the Nominating and Corporate Governance Committee
are "independent" under these standards.
The Nominating and Corporate Governance Committee met four times during
the fiscal year ended December 31, 2005. All members of the Nominating and
Corporate Governance Committee attended at least 75% of the meetings of the
committee during the times they were members of the Nominating and Corporate
Governance Committee.
The Nominating and Corporate Governance Committee's charter is
available on the Company's website at
www.falconstor.com/en/company/?pg=Governance.
COMPENSATION
Directors who are also employees receive no compensation for serving on
the Company's Board of Directors. Non-employee directors are reimbursed for all
travel and other expenses incurred in connection with attending Board and
Committee meetings.
Pursuant to the 2004 Outside Directors Stock Option Plan (the "2004
Plan"), each non-employee director of the Company is entitled upon becoming a
non-employee director to receive an initial grant of options to acquire 50,000
shares of Common Stock and an annual grant of options to acquire 10,000 shares
of Common Stock on the date of each Annual Meeting of Stockholders of the
12
Company. These stock options are granted with per share exercise prices equal to
the fair market value of the Common Stock on the date of grant. A director who
received an initial grant of options to acquire 50,000 shares of Common Stock
within six months prior to an Annual Meeting of Stockholders is not entitled to
receive an annual grant of options to acquire 10,000 shares of Common Stock on
the date of the Annual Meeting. A director who serves as Chairperson of a
committee of the Board of Directors for at least six months during a fiscal year
is entitled to receive an additional grant of options to acquire 5,000 shares on
the date of the next Annual Meeting of Stockholders. One-third of the options
vest on the first anniversary of the date of grant, and one-twenty fourth of the
remainder vests each month thereafter for twenty-four months.
In May 2005, each of Messrs. Carney, Dolin and Fischer received
options to purchase 15,000 shares of Common Stock at an exercise price of $6.01
per share as their annual grants under the 2004 Plan, and Mr. Kaufman received
options to purchase 50,000 shares of Common Stock at an exercise price of $6.01
per share as his initial grant of options under the 2004 Plan. Mr. Bock received
options to purchase 50,000 shares of Common Stock at an exercise price of $8.20
per share as his initial grant of options upon becoming a director in January,
2005.
NOMINATING PROCEDURES AND DIRECTOR QUALIFICATIONS
The Nominating and Corporate Governance Committee has adopted the
following policies regarding nominations and director qualifications:
I. Consideration of Nominees Recommended by Stockholders
The Committee recognizes that qualified candidates for nomination for
Director can come from many different sources, including from the Company's
stockholders. The Committee will therefore consider any nominee who meets the
minimum qualifications set forth below.
To propose a nominee, a stockholder must provide the following
information:
1. The stockholder's name and, if different, the name of
the holder of record of the shares.
2. The stockholder's address and telephone number.
3. The name of the proposed nominee.
4. The address and phone number of the proposed nominee.
5. A listing of the proposed nominee's qualifications.
6. A statement by the stockholder revealing whether the
proposed nominee has assented to the submission of
her/his name by the stockholder.
7. A statement from the stockholder describing any
business or other relationship with the nominee.
8. A statement from the stockholder stating why the
stockholder believes the nominee would be a valuable
addition to the Company's Board of Directors.
13
The stockholder should submit the required information to:
Nominating and Corporate Governance Committee
c/o General Counsel
FalconStor Software, Inc.
2 Huntington Quadrangle
Suite 2S01
Melville, NY 11747
With a copy to:
Director Human Resources
FalconStor Software, Inc.
2 Huntington Quadrangle
Suite 2S01
Melville, NY 11747
If any information is missing, the proposed nominee will not be
considered.
II. Qualifications for Candidates
The Committee believes that the Company and its stockholders are best
served by having directors from diverse backgrounds who can bring different
skills to the Company. It is therefore not possible to create a rigid list of
qualifications for Director candidates. However, absent unique circumstances,
the Committee expects that each candidate should have the following minimum
qualifications:
o Substantial experience with technology companies. This experience may
be the result of employment with a technology company or may be gained
through other means, such as financial analysis of technology
companies;
o The highest level of personal and professional ethics, integrity and
values;
o An inquiring and independent mind;
o Practical wisdom and mature judgment;
o Expertise that is useful to the Company and complementary to the
background and experience of other Board members, so that an optimal
balance of Board members can be achieved and maintained;
o Willingness to devote the required time to carrying out the duties and
responsibilities of Board membership;
o Commitment to serve on the Board for several years to develop knowledge
about the Company's business;
o Willingness to represent the best interests of all stockholders and
objectively appraise management performance; and
14
o Involvement only in activities or interests that do not conflict with
the director's responsibilities to the Company and its stockholders.
At any time, the Committee may be looking for director candidates with
certain qualifications or skills to replace departing directors or to complement
the skills of existing directors and to add to the value of the Board of
Directors.
III. Identification and Evaluation of Candidates
Candidates for director may come from many different sources including,
among others, recommendations from current directors, recommendations from
management, third-party search organizations, and stockholders.
In each instance, the Committee will perform a thorough examination of
the candidate. An initial screening will be performed to ensure that the
candidate meets the minimum qualifications set forth above and has skills that
would enhance the Board of Directors. Following the initial screening, if the
candidate is still viewed as a potential nominee, the Committee will perform
additional evaluations including, among other things, some or all of the
following: Detailed resume review; personal interviews; interviews with
employer(s); and interviews with peer(s).
All candidates will be reviewed to determine whether they meet the
independence standards of the Nasdaq Standards. Failure to meet the independence
standards may be a disqualifying factor based on the Board of Director's
composition at the time. Even if failure to meet the independence standards is
not by itself disqualifying, it will be taken into account by the Committee in
determining whether the candidate would make a valuable contribution to the
Board of Directors.
CONTACTING THE BOARD OF DIRECTORS
Stockholders and others may contact FalconStor's Board of Directors by
sending a letter to:
Board of Directors
FalconStor Software, Inc.
2 Huntington Quadrangle, Suite 2S01
Melville, NY 11747
or by clicking on the "Contact FalconStor's Board of Directors" link on the
FalconStor Corporate Governance home page at
www.falconstor.com/en/company/?pg=Governance.
Communications directed to the Board of Directors are screened by the
Company's Legal and/or Investor Relations departments. Routine requests for
Company information are handled by the appropriate Company department. Other
communications are reviewed to determine if forwarding to the Board of Directors
is necessary or appropriate. The Board of Directors receives a quarterly summary
of all communications that are not forwarded to the Board's attention. All
communications are kept on file for two years for any Director who wishes to
view them.
15
ATTENDANCE AT ANNUAL MEETINGS
The Company's policy is that, except for unusual circumstances, all
board members should attend the Company's Annual Meetings of Stockholders. All
board members attended the Company's 2005 Annual Meeting of Stockholders.
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
The following table contains the names, positions and ages of the
executive officers of the Company who are not directors.
Name Position Age
---- -------- ---
Wayne Lam Vice President 42
James Weber Chief Financial Officer, Treasurer and Vice President 35
Bernard Wu Vice President, Business Development 48
WAYNE LAM has served as a vice president of the Company and its
predecessor entity since April 2000. Mr. Lam has more than 15 years of software
development and corporate management experience. As vice president at Computer
Associates, he held various roles in product marketing, business development and
product development. Mr. Lam joined Computer Associates in 1996 with its
acquisition of Cheyenne Software, where he held various positions including
general manager of Cheyenne Software Netware Division, director of business
development, and head of Cheyenne Communications, a business development unit
focusing on communication software. From 1989 to 1993 he was co-founder and
chief executive officer of Applied Programming Technologies, where he managed
all aspects of its operations and development projects. From 1987 to 1989 he was
vice president of engineering at Advanced Graphic Applications, where he managed
the development of PC-based document management systems and optical storage
device drivers. Mr. Lam has a B.E. in Electrical Engineering from Cooper Union,
where he was involved with a privately funded research project studying the
feasibility of building paperless offices using optical storage devices. The
success of the project led to the formation of Advanced Graphic Applications.
JAMES WEBER has served as Chief Financial Officer, Treasurer and a Vice
President since February, 2004. Mr. Weber has over 10 years of financial,
accounting and management experience. Prior to becoming Chief Financial Officer,
Mr. Weber served as worldwide Corporate Controller of the Company and its
predecessor entity since April 2001. From 1998 through 2001, Mr. Weber served as
Corporate Controller for theglobe.com, an Internet community. Before joining
theglobe.com, Mr. Weber had been an audit manager with KPMG and had several
years of public accounting experience. Mr. Weber is a Certified Public
Accountant in the State of New York and received his Bachelor of Science degree
in accounting from Fordham University.
BERNARD WU has served as Vice President of Business Development of the
Company and its predecessor entity since November, 2000. From 1998 to October
2000, Mr. Wu was Senior Vice President of sales and marketing for the Internet
Outsourcing Division of Trend Micro, a leading Internet security software
company. Mr. Wu had worldwide responsibility for defining, launching, and
16
managing OEM, service, and alliance partnerships with ISPs, ASPs,
telecommunication carriers, and other software companies for the purpose of
offering network-based security services. Prior to that, Mr. Wu had 15 years'
experience in various executive and managerial positions at companies such as
Intel, Seagate, Conner Peripherals, and Computer Associates/Cheyenne in areas
including product development, marketing, and OEM/channel sales of RAID,
optical, and tape-based storage management software and subsystems. In 1996 he
co-authored a patent in the area of SCSI enclosure management services which has
been widely adopted in the industry. Mr. Wu has a BS/MS in engineering from the
University of California at Berkeley and an MBA from University of California at
Los Angeles Anderson School of Management.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth, for the
fiscal years indicated, all compensation awarded to, paid to or earned by the
Company's chief executive officer and the Company's other executive officers
(collectively, the "Named Executive Officers"). The executive compensation
provided below reflects the executive compensation information of the Company
for the years indicated.
SUMMARY COMPENSATION TABLE
Name and Principal Long Term
Position Annual Compensation Compensation
-------------------------- -------------------------------------------- --------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Year ($) ($) ($)(3) Options (#) ($)
------- ---------- ------------ -------------- -------------- -------------
ReiJane Huai............... 2005 $275,000 $47,545 (2) -- -- --
Chairman and Chief 2004 $191,667 -- $16,000 -- --
Executive Officer 2003 $150,000 -- $24,000 -- --
James Weber (1)........... 2005 $180,000 -- -- 125,000 --
Chief Financial Officer 2004 $150,000 -- -- -- --
and Vice President 2003 $90,000 $18,000 -- 50,000 --
Wayne Lam............... 2005 $180,000 -- -- 170,000 --
Vice President 2004 $150,000 -- -- -- --
2003 $120,000 -- -- 100,000 --
Bernard Wu................. 2005 $180,000 -- -- 200,000 --
Vice President-Business 2004 $150,000 -- -- -- --
Development 2003 $150,000 -- -- 100,000 --
(1) Mr. Weber was appointed Chief Financial Officer and Vice President on February 4, 2004.
(2) Mr. Huai was paid a bonus of $47,545 in 2006 for services rendered in 2005 and 2004.
(3) Mr. Huai was given automobile allowances of $16,000 in 2004 and $24,000 in 2003.
17
OPTION GRANTS DURING 2005 FISCAL YEAR
The following table provides information related to options to purchase
Common Stock granted to the Company's Named Executive Officers. The Company
currently does not have any plans providing for the grant of stock appreciation
rights.
Potential Realizable Value At
Assumed Rates of Stock Price
Individual Grants Appreciation for Option Term(2)
-------------------------------------------------------------------------------------------------------------------------
Name Number of % of Total
Securities Options Exercise
Underlying Granted or Base
optioton(#) employees in Price
(3) Fiscal Year ($/Sh)(1) Expiration Date 5% 10%
-------------------------------------------------------------------------------------------------------------------------
James Weber 125,000 6% $8.20 January 6, 2015 $644,620 $1,633,586
Wayne Lam 170,000 8% $8.20 January 6, 2015 $876,679 $2,221,677
Bernie Wu 125,000 6% $8.20 January 6, 2015 $644,620 $1,633,586
Bernie Wu 75,000 4% $6.80 November 7, 2015 $320,736 $812,809
(1) The option exercise price must be paid in cash. The exercise price is equal
to or greater than the fair market value of the Common Stock on the date of
grant.
(2) The potential realizable value portion of the foregoing table illustrates
values that might be realized upon exercise of the options immediately prior to
the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options. These
numbers do not take into account provisions of certain options providing for
termination of the option following termination of employment,
non-transferability or differences in vesting periods. Regardless of the
theoretical value of an option, its ultimate value will depend upon the market
value of the Common Stock at a future date, and that value will depend on a
variety of factors, including the overall condition of the stock market and the
Company's results of operations and financial condition. There can be no
assurance that the values reflected in this table will be achieved.
(3) These options become exercisable with respect to 33% of the shares indicated
in each of 2006 and 2007 and 34% in 2008.
18
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the
number of options exercised during 2005 and unexercised stock options held by
the Named Executive Officers as of December 31, 2005.
Number of Securities
Underlying Unexercised Value of Unexercised In-
Shares Options at 2005 Fiscal the-Money Options at 2005
acquired on Value Year-End (#) Fiscal Year-End ($)(2)
Name Exercise (#) Realized (1) Exercisable/unexercisable Exercisable/unexercisable
---- ------------ ------------ ---------------------------- -------------------------
ReiJane Huai -- -- 0/0 0/0
James Weber -- -- 133,479/142,000 $582,078/$35,020
Wayne Lam 50,000 $339,685 449,743/204,000 $1,794,638/$-0-
Bernard Wu -- -- 299,499/234,000 $1,254,255/$44,250
---------------------------------------------------------------------------------------------------------------------------------------
(1) Represents the fair value of the underlying securities on the date of
exercise, less the exercise price of such options.
(2) On December 31, 2005, the last reported sales price of the Common Stock as
reported on The Nasdaq National Market was $7.39.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Mr. Lam, Mr. Weber and Mr. Wu each failed to file one Form 4, and Mr.
Huai failed to file two Forms 4, on a timely basis during the year ended
December 31, 2005. All of the Forms 4 were subsequently filed. In the case of
Messrs. Lam, Weber and Wu, the Forms 4 reported a grant of stock options to the
relevant Executive Officer. In the case of Mr. Huai, the Forms 4 reported gifts
of shares of Company Common Stock by Mr. Huai. The Company has instituted
additional procedures to prevent late filings in the future.
19
EQUITY COMPENSATION PLAN INFORMATION
The Company currently does not have any equity compensation plans not
approved by security holders.
Number of Number of Securities
Securities to be Weighted - Remaining Available for
Issued upon Average exercise Future Issuance Under
Exercise of Price of Equity Compensation
Outstanding Outstanding Plans (Excluding
Options, Warrants Options, Warrants Securities Reflected in
and Rights(1) and Rights(1) Column (a))(1)
PLAN CATEGORY (a) (b) (c)
------------- --- --- ---
Equity compensation
plans approved by
security holders............. 10,200,908 $ 5.22 1,006,314
(1) As of December 31, 2005.
EMPLOYMENT AGREEMENTS
The Company entered into an Amended and Restated Employment Agreement
with ReiJane Huai dated as of September 1, 2004, and a Second Amended and
Restated Employment with Mr. Huai dated as of November 7, 2005, providing for
the employment of Mr. Huai as President and Chief Executive Officer. The
employment agreement, as amended, provides that Mr. Huai shall devote
substantially all of his professional time to the business of the Company. The
employment agreement provides a base salary in the amount of $275,000. The
agreement further provides for the potential payment of bonuses to Mr. Huai for
the periods ending December 31, 2005, December 31, 2006, and December 31, 2007.
For a description of these bonuses, please see the 2005 COMPENSATION AND STOCK
OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION, below. The agreement contains
non-competition, confidentiality and non-solicitation provisions that apply for
twenty-four months after cessation of employment. The agreement expires on
December 31, 2007.
SEVERANCE AGREEMENTS
Effective December 1, 2005, and as amended and restated on December 30,
2005, the Company adopted the 2005 FalconStor Software, Inc., Key Executive
Severance Protection Plan (the "Severance Plan"). Pursuant to the Severance
Plan, certain key Company employees, including Messrs. Huai, Lam, Weber and Wu,
are entitled to receive severance benefits if, within two years of a Change in
Control (as defined in the Severance Plan) of the Company, the employee's
employment is terminated other than (i) for Cause (as defined in the Severance
Plan) by the Company, (ii) voluntarily by the employee (other than for Good
Reason (as defined in the Severance Plan)), or (iii) by reason of the death or
20
Permanent Disability (as defined in the Severance Plan) of the employee. The
severance benefits payable include the payment of a multiple of the employee's
salary and bonus and the continuation of certain benefits for a defined period
for the employee. The multiple for each of Messrs. Huai, Lam, Weber and Wu is
three, and the benefits continuation period for each is thirty-six months. The
Severance Plan also provides the employee with the right to replace all stock
options, whether vested or not, with fully vested stock options, or,
alternatively, subject to the approval of the Board of Directors at the time,
the right to receive a cash payment for surrendering the options equal to the
difference between the full exercise price of each option surrendered and the
greater of (i) the average price per share paid in connection with the
acquisition of control of the Company if such control was acquired by the
payment of cash or the then fair market value of the consideration paid for such
shares if such control was acquired for consideration other than cash, (ii) the
price per share paid in connection with any tender offer for shares of the
Company's Common Stock leading to control, or (iii) the mean between the high
and low selling price of such stock on the Nasdaq National Market or other
market on which the Company's Common Stock is then traded on the date on which
the employee is entitled to a severance benefit. Finally, the Severance Plan
provides that if any excise taxes, and any interest or penalties, are imposed on
the employee pursuant Section 4999 of the Internal Revenue Code of 1986, as
amended, the Company will make the employee whole.
REPORT ON REPRICING OF OPTIONS. None of the stock options granted under
any of the Company's plans was repriced in the fiscal year ended December 31,
2005.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCK AND INSIDER
PARTICIPATION. Messrs. Patrick B. Carney, Lawrence S. Dolin, Steven R. Fischer,
and Alan W. Kaufman served as members of the Compensation and Stock Option
Committee of the Board of Directors at various times during the fiscal year
ended December 31, 2005. There were no transactions involving the Company and
such individuals.
AUDIT COMMITTEE REPORT
The Board of Directors appoints an Audit Committee each year to review
the Company's financial matters. Please see the AUDIT COMMITTEE discussion in
the BOARD OF DIRECTORS section, above, for a discussion of the Audit Committee.
The Audit Committee meets with KPMG LLP (the Company's independent
registered public accounting firm) and reviews the scope of their audit, report
and recommendations. The Audit Committee members reviewed and discussed the
audited consolidated financial statements as of and for the fiscal year ended
December 31, 2005 with management. The Audit Committee also discussed all
matters required to be discussed by Statement of Auditing Standards No. 61,
COMMUNICATION WITH AUDIT COMMITTEES, as currently in effect, with KPMG LLP. The
Audit Committee received the written disclosures and the letter from KPMG LLP as
required by Independence Standards Board Standard No. 1 INDEPENDENCE DISCUSSIONS
WITH AUDIT COMMITTEES, as currently in effect, and has discussed the
independence of KPMG LLP with representatives of such firm.
Based on their review and the discussions described above, the Audit
Committee recommended to the Board of Directors that the Company's audited
consolidated financial statements be included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, to be filed with the SEC.
21
AUDIT COMMITTEE
Steven L. Bock
Lawrence S. Dolin
Steven R. Fischer
2005 COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION:
GENERAL
During the fiscal year ended December 31, 2005, the Compensation and
Stock Option Committee determined the cash and other incentive compensation, if
any, to be paid to the Company's executive officers and key employees. Please
see the COMPENSATION AND STOCK OPTION COMMITTEE discussion in the BOARD OF
DIRECTORS section, above, for a discussion of the Compensation and Stock Option
Committee.
COMPENSATION PHILOSOPHY
The Compensation and Stock Option Committee's executive compensation
philosophy is to base management's compensation, in part, on achievement of the
Company's annual and long-term performance goals, to provide competitive levels
of compensation, to recognize individual initiative, achievement and length of
service to the Company, and to assist the Company in attracting and retaining
qualified management. The Compensation and Stock Option Committee also believes
that the potential for equity ownership by management is beneficial in aligning
management's and stockholders' interests in the enhancement of stockholder
value. The Company has not established a policy with regard to Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), since the Company
has not paid and does not currently anticipate paying compensation in excess of
$1 million per annum to any employee. The Company believes, however, that any
compensation received by executive officers pursuant to the exercise of options
granted under the FalconStor Software, Inc., 2000 Stock Option Plan (and the
FalconStor Software, Inc, 2006 Incentive Stock Plan, if approved by
stockholders) qualifies as "performance-based" compensation.
SALARIES
Base salaries for the Company's executive officers are determined
initially by evaluating the responsibilities of the position held and the
experience of the individual, and by reference to the competitive marketplace
for management talent, including a comparison of base salaries for comparable
positions at other comparable companies. Base salary compensation of executive
officers is reviewed annually by the Compensation and Stock Option Committee,
and recommendations of the Compensation and Stock Option Committee in that
regard are acted upon by the Board of Directors. Annual salary adjustments are
determined by evaluating the competitive marketplace; the performance of the
Company, which includes operating results of the Company and cash management;
quality of products; the performance of the executive; and the length of the
executive's service to the Company and any increased responsibilities assumed by
the executive. The Company places itself between the low and medium levels in
determining salaries compared to the other comparable storage software
companies. The Company does this for two primary reasons. First, the Company has
granted stock options to executive officers to align the interest of the
executive officers with that of the Company and its stockholders: long-term
22
growth. Second, the Company and its executive officers agree that keeping cash
compensation to a low level will help the Company to reach profitability and to
continue the long-term growth of the Company.
INCENTIVE COMPENSATION
The Company has in the past granted, and may continue to grant,
discretionary bonuses to individual executive officers for personal performance
that substantially exceeded the Company's expectations. This has included, and
might include in the future, taking on tasks outside the normal scope of the
executive officer's responsibilities or overseeing the successful completion of
unforeseen projects. No discretionary bonuses exceeded thirty percent of any
executive officer's salary during 2005.
The Company from time to time will consider the payment of
discretionary bonuses to its executive officers on an annual basis after the
close of each fiscal year. Bonuses would be determined based, first, upon the
level of achievement by the Company of its strategic and operating goals and,
second, upon the level of personal achievement by participants. The achievement
of goals by the Company includes, among other things, the performance of the
Company as measured by the operating results of the Company and quality of
products. The achievement of personal goals includes the actual performance of
the department of the Company for which the executive officer has responsibility
as compared to the planned performance thereof, other individual contributions,
the ability to manage and motivate employees and the achievement of assigned
projects. Despite achievement of personal goals, bonuses might not be given
based upon the performance of the Company as a whole. To date, the Company has
not granted any such discretionary bonuses.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In September, 2004, the Company entered into an Amended and Restated
Employment Agreement (the "Employment Agreement") with Mr. Huai. In setting the
terms of the Employment Agreement, the Compensation and Stock Option Committee
considered the following items, among others:
o the Company's salary structure and compensation philosophy with regard
to all executive officers
o the Company's progress to that point under Mr. Huai's leadership
o the Company's prospects during the term of the Employment Agreement
(September 1, 2004 to December 31, 2007)
o Mr. Huai's expertise and leadership in the field of network storage
software
o the cost to the Company if Mr. Huai departed, including;
o compensation that would be paid to his successor
o the cost of identifying and hiring a successor
o the disruption to the Company's business that might be caused by
his departure
23
o the intangible cost of the loss of Mr. Huai's vision and
leadership
o the compensation paid to chief executive officers of peer companies
both nationwide and in the region of the Company's headquarters.
Based on these criteria, in the Compensation and Stock Option Committee
determined that Mr. Huai's base salary was significantly lower than the level
appropriate to a leader with Mr. Huai's experience, vision, and expertise,
particularly in light of the Company's growth under his leadership. The
Compensation and Stock Option Committee set a new base salary of $275,000, which
it believes is still in the low to moderate range. In addition, the Compensation
and Stock Option Committee determined that a provision for bonuses based on the
Company's performance would be appropriate.
In 2005, before any bonus to Mr. Huai had become due or payable, the
Compensation and Stock Option Committee revisited the terms of the bonus
provision. The Compensation and Stock Option Committee determined that the
effect of Statement of Financial Accounting Standards 123(R), SHARE BASED
PAYMENTS ("SFAS 123(R)"), would likely have a negative impact on Mr. Huai's
ability to earn bonuses. The Compensation and Stock Option Committee further
determined that the inclusion of a charge for equity-based compensation in the
results on which the bonus calculation is based would cause those numbers to no
longer provided a meaningful, comparable measure of the Company's growth and
success under Mr. Huai's leadership. As a result, the Compensation and Stock
Option Committee decided to exclude the effect of SFAS 123(R) from any bonus
calculation. The Compensation and Stock Option Committee also decided to exclude
from any bonus calculation other extraordinary, non-recurring and/or other
unusual items. The Compensation and Stock Option Committee believes that any
extraordinary, non-recurring or other unusual items could distort the results on
which any bonus is based - positively or negatively - such that the results
would no longer provide a meaningful, comparable measure of the Company's growth
and success under Mr. Huai's leadership. Thus, a Second Amended and Restated
Employment Agreement (the "Second Employment Agreement") was entered into with
Mr. Huai. The Second Employment Agreement is identical in all terms to the
Employment Agreement except for the provision regarding bonuses.
The Second Employment Agreement provides for bonuses as follows:
The Employee shall be entitled to receive a cash bonus (i) for the
period from September 1, 2004 through December 31, 2005 (the "First
Bonus Period") in an amount equal to 2.50% of the Corporation's net
operating income for such period as determined by reference to the
Corporation's income statements, but without giving effect to (a)
Statement of Financial Accounting Standard 123R, or (b) such other
extraordinary, non-recurring and/or other unusual items as determined
by the Compensation Committee of the Company's Board of Directors and
agreed by a majority of the independent directors of the Company's
Board of Directors (hereinafter referred to as the "Operating Income")
during the First Bonus Period, (ii) for the fiscal year of the
Corporation ending December 31, 2006 (the "Second Bonus Period") in an
amount equal to the product of (A) the Applicable Percentage (as
defined below) and (B) the Operating Income for the Second Bonus Period
and (iii) for the fiscal year of the Corporation ending December 31,
2007 (the "Third Bonus Period") in an amount equal to the product of
(A) the Applicable Percentage and (B) the Operating Income for the
Third Bonus Period. Each bonus payable to the Employee shall be paid
within 75 days after the last day of the applicable Bonus Period. For
purposes hereof, "Applicable Percentage" shall mean (I) 1.50%, if the
24
percentage obtained by dividing (x) the Operating Income for the Second
Bonus Period or the Third Bonus Period, as the case may be, by (y) the
shareholders equity of the Corporation during the Second Bonus Period
or the Third Bonus Period, as the case may be, as determined by
reference to the annual audited balance sheet of the Corporation for
the year ending as of the end of such Bonus Period (hereinafter
referred to as "Shareholders Equity") is less than or equal to 5%, (II)
2.00%, if the percentage obtained by dividing (x) the Operating Income
for the Second Bonus Period or the Third Bonus Period, as the case may
be, by (y) the Shareholders Equity is more than 5% but less than or
equal to 10%, (III) 2.25%, if the percentage obtained by dividing (x)
the Operating Income for the Second Bonus Period or the Third Bonus
Period, as the case may be, by (y) the Shareholders Equity is more than
10% but less than or equal to 15%, (IV) 2.50%, if the percentage
obtained by dividing (x) the Operating Income for the Second Bonus
Period or the Third Bonus Period, as the case may be, by (y) the
Shareholders Equity is more than 15% but less than or equal to 20% and
(V) 3.00%, if the percentage obtained by dividing (x) the Operating
Income for the Second Bonus Period or the Third Bonus Period, as the
case may be, by (y) the Shareholders Equity is more than 20%.
The Company made no payments to Mr. Huai in 2005 based on the Company's
performance.
STOCK OPTION AND OTHER PLANS
The Company awarded options to the Named Executive Officers in 2005 as
set forth above. It is the philosophy of the Compensation and Stock Option
Committee that stock options should be awarded to employees of the Company to
promote long-term interests between such employees and the Company's
stockholders through an equity interest in the Company and to assist in the
retention of such employees. The Compensation and Stock Option Committee also
considers the amount and terms of options previously granted to Named Executive
Officers. The Compensation and Stock Option Committee believes the potential for
equity ownership by management is beneficial in aligning management's and
stockholders' interest in the enhancement of stockholder value.
COMPENSATION AND STOCK OPTION COMMITTEE:
Patrick B. Carney
Lawrence S. Dolin
Alan W. Kaufman
COMMON STOCK PERFORMANCE: The following graph compares, for each of the periods
indicated, the percentage change in the Company's cumulative total stockholder
return on the Company's Common Stock with the cumulative total return of a) an
index consisting of Computer Software and Services companies, a peer group
index, and b) the Russell 3000 Index, a broad equity market index. The stock
price information for the Company at fiscal year ends prior to fiscal year ended
December 31, 2001, reflects the stock price of Network Peripherals, Inc.
25
[OBJECT OMITTED]]
ASSUMES $100 INVESTED ON DEC. 29, 2000
ASSUMES DIVIDENT REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2005
Fiscal Year Ending
12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05
-------- -------- -------- -------- -------- --------
FalconStor Software, Inc. . . . . . . . . . . . . 100.00 140.73 60.27 135.76 148.65 114.79
Computer Software & Services Index . . 100.00 88.60 60.34 78.03 85.70 85.91
Russell 3000 Index . . . . . . . . . . . . . . . 100.00 87.36 67.44 86.82 95.56 99.65
There can be no assurance that the Common Stock's performance will
continue with the same or similar trends depicted in the graph above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
26
PROPOSAL NO. 2
FALCONSTOR SOFTWARE, INC.,
2006 INCENTIVE STOCK PLAN
The Board of Directors proposes that the FalconStor Software, Inc.,
2006 Incentive Stock Plan (the "2006 Plan") be approved.
The 2006 Plan is intended to assist the Company in securing and
retaining employees, officers, consultants and advisors (the "Participants") by
allowing them to participate in the ownership and growth of the Company through
the grant of incentive and nonqualified stock options and shares of restricted
stock. The granting of such options and restricted stock serves as partial
consideration for, and gives the Participants an additional inducement to remain
in, the service of the Company and its subsidiaries and provides them with an
increased incentive to work towards the Company's success. Shares of Common
Stock may be issued under the 2006 Plan upon the exercise of incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and nonqualified stock options, or to Participants with
such restrictions as determined by the Company.
The Board of Directors believes it is in the Company's and its
stockholders' best interests to approve the 2006 Plan because it would allow the
Company to continue to grant options and to grant restricted shares which
facilitates the benefits of the additional incentive inherent in the ownership
of Common Stock by the Participants and helps the Company retain the services of
these Participants.
The proposed 2006 Plan is attached as Exhibit A to this Proxy
Statement.
SUMMARY OF THE 2006 PLAN
The following summary of the 2006 Plan, assuming stockholder approval
of the 2006 Plan, is qualified in its entirety by the specific language of the
2006 Plan.
GENERAL. The 2006 Plan provides for the grant of incentive and
nonqualified stock options, and restricted stock, to employees, officers,
consultants and advisors of the Company.
SHARES SUBJECT TO PLAN. A maximum of 1,500,000 of the authorized but
unissued or treasury shares of the common stock of the Company may be issued
upon the grant of restricted shares or upon the exercise of options granted
under the 2006 Plan. Upon any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments will be made to the
shares subject to the 2006 Plan and to outstanding restricted shares and
options. To the extent that (i) any outstanding restricted share or under the
2006 Plan expires or terminates prior to the termination of the restrictions on
restricted stock, (ii) any options expires prior to the exercise in full, or
(iii) shares issued upon the exercise of an option are repurchased by the
Company, the shares of Common Stock for which such option is not exercised or
27
the repurchased shares shall be returned to the 2006 Plan and again become
available for grant. No Participant may be granted, in total, options to
purchase more than 15% of the shares authorized under the plan.
ADMINISTRATION. The 2006 Plan will be administered by a Committee,
consisting of two or more Non-Employee members of the Board of Directors
appointed by the Board of Directors. The Committee will approve option and
restricted share grants to employees, officers, consultants and advisors of the
Company, and will determine the terms of any restrictions on restricted shares,
subject to the provisions of the 2006 Plan. The Committee will also make any
other determinations necessary or advisable for the administration of the 2006
Plan. The determinations by the Committee will be final and conclusive.
ELIGIBILITY. Employees, officers, consultants and advisors of the
Company are eligible to participate in the 2006 Plan.
TERMS AND CONDITIONS OF OPTIONS. Each option granted under the 2006
Plan is evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the 2006 Plan. The
purchase price of each share of Common Stock purchasable under an incentive
option shall be determined by the Stock Option Committee at the time of grant,
but shall not be less than 100% of the fair value of such share of Common Stock
on the date the option is granted; provided, however, that with respect to a
Participant who, at the time such incentive option is granted, owns (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or of any Subsidiary, the
purchase price per share of Common Stock shall be at least 110% of the fair
market value per share of Common Stock on the date of grant. The purchase price
of each share of Common Stock purchasable under a nonqualified option shall not
be less than 100% of the fair market value of such share of Common Stock on the
date the option is granted. Generally, the fair market value of the Common Stock
will be the closing price per share on the date of grant as reported on The
Nasdaq National Market. The exercise price may be paid in cash, by check, or in
cash equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale of some or all of the shares of Common
Stock being acquired upon the exercise of the option, or by any combination of
these. Not withstanding the foregoing, an optionee may not take any actions
which are prohibited by the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated by the Securities and Exchange Commission or any other
agency thereunder.
Options granted under the 2006 Plan become exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee at the time of grant. The term of each option shall be determined by
the Committee (but shall not be more than 10 years after the date of grant),
subject to earlier termination in the event the optionee's service with the
Company ceases.
In general, during the lifetime of the optionee, the option may be
exercised only by the optionee and may not be transferred or assigned, except by
will or the laws of descent and distribution. However, the 2006 Plan provides
that, with the consent of the Committee, an optionee may transfer a nonqualified
option to (i) a trust for the exclusive benefit of the optionee or (ii) a member
of the optionee's immediate family (or a trust for his or her benefit).
28
Upon a Change of Control of the Company, the Company will replace all
unexercised stock options with an equal number of unrestricted and fully vested
stock options to purchase shares of the Company's Common Stock. Alternatively,
upon a Change of Control, and subject to Board approval at the time, an optionee
may elect to surrender any unexercised options and to receive in return from the
Company a cash payment equal to the difference between the exercise price of
each option surrendered and the greater of (i) the average price per share paid
in connection with the acquisition of the Company, (ii) the price per share paid
in connection with any tender offer for shares of the Company's common stock
leading to control, and (iii) the mean between the high and the low selling
prices of such stock on the Nasdaq National Market or other market on which the
Company's common stock is then traded on the date of the Change of Control.
Simultaneously with the granting of an option the Committee may also
grant dividend equivalent rights equal to the number of shares of common stock
underlying the option multiplied by the per-share cash dividend or per-share
market value of a non-cash dividend. This provision shall only apply to special
dividends of the Company.
TERMS AND CONDITIONS OF RESTRICTED STOCK. A grantee of restricted stock
has no right to an award of restricted stock until the grantee accepts the award
within the timeframe prescribed by the Committee and, if the Committee requires,
makes payment to the Company in cash, or by check or other acceptable
instrument. Certificate(s) are issued in the grantee's name after acceptance of
the award by the grantee, but are not delivered to the Grantee until the shares
are free of any restrictions specified by the Committee at the time grant.
Shares of restricted stock are forfeitable until the terms of the
restricted stock grant have been satisfied. Shares of restricted stock are not
transferable until the date on which the Committee has specified such
restrictions have lapsed. Unless otherwise provided by the Committee at or after
grant, distributions in the form of dividends or otherwise of additional shares
or property in respect of shares of restricted stock shall be subject to the
same restrictions as such shares of restricted stock.
Upon the occurrence of a change in control of the Company, the
Committee may accelerate the vesting of outstanding restricted stock, in whole
or in part, as determined by the Committee, in its sole discretion.
Unless otherwise determined by the Committee at or after grant, in the
event the grantee ceases to be an employee or otherwise associated with the
Company for any other reason, all shares of restricted stock previously awarded
to him which are still subject to restrictions will be forfeited and the Company
will have the right to complete a blank stock power. The Committee may provide
(on or after grant) that restrictions or forfeiture conditions relating to
shares of restricted stock will be waived in whole or in part in the event of
termination resulting from specified causes, and the Committee may in other
cases waive in whole or in part restrictions or forfeiture conditions relating
to restricted stock.
TERMINATION OR AMENDMENT. Unless earlier terminated by the Board, the
2006 Plan will terminate on April 3, 2016. The 2006 Plan provides that it may be
terminated or amended by the Board at any time, subject to stockholder approval
only if such amendment would increase the total number of shares of Common Stock
reserved for issuance thereunder.
29
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. In general, no taxable income for federal
income tax purposes will be recognized by an option holder upon receipt or
exercise of an incentive stock option, and the Company will not then be entitled
to any tax deduction. Assuming that the option holder does not dispose of the
option shares before the later of (i) two years after the date of grant or (ii)
one year after the exercise of the option, upon any such disposition, the option
holder will recognize capital gain equal to the difference between the sale
price on disposition and the exercise price.
If, however, the option holder disposes of his option shares prior to
the expiration of the required holding period, he will recognize ordinary income
for federal income tax purposes in the year of disposition equal to the lesser
of (i) the difference between the fair market value of the shares at the date of
exercise and the exercise price, or (ii) the difference between the sale price
upon disposition and the exercise price. Any additional gain on such
disqualifying disposition will be treated as capital gain. In addition, if such
a disqualifying disposition is made by the option holder, the Company will be
entitled to a deduction equal to the amount of ordinary income recognized by the
option holder provided that such amount constitutes an ordinary and reasonable
expense of ours.
NON-QUALIFIED STOCK OPTIONS. No taxable income will be recognized by an
option holder upon receipt of a nonqualified stock option, and the Company will
not be entitled to a tax deduction for such grant.
Upon the exercise of a nonqualified stock option, the option holder
will generally include in taxable income, for federal income tax purposes, the
excess in value on the date of exercise of the shares acquired pursuant to the
nonqualified stock option over the exercise price. Upon a subsequent sale of the
shares, the option holder will derive short-term or long-term gain or loss,
depending upon the option holder's holding period for the shares, commencing
upon the exercise of the option, and upon the subsequent appreciation or
depreciation in the value of the shares.
The Company generally will be entitled to a corresponding deduction at
the time that the participant is required to include the value of the shares in
his income.
RESTRICTED SHARES. Restricted stock may be granted under this Plan
aside from, or in association with, any other award. A participant shall have no
rights to an award of restricted stock unless and until the participant accepts
the award, and if the Committee shall deem it desirable, makes payments to the
Company of cash, or by check. After acceptance and the issuance of a stock
certificate, the participant shall have all the rights of a stockholder with
respect to the restricted stock.
The Company shall issue in the participant's name a certificate for the
shares of Common Stock associated with the award of restricted stock; however,
unless otherwise provided, the certificate shall not be delivered to the
participant until such shares are free of any restrictions specified by the
Committee at the time of grant. Shares of restricted stock are forfeitable until
the terms of the restricted stock grant have been satisfied, and shares of
restricted stock may not be transferred until all restrictions have lapsed. Upon
a Change of Control, the Committee may accelerate the vesting of outstanding
restricted stock, in its sole discretion.
30
DIVIDEND EQUIVALENTS. Assuming that the provisions relating to
nonqualified deferred compensation set forth in Section 409A of the Code are
inapplicable, no taxable income will be recognized by an option holder upon
receipt of a dividend equivalent right and the Company will not be entitled to a
tax deduction upon the grant of such right.
Upon the exercise of the stock option and receipt of cash or property
with respect to the dividend equivalent right, the option holder will include in
taxable income, for federal income tax purposes, the fair market value of the
cash and other property received with the respect to the dividend equivalent
right and the Company will generally be entitled to a corresponding tax
deduction.
As indicated above, the tax treatment of dividend equivalent rights is
not clear. The Act contains provisions applicable to nonqualified deferred
compensation plans, which, if certain conditions are not met, could result in
the immediate taxation of income and the imposition of interest and additional
tax.
The Board believes it is in the Company's best interests to approve the
2006 Plan, which would allow the Company to continue to grant options, and to
grant restricted stock, to secure for the Company the benefits of the additional
incentive inherent in the ownership of shares of the Company's Common Stock by
employees, officers, consultants and advisors and to help the Company secure and
retain the services of employees, officers, consultants and advisors.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE FALCONSTOR
SOFTWARE, INC., 2006 INCENTIVE STOCK PLAN.
31
PROPOSAL NO. 3
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The accounting firm of KPMG LLP has been selected as the independent
registered public accounting firm to audit the Company's consolidated financial
statements for the fiscal year ending December 31, 2006. Although the selection
of accountants does not require ratification, the Audit Committee of the Board
of Directors has directed that the appointment of KPMG LLP be submitted to
stockholders for ratification due to the significance of their appointment by
the Company. If stockholders do not ratify the appointment of KPMG LLP, the
Audit Committee will consider the appointment of another independent registered
public accounting firm. A representative of KPMG LLP, which served as the
Company's independent registered public accounting firm for the fiscal year
ended December 31, 2005, is expected to be present at the Meeting and, if he so
desires, will have the opportunity to make a statement, and in any event will be
available to respond to appropriate questions.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees for services rendered by KPMG LLP for the years 2005 and 2004 fell
into the following categories:
AUDIT FEES: Fees billed for professional services rendered by KPMG LLP
for the audit of the Company's consolidated financial statements as of and for
the fiscal years ended December 31, 2005 and 2004, and the reviews of the
interim condensed consolidated financial statements included in the Company's
Form 10-Qs during such fiscal years. These fees also include the audits of
internal control over financial reporting, required under Section 404 of the
Sarbanes-Oxley Act of 2002.
AUDIT RELATED FEES: Fees billed for professional services rendered by
KPMG LLP for audit related services, primarily including consents in connection
with registration statements filed by the Company.
TAX FEES: Fees billed for tax-related services rendered by KPMG LLP to the Company.
ALL OTHER FEES: Fees billed for non-audit related services rendered by KPMG LLP to the Company.
The approximate fees for each category were as follows:
Year Ended December 31,
-----------------------
Description 2005 2004
----------- ---- ----
Audit Fees $564,100 $642,175
Audit Related Fees $7,000 $16,550
Tax Fees $55,250 $54,000
Other Fees $-- $--
32
The Audit Committee has considered whether the provision by KPMG LLP of
the services covered by the fees other than the audit fees is compatible with
maintaining KPMG LLP's independence and believes that it is compatible.
AUDIT COMMITTEE PRE-APPROVAL PROCEDURES. The Audit Committee has
adopted the following guidelines regarding the engagement of the Company's
independent auditor to perform services for the Company:
For audit services (including statutory audit engagements as required
under local country laws), the independent registered public accounting firm
(auditor) will provide the Audit Committee with an engagement letter during the
first quarter of each year outlining the scope of the audit services proposed to
be performed during the fiscal year. If agreed to by the Audit Committee, this
engagement letter will be formally accepted by the Audit Committee at its first
quarter meeting.
The independent auditor will submit to the Audit Committee for approval
an audit services fee proposal after acceptance of the engagement letter.
For non-audit services, Company management will submit to the Audit
Committee for approval (during the second quarter of each fiscal year) the list
of non-audit services that it recommends the Audit Committee engage the
independent auditor to provide for the fiscal year. Company management and the
independent auditor will each confirm to the Audit Committee that each non-audit
service on the list is permissible under all applicable legal requirements. In
addition to the list of planned non-audit services, a budget estimating
non-audit service spending for the fiscal year will be provided. The Audit
Committee will approve both the list of permissible non-audit services and the
budget for such services. The Audit Committee will be informed routinely as to
the non-audit services actually provided by the independent auditor pursuant to
this pre-approval process.
To ensure prompt handling of unexpected matters, the Audit Committee
delegates to the Chair the authority to amend or modify the list of approved
permissible non-audit services and fees. The Chair will report action taken to
the Audit Committee at the next Audit Committee meeting.
The independent auditor must ensure that all audit and non-audit
services provided to the Company have been approved by the Audit Committee. The
Company Controller will be responsible for tracking all independent auditor fees
against the budget for such services and report at least annually to the Audit
Committee.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
33
SOLICITATION STATEMENT
The Company will bear all expenses in connection with the solicitation
of proxies. In addition to the use of the mail, solicitations may be made by the
Company's regular employees, by telephone, telegraph or personal contact,
without additional compensation. The Company will, upon their request, reimburse
brokerage houses and persons holding shares of Common Stock in the names of the
Company's nominees for their reasonable expenses in sending solicited material
to their principals.
STOCKHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials to be
distributed in connection with the next annual meeting of stockholders of the
Company, stockholder proposals for such meeting must be submitted to the Company
no later than December 6, 2006.
On May 21, 1998 the SEC adopted an amendment to Rule 14a-4, as
promulgated under the Securities and Exchange Act of 1934, as amended. The
amendment to Rule 14a-4(c)(1) governs the Company's use of its discretionary
proxy voting authority with respect to a stockholder proposal, which is not
addressed in the Company's proxy statement. The amendment provides that if the
Company does not receive notice of the proposal at least 45 days prior to the
first anniversary of the date of mailing of the prior year's proxy statement,
then the Company will be permitted to use its discretionary voting authority
when the proposal is raised at the annual meeting, without any discussion of the
matter in the proxy statement.
With respect to the Company's 2007 Annual Meeting of Stockholders, if
the Company is not provided notice of a stockholder proposal, which has not been
timely submitted, for inclusion in the Company's proxy statement by February 19,
2007 the Company will be permitted to use its discretionary voting authority as
outlined above.
OTHER MATTERS
So far as now known, there is no business other than that described
above to be presented for action by the stockholders at the Annual Meeting, but
it is intended that the proxies will be voted upon any other matters and
proposals that may legally come before the Annual Meeting or any adjournment
thereof, in accordance with the discretion of the persons named therein.
ANNUAL REPORT
The Company has sent, or is concurrently sending, to all of its
stockholders of record as of March 29, 2006 a copy of its Annual Report for the
fiscal year ended December 31, 2005. Such report contains the Company's audited
consolidated financial statements for the fiscal year ended December 31, 2005.
34
By Order of the Board of Directors,
Seth R. Horowitz
Secretary
Dated: Melville, New York
April 12, 2006
THE COMPANY WILL FURNISH A FREE COPY OF ITS ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 (WITHOUT EXHIBITS) TO ALL OF ITS
STOCKHOLDERS OF RECORD AS OF MARCH 29, 2006 WHO WILL MAKE A WRITTEN REQUEST TO
MR. JAMES WEBER, CHIEF FINANCIAL OFFICER, FALCONSTOR SOFTWARE, INC., 2
HUNTINGTON QUADRANGLE, SUITE 2S01, MELVILLE, NEW YORK 11747.
35
EXHIBIT A
FALCONSTOR SOFTWARE, INC.
2006 INCENTIVE STOCK PLAN
1. PURPOSE OF THE PLAN.
This 2006 Incentive Stock Plan (the "Plan") is intended as an incentive, to
retain in the employ of and as directors, officers, consultants, advisors and
employees to FalconStor Software, Inc., a Delaware corporation (the "Company"),
and any Subsidiary of the Company, within the meaning of Section 424(f) of the
United States Internal Revenue Code of 1986, as amended (the "Code"), persons of
training, experience and ability, to attract new directors, officers,
consultants, advisors and employees whose services are considered valuable, to
encourage the sense of proprietorship and to stimulate the active interest of
such persons in the development and financial success of the Company and its
Subsidiaries.
It is further intended that certain options granted pursuant to the Plan
shall constitute incentive stock options within the meaning of Section 422 of
the Code (the "Incentive Options") while certain other options granted pursuant
to the Plan shall be nonqualified stock options (the "Nonqualified Options").
Incentive Options and Nonqualified Options are hereinafter referred to
collectively as "Options."
The Company intends that the Plan meet the requirements of Rule 16b-3
("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company pursuant to the Plan will be exempt from the operation of Section
16(b) of the Exchange Act. Further, the Plan is intended to satisfy the
performance-based compensation exception to the limitation on the Company's tax
deductions imposed by Section 162(m) of the Code with respect to those Options
for which qualification for such exception is intended. In all cases, the terms,
provisions, conditions and limitations of the Plan shall be construed and
interpreted consistent with the Company's intent as stated in this Section 1.
2. ADMINISTRATION OF THE PLAN.
The Board of Directors of the Company (the "Board") shall appoint and
maintain as administrator of the Plan a Committee (the "Committee") consisting
of two or more directors who are "Non-Employee Directors" (as such term is
defined in Rule 16b-3) and "Outside Directors" (as such term is defined in
Section 162(m) of the Code), which shall serve at the pleasure of the Board. The
Committee, subject to Sections 3, 5 and 6 hereof, shall have full power and
authority to designate recipients of Options and restricted stock ("Restricted
Stock") and to determine the terms and conditions of the respective Option and
Restricted Stock agreements (which need not be identical) and to interpret the
provisions and supervise the administration of the Plan. The Committee shall
have the authority, without limitation, to designate which Options granted under
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the Plan shall be Incentive Options and which shall be Nonqualified Options. To
the extent any Option does not qualify as an Incentive Option, it shall
constitute a separate Nonqualified Option.
Subject to the provisions of the Plan, the Committee shall interpret the
Plan and all Options and Restricted Stock granted under the Plan, shall make
such rules as it deems necessary for the proper administration of the Plan,
shall make all other determinations necessary or advisable for the
administration of the Plan and shall correct any defects or supply any omission
or reconcile any inconsistency in the Plan or in any Options or Restricted Stock
granted under the Plan in the manner and to the extent that the Committee deems
desirable to carry into effect the Plan or any Options or Restricted Stock. The
act or determination of a majority of the Committee shall be the act or
determination of the Committee and any decision reduced to writing and signed by
all of the members of the Committee shall be fully effective as if it had been
made by a majority at a meeting duly held. Subject to the provisions of the
Plan, any action taken or determination made by the Committee pursuant to this
and the other Sections of the Plan shall be conclusive on all parties.
In the event that for any reason the Committee is unable to act or if the
Committee at the time of any grant, award or other acquisition under the Plan
does not consist of two or more Non-Employee Directors, or if there shall be no
such Committee, then the Plan shall be administered by the Board, and references
herein to the Committee (except in the proviso to this sentence) shall be deemed
to be references to the Board, and any such grant, award or other acquisition
may be approved or ratified in any other manner contemplated by subparagraph (d)
of Rule 16b-3; provided, however, that grants to the Company's Chief Executive
Officer or to any of the Company's other four most highly compensated officers
that are intended to qualify as performance-based compensation under Section
162(m) of the Code may only be granted by the Committee.
3. DESIGNATION OF OPTIONEES AND GRANTEES.
The persons eligible for participation in the Plan as recipients of Options
(the "Optionees") or Restricted Stock (the "Grantees" and together with
Optionees, the "Participants") shall include directors, officers and employees
of the Company or any subsidiary and consultants subject to their meeting the
eligibility requirements of Rule 701 promulgated under the Securities Act of
1933, as amended (the "Securities Act"), provided that Incentive Options may
only be granted to employees of the Company and any Subsidiary. In selecting
Participants, and in determining the number of shares to be covered by each
Option or shares of Restricted Stock granted to Participants, the Committee may
consider any factors it deems relevant, including without limitation, the office
or position held by the Participant or the Participant's relationship to the
Company, the Participant's degree of responsibility for and contribution to the
growth and success of the Company or any Subsidiary, the Participant's length of
service, promotions and potential. A Participant who has been granted an Option
or Restricted Stock hereunder may be granted an additional Option or Options, or
Restricted Stock if the Committee shall so determine.
4. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Section 8 hereof, a total of 1,500,000
shares of the Company's Common Stock, par value $0.001 per share (the "Stock"),
shall be subject to the Plan. The maximum number of shares of Stock that may be
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subject to Options granted under the Plan to any individual in any calendar year
shall not exceed fifteen percent (15%) of the shares and the method of counting
such shares shall conform to any requirements applicable to performance-based
compensation under Section 162(m) of the Code, if qualification as
performance-based compensation under Section 162(m) of the Code is intended. The
shares of Stock subject to the Plan shall consist of unissued shares, treasury
shares or previously issued shares held by any Subsidiary of the Company, and
such amount of shares of Stock shall be and is hereby reserved for such purpose.
Any of such shares of Stock that may remain unissued and that are not subject to
outstanding Options at the termination of the Plan shall cease to be reserved
for the purposes of the Plan, but until termination of the Plan the Company
shall at all times reserve a sufficient number of shares of Stock to meet the
requirements of the Plan. Should any Option or share of Restricted Stock expire
or be canceled prior to its exercise or vesting in full or should the number of
shares of Stock to be delivered upon the exercise or vesting in full of an
Option or share of Restricted Stock be reduced for any reason, the shares of
Stock theretofore subject to such Option or share of Restricted Stock may be
subject to future Options or shares of Restricted Stock under the Plan, except
where such reissuance is inconsistent with the provisions of Section 162(m) of
the Code where qualification as performance-based compensation under Section
162(m) of the Code is intended.
5. TERMS AND CONDITIONS OF OPTIONS.
Options granted under the Plan shall be subject to the following conditions
and shall contain such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The purchase price of each share of Stock
purchasable under an Incentive Option shall be determined by the Committee at
the time of grant, but shall not be less than 100% of the Fair Market Value (as
defined below) of such share of Stock on the date the Option is granted;
provided, however, that with respect to an Optionee who, at the time such
Incentive Option is granted, owns (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes of stock
of the Company or of any Subsidiary, the purchase price per share of Stock shall
be at least 110% of the Fair Market Value per share of Stock on the date of
grant. The purchase price of each share of Stock purchasable under a
Nonqualified Option shall not be less than 100% of the Fair Market Value of such
share of Stock on the date the Option is granted. The exercise price for each
Option shall be subject to adjustment as provided in Section 8 below. "Fair
Market Value" means the closing price on the date of grant on the principal
securities exchange on which shares of Stock are listed (if the shares of Stock
are so listed), or on the NASDAQ Stock Market (if the shares of Stock are
regularly quoted on the NASDAQ Stock Market), or, if not so listed or regularly
quoted, the mean between the closing bid and asked prices of publicly traded
shares of Stock in the over the counter market, or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Company, or as determined by the Committee in a manner
consistent with the provisions of the Code. Anything in this Section 5(a) to the
contrary notwithstanding, in no event shall the purchase price of a share of
Stock be less than the minimum price permitted under the rules and policies of
any national securities exchange on which the shares of Stock are listed.
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(b) OPTION TERM. The term of each Option shall be fixed by the
Committee, but no Option shall be exercisable more than ten years after the date
such Option is granted and in the case of an Incentive Option granted to an
Optionee who, at the time such Incentive Option is granted, owns (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or of any Subsidiary, no
such Incentive Option shall be exercisable more than five years after the date
such Incentive Option is granted.
(c) EXERCISABILITY. Subject to Section 5(j) hereof, Options shall be
exercisable at such time or times and subject to such terms and conditions as
shall be determined by the Committee at the time of grant; provided, however,
that in the absence of any Option vesting periods designated by the Committee at
the time of grant, Options shall vest and become exercisable as to one-third of
the total amount of shares subject to the Option on each of the first, second
and third anniversaries of the date of grant; and provided further that no
Options shall be exercisable until such time as any vesting limitation required
by Section 16 of the Exchange Act, and related rules, shall be satisfied if such
limitation shall be required for continued validity of the exemption provided
under Rule 16b-3(d)(3).
Notwithstanding any provision in this Plan, in the event there is a Change
of Control (as defined below), the Company shall, at no cost to the Participant,
replace any and all stock options granted by the Company and held by the
Participant at the time of the Change of Control, whether or not vested, with an
equal number of unrestricted and fully vested stock options to purchase shares
of the Company's Common Stock (the "Option Replacement"). With respect to the
Option Replacement, all options will become fully vested. Alternatively, in the
event of a Change of Control, in lieu of the Option Replacement, a Participant
may, subject to Board approval at the time, elect to surrender the Participant's
rights to such options, and upon such surrender, the Company shall pay to the
Participant an amount in cash per stock option (whether vested or unvested) then
held, which is the difference between the full exercise price of each option
surrendered and the greater of (i) the average price per share paid in
connection with the acquisition of control of the Company if such control was
acquired by the payment of cash or the then fair market value of the
consideration paid for such shares if such control was acquired for
consideration other than cash, (ii) the price per share paid in connection with
any tender offer for shares of the Company's Common Stock leading to control, or
(iii) the mean between the high and low selling price of such stock on the
Nasdaq National Market or other market on which the Company's Common Stock is
then traded on the date of the Change of Control.
For purposes of the Plan, a Change in Control shall be deemed to have
occurred if:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any "Person" (as
the term "person" is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), immediately
after which such Person has "Beneficial Ownership" (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of
(1) the then-outstanding shares of common stock of the Company (or any other
securities into which such shares of common stock are changed or for which such
shares of common stock are exchanged) (the "Shares") or (2) the combined voting
power of the Company's then-outstanding Voting Securities; PROVIDED, HOWEVER,
that in determining whether a Change in Control has occurred pursuant to this
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paragraph (a), the acquisition of Shares or Voting Securities in a "Non-Control
Acquisition" (as hereinafter defined) shall not constitute a Change in Control.
A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit
plan (or a trust forming a part thereof) maintained by (A) the Company or (B)
any corporation or other Person the majority of the voting power, voting equity
securities or equity interest of which is owned, directly or indirectly, by the
Company (for purposes of this definition, a "Related Entity"), (ii) the Company
or any Related Entity, or (iii) any Person in connection with a "Non-Control
Transaction" (as hereinafter defined);
(ii) The individuals who, as of the Effective Date, are members
of the board of directors of the Company (the "Incumbent Board"), cease for any
reason to constitute at least a majority of the members of the board of
directors of the Company or, following a Merger (as hereinafter defined), the
board of directors of (x) the corporation resulting from such Merger (the
"Surviving Corporation"), if fifty percent (50%) or more of the combined voting
power of the then-outstanding voting securities of the Surviving Corporation is
not Beneficially Owned, directly or indirectly, by another Person (a "Parent
Corporation") or (y) if there is one or more than one Parent Corporation, the
ultimate Parent Corporation; PROVIDED, HOWEVER, that, if the election, or
nomination for election by the Company's common stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of the Plan, be considered a member of the
Incumbent Board; and PROVIDED, FURTHER, HOWEVER, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of an actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the board of directors of the
Company (a "Proxy Contest"), including by reason of any agreement intended to
avoid or settle any Proxy Contest; or
(iii) The consummation of:
(a) A merger, consolidation or reorganization (1) with or
into the Company or (2) in which securities of the Company are issued (a
"Merger"), unless such Merger is a "Non-Control Transaction." A "Non-Control
Transaction" shall mean a Merger in which:
(1) the stockholders of the Company immediately before
such Merger own directly or indirectly immediately following such
Merger at least fifty percent (50%) of the combined voting power
of the outstanding voting securities of (x) the Surviving
Corporation, if there is no Parent Corporation or (y) if there is
one or more than one Parent Corporation, the ultimate Parent
Corporation;
(2) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such Merger constitute at least a majority of the
members of the board of directors of (x) the Surviving
Corporation, if there is no Parent Corporation, or (y) if there
is one or more than one Parent Corporation, the ultimate Parent
Corporation; and
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(3) no Person other than (1) the Company, (2) any
Related Entity, or (3) any employee benefit plan (or any trust
forming a part thereof) that, immediately prior to the Merger,
was maintained by the Company or any Related Entity, or (4) any
Person who, immediately prior to the Merger had Beneficial
Ownership of twenty percent (20%) or more of the then outstanding
Shares or Voting Securities, has Beneficial Ownership, directly
or indirectly, of twenty percent (20%) or more of the combined
voting power of the outstanding voting securities or common stock
of (x) the Surviving Corporation, if fifty percent (50%) or more
of the combined voting power of the then outstanding voting
securities of the Surviving Corporation is not Beneficially
Owned, directly or indirectly by a Parent Corporation, or (y) if
there is one or more than one Parent Corporation, the ultimate
Parent Corporation;
(b) A complete liquidation or dissolution of the Company; or
(c) The sale or other disposition of all or substantially all of
the assets of the Company and its subsidiaries taken as a whole to any Person
(other than (x) a transfer to a Related Entity, (y) a transfer under conditions
that would constitute a Non-Control Transaction, with the disposition of assets
being regarded as a Merger for this purpose or (z) the distribution to the
Company's stockholders of the stock of a Related Entity or any other assets).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any Person (the "Subject Person") acquired Beneficial Ownership
of more than the permitted amount of the then outstanding Shares or Voting
Securities as a result of the acquisition of Shares or Voting Securities by the
Company which, by reducing the number of Shares or Voting Securities then
outstanding, increases the proportional number of shares Beneficially Owned by
the Subject Persons; PROVIDED, that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of Shares or
Voting Securities by the Company and, after such share acquisition by the
Company, the Subject Person becomes the Beneficial Owner of any additional
Shares or Voting Securities and such Beneficial Ownership increases the
percentage of the then outstanding Shares or Voting Securities Beneficially
Owned by the Subject Person, then a Change in Control shall occur.
(d) METHOD OF EXERCISE. Options to the extent then exercisable
may be exercised in whole or in part at any time during the option period, by
giving written notice to the Company specifying the number of shares of Stock to
be purchased, accompanied by payment in full of the purchase price, in cash, or
by check or such other instrument as may be acceptable to the Committee. As
determined by the Committee, in its sole discretion, at or after grant, payment
in full or in part may be made at the election of the Optionee (i) in the form
of Stock owned by the Optionee (based on the Fair Market Value of the Stock
which is not the subject of any pledge or security interest, (ii) in the form of
shares of Stock withheld by the Company from the shares of Stock otherwise to be
received with such withheld shares of Stock having a Fair Market Value equal to
the exercise price of the Option, or (iii) by a combination of the foregoing,
such Fair Market Value determined by applying the principles set forth in
Section 5(a), provided that the combined value of all cash and cash equivalents
and the Fair Market Value of any shares surrendered to the Company is at least
equal to such exercise price and except with respect to (ii) above, such method
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of payment will not cause a disqualifying disposition of all or a portion of the
Stock received upon exercise of an Incentive Option. Notwithstanding the
forgoing, an Optionee may not take any actions that are prohibited by the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the
Securities and Exchange Commission or any agency thereunder. An Optionee shall
have the right to dividends and other rights of a stockholder with respect to
shares of Stock purchased upon exercise of an Option at such time as the
Optionee (i) has given written notice of exercise and has paid in full for such
shares, and (ii) has satisfied such conditions that may be imposed by the
Company with respect to the withholding of taxes.
(e) NON-TRANSFERABILITY OF OPTIONS. Options are not transferable
and may be exercised solely by the Optionee during his lifetime or after his
death by the person or persons entitled thereto under his will or the laws of
descent and distribution. The Committee, in its sole discretion, may permit a
transfer of a Nonqualified Option to (i) a trust for the benefit of the
Optionee, (ii) a member of the Optionee's immediate family (or a trust for his
or her benefit) or (iii) pursuant to a domestic relations order. Any attempt to
transfer, assign, pledge or otherwise dispose of, or to subject to execution,
attachment or similar process, any Option contrary to the provisions hereof
shall be void and ineffective and shall give no right to the purported
transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined by the
Committee, if any Optionee's employment with or service to the Company or any
Subsidiary terminates by reason of death, the Option may thereafter be
exercised, to the extent then exercisable (or on such accelerated basis as the
Committee shall determine at or after grant), by the legal representative of the
estate or by the legatee of the Optionee under the will of the Optionee, for a
period of one (1) year after the date of such death (or, if later, such time as
the Option may be exercised pursuant to Section 14(d) hereof) or until the
expiration of the stated term of such Option as provided under the Plan,
whichever period is shorter.
(g) TERMINATION BY REASON OF DISABILITY. Unless otherwise
determined by the Committee, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of total and permanent
disability, any Option held by such Optionee may thereafter be exercised, to the
extent it was exercisable at the time of termination due to disability (or on
such accelerated basis as the Committee shall determine at or after grant), but
may not be exercised after three (3) months after the date of such termination
of employment or service (or, if later, such time as the Option may be exercised
pursuant to Section 14(d) hereof) or the expiration of the stated term of such
Option, whichever period is shorter; PROVIDED, HOWEVER, that, if the Optionee
dies within such three (3) month period, any unexercised Option held by such
Optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one (1) year after the date of
such death (or, if later, such time as the Option may be exercised pursuant to
Section 14(d) hereof) or for the stated term of such Option, whichever period is
shorter.
(h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise
determined by the Committee, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of Normal or Early Retirement (as
such terms are defined below), any Option held by such Optionee may thereafter
be exercised to the extent it was exercisable at the time of such Retirement (or
on such accelerated basis as the Committee shall determine at or after grant),
but may not be exercised after three (3) months after the date of such
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termination of employment or service (or, if later, such time as the Option may
be exercised pursuant to Section 14(d) hereof) or the expiration of the stated
term of such Option, whichever date is earlier; provided, however, that, if the
Optionee dies within such three (3) month period, any unexercised Option held by
such Optionee shall thereafter be exercisable, to the extent to which it was
exercisable at the time of death, for a period of one (1) year after the date of
such death (or, if later, such time as the Option may be exercised pursuant to
Section 14(d) hereof) or for the stated term of such Option, whichever period is
shorter.
For purposes of this paragraph (h), "Normal Retirement" shall
mean retirement from active employment with the Company or any Subsidiary on or
after the normal retirement date specified in the applicable Company or
Subsidiary pension plan or if no such pension plan, age 65, and "Early
Retirement" shall mean retirement from active employment with the Company or any
Subsidiary pursuant to the early retirement provisions of the applicable Company
or Subsidiary pension plan or if no such pension plan, age 55.
(i) OTHER TERMINATION. Unless otherwise determined by the
Committee upon grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates for any reason other than death, disability
or Normal or Early Retirement, the Option shall thereupon terminate, except that
the portion of any Option that was exercisable on the date of such termination
of employment or service may be exercised for the lesser of thirty (30) days
after the date of termination or the balance of such Option's term if the
Optionee's employment or service with the Company or any Subsidiary or Affiliate
is terminated by the Company or such Subsidiary without cause (the determination
as to whether termination was for cause to be made by the Committee). The
transfer of an Optionee from the employ of or service to the Company to the
employ of or service to a Subsidiary, or vice versa, or from one Subsidiary to
another, shall not be deemed to constitute a termination of employment or
service for purposes of the Plan.
(j) LIMIT ON VALUE OF INCENTIVE OPTION. The aggregate Fair Market
Value, determined as of the date the Incentive Option is granted, of Stock for
which Incentive Options are exercisable for the first time by any Optionee
during any calendar year under the Plan (and/or any other stock option plans of
the Company or any Subsidiary) shall not exceed $100,000.
(k) GRANTS TO FOREIGN EMPLOYEES. The terms of grants to foreign
employees may vary from the terms of this Section 5 provided that the terms
shall only be more restrictive than any term in this Section 5.
(l) DIVIDEND EQUIVALENTS. Simultaneously with the grant of any
Option and under such terms and conditions as the Committee deems appropriate
and subject to Section 12 herein, the Committee may grant special dividend
equivalent rights ("Dividend Equivalents") which amount shall be determined by
multiplying the number of shares of Stock subject to an Option by the per-share
cash dividend, or the per-share fair market value (as determined by the
Committee) of any dividend in consideration other than cash, paid by the Company
on its Stock on a dividend payment date (other than the regular quarterly cash
dividends of the Company). Unless otherwise determined by the Committee at
grant, the Dividend Equivalents (i) shall have the same vesting schedule, if
any, as the Options to which the Dividend Equivalents relate and (ii) shall be
payable upon exercise of the Options to which the Dividend Equivalents relate.
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At the discretion of the Committee, Dividend Equivalents shall be credited to
accounts on the Company's records for purposes of the Plan. Dividend Equivalents
may be accrued as a cash obligation, or may be converted to shares of Stock for
the Participant. The Committee shall determine whether any deferred Dividend
Equivalents will accrue interest. The Committee may provide that an Optionee may
use Dividend Equivalents to pay the Purchase Price. Dividend Equivalents may be
payable in cash or shares of Stock or in a combination of the two, as determined
by the Committee.
6. TERMS AND CONDITIONS OF RESTRICTED STOCK.
Restricted Stock may be granted under this Plan aside from, or in
association with, any other award and shall be subject to the following
conditions and shall contain such additional terms and conditions (including
provisions relating to the acceleration of vesting of Restricted Stock upon a
Change of Control), not inconsistent with the terms of the Plan, as the
Committee shall deem desirable:
(a) GRANTEE RIGHTS. A Grantee shall have no rights to an award of
Restricted Stock unless and until Grantee accepts the award within the period
prescribed by the Committee and, if the Committee shall deem desirable, makes
payment to the Company in cash, or by check or such other instrument as may be
acceptable to the Committee. After acceptance and issuance of a certificate or
certificates, as provided for below, the Grantee shall have the rights of a
stockholder with respect to Restricted Stock subject to the non-transferability
and forfeiture restrictions described in Section 6(d) below.
(b) ISSUANCE OF CERTIFICATES. The Company shall issue in the Grantee's
name a certificate or certificates for the shares of Common Stock associated
with the award promptly after the Grantee accepts such award.
(c) DELIVERY OF CERTIFICATES. Unless otherwise provided, any
certificate or certificates issued evidencing shares of Restricted Stock shall
not be delivered to the Grantee until such shares are free of any restrictions
specified by the Committee at the time of grant.
(d) FORFEITABILITY, NON-TRANSFERABILITY OF RESTRICTED STOCK. Shares of
Restricted Stock are forfeitable until the terms of the Restricted Stock grant
have been satisfied. Shares of Restricted Stock are not transferable until the
date on which the Committee has specified such restrictions have lapsed. Unless
otherwise provided by the Committee at or after grant, distributions in the form
of dividends or otherwise of additional shares or property in respect of shares
of Restricted Stock shall be subject to the same restrictions as such shares of
Restricted Stock.
(e) CHANGE OF CONTROL. Upon the occurrence of a Change in Control as
defined in Section 5(c), the Committee may accelerate the vesting of outstanding
Restricted Stock, in whole or in part, as determined by the Committee, in its
sole discretion.
(f) TERMINATION OF EMPLOYMENT. Unless otherwise determined by the
Committee at or after grant, in the event the Grantee ceases to be an employee
or otherwise associated with the Company for any other reason, all shares of
Restricted Stock theretofore awarded to him which are still subject to
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restrictions shall be forfeited and the Company shall have the right to complete
a blank stock power. The Committee may provide (on or after grant) that
restrictions or forfeiture conditions relating to shares of Restricted Stock
will be waived in whole or in part in the event of termination resulting from
specified causes, and the Committee may in other cases waive in whole or in part
restrictions or forfeiture conditions relating to Restricted Stock.
7. TERM OF PLAN.
No Option or shares of Restricted Stock shall be granted pursuant to the
Plan on or after the date that is ten years from the effective date of the Plan,
but Options or shares of Restricted Stock theretofore granted may extend beyond
that date.
8. CAPITAL CHANGE OF THE COMPANY.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the Plan
and in the number and option price of shares subject to outstanding Options
granted under the Plan, to the end that after such event each Optionee's
proportionate interest shall be maintained (to the extent possible) as
immediately before the occurrence of such event. The Committee shall, to the
extent feasible, make such other adjustments as may be required under the tax
laws so that any Incentive Options previously granted shall not be deemed
modified within the meaning of Section 424(h) of the Code. Appropriate
adjustments shall also be made in the case of outstanding Restricted Stock
granted under the Plan.
The adjustments described above will be made only to the extent consistent
with continued qualification of the Option under Section 422 of the Code (in the
case of an Incentive Option) and Section 409A of the Code.
9. PURCHASE FOR INVESTMENT/CONDITIONS.
Unless the Options and shares covered by the Plan have been registered
under the Securities Act, or the Company has determined that such registration
is unnecessary, each person exercising or receiving Options or Restricted Stock
under the Plan may be required by the Company to give a representation in
writing that he is acquiring the securities for his own account for investment
and not with a view to, or for sale in connection with, the distribution of any
part thereof. The Committee may impose any additional or further restrictions on
awards of Options or Restricted Stock as shall be determined by the Committee at
the time of award.
10. TAXES.
(a) The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options or Restricted
Stock granted under the Plan with respect to the withholding of any taxes
(including income or employment taxes) or any other tax matters.
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(b) If any Grantee, in connection with the acquisition of Restricted
Stock, makes the election permitted under Section 83(b) of the Code (that is, an
election to include in gross income in the year of transfer the amounts
specified in Section 83(b)), such Grantee shall notify the Company of the
election with the Internal Revenue Service pursuant to regulations issued under
the authority of Code Section 83(b).
(c) If any Grantee shall make any disposition of shares of Stock
issued pursuant to the exercise of an Incentive Option under the circumstances
described in Section 421(b) of the Code (relating to certain disqualifying
dispositions), such Grantee shall notify the Company of such disposition within
ten (10) days hereof.
11. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on April 3, 2006; provided, however, that if,
and only if, certain options are intended to qualify as Incentive Stock Options,
the Plan must subsequently be approved by majority vote of the Company's
stockholders no later than April 3, 2007, and further, that in the event certain
Option grants hereunder are intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the Code, the requirements
as to shareholder approval set forth in Section 162(m) of the Code are
satisfied.
12. AMENDMENT AND TERMINATION.
The Board may amend, suspend, or terminate the Plan, except that no
amendment shall be made that would impair the rights of any Participant under
any Option or Restricted Stock theretofore granted without the Participant's
consent, and except that no amendment shall be made which, without the approval
of the stockholders of the Company would:
(a) materially increase the number of shares that may be issued under
the Plan, except as is provided in Section 8;
(b) materially increase the benefits accruing to the Participants
under the Plan;
(c) materially modify the requirements as to eligibility for
participation in the Plan;
(d) decrease the exercise price of an Incentive Option to less than
100% of the Fair Market Value per share of Stock on the date of grant thereof or
the exercise price of a Nonqualified Option to less than 100% of the Fair Market
Value per share of Stock on the date of grant thereof;
(e) extend the term of any Option beyond that provided for in Section
5(b); or
(f) except as otherwise provided in Sections 5(c), 5(l) and 8 hereof,
reduce the exercise price of outstanding Options or effect repricing through
cancellations and re-grants of new Options.
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Subject to the forgoing, the Committee may amend the terms of any Option
theretofore granted, prospectively or retrospectively, but no such amendment
shall impair the rights of any Optionee without the Optionee's consent.
It is the intention of the Board that the Plan comply strictly with the
provisions of Section 409A of the Code and Treasury Regulations and other
Internal Revenue Service guidance promulgated thereunder (the "Section 409A
Rules") and the Committee shall exercise its discretion in granting awards
hereunder (and the terms of such awards), accordingly. The Plan and any grant of
an award hereunder may be amended from time to time (without, in the case of an
award, the consent of the Participant) as may be necessary or appropriate to
comply with the Section 409A Rules.
13. GOVERNMENT REGULATIONS.
The Plan, and the grant and exercise of Options or Restricted Stock
hereunder, and the obligation of the Company to sell and deliver shares under
such Options and Restricted Stock shall be subject to all applicable laws, rules
and regulations, and to such approvals by any governmental agencies, national
securities exchanges and interdealer quotation systems as may be required.
14. GENERAL PROVISIONS.
(a) CERTIFICATES. All certificates for shares of Stock delivered under
the Plan shall be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, or other securities
commission having jurisdiction, any applicable Federal or state securities law,
any stock exchange or interdealer quotation system upon which the Stock is then
listed or traded and the Committee may cause a legend or legends to be placed on
any such certificates to make appropriate reference to such restrictions.
(b) EMPLOYMENT MATTERS. Neither the adoption of the Plan nor any grant
or award under the Plan shall confer upon any Participant who is an employee of
the Company or any Subsidiary any right to continued employment or, in the case
of a Participant who is a director, continued service as a director, with the
Company or a Subsidiary, as the case may be, nor shall it interfere in any way
with the right of the Company or any Subsidiary to terminate the employment of
any of its employees, the service of any of its directors or the retention of
any of its consultants or advisors at any time.
(c) LIMITATION OF LIABILITY. No member of the Committee, or any
officer or employee of the Company acting on behalf of the Committee, shall be
personally liable for any action, determination or interpretation taken or made
in good faith with respect to the Plan, and all members of the Committee and
each and any officer or employee of the Company acting on their behalf shall, to
the extent permitted by law, be fully indemnified and protected by the Company
in respect of any such action, determination or interpretation.
(d) REGISTRATION OF STOCK. Notwithstanding any other provision in the
Plan, no Option may be exercised unless and until the Stock to be issued upon
the exercise thereof has been registered under the Securities Act of 1933, as
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amended, and applicable state securities laws, or are, in the opinion of counsel
to the Company, exempt from such registration in the United States. The Company
shall not be under any obligation to register under applicable federal or state
securities laws any Stock to be issued upon the exercise of an Option granted
hereunder in order to permit the exercise of an Option and the issuance and sale
of the Stock subject to such Option, although the Company may in its sole
discretion register such Stock at such time as the Company shall determine. If
the Company chooses to comply with such an exemption from registration, the
Stock issued under the Plan may, at the direction of the Committee, bear an
appropriate restrictive legend restricting the transfer or pledge of the Stock
represented thereby, and the Committee may also give appropriate stop transfer
instructions with respect to such Stock to the Company's transfer agent.
15. NON-UNIFORM DETERMINATIONS.
The Committee's determinations under the Plan, including, without
limitation, (i) the determination of the Participants to receive awards, (ii)
the form, amount and timing of such awards, (iii) the terms and provisions of
such awards and (ii) the agreements evidencing the same, need not be uniform and
may be made by it selectively among Participants who receive, or who are
eligible to receive, awards under the Plan, whether or not such Participants are
similarly situated.
16. GOVERNING LAW.
The validity, construction, and effect of the Plan and any rules and
regulations relating to the Plan shall be determined in accordance with the
internal laws of the State of Delaware, without giving effect to principles of
conflicts of laws, and applicable federal law.
FalconStor Software, Inc.
April 3, 2006
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PROXY
FALCONSTOR SOFTWARE, INC.
Proxy for Annual Meeting of Stockholders
Solicited by the Board of Directors
The undersigned hereby appoints ReiJane Huai and James Weber, and each of
them, with full power of substitution to represent the undersigned and to vote
all of the shares of common stock of FalconStor Software, Inc. ("FalconStor")
which the undersigned is entitled to vote at the Annual Meeting of Stockholders
of FalconStor to be held at FalconStor Software, Inc., 2 Huntington Quadrangle,
Suite 2S01, Melville, New York, on Wednesday, May 17, 2006, at 9:00 a.m., local
time, and at any adjournment thereof, (1) as hereinafter specified upon the
proposals listed below and (2) in their discretion, upon such other matters as
may properly come before the meeting.
IMPORTANT: PLEASE DATE, SIGN AND MAIL PROMPTLY THIS PROXY IN THE ENCLOSED
RETURN ENVELOPE TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF
YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON SHOULD YOU WISH TO DO SO EVEN
THOUGH YOU HAVE ALREADY SENT IN YOUR PROXY.
1. To elect the following directors: (01) Steven L. Bock and (02) Patrick B.
Carney, to serve as directors until the 2009 Annual Meeting of Stockholders
of the Company and until successors have been duly elected and qualified.
____________ FOR ALL NOMINEES __________ WITHHELD FROM ALL NOMINEES
___________________________________________________________________
FOR ALL NOMINEES EXCEPT AS NOTED ABOVE
2. To approve the FalconStor Software, Inc., 2006 Incentive Stock Plan.
FOR ___________ AGAINST ___________ ABSTAIN ___________
3. To ratify the appointment of KPMG LLP as the independent registered public
accounting firm of the Company for the fiscal year ending December 31,
2006.
FOR ___________ AGAINST ___________ ABSTAIN ___________
4. With discretionary authority, upon such other matters as may properly come
before the meeting. At this time, the persons making this solicitation know
of no other matters to be presented at the meeting.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT _____
MARK HERE IF YOU PLAN TO ATTEND THE MEETING ____
Please sign your name exactly as it appears on the stock certificate
representing your shares. If signing for estates, trusts or corporations, title
or capacity should be stated. If shares are held jointly, both should sign.
Signature: __________________ Date______________
Signature: __________________ Date______________