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 (Amendment No. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)2))
/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)
Kenneth A. Schlesinger, Esq.
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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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(2) Aggregate number of securities to which transaction applies:
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(3) Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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FALCONSTOR SOFTWARE, INC.
125 Baylis Rd. Suite 140
Melville, NY 11747
-----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 17, 2002
-----------------
To Our Stockholders:
We invite you to attend our annual stockholders' meeting on Friday,
May 17, 2002 at the Huntington Hilton, Route 110 at 598 Broadhollow Road,
Melville, New York 11747 at 9:00 a.m. At the meeting, you will hear an update on
our operations, have a chance to meet some of our directors and executives, and
will act on the following matters:
1) To elect a director to a three-year term;
2) To approve amendments to our 1994 Outside Directors Stock
Option Plan, as amended (the "1994 Plan") to (i) increase the
number of shares issuable upon exercise of options under the
1994 Plan from 150,000 to 500,000, (ii) increase the initial
grant of shares underlying options each non-employee director
is entitled to receive on the day they become a non-employee
director from 15,000 to 50,000 shares of Common Stock, and
(iii) increase the annual grant for shares underlying options
for non-employee directors from 5,000 to 10,000 shares;
3) To approve an amendment to our 2000 Stock Option Plan (the
"2000 Plan") to increase the number of shares of Common Stock
reserved for issuance thereunder by 2,000,000 from 8,662,296
to 10,662,296;
4) To ratify the appointment of KPMG LLP as our independent
accountants for fiscal 2002; and
5) Any other matters that properly come before the meeting.
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 nominee.
Only stockholders of record at the close of business on March 20,
2002 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.
We have also provided you with the exact place and time of the
meeting if you wish to attend in person.
Sincerely yours,
ReiJane Huai
Chief Executive Officer
Dated: Melville, New York
April 17, 2002
FALCONSTOR SOFTWARE, INC.
125 Baylis Rd. Suite 140
Melville, New York 11747
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2002 PROXY STATEMENT
GENERAL INFORMATION
This proxy statement contains information related to the annual
meeting of stockholders of FalconStor Software, Inc. to be held on Friday, May
17, 2002, beginning at 9:00 a.m., at the Huntington Hilton, Route 110 at 598
Broadhollow Road, Melville, New York 11747, 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 a director to a three-year term;
2) To approve amendments to our 1994 Outside Directors Stock
Option Plan, as amended (the "1994 Plan") to (i) increase the
number of shares issuable upon exercise of options under the
1994 Plan from 150,000 to 500,000, (ii) increase the initial
grant of shares underlying options each non-employee director
is entitled to receive on the day they become a non-employee
director from 15,000 to 50,000 shares of Common Stock, and
(iii) increase the annual grant for shares underlying options
for non-employee directors from 5,000 to 10,000 shares;
3) To approve an amendment to our 2000 Stock Option Plan (the
"2000 Plan") to increase the number of shares of Common Stock
reserved for issuance thereunder by 2,000,000 from 8,662,296
to 10,662,296;
4) To ratify the appointment of KPMG LLP as our independent
accountants for fiscal 2002; and
5) 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 20, 2002 (the "Record Date"), may vote at the meeting. As of
this date, we had 45,240,294 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 nominee,
in favor of the amendments of the 1994 Plan, in favor of the amendment to the
2000 Plan, and in favor of the ratification of the appointment of KPMG LLP as
our independent accountants.
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. Secondly, you
may vote in person at the meeting. Lastly, you may notify our Chief Financial
Officer in writing at 125 Baylis Road, Suite 140, 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.
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Votes Needed
The director nominee receiving a majority of the votes cast during
the meeting will be elected to fill the seat of our director. 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 directors and the ratification of the
auditors.
Attending in Person
Only stockholders, their proxy holders, and our invited guests may
attend the meeting. 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 and an identification with a photo at the meeting. For example,
you could bring an account statement showing that you owned FalconStor Software,
Inc. shares as of March 20, 2002 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 20, 2002, 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, (iii) each of the
executive officers named in the summary compensation table and (iv) by all
directors 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) 10,824,260 23.9%
c/o FalconStor Software, Inc.
125 Baylis Road
Melville, NY 11747
Barry Rubenstein (4) 6,955,053 15.4%
68 Wheatley Road
Brookville, NY 11545
Irwin Lieber (5) 4,602,689 10.2%
80 Cuttermill Road Suite 311
Great Neck, NY 11021
Barry Fingerhut (6) 3,000,164 6.6%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Seth Lieber (7) 3,014,474 6.7%
200 East 72 Street, PH N
New York, NY 10021
Jonathan Lieber (8) 2,927,852 6.5%
271 Hamilton Road
Chappaqua, NY 10514
Marilyn Rubenstein (9) 2,482,424 5.5%
c/o Barry Rubenstein
68 Wheatley Road
Brookville, NY 11545
-4-
Lawrence S. Dolin (10) 40,000 *
Steven R. Fischer 2,500 *
Steven H. Owings 58,030 *
Jacob Ferng (11) 190,570 *
Wayne Lam (12) 177,432 *
All Directors and Executive Officers as a Group (13)
(6 persons) 11,292,792 24.8%
*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 date
hereof 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
45,240,294.
(3) Based upon information contained in a Form 3 and Schedule 13D filed
by Mr. Huai and certain other information.
(4) Based upon information contained in a report on a 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"), and a Form 3 filed by
Mr. Rubenstein with the SEC as well as certain other information.
Consists of (i) 1,812,903 shares of Common Stock held by Mr.
Rubenstein, (ii) 395,217 shares of common stock held by Brookwood,
(iii) 642,453 shares 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
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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) 692,983 shares of common stock held by Woodland Partners
and (xi) 743,513 shares of common stock held by Woodland Fund. Does
not include 8,258 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) 1,934,705 shares of Common Stock
held by Irwin Lieber, (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, and
(vii) 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 upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 322,180 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, and
(vii) 299,809 shares of Common Stock held by Wheatley Associates.
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.
(7) Based upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 86,622 shares of Common Stock
held by Seth Lieber, (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) 259,868 shares of Common Stock held by Applegreen. Mr. Lieber
disclaims beneficial ownership of the securities held by Wheatley,
Wheatley Foreign, Wheatley II, Wheatley III, Wheatley Foreign III,
Wheatley Associates and Applegreen, except to the extent of his
respective equity interests therein.
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(8) Based upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 484,051 shares of Common Stock
held by Wheatley, (ii) 41,008 shares of Common Stock held by
Wheatley Foreign, (iii) 180,089 shares of Common Stock held by
Wheatley II, (iv) 1,370,015 shares of Common Stock held by Wheatley
III, (v) 293,012 shares of Common Stock held by Wheatley Foreign
III, (vi) 299,809 shares of Common Stock held by Wheatley Associates
and (vii) 259,868 shares of Common Stock held by Applegreen
Partners. Mr. Lieber disclaims beneficial ownership of the
securities held by 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) 8,258 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 1,812,903 shares of Common Stock held by Mrs. Rubenstein's
spouse, Barry Rubenstein.
(10) Includes 40,000 shares held by Northern Union Club. 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
respective equity interests therein.
(11) Includes options to purchase 95,285 shares of Common Stock
exercisable within 60 days of the Record Date.
(12) Includes options to purchase 173,895 shares of Common Stock
exercisable within 60 days of the Record Date.
(13) Includes options to purchase 269,180 shares of Common Stock
exercisable within 60 days of the Record Date.
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PROPOSAL NO. 1
ELECTION OF DIRECTOR
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.
There are currently four members on the Board of Directors. The Board of
Directors nominee for director, Steven R. Fischer, is currently a director of
the Company. All directors are chosen for a full three-year term to succeed
those whose terms expire. It is therefore proposed that Mr. Fischer be elected
to serve until the Annual Meeting of Stockholders to be held in 2005 and until
his successor is elected and shall have qualified.
Unless authority is specifically withheld, proxies will be voted for
the election of the nominee below to serve as a director of the Company for a
term which will expire at the Company's 2005 Annual Meeting of Stockholders or
until a successor is elected and qualified.
Director
Name Position Age Since
- ---- -------- --- -----
Steven R. Fischer Director Nominee 57 2001
Steven R. Fischer has held multiple positions with Transamerica Business Capital
Corporation, which specializes in secured lending for mergers, acquisitions and
restructurings, since 1992. He is currently serving as Transamerica's President.
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. 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.
The names of the directors, whose terms expire at the 2003 and 2004
Annual Meetings of Stockholders of the Company, who are currently serving their
terms are set forth below:
Director
Name Position Age Since
- ---- -------- --- -----
ReiJane Huai Chairman 43 2000
Lawrence S. Dolin Director 58 2001
Steven H. Owings Director 49 2001
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
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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's term as Chairman
of the Board of Directors expires in 2004.
Lawrence S. Dolin has held several positions with Noteworthy Medical Systems,
Inc., a provider of computerized patient record software, since July 1998. He is
currently serving as Noteworthy's chairman, president and chief executive
officer. 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's term as director of the Company expires
in 2004. Mr. Dolin has been a director of the Company since August 2001.
Steven H. Owings served as the chief executive officer of ScanSource, Inc., a
value-added distributor of POS and bar code products, from 1992 to early 2000.
He has served as chairman of the board of directors of ScanSource, Inc., since
its inception in December 1992. From 1991 to 1992, Mr. Owings served as chairman
of the board of directors, chief executive officer and the sole shareholder of
Argent Technologies, Inc., a personal computer manufacturer. From 1983 to 1991
he held various positions with Gates/FA Distributing, Inc., and its
predecessors, a computer distribution company, including serving as president,
chief executive officer and chairman of the board of directors. From December
1987 to September 1994, Mr. Owings served as a director of Gates. From July 1996
to April 1997, he served as a director of Globelle Corporation, an international
distributor of personal computer products. He holds a B.A. from Clemson
University. Mr. Owings' term as director of the Company expires in 2003. Mr.
Owings has been a director of the Company since August 2001.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEE.
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Meetings and Committees
The Board of Directors met on four occasions and took action by
unanimous written consent on six occasions during the fiscal year ended December
31, 2001. There are two committees of the Board of Directors: the Compensation
Committee/Stock Option Committee and the Audit Committee. The members of the
Compensation Committee/Stock Option Committee are ReiJane Huai, Lawrence S.
Dolin and Steven R. Fischer. The Compensation Committee/Stock Option Committee
met on one occasion and took action by unanimous written consent on one occasion
during the fiscal year ended December 31, 2001. The Compensation Committee/Stock
Option Committee reviews compensation arrangements and personnel matters and has
the authority to determine the procedures regarding the release of stockholders
and option holders of the Company from their respective lock-up agreements. The
members of the Audit Committee are Lawrence S. Dolin, Steven H. Owings and
Steven R. Fischer. The Audit Committee met on one occasion and took action by
unanimous written consent on one occasion during the fiscal year ended December
31, 2001. The primary purpose of the Audit Committee is to assist the Board of
Directors in fulfilling its responsibility to oversee the Company's financial
reporting activities. The Audit Committee annually recommends to the Board of
Directors independent public accountants to serve as auditors of the Company's
books, records and accounts, reviews the scope of the audits performed by such
auditors and the audit reports prepared by them, reviews and monitors the
Company's internal accounting procedures and monitors compliance with the
Company's Code of Ethics Policy and Conflict of Interest Policy. A report from
the Audit Committee is also included in this Proxy Statement, see Audit
Committee Report.
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 1994 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 15,000 shares of Common Stock and an annual grant of options
to acquire 5,000 shares of Common Stock on the date of each Annual Meeting of
Stockholders of the Company. These stock options will be granted with per share
exercise prices equal to the fair market value of the Common Stock on the date
of grant.
The Company is seeking stockholder approval of proposed amendments
to the 1994 Plan in which the initial grant shall be increased to options to
acquire 50,000 shares of Common Stock and the annual grant shall be increased to
options to acquire 10,000 shares. See "Proposal No. 2 - Approval of Amendments
to the 1994 Outside Directors Stock Option Plan." In August 2001, each of
Messrs. Dolin, Fischer and Owings received options to purchase 15,000 shares of
Common Stock at an exercise price of $9.60 per share. Messrs. Dolin, Fischer and
Owings will
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be granted additional options to purchase 35,000 shares of Common Stock subject
to stockholder approval of the proposed amendments to the 1994 Plan.
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
- ---- -------- ---
Jacob Ferng, CPA Chief Financial Officer, Treasurer, 40
Wayne Lam Corporate Secretary and Vice President
Vice President, Marketing 38
Jacob Ferng has served as chief financial officer and vice president of the
Company and its predecessor entity since August 2000. Mr. Ferng has more than 10
years of experience handling corporate finance, worldwide software production
and product distribution for publicly held companies, various private
corporations and a public accounting firm. Mr. Ferng was vice president of
finance and production worldwide for Computer Associates from 1996 to April
2000. He also served as corporate controller and vice president of finance and
operations of Cheyenne Software from 1991 to 1996. From 1988 to 1990, he was an
accountant for General Aerospace, Bell Associates, CPAs. He has a master's
degree in Accounting/Taxation from Long Island University, C.W. Post. Currently,
he is a certified public accountant in the state of New York.
Wayne Lam has served as vice president of marketing 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
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feasibility of building paperless offices using optical storage devices. The
success of the project led to the formation of Advanced Graphic Applications.
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"). Please note that as described
under "Certain Relationships and Related Transactions," FalconStor, Inc. was the
accounting acquiror in the merger between Network Peripherals Inc. and
FalconStor, Inc. and the transaction was accounted for as a recapitalization of
FalconStor, Inc. Accordingly, the executive compensation provided below reflects
the executive compensation information of the Company from the inception of
FalconStor, Inc. on February 10, 2000 through December 31, 2001. However, under
Item 402 of Regulation S-K, the Company is also required to disclose
compensation information for James Regel, the former President and Chief
Executive Officer of Network Peripherals Inc. since he held such position during
the fiscal year ended December 31, 2001. The compensation information for Mr.
Regel reflects compensation from Network Peripherals Inc.
Summary Compensation Table
Long Term
Name and Principal Position Annual Compensation Compensation
- ------------------------------- ----------------------------------------- ------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Year ($) ($)(1) ($)(2) Options (#) ($)(3)
------ ---------- ------------ --------------- ------------ -----------------
ReiJane Huai.................. 2001 $170,833 -- $ 8,000 -- $ 239,924
Chairman and Chief 2000 -- -- -- -- --
Executive Officer
Jacob Ferng................... 2001 $ 95,833 $ 20,000 -- --
Chief Financial Officer 2000 $ 20,833 -- -- 288,743 --
and Vice President
Wayne Lam..................... 2001 $ 96,667 $ 10,000 -- -- --
Vice President-Marketing 2000 $ 41,154 -- -- 288,743 --
James Regel (4)............... 2001 $350,000 -- -- (5) 125,000 --
Former President and Chief 2000 $145,833 -- -- 375,000 --
Executive Officer of Network
Peripherals Inc.
(1) Bonuses of $20,000 and $10,000 for Mr. Ferng and Mr. Lam, respectively
were paid in 2002 for services rendered in 2001.
(2) Mr. Huai was given an automobile allowance of $8,000 in 2001.
(3) Mr. Huai was reimbursed $239,924 in June 2001 for the payment of
Hart-Scott-Rodino filing fees as well as all taxes that were due as a
result of this reimbursement. The filing fees were incurred in connection
with FalconStor's merger with Network Peripherals Inc.
(4) Mr. Regel joined Network Peripherals Inc. in 2000.
(5) Mr. Regel will also receive an additional $233,000 in 2002 related to his
severance agreement plus an amount equal to $1,000,000 minus the value of
his in-the-money options on August 22, 2002.
Option Grants During 2001 Fiscal Year
The following table provides information related to options to
purchase Common Stock granted to James Regel during 2001. The Company currently
does not have any plans providing for the grant of stock appreciation rights.
Potential Realizable
Value at Assumed
Rates of Stock Price
Appreciation for
Individual Grants Option Term(2)
- ----------------------------------------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to Exercise or
Underlying Employees in Base Price
Name Option(#) Fiscal Year ($/Sh)(1) Expiration Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------------------
James Regel 125,000 5% $7.625 January 26, 2001 $599,415 $1,519,036
(1) The option exercise price may be paid in shares of Common Stock owned by the
executive, in cash, or a combination of any of the foregoing. The exercise price
is equal to or greater than the fair market value of the Common Stock on the
date of grant.
(2) The potential realizable value portion of the foregoing table illustrates
values that might be realized upon exercise of the options immediately prior to
the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options. These
numbers do not take into account provisions of certain options providing for
termination of the option following termination of employment,
non-transferability or differences in vesting periods. Regardless of the
theoretical value of an option, its ultimate value will depend upon the market
value of the Common Stock at a future date, and that value will depend on a
variety of factors, including the overall condition of the stock market and the
Company's results of operations and financial condition. There can be no
assurance that the values reflected in this table will be achieved.
-13-
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
No options were exercised by any Named Executive Officer during the
fiscal year ended December 31, 2001. The following table sets forth certain
information concerning unexercised stock options held by the Named Executive
Officers as of December 31, 2001.
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at 2001 Money Options at
Fiscal Year-End (#) Fiscal Year-End 2001 ($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------------- -------------------------
ReiJane Huai..................... 0/0 0/0
Jacob Ferng...................... 95,285/193,458 $830,284/$1,685,735
Wayne Lam........................ 95,285/193,458 $830,284/$1,685,735
James Regel...................... 500,000/0 $179,315/0
- -------------------
(1) On December 31, 2001, the last reported sales price of the Common Stock as
reported on The Nasdaq National Market was $9.06.
Employment Agreements
The Company has entered into an employment agreement with ReiJane
Huai dated as of September 2001, providing for the employment of such individual
as Chairman, President and Chief Executive Officer. The employment agreement
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 $150,000, subject to an increase of $15,000 per annum, provided
that the Company's earnings were higher than the previous year, as certified by
either the Company's Chief Financial Offer or its independent auditors and such
other increases as determined by the Board of Directors. The agreement contains
non-competition, confidentiality and non-solicitation provisions that apply for
twenty-four months after cessation of employment.
-14-
Severance Agreements
The Company has entered into Change of Control Contracts with each
of ReiJane Huai, Wayne Lam and Jacob Ferng dated as of December 2001 that
provide for severance pay and incidental benefits if there is a change in
control of the Company (as defined in the Change of Control Contracts). The
payment is a lump sum payment equal to 4.0 times one year's annual compensation.
The agreements also provide such individuals with the right to replace all stock
options whether vested or not with fully vested stock options, or alternatively
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 the price per share paid by the acquirer in the change of control
transaction or the market price of the Company's Common Stock on the date of the
change of control. Finally, the agreements provide that if any excise taxes are
imposed on Messrs. Huai, Lam and Ferng by Section 4999 of the Internal Revenue
Code of 1986, as amended, the Company will make them whole.
Report on Repricing of Options. None of the stock options granted
under any of the Company's plans were repriced in the fiscal year ended 2001.
Compensation Committee Interlock and Insider Participation. Messrs.
ReiJane Huai, Lawrence S. Dolin and Steven R. Fischer served as members of the
Compensation Committee of the Board of Directors during the fiscal year ended
December 31, 2001. For information relating to transactions involving the
Company and such individuals, please see "Certain Relationships and Related
Transactions."
-15-
Audit Committee Report
The Board of Directors appoints an Audit Committee each year to
review the Company's financial matters. The members of the Audit Committee are
Lawrence S. Dolin, Steven H. Owings and Steven R. Fischer. Each member of the
Company's Audit Committee meets the independence requirements set by the
Securities Exchange Commission (the "SEC") and the Nasdaq National Market. The
Audit Committee operates under a written charter adopted by the Board of
Directors.
The primary purpose of the Audit Committee is to assist the Board of
Directors in fulfilling its responsibility to oversee the Company's financial
reporting activities. The Audit Committee meets with the Company's independent
accountants and reviews the scope of their audit, report and recommendations.
The Audit Committee also recommends to the Board of Directors the selection of
the Company's independent accountants. The Audit Committee met one time during
fiscal 2001. The Audit Committee members reviewed and discussed the audited
financial statements for the fiscal year ending December 31, 2001 with
management. The Audit Committee also discussed all the matters required to be
discussed by Statement of Auditing Standard No. 61 with the Company's
independent auditors, KPMG LLP. The Audit Committee received the written
disclosures and the letter from KPMG LLP as required by Independence Standards
Board Standard No. 1 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
financial statements be included in the Company's Annual Report on Form 10-K to
be filed with the SEC.
Audit Committee
---------------
Lawrence S. Dolin
Steven H. Owings
Steven R. Fischer
2001 Compensation Committee/Stock Option Committee Report on Executive
Compensation:
General
The Compensation Committee/Stock Option Committee determines the
cash and other incentive compensation, if any, to be paid to the Company's
executive officers and key employees and is responsible for the administration
and award of stock options under the Company's 2000 Plan. Messrs. Huai, Dolin
and Fischer serve as members of the Compensation
-16-
Committee/Stock Option Committee. Messrs. Dolin and Fischer are non-employee
directors of the Company, as defined under Rule 16b-3 of the Securities Exchange
Act of 1934, as amended. Mr. Huai serves as Chairman of the Compensation
Committee/Stock Option Committee. The Compensation Committee/Stock Option
Committee met one time during the fiscal year ended December 31, 2001.
Compensation Philosophy
The Compensation Committee/Stock Option Committee's executive
compensation philosophy is to base management's pay, 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 Committee/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").
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 Committee/Stock Option
Committee, and recommendations of the Compensation Committee/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; 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.
Incentive Compensation
The Company from time to time will consider the payment of
discretionary bonuses to its executive officers. 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
-17-
motivate employees and the achievement of assigned projects. Bonuses are
determined annually after the close of each fiscal year. Despite achievement of
personal goals, bonuses may not be given based upon the performance of the
Company as a whole.
Compensation of Chief Executive Officer
Mr. Huai's salary in 2001 was $170,833. Mr. Huai's salary is based
upon the factors described in the "Salaries" paragraph above and his base salary
is now set forth in his employment contract.
Stock Option and Other Plans
The Company did not award options to any of the current Executive
Officers in 2001. It is the philosophy of the Compensation Committee/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 assist in the
retention of such employees. The Compensation Committee/Stock Option Committee
also considered the amount and terms of options previously granted to executive
officers. The Compensation Committee/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 Committee/Stock Option Committee:
---------------------------------------------
ReiJane Huai, Chairman
Lawrence S. Dolin
Steven R. Fischer
-18-
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) Russell 3000 Index, a broad equity market index. The
Company changed its peer group index (from Nasdaq Computer Manufacturer Index to
Computer Software and Services) and its broad market index (from Nasdaq Stock
Market Index to Russell 3000 Index) as a result of the merger described in
"Certain Relationships and Related Transactions," in which the Company became a
provider of storage networking infrastructure software (as opposed to designing
and selling Ethernet switching solutions designed for local area networks). In
accordance with Regulation S-K, the Company is required to include its previous
peer group index and broad market index in this Proxy Statement. 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.
[PERFORMANCE GRAPH]
Fiscal year ending
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
- ------------------------------------------------------------------------------------------------------------------------------------
FalconStor Software, Inc. 100.00 40.85 25.35 266.20 36.27 51.04
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Software and Services 100.00 120.65 180.07 309.02 185.66 164.49
- ------------------------------------------------------------------------------------------------------------------------------------
Russell 3000 Index 100.00 131.78 163.17 194.77 178.15 155.64
- ------------------------------------------------------------------------------------------------------------------------------------
Nasdaq Computer Manufacturer Index 100.00 146.67 377.26 743.16 471.99 273.63
- ------------------------------------------------------------------------------------------------------------------------------------
Nasdaq Stock Market Index 100.00 122.32 172.52 304.29 191.25 152.46
- ------------------------------------------------------------------------------------------------------------------------------------
There can be no assurance that the Common Stock's performance will
continue with the same or similar trends depicted in the graph above.
-19-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 22, 2001, pursuant to an Agreement and Plan of Merger and
Reorganization, (the "Merger Agreement"), FalconStor, Inc. ("FalconStor") merged
with Network Peripherals Inc. ("NPI"), with NPI as the surviving corporation.
Under the terms of the Merger Agreement, all of FalconStor's preferred shares
were converted into common shares and the stockholders of FalconStor received
0.721858 shares of NPI common stock for each share of FalconStor common stock
that they held. Although NPI acquired FalconStor, as a result of the
transaction, FalconStor stockholders held a majority of the voting interests in
the combined enterprise after the merger. Accordingly, for accounting purposes,
the acquisition was a "reverse acquisition" and FalconStor was the "accounting
acquiror." Further, as a result of NPI's decision on June 1, 2001 to discontinue
its NuWave and legacy business, at the time of the merger NPI was a
non-operating public shell with no continuing operations, and FalconStor
purchased no intangible assets associated with NPI. As a result, the transaction
was accounted for as a recapitalization of FalconStor and recorded based on the
fair value of NPI's net tangible assets acquired by FalconStor, with no goodwill
or other intangible assets being recognized. The conversion of all of
FalconStor's preferred stock into common stock resulted in an additional
20,207,460 shares of common stock outstanding and, for accounting purposes, the
merger resulted in the issuance of 13,348,605 common shares to NPI's pre-merger
shareholders. In connection with the merger, the name of NPI was changed to
FalconStor Software, Inc. The following directors, executive officers, 5%
stockholders and entities affiliated with 5% stockholders acquired common stock
in the merger: ReiJane Huai - 10,824,260 shares; Wayne Lam - 3,537 shares; Barry
Rubenstein - 1,812,903 shares; Brookwood Partners - 526,956 shares; Seneca
Ventures- 642,453 shares; Wheatley Associates III, L.P.- 299,809 shares;
Wheatley Foreign Partners, L.P. - 41,008 shares; Wheatley Foreign Partners III,
L.P. - 293,012 shares;Wheatley Partners, L.P. - 484,051 shares;Wheatley Partners
II, L.P. - 180,089 shares; Wheatley Partners III, L.P. - 1,370,015 shares;
Woodland Partners - 692,983 shares; Woodland Venture Fund - 743,513 shares;
Irwin Lieber - 1,905,705 shares; Barry Fingerhut - 303,180 shares; Seth Lieber -
115,497 shares; Applegreen Partners - 346,491 shares; Jonathan Lieber - 25,265
shares; and Marilyn Rubenstein - 8,258 shares.
On October 2, 2001, the Company invested approximately $2,300,000 in
a private placement of Network-1 Security Solutions, Inc. ("Network-1"), a
publicly traded corporation that develops and markets intrusion prevention
software products. For its investment, the Company received 1,084,935 shares of
preferred stock, which if converted into common stock, would represent an
approximate 16.5% ownership of Network-1. The following 5% stockholders or
entities affiliated with 5% stockholders of the Company also invested the
following approximate amounts in the private placement of Network-1: Applegreen
Partners - $75,000; Brookwood Partners - $250,000; Barry Fingerhut - $350,000;
Irwin Lieber - $350,000; Jonathan Lieber - $25,000; Seth Lieber - $25,000; Barry
Rubenstein - $100,000; Seneca Ventures - $350,000; Wheatley Partners, L.P. -
$184,000; Wheatley Partners II, L.P. - $200,000;
-20-
Wheatley Foreign Partners, L.P. - $16,000; Woodland Partners - $200,000;
Woodland Venture Fund - $450,000.
Barry Rubenstein, a 5% stockholder, may be deemed to be the
beneficial owner of the securities acquired by Seneca Ventures, Woodland Venture
Fund, Woodland Partners, Brookwood Partners, Wheatley Associates III, L.P.,
Wheatley Foreign Partners, L.P., Wheatley Foreign Partners III, L.P., Wheatley
Partners, L.P., Wheatley Partners II, L.P. and Wheatley Partners III, L.P. Barry
Fingerhut and Irwin Lieber, each of whom are 5% stockholders, may be deemed to
be a beneficial owner of the securities acquired by Wheatley Associates III,
L.P., Wheatley Foreign Partners, L.P., Wheatley Foreign Partners III, L.P.,
Wheatley Partners, L.P., Wheatley Partners II, L.P. and Wheatley Partners III,
L.P. Seth Lieber and Jonathan Lieber, each of whom are 5% stockholders, may be
deemed to be the beneficial owners of the securities acquired by Wheatley
Associates III, L.P., Wheatley Foreign Partners, L.P., Wheatley Foreign Partners
III, L.P., Wheatley Partners, L.P., Wheatley Partners II, L.P. and Wheatley
Partners III, L.P. and Applegreen Partners. Marilyn Rubenstein, a 5%
stockholder, may be deemed to be a beneficial owner of the securities acquired
by Seneca Ventures, Brookwood Partners, Woodland Partners and Woodland Venture
Fund.
-21-
PROPOSAL NO. 2
APPROVAL OF AMENDMENTS TO THE 1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
The Board of Directors proposes that the amendments to the 1994 Plan
(the "Plan Amendment") be approved, whereby (i) the number of shares issuable
upon the exercise of options under the 1994 Plan would be increased from 150,000
to 500,000, (ii) the initial grant of shares underlying options each
non-employee director is entitled to receive on the day they become a
non-employee director would be increased from 15,000 to 50,000 shares of Common
Stock and (iii) the annual grant for shares underlying options for non-employee
directors would be increased from 5,000 to 10,000 shares.
As of the Record Date, options to purchase 14,584 shares were
available for grant under the 1994 Plan and options to purchase 125,000 shares
were issued and outstanding, with a weighted average exercise price of
approximately $10.96. All such issued options vest over a four-year period. If
the Plan Amendment is approved, then each of Steven R. Fischer, Lawrence S.
Dolin and Steven H. Owings will receive options to purchase 35,000 shares of
Common Stock.
The Board of Directors believes it is in the Company's and its
stockholders' best interests to approve the Plan Amendment because it would
allow the Company to continue to grant options under the 1994 Plan which
facilitates the benefits of the additional incentive inherent in the ownership
of Common Stock by directors and helps the Company retain the services of
directors. The 1994 Plan, as proposed to be amended hereby, is intended to
assist the Company in securing and retaining directors by allowing them to
participate in the ownership and growth of the Company through the grant of
nonqualified stock options. The granting of such options serves as partial
consideration for and gives optionees 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.
On April 26, 1994, the Board of Directors of NPI, the Company's
predecessor, adopted the 1994 Plan. The 1994 Plan was approved at the 1994
Annual Meeting of NPI stockholders. On February 18, 1997, the Board of Directors
of NPI amended the 1994 Plan whereby (i) the formula for granting options was
changed, (ii) the option vesting provisions applicable in the event of a change
in control was changed, and (iii) the requirements for stockholder approval of
subsequent amendments to the 1994 Plan were revised.
The proposed amendments to the 1994 Plan are attached as Exhibit A
to this Proxy Statement.
-22-
SUMMARY OF THE 1994 PLAN, AS AMENDED
The following summary of the 1994 Plan, assuming stockholder
approval of the Plan Amendment, is qualified in its entirety by the specific
language of the 1994 Plan.
General. The 1994 Plan provides for the automatic grant of
nonstatutory stock options to nonemployee directors of the Company.
Shares Subject to Plan. A maximum of 500,000 of the authorized but
unissued or treasury shares of the common stock of the Company may be issued
upon the exercise of options granted under the 1994 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 1994 Plan, to
the terms of the automatic grant of options described below, and to outstanding
options. To the extent that any outstanding option under the 1994 Plan expires
or terminates prior to exercise in full or if 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 the repurchased shares are returned to the plan
and again become available for grant.
Administration. The 1994 Plan is intended to operate automatically
without discretionary administration. To the extent administration is necessary,
it will be performed by the Board of Directors or a duly appointed committee of
the Board (hereinafter referred to collectively as the "Board"). However, the
Board has no discretion to select the nonemployee directors of the Company who
are granted options under the 1994 Plan, to set the exercise price of such
options, to determine the number of shares for which or the time at which
particular options are granted or to establish the duration of such options. The
Board is authorized to interpret the 1994 Plan and options granted thereunder,
and all determinations of the Board will be final and binding on all persons
having an interest in the 1994 Plan or any option.
Eligibility. Only directors of the Company who, at the time of
grant, are not employees of the Company or of any parent or subsidiary
corporation of the Company (the "Outside Directors") are eligible to participate
in the 1994 Plan. Currently, the Company has three Outside Directors.
Automatic Grant of Options. Each person first elected or appointed
as an Outside Director prior to August 22, 2001 was granted automatically, on
the date of such initial election or appointment, an option (an "Initial
Option") to purchase 15,000 shares of Common Stock. On the date of each annual
meeting of stockholders of the Company prior to August 22, 2001, an additional
option (an "Annual Option") to purchase 5,000 shares of Common Stock was granted
automatically to each Outside Director, other than an Outside Director who
received an Initial Option within six months prior to the annual meeting.
Provided that the stockholders approve the proposed amendments to the 1994 Plan,
on and after August 22, 2001, each Initial Option will be for the purchase of
50,000 shares of Common Stock and each Annual Option will be for the purchase of
10,000 shares of Common Stock.
-23-
Terms and Conditions of Options. Each option granted under the 1994
Plan is evidenced by a written agreement between the Company and the Outside
Director specifying the number of shares subject to the option and the other
terms and conditions of the option, consistent with the requirements of the 1994
Plan. The exercise price per share of any option granted under the 1994 Plan
must equal the fair market value, as determined pursuant to the plan, of a share
of the Company's Common Stock on the date of grant. 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.
Options granted under the 1994 Plan become exercisable at a rate of
25% one year after the date of grant and then ratably in monthly installments
over the succeeding three years of service. The term of each option is 10 years
after the date of grant, subject to earlier termination in the event the
optionee's service with the Company ceases or in the event of a Change in
Control of the Company, as discussed below. The Board has amended the 1994 Plan
to provide that options will remain exercisable for 12 months following an
optionee's termination of service, unless such termination results from the
optionee's death or disability, in which case the option remains exercisable for
36 months following the optionee's termination of service, provided that in any
event the option must be exercised no later than its expiration date. In
addition, the Board has amended the 1994 Plan to provide that "service" for
purposes of the 1994 Plan will mean service to the Company in any capacity,
whether as a director, employee or consultant.
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, in order to facilitate
estate planning by the directors, the 1994 Plan provides that, with the consent
of the Board, the optionee may transfer all or a portion of the option to (i) an
immediate family member, (ii) a trust for the exclusive benefit of the optionee
and/or one or more immediate family members, (iii) a partnership in which the
optionee and/or one or more immediate family members are the only partners, or
(iv) such other person or entity as the Board permits. For this purpose,
"immediate family member" means the optionee's spouse, former spouse, children
or grandchildren, whether natural or adopted.
Change in Control. The 1994 Plan provides that, in the event of (i)
a merger or consolidation in which the Company is not the surviving corporation
or in which the stockholders of the Company before such transaction do not
retain after such transaction, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company, (ii) the sale,
exchange or transfer of all or substantially all of the assets of the Company
other than to one or more subsidiary corporations, (iii) the direct or indirect
sale or exchange by the
-24-
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such transaction do not
retain after such transaction, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company, or (iv) a
liquidation or dissolution of the Company (a "Change in Control"), all options
outstanding under the 1994 Plan will become immediately exercisable and vested
in full as of the date ten days prior to the Change in Control. In addition, the
acquiring or successor corporation may assume or substitute substantially
equivalent options for the options outstanding under the 1994 Plan. To the
extent that the options outstanding under the 1994 Plan are not assumed,
substituted for, or exercised prior to the Change in Control, they will
terminate.
Termination or Amendment. Unless earlier terminated by the Board,
the 1994 Plan will terminate on April 24, 2007. The 1994 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.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Non-Qualified Stock Options. Upon exercise of a non-qualified stock
option granted under the 1994 Plan, the grantee will recognize ordinary income
in an amount equal to the excess of the fair market value of the shares received
over the exercise price of such shares. That amount increases the grantee's
basis in the stock acquired pursuant to the exercise of the non-qualified
option. Upon a subsequent sale of the stock, the grantee will incur short-term
or long-term gain or loss depending upon his holding period for the shares and
upon the shares' subsequent appreciation or depreciation in the value. The
Company will be allowed a federal income tax deduction for the amount recognized
as ordinary income by the grantee upon the grantee's exercise of the option.
Summary of Tax Consequences. This outline is no more than a summary
of the federal income tax provisions relating to the grant and exercise of
options and stock appreciation rights under the 1994 Plan and the sale of shares
acquired under the 1994 Plan. Individual circumstances may vary these results.
The federal income tax laws and regulations are constantly being amended, and
each participant should rely upon his own tax counsel for advice concerning the
federal income tax provisions applicable to the 1994 Plan.
The Board believes it is in the Company's best interests to approve
the 1994 Plan, which would allow the Company to continue to grant options under
the 1994 Plan to secure for the Company the benefits of the additional incentive
inherent in the ownership of shares of the Company's Common Stock by directors.
AMENDED PLAN BENEFITS
The following table sets forth the grants of stock options that will
be received under the 1994 Plan during the fiscal year ending December 31, 2002
by all current directors who are not
-25-
executive officers as a group, if the foregoing proposal is approved by the
stockholders. None of the other groups or individuals for whom disclosure in
this table would otherwise be required in the following table are eligible to
participate in the 1994 Plan. Benefits under the 1994 Plan will depend on a
number of factors, including the fair market value of the Company's Common Stock
on future dates and the exercise decisions made by the optionees. Consequently
it is not possible to determine the benefits that might be received by persons
granted options under the 1994 Plan.
NEW PLAN BENEFITS
- ------------------------------------------------------------------------------------------------
Amended Plan Grants in 2002 Current Plan Grants in 2001
- ------------------------------------------------------------------------------------------------
Exercise Price Number of Exercise Price Number of
Pre Share Shares Per Share Shares
- ------------------------------------------------------------------------------------------------
Lawrence Dolin * 45,000 $9.60 15,000
- ------------------------------------------------------------------------------------------------
Steven Fischer * 45,000 $9.60 15,000
- ------------------------------------------------------------------------------------------------
Steven Owings * 45,000 $9.60 15,000
- ------------------------------------------------------------------------------------------------
All Outside
Directors as a
Group * 135,000 $9.60 45,000
- ------------------------------------------------------------------------------------------------
* Options will be granted at the fair market value of the Common Stock on the
date of the 2002 Annual Meeting.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE 1994 OUTSIDE
DIRECTORS STOCK OPTION PLAN AMENDMENT.
-26-
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO THE 2000 STOCK OPTION PLAN
The Board of Directors proposes that the amendment to the 2000 Plan
(the "2000 Plan Amendment") be approved, whereby the number of shares issuable
upon the exercise of options under the 2000 Plan would be increased from
8,662,296 to 10,662,296.
As of the Record Date, options to purchase 1,993,394 shares were
available for grant under the 2000 Plan and options to purchase 6,001,856 shares
were issued and outstanding, with a weighted average exercise price of
approximately $2.24 per share. All such issued options vest over a three-year
period.
The 2000 Plan is intended to assist the Company in securing and
retaining employees, officers, consultants and advisors (the "Optionees") by
allowing them to participate in the ownership and growth of the Company through
the grant of incentive and nonqualified stock options. The granting of such
options serves as partial consideration for and gives the Optionees 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 2000 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.
The Board of Directors believes it is in the Company's and its
stockholders' best interests to approve the 2000 Plan Amendment because it would
allow the Company to continue to grant options under the 2000 Plan which
facilitates the benefits of the additional incentive inherent in the ownership
of Common Stock by the Optionees and helps the Company retain the services of
these Optionees.
The proposed Amendment to the 2000 Plan is attached as Exhibit B to
this Proxy Statement.
SUMMARY OF THE 2000 PLAN, AS AMENDED
The following summary of the 2000 Plan, assuming stockholder
approval of the above amendment, is qualified in its entirety by the specific
language of the 2000 Plan.
General. The 2000 Plan provides for the grant of incentive and
nonqualified stock options to employees, officers, consultants and advisors of
the Company.
Shares Subject to Plan. A maximum of 10,662,296 of the authorized
but unissued or treasury shares of the common stock of the Company may be issued
upon the exercise of options granted under the 2000 Plan. Upon any stock
dividend, stock split, reverse stock split,
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recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments will be made to the
shares subject to the 2000 Plan and to outstanding options. To the extent that
any outstanding option under the 2000 Plan expires or terminates prior to
exercise in full or if 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 the repurchased shares are returned to the 2000 Plan and again
become available for grant.
Administration. The 2000 Plan will be administered by a Stock Option
Committee, consisting of two or more members of the Board of Directors appointed
by the Board of Directors. The Stock Option Committee will approve option grants
to employees, officers, consultants and advisors of the Company, subject to the
provisions of the 2000 Plan. The Stock Option Committee will also make any other
determinations necessary or advisable for the administration of the 2000 Plan.
The determinations by the Stock Option Committee will be final and conclusive.
Eligibility. Employees, officers, consultants and advisors of the
Company are eligible to participate in the 2000 Plan.
Terms and Conditions of Options. Each option granted under the 2000
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 2000 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 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 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 80% 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.
Options granted under the 2000 Plan become exercisable at such time
or times and subject to such terms and conditions as shall be determined by the
Stock Option Committee at the time of grant. The term of each option shall be
determined by the Stock Option Committee
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(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 2000 Plan provides
that, with the consent of the Stock Option 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).
Termination or Amendment. Unless earlier terminated by the Board,
the 2000 Plan will terminate on May 1, 2010. The 2000 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.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. Incentive stock options granted under the
2000 Option Plan are intended to be "incentive stock options" as defined by
Section 422 of the Code. Under present law, the grantee of an incentive stock
option will not realize taxable income upon the grant or the exercise of the
incentive stock option and the Company will not receive an income tax deduction
at either such time. If the grantee does not sell the shares acquired upon
exercise of an incentive stock option within either (i) two years after the
grant of the incentive stock option or (ii) one year after the date of exercise
of the incentive stock option, the gain upon a subsequent sale of the shares
will be taxed as long-term capital gain. If the grantee, within either of the
above periods, disposes of the shares acquired upon exercise of the incentive
stock option, the grantee will recognize as ordinary income an amount equal to
the lesser of (i) the gain realized by the grantee upon such disposition or (ii)
the difference between the exercise price and the fair market value of the
shares on the date of exercise. In such event, the Company would be entitled to
a corresponding income tax deduction equal to the amount recognized as ordinary
income by the grantee. The gain in excess of such amount recognized by the
grantee as ordinary income would be taxed as a long-term capital gain or
short-term capital gain (subject to the holding period requirements for
long-term or short-term capital gain treatment).
Unless the shares subject to an incentive stock option are subject
to a risk of forfeiture at the time the option is exercised, the exercise of the
incentive stock option will result in the excess of the stock's fair market
value on the date of exercise over the exercise price being included in the
optionee's alternative minimum taxable income (AMTI). If the shares are subject
to a risk of forfeiture and are nontransferable, the excess described above will
be included in AMTI when the risk of forfeiture lapses or the shares become
transferable, whichever occurs sooner. Liability for the alternative minimum tax
is complex and depends upon an individual's overall tax situation. Before
exercising an incentive stock option, a grantee should discuss the possible
-29-
application of the alternative minimum tax with his tax advisor in order to
determine the tax's impact.
Non-Qualified Stock Options. Upon exercise of a non-qualified stock
option granted under the 2000 Plan, the grantee will recognize ordinary income
in an amount equal to the excess of the fair market value of the shares received
over the exercise price of such shares. That amount increases the grantee's
basis in the stock acquired pursuant to the exercise of the non-qualified
option. Upon a subsequent sale of the stock, the grantee will incur short-term
or long-term gain or loss depending upon his holding period for the shares and
upon the shares' subsequent appreciation or depreciation in the value. The
Company will be allowed a federal income tax deduction for the amount recognized
as ordinary income by the grantee upon the grantee's exercise of the option.
Summary of Tax Consequences. This outline is no more than a summary
of the federal income tax provisions relating to the grant and exercise of
options and stock appreciation rights under the 2000 Plan and the sale of shares
acquired under the 2000 Plan. Individual circumstances may vary these results.
The federal income tax laws and regulations are constantly being amended, and
each participant should rely upon his own tax counsel for advice concerning the
federal income tax provisions applicable to the 2000 Plan.
The Board believes it is in the Company's best interests to approve
the 2000 Plan, which would allow the Company to continue to grant options under
the 2000 Plan 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.
AMENDED PLAN BENEFITS
The following table sets forth the stock options outstanding under
the 2000 Plan as of the Record Date.
- --------------------------------------------------------------------------------
Stock Options Outstanding
- --------------------------------------------------------------------------------
ReiJane Huai -0-
- --------------------------------------------------------------------------------
Jacob Ferng 193,458
- --------------------------------------------------------------------------------
Wayne Lam 288,743
- --------------------------------------------------------------------------------
All Executive Officers as a Group 482,201
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Non-Executive Directors as a Group -0-
- --------------------------------------------------------------------------------
Non-Executive Officer Employees as a Group 5,519,655
- --------------------------------------------------------------------------------
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE 2000 STOCK OPTION
PLAN AMENDMENT.
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PROPOSAL NO. 4
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of KPMG LLP has been selected as the independent
public accountants for the Company for the fiscal year ending December 31, 2002.
Although the selection of accountants does not require ratification, the Board
of Directors have 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
Board of Directors will consider the appointment of other certified public
accountants. A representative of that firm, which served as the Company's
independent public accountants for the fiscal year ended December 31, 2001, 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.
Audit Fees: The aggregate fees billed for professional services
rendered by KPMG LLP for the audit of the Company's annual financial statements
for the fiscal year ended December 31, 2001 and the reviews of the financial
statements included in the Company's Form 10-Qs for such fiscal year were
approximately $120,000.
Financial Information Systems Design And Implementation Fees: No
fees were billed for professional services rendered by KPMG LLP for financial
information systems design and implementation services for the fiscal year ended
December 31, 2001.
All Other Fees: The aggregate fees billed for audit related services
rendered by KPMG LLP to the Company, for the fiscal year ended December 31, 2001
were approximately $165,200. These fees consisted primarily of reviews of SEC
filings and other related issuances of consents and tax services.
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.
Changes in and disagreements with Accountants on Accounting and
Financial Disclosure - On August 30, 2001, the Company dismissed
PricewaterhouseCoopers LLP ("PWC") as its independent accountants. The reports
of PWC on the Company's balance sheets as of December 31, 2000 and 1999 and
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000 did not contain an
adverse opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit
-32-
scope or accounting principles. The Company 's Board of Directors approved the
dismissal of PWC on August 30, 2001. During the fiscal years ended December 31,
2000 and 1999 and during the subsequent interim period through August 30, 2001,
there were no disagreements with PWC on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures which
disagreements if not resolved to the satisfaction of PWC would have caused them
to make reference thereto in their report on the financial statements for such
years. During the fiscal years ended December 31, 2000, 1999 and 1998 and during
the subsequent interim period through August 30, 2001, there were no reportable
events (as defined in Item 304(a)(1)(v) of Regulation S-K).
The Company requested that PWC furnish it a letter addressed to the
SEC stating whether PWC agrees with the statements made by the Company herein
and, if not, stating the respects in which it does not agree. PWC's letter,
dated September 5, 2001 was filed as Exhibit 16.1 to a Form 8-K filed by the
Company.
Simultaneously with the dismissal of its former auditors, the
Company engaged KPMG LLP, the independent auditors of FalconStor, Inc., as its
independent public auditors, replacing its former auditor, PWC. The Audit
Committee of the Board of Directors of the Company approved the appointment of
KPMG LLP as its independent accountants and auditors on August 30, 2001. During
the two most recent fiscal years and subsequent interim periods, the Company had
not consulted with KPMG LLP regarding (i) either the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on its financial statements, or (ii) any
matter that was either the subject of disagreement on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures or a reportable event (as defined in Item 304(a)(1)(v) of Regulation
S-K).
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE SELECTION OF THE INDEPENDENT
PUBLIC ACCOUNTANTS.
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
-33-
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 18, 2002.
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 2003 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 March
3, 2003 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 Meeting, but it is
intended that the proxies will be voted upon any other matters and proposals
that may legally come before the 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, all of its
stockholders of record as of March 20, 2002 a copy of its Annual Report on Form
10-K for the fiscal year ended December 31, 2001. Such report contains the
Company's certified consolidated financial statements for the fiscal year ended
December 31, 2001.
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By Order of the Company,
ReiJane Huai, Chairman and Chief Executive Officer
Dated: Melville, New York
April 17, 2002
The Company will furnish a free copy of its Annual Report on Form
10-K for the fiscal year ended December 31, 2001 (without exhibits) to all of
its stockholders of record as of March 20, 2002 who will make a written request
to Mr. Jacob Ferng, Chief Financial Officer, FalconStor Software, Inc., 125
Baylis Road Suite 140 Melville, New York 11747.
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
FALCONSTOR SOFTWARE, INC.
Proxy -- Annual Meeting of Stockholders
May 17, 2002
The undersigned, a stockholder of FalconStor Software, Inc., a Delaware
corporation (the "Company"), does hereby appoint ReiJane Huai, the true and
lawful attorney and proxy with full power of substitution, for and in the name,
place and stead of the undersigned, to vote all of the shares of Common Stock of
the Company which the undersigned would be entitled to vote if personally
present at the 2002 Annual Meeting of Stockholders of the Company to be held at
the Huntington Hilton, Route 110 at 598 Broadhollow Road, Melville, New York
11747, on May 17, 2002, at 9:00 a.m., Local Time, or at any adjournment or
postponements thereof.
The undersigned hereby revokes any proxy or proxies heretofore given and
acknowledges receipt of a copy of the Notice of Annual Meeting and Proxy
Statement, both dated April 17, 2002, and a copy of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH ANY DIRECTIONS HEREIN GIVEN. UNLESS
OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED TO ELECT THE DIRECTOR, APPROVE AN
AMENDMENT TO THE 1994 OUTSIDE DIRECTORS STOCK OPTION PLAN, APPROVE AN AMENDMENT
TO THE 2000 STOCK OPTION PLAN AND TO RATIFY THE APPOINTMENT OF KPMG LLP AS THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS.
1. To elect the following director: Steven R. Fischer, to serve as a director
until the 2005 Annual Meeting of Stockholders of the Company and until a
successor have been duly elected and qualified.
____________ FOR NOMINEE __________ WITHHELD FROM NOMINEE
WITHHELD _______________________________________________________________
To withhold authority to vote for nominee, print name above
2. To approve amendments to our 1994 Outside Directors Incentive Stock Option
Plan.
FOR ___________ AGAINST ___________ ABSTAIN ___________
3. To approve amendment to our 2000 Stock Option Plan.
FOR ___________ AGAINST ___________ ABSTAIN ___________
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4. To ratify the appointment of KPMG LLP as the independent public
accountants of the Company for the fiscal year ending December 31, 2002.
FOR ___________ AGAINST ___________ ABSTAIN ___________
5. DISCRETIONARY AUTHORITY: To vote with discretionary authority with respect
to all other matters that may come before the Meeting.
NOTE: Your signature should appear the same as your name appears hereon. In
signing as attorney, executor, administrator, trustee or guardian, please
indicate the capacity in which signing. When signing as joint tenants, all
parties in the joint tenancy must sign. When a proxy is given by a corporation,
it should be signed by an authorized officer and the corporate seal affixed. No
postage is required if mailed in the United States.
Signature: __________________ Date______________
Signature: __________________ Date______________
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW: _____________
-37-
EXHIBIT A
Amendments to 1994 Outside Directors Stock Option Plan
IF APPROVED BY STOCKHOLDERS, Article 4 and Section 6(a) of the
FalconStor Software Inc. 1994 Outside Directors Stock Option Plan shall read in
its entirety as follows:
4. Shares Subject to Option. Options shall be for the purchase of
shares of authorized but unissued common stock or treasury shares of common
stock of the Company (the "Stock"), subject to adjustment as provided in
paragraph 8. The maximum number of shares of Stock which may be issued under the
Plan shall be Five Hundred Thousand (500,000) shares. In the event that any
outstanding Option for any reason expires or is terminated and/or shares of
Stock subject to repurchase are repurchased by the Company, the shares allocable
to the unexercised portion of such Option, or such repurchased shares, may again
be subject to an Option grant.
6. Terms, Conditions and Form of Options. Options granted pursuant
to the Plan shall be evidenced by written agreements specifying the number of
shares of Stock covered thereby (the "Option Agreement"), which written
agreement may incorporate all or any of the terms of the Plan by reference and
shall comply with and be subject to the following terms and conditions:
6) Automatic Grant of Options. Subject to execution by an
Outside Director of an appropriate Option Agreement, options
shall be granted automatically and without further action of
the Board, as follows:
(1) Each person who is newly elected or appointed as an Outside Director
after the Annual Meeting of Stockholders of the Company held in 2002
(the "2002 Annual Meeting") shall be granted an Option on the day of
such initial election or appointment to purchase Fifty Thousand
(50,000) shares of Stock. In addition, each person who was appointed
as an Outside Director on August 22, 2001 was granted an option to
purchase Fifteen Thousand (15,000) shares of stock on August 22,
2001 and upon stockholder approval of the amendments to the Plan at
the 2002 Annual Meeting will be granted an option to purchase an
additional Thirty-Five Thousand (35,000) shares of Stock.
(2) On the date of each Annual Meeting of Stockholders of FalconStor
Software, Inc. occurring on or after the date of the 2002 Annual
Meeting, each Outside Director shall be granted an Option to
purchase Ten Thousand (10,000) shares of Stock.
(3) Notwithstanding the foregoing, any person may elect not to receive
an Option to be granted pursuant to this paragraph 6(a) by
delivering written notice of such election to the Board no later
than the day prior to the date on which such Option would otherwise
be granted. A person do declining an Option shall receive no payment
or other consideration
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in lieu of such declined Option. A person who has declined an Option
may revoke such election by delivering written notice of such
revocation to the Board no later than the day prior to the date on
which such Option would be granted pursuant to paragraph 6(a).
(4) Notwithstanding any other provision of the Plan to the contrary, no
Option shall be granted to any individual on a day when he or she is
no longer serving as an Outside Director of the Company.
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EXHIBIT B
Amendment to 2000 Stock Option Plan
If approved by Stockholders, paragraph 4 of the FalconStor Software,
Inc. 2000 Stock Option Plan shall read in its entirety as follows:
4. Stock Reserved for the Plan.
Subject to adjustment as provided in Section 7 hereof, a total of
10,662,296 shares of the Company's Common Stock, $.001 par value per share (the
"Stock"), shall be subject to the Plan. The shares of Stock subject to the Plan
shall consist of unissued shares or previously issued shares held by any
Subsidiary or Affiliate 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 unsold 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 expire or be canceled prior to its exercise in full or should the number
of shares of Stock to be delivered upon the exercise in full of an Option be
reduced for any reason, the shares of Stock thereforeto subject to such Options
may be subject to future Options under the Plan.
-40-
