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 240.14a-11(c) or 240.14a-12
INTELECT COMMUNICATIONS SYSTEMS LIMITED
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the 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)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: ________
(2) Aggregate number of securities to which transaction applies: ___________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined: ______________
(4) Proposed maximum aggregate value of transaction: _______________________
(5) Total fee paid: ________________________________________________________
[ ] 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: ________________________________________________
(2) Form, Schedule or Registration Statement No.: __________________________
(3) Filing Party: __________________________________________________________
(4) Date Filed: ____________________________________________________________
INTELECT COMMUNICATIONS SYSTEMS LIMITED
NOTICE OF THE
ANNUAL GENERAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, AUGUST 13, 1997
TAKE NOTICE that the Annual General Meeting of Shareholders of INTELECT
COMMUNICATIONS SYSTEMS LIMITED (the "Company") will be held on Wednesday, August
13, 1997, at 9:00 a.m. at Gleneagles Country Club, 5401 West Park Blvd., Plano,
Texas (the "Meeting") for the purpose of considering and voting upon the
following matters:
1. To fix the number of directors at five (5) and to elect two (2)
directors to fill the vacancies created by the expiry of the
terms of two of the directors at the Meeting;
2. To increase the number of shares reserved for issuance under the
Company's Stock Incentive Plan;
3. To appoint Arthur Andersen LLP as independent auditor of the
Company for the current year; and
4. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors of the Company has no knowledge of any other
business to be transacted at the Meeting. The Company is, however, in the
process of preparing a plan to change the Company's domicile from Bermuda to the
State of Delaware in the United States. This process entails the resolution of
various accounting and tax issues and will require the approval of the
shareholders at a special meeting of the shareholders. The Company expects that
such meeting will be held prior to the end of 1997.
The close of business on July 2, 1997, has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Meeting and any adjournment thereof.
Shareholders of the Company who are unable to attend the Meeting in
person are requested to date and sign the enclosed form of proxy and return it
in the enclosed envelope. In order to be valid and acted upon at the Meeting,
forms of proxy must be returned to the Assistant Secretary of the Company, c/o
American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York,
NY 10005 at any time up to the last business day before the Meeting or any
adjournment thereof or deposited with the Chairman of the Meeting at the Meeting
and any adjournment thereof. A shareholder whose shares are held by a broker
must return his proxy to his broker in the envelope provided.
DATED July 15, 1997.
BY ORDER OF THE BOARD OF DIRECTORS
EDWIN J. DUCAYET, JR., ASSISTANT SECRETARY
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO POSTAGE NEED
BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
INTELECT COMMUNICATIONS SYSTEMS LIMITED
1100 Executive Drive
Richardson, Texas 75081
PROXY STATEMENT
FOR THE
ANNUAL GENERAL MEETING OF SHAREHOLDERS TO BE HELD ON
WEDNESDAY, AUGUST 13, 1997
This Proxy Statement accompanies the Notice (the "Notice") of the Annual
General Meeting of Shareholders of Intelect Communications Systems Limited (the
"Company") and is furnished in connection with the solicitation by the Board of
Directors of the Company of proxies to be voted at the Annual General Meeting of
Shareholders of the Company (the "Meeting") and at any and all adjournments of
such Meeting. The Meeting is to be held on Wednesday, August 13, 1997, at 9:00
a.m. at Gleneagles Country Club, 5401 West Park Blvd., Plano, Texas. It is
expected that solicitation of proxies will be primarily by mail, however, the
Company may retain agents to solicit proxies. The costs of solicitation will be
borne by the Company. Unless otherwise stated, all amounts included in this
Proxy Statement are stated in U.S. dollars.
The Company's Annual Report for the year ended December 31, 1996 is
being mailed to stockholders with the mailing of the Notice of Meeting and Proxy
Statement. The Notice of Meeting, this Proxy Statement, the Annual Report, and
the enclosed proxy are being first mailed to shareholders on or about July 15,
1997.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS AMENDED, FOR THE
YEAR ENDING DECEMBER 31, 1996, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, EXCEPT FOR EXHIBITS, WILL BE FURNISHED WITHOUT CHARGE TO ANY
SHAREHOLDER OF THE COMPANY UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.
The Meeting has been called to consider and take action on the following
proposals:
1. To fix the number of directors at five (5) and to elect two (2)
directors to fill the vacancies created by the expiry of the
terms of two of the directors at the Meeting;
2. To increase the number of shares reserved for issuance under the
Company's Stock Incentive Plan;
3. To appoint Arthur Andersen LLP as the independent auditor of
Company for the current year; and
4. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors has no knowledge of any other business to be
transacted at the Meeting. The Company is, however, in the process of preparing
a plan to change the Company's domicile from Bermuda to the State of Delaware in
the United States. This process entails the resolution of various accounting and
tax issues and will require the approval of the shareholders at a special
meeting of the shareholders. The Company expects that such meeting will be held
prior to the end of 1997.
APPOINTMENT AND REVOCATION OF PROXIES
The persons designated in the enclosed form of proxy are either
directors or officers of the Company. A shareholder desiring to appoint some
other person to represent him or her at the Meeting may do so either by
inserting such person's name in the blank space provided in the form of proxy or
by completing another form of proxy.
1
A proxy or revocation of proxy, in order to be acted upon, must be
deposited with the Assistant Secretary of the Company, c/o American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, NY 10005 at any
time up to and including the last business day preceding the day of the Meeting
or any adjournment thereof, or with the Chairman of the Meeting at the Meeting
or any adjournment thereof. In the case of a proxy revocation by means other
than attending the Meeting and notifying the Chairman, such revocation shall be
by an instrument in writing executed by the shareholder or by his attorney
authorized in writing or, if the shareholder is a corporation, under its
corporate seal or by an officer or attorney thereof duly authorized.
EXERCISE OF DISCRETION BY PROXIES
All properly executed proxies, not revoked prior to the vote at the
Meeting, will be voted or withheld from voting in accordance with the
instructions of the shareholder on any ballot that may be called for and, if the
shareholder specifies a choice with respect to any matter to be acted upon, the
shares will be voted accordingly. IF NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE
VOTED FOR: (1) THE FIXING OF THE NUMBER OF DIRECTORS AT FIVE (5) AND THE
ELECTION OF MANAGEMENT'S NOMINEES AS DIRECTORS; (2) AN INCREASE IN THE NUMBER OF
SHARES RESERVED FOR ISSUANCE UNDER THE COMPANY'S STOCK INCENTIVE PLAN; AND (3)
THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS AUDITOR OF THE COMPANY.
The enclosed form of proxy confers discretionary authority upon the
persons named therein with respect to amendments or variations to matters
identified in the Notice and with respect to other matters which are
appropriately brought before the Meeting. Except as disclosed herein, at the
date hereof, the management of the Company knows of no such amendments,
variations or other matters.
VOTING SHARES, QUORUM AND VOTES REQUIRED
The voting shares of the Company are its Common Shares with a par value
of $0.01. On July 2, 1997, the Company had outstanding approximately 20,520,161
Common Shares (which number does not include certain requests for conversions
into Common Shares that are presently in dispute). Shareholders of record at the
close of business on July 2, 1997 (the "Record Date") are entitled to one vote
for each Common Share held by them, except to the extent that any such
shareholder transfers any such shares after that date and the transferee
produces properly endorsed share certificates or otherwise establishes ownership
of the shares and demands not later than ten days before the Meeting that the
new name of ownership be included in the shareholders list for the Meeting, in
which case the transferee is entitled to vote such shares at the Meeting. The
presence of two shareholders or proxy holders representing in excess of 35% of
the issued and outstanding shares entitled to vote is necessary to constitute a
quorum at the Meeting. Approval of each of the items to be voted upon requires
the affirmative votes of not less than a majority of Common Shares represented
and voting at the Meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of July 2, 1997,
with respect to the beneficial ownership of the Company's Common Shares by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding Common Shares; (ii) each director and nominee for
director, (iii) each executive officer named in the Summary Compensation Table
under the heading "Executive Compensation" below and (iv) all directors and
executive officers of the Company as a group. Unless otherwise indicated, the
information included below is based upon the Company's stock transfer records as
maintained by the Company's stock transfer agent.
The number of Common Shares beneficially owned by each director or
executive officer is determined under the rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire within 60 days after July 2, 1997 through the exercise of any stock
option or other right. Unless otherwise indicated, each person has sole
investment and voting power (or shares such power with his or her spouse) with
2
respect to the shares set forth in the following table. The inclusion herein of
any shares deemed beneficially owned does not constitute admission of beneficial
ownership of those shares.
Name and Address Amount and Nature of Percent of Class
of Beneficial Owner Beneficial Ownership
- ------------------------------- --------------------------- ----------------
Herman M. Frietsch 645,334(1) 3.03%
1100 Executive Drive
Richardson, Texas
Peter E. Ianace 148,095(2) *
1100 Executive Drive
Richardson, Texas
R. Eugene Helms 100,000(3) *
269 W. Renner Parkway
Richardson, Texas
Anton Liechtenstein 377,400(4) 1.77%
Administration and Trust Co.
Josepf Rheinbergerstrasse 6
Vaduz, Liechtenstein
Philip P. Sudan, Jr. 100,000(5) *
Two Houston Center, Suite 3900
Houston, Texas
Robert E. Garrison II 100,000(6) *
5599 San Felipe, 3rd Floor
Houston, Texas
Peter G. Leighton(7) 100 *
31 Church Street
Hamilton, Bermuda HM12
Rhianon M. Pedro(8) 10 *
31 Church Street
Hamilton, Bermuda HM12
Jeremy T. G. Posner(9) 0 *
Zichron Tuvia 28
Jerusalem
Israel
The Coastal Corporation Second 750,000(10) 3.65%
Pension Trust
Nine Greenway Plaza
Houston, Texas
All Directors and Executive
Officers as a group (9 persons)(11) 1,501,606 7.32%
3
- ---------------------------
(1) Includes 243,334 shares issuable upon exercise of options which are
currently exercisable or become exercisable by August 31, 1997. Includes
6,000 shares owned beneficially by Mr. Frietsch's spouse as to which he
disclaims beneficial ownership.
(2) Includes 140,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by August 31, 1997.
(3) Includes 100,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by August 31, 1997.
(4) Includes 100,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by August 31, 1997.
(5) Includes 100,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by August 31, 1997.
(6) Includes 100,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by August 31, 1997.
(7) Resigned as President and director in March 1997.
(8) Terminated as Treasurer, Chief Financial Officer and Senior Vice
President in February 1997.
(9) Resigned as a director in March 1997.
(10) The information reported is based on a Schedule 13D filed with the
Securities and Exchange Commission on June 13, 1997 by The Coastal
Corporation Second Pension Trust. Does not include 4,964,013 Common
Shares issuable upon conversion of the Company's Series A Preferred
Stock after August 31, 1997. See "Certain Transactions."
(11) Includes 791,667 shares issuable upon exercise of options which are
currently exercisable or become exercisable by August 31, 1997.
* Indicates holdings of less than one percent.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors, executive officers, and
persons nominated to become directors is set forth below. The current directors
were elected by the shareholders at the Annual General Meeting of Shareholders
in June 1996, or were subsequently appointed by the Board to fill vacancies
created by resignations. Directors will serve for the remainder of their
respective terms or until their successors are elected. The executive officers
of the Company are elected by, and serve at the pleasure of, the Board of
Directors.
NAME AGE OFFICE AND EMPLOYMENT DURING LAST FIVE YEARS
Herman M. Frietsch 57 Chairman of the Board of the Company since 1989;
Chief Executive Officer and President since
February 1997; Director since 1988; Executive
Chairman from October 1995 to February 1997; Chief
Executive Officer of Intelect Systems Corp.
(a subsidiary of the Company).
Peter E. Ianace 48 Vice President, Sales and Marketing of the Company
since February 1997; Vice President, Marketing and
Distribution of the Company since June 1996;
President of Intelect Network Technologies Company
(a subsidiary of the Company) since November 1993;
Chief Executive Officer of Intelect Network
Technologies Company since July 1995; President of
Opcom, Inc., a fiber optic products manufacturer,
from January 1992 to March 1993.
4
R. Eugene Helms 46 Vice President, Chief Technology Officer of the
Company since June 1996; President and Chief
Executive Officer of DNA Enterprises, Inc. (a
subsidiary of the Company) April 1996; President
and Owner of TeleSolutions Inc., a consulting
firm, since January 1990; Vice President,
Engineering of Mizar, Inc., a DSP products
manufacturer, from March 1994 to October5 1995.
Edwin J. Ducayet, Jr. 57 Chief Financial Officer of the Company since
February 1997; Vice President and Chief Financial
Officer of Intelect Network Technologies Company
since December 1991.
Prinz Anton von and zu 51 Director of the Company since 1980; Chairman of
Liechtenstein the Stock Option Committee; First Managing
Director of the Company; Private Investor.
Philip P. Sudan, Jr. 45 Director of the Company since February 1997;
Chairman of the Audit Committee; Partner, Ryan &
Sudan, L.L.P., a law firm in Houston, Texas, since
1990.
Robert E. Garrison II 55 Director of the Company since June 1997; Founder
of Harris Webb & Garrison, Inc., a regional
investment banking firm located in Houston, Texas,
and a partner from 1994 to present; Chairman of
the Board and CEO of Pinnacle Management & Trust
Co., a trust company and money management firm,
from 1994 to present; Chairman of the Board of
BioCyte Therapeutics, Inc., a company engaged in
the clinical development of novel therapeutics for
life threatening diseases, primarily cancer.
President and CEO of Med Center Bank & Trust, a
Texas state bank, from 1992 to 1994; Mr. Garrison
serves on the Board of Directors of Somerset House
Publishing, Inc., FFP Partners, Harris Webb &
Garrison, Inc., Pinnacle Management & Trust Co.,
and BioCyte Therapeutics, Inc.
Messrs. Frietsch and Sudan are members of the Compensation Committee of
the Board of Directors. Messrs. Sudan and Garrison are members of the Audit
Committee of the Board of Directors. Messrs. Sudan, Liechtenstein, and Garrison
are members of the Stock Option Committee of the Board of Directors.
Effective March 5, 1997, Peter G. Leighton resigned as President and
Director of the Company. By letter dated March 21, 1997, Mr. Leighton requested
that the Company disclose his letter of resignation which he furnished to the
Board of Directors of the Company and which describes Mr. Leighton's
disagreements with the Company's operations, policies or practices. The Company
has summarized those disagreements, and the Company has presented its views why
it believes Mr. Leighton's description of certain events is incorrect or
incomplete, in a Form 8-K filed March 27, 1997. The following restates the
summary of Mr. Leighton's description of his disagreement with the Company and
the Company's response as set forth in such Form 8-K filing: Mr. Leighton stated
in his March 5, 1997 letter of resignation that he disagreed with the Company's
entering into a $15,000,000 Credit Facility (the "Facility") with St. James
Capital Corporation ("St. James"). Mr. Leighton stated in his letter: "Because
of my complete objection to the Facility, and the course on which [the Company]
has been set in motion by a majority of its Board members, it is impossible for
me to continue as a director of this Company." Mr. Leighton expressed concern in
his letter that the Company would reach a point where it could not repay the
Facility without the injection of further capital. Mr. Leighton also stated that
if the Company was unable to raise capital through an equity offering, the
Company would be required to negotiate with St. James for additional financing
before it can seek financing from other sources. Mr. Leighton also mentioned in
his letter certain financing sources that the Board had considered in
5
addition to St. James, and Mr. Leighton disagreed with certain actions taken by
Mr. Herman Frietsch, as Chairman of the Board, which had the result of
preventing Mr. Leighton from binding the Company to such other financing sources
and requiring Board of Directors approval of such other financing sources. Mr.
Leighton also believed that the Board of Directors failed in its duty of care to
the Company regarding the proper consideration of available financing proposals
and that the Facility was contrary to the interests of the Company and its
stockholders.
The Company believes Mr. Leighton's description of certain events as
stated in his letter of resignation are incorrect and incomplete, and includes
the following brief statement presenting its views on such matters:
The Board of Directors of the Company gave careful and thorough
consideration to all available financing proposals, including those brought
forth by Mr. Leighton. The Board of Directors believes that Mr. Leighton's
proposals (namely, discounted subordinated convertible debt financings) were not
in the best interests of the Company or its stockholders and, among other
things, presented significant dilution to stockholders at prices discounted to
market. In addition, the Board believed that such financings failed to provide a
long-term source of stable financing on which to build future growth. The Board
recognized the Company's need for short- and long-term financing on the best
possible terms available and gave due consideration to every available
alternative. Notwithstanding the assertions in Mr. Leighton's letter, the Board
does not believe Mr. Leighton's proposal would have presented the best available
financing for the Company. The Board also does not agree with Mr. Leighton's
assertion that the Facility creates "fiscal uncertainty." The Facility was
designed to provide the Company with the ability to meet existing short-term
debt obligations and to provide the necessary short-term working capital to
enable the Company to obtain more favorable, long-term capital financing.
Further, the Facility was not "exclusive," but merely provided St. James with
the first opportunity to provide the Company with additional financing.
The Company disputes Mr. Leighton's assertion that he was in "complete
objection" to the Facility. Contrary to Mr. Leighton's characterization that he
was in "complete objection" to the Facility, Mr. Leighton in fact voted in favor
of the Facility on three (3) separate occasions: at a Board of Directors meeting
in Dallas, Texas on February 14, 1997; at a Board of Directors meeting in
Hamilton, Bermuda on February 18, 1997; and by a Unanimous Written Consent of
the Board of Directors of the Company dated February 18, 1997. Furthermore, Mr.
Leighton, as President of the Company, himself executed the Letter of Intent
dated February 14, 1997 with St. James for the Facility.
Finally, the Board of Directors believes that certain concerns of Mr.
Leighton may have been related to personal differences existing between Mr.
Leighton and certain members of the Board and the Company's management. Mr.
Leighton's resignation came only five days after the Board of Directors voted on
February 28, 1997 to redomicile the Company from Bermuda (Mr. Leighton's place
of residence) to the United States, and transfer all of the Company's accounting
and financial functions and reporting controls from Bermuda to the United
States. The Company also notes that Mr. Leighton's term as a director was set to
expire at the Meeting.
Effective March 13, 1997, Jeremy T. G. Posner resigned as a director of
the Company. By letter dated May 1, 1997, Mr. Posner, through his attorney,
requested that the Company disclose his letter of resignation which he furnished
to the Board of Directors of the Company and which describes Mr. Posner's
disagreements with the Company's operations, policies or practices. The Company
has summarized those disagreements, and the Company has presented its views why
it believes Mr. Posner's description of certain events is incorrect or
incomplete, in a Form 8-K filed May 8, 1997. The following restates the summary
of Mr. Posner's description of his disagreement with the Company and the
Company's response as set forth in such Form 8-K filing: Mr. Posner stated in
his March 13, 1997 letter of resignation that he was resigning as it had "become
increasingly clear . . . that [his] views as a director of the [Company] are in
the minority of the Board and [his] efforts to further the interests of the
[Company] have been totally frustrated," and Mr. Posner's letter cites two
examples.
The Company believes Mr. Posner's description of certain events as
stated in his letter of resignation are incorrect and incomplete and that Mr.
Posner's resignation was the result of his disagreement with the source and
structure of potential financing and other operational issues of the Company.
6
BOARD AND COMMITTEE MEETINGS
The business of the Company is managed under the direction of the Board
of Directors. The Board meets on a regularly scheduled basis to review
significant developments affecting the Company and to act on matters requiring
Board approval. It also holds special meetings and acts by written consent when
important matters require Board action between scheduled meetings. The Board of
Directors of the Company held 13 meetings during fiscal 1996. Except as set
forth below, each director attended at least 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by all committees of the Board of Directors on which the director served
and during the period he served. Messrs. Frietsch, Leighton, and Posner each
attended 100% of the meetings of the Board of Directors during 1996. Mr. Anton
Liechtenstein attended five of the 13 meetings (i.e., 38%), but was represented
by proxy at each of the other meetings. Mr. Simon C. Scupham served as a
director until his term expired at the Annual General Meeting in June 1996. Mr.
Scupham was unable to attend any of the six meetings held in 1996 before the
expiration of his term. Mr. Wendall Hollis was appointed a director in March
1996 and attended six of the nine Board meetings held in 1996 while he was a
director.
The Company's Board of Directors has three standing committees: the
Audit Committee, the Compensation Committee, and the Stock Option Committee.
The Audit Committee is responsible for approving the scope of the annual
audit and for making recommendations to the Board of Directors concerning the
selection of the Company's independent accountants. The Audit Committee also
reports to the Board of Directors concerning the Company's internal accounting
controls, factors that may affect the integrity of the Company's financial
reports, compliance by the Company's management and employees with Company
policies, and other matters. During fiscal 1996, the members of the Audit
Committee were: from January to June 1996, Messrs. Liechtenstein and Scupham;
from June to December 1996, Messrs. Liechtenstein and Hollis. This committee met
informally one time during fiscal 1996.
The Compensation Committee is responsible for determining the
compensation of the Company's senior management and establishing compensation
policies for the Company's employees generally. During fiscal 1996, the members
of this committee were Messrs. Frietsch and Leighton. The Compensation Committee
met informally at least six times during fiscal 1996. See "Compensation
Committee Report on Executive Compensation" below.
The Stock Option Committee is responsible for administering the
Company's stock option plans. During fiscal 1996, the members of the committee
were Messrs. Liechtenstein and Scupham until June 1996, and thereafter were
Messrs. Liechtenstein and Hollis. The Stock Option Committee held no formal
meetings during fiscal 1996, but instead formalized all its decisions by use of
written unanimous consents in lieu of such meetings. The Stock Option Committee
executed 15 unanimous consents during fiscal 1996.
The Company does not have a nominating committee or a committee serving
a similar function. Nominations are made by and through the full Board of
Directors.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
During 1996, directors received no cash compensation or meeting
attendance fees for their services as directors, however, non-employee, outside
directors who are members of the Audit Committee and the Stock Option Committee
each received a cash fee of $10,000 per annum for work on each committee.
Currently, employee directors receive no compensation for their services as
directors, however, non-employee, outside directors each receive a cash fee of
$1,000 per month for service as directors, and members of the Audit,
Compensation, and the Stock Option Committees each receive a cash fee of up to
$1,000 per month for work on each committee. Non-employee, outside directors
also may receive grants of stock options in the discretion of the Board.
7
For a discussion of certain transactions between the Company and certain
directors and their affiliates, see "Certain Transactions."
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes the annual and long-term compensation
paid to Herman M. Frietsch, President and Chief Executive Officer of the
Company, and the other Executive Officers who have earned more than $100,000 in
salary and bonus during the last three completed fiscal years ended December 31,
1996 (the Chief Executive Officer and such other Executive Officers are
hereinafter referred to as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
----------------------------------------------- -------------
Other Securities
Annual Underlying All Other
Fiscal Compen- Options / Compen-
Name and Principal Positions Year Salary ($) Bonus ($) sation ($) SARS (#) sation
- --------------------------- -------- ----------- ----------- ------------- ----------- ------------
Herman M. Frietsch 1994 20,000 150,000 - 40,000 0
Chairman and Chief 1995 120,000 120,000 - 150,000 0
Executive Officer of the 1996 250,000 - - 50,000 0
Company; CEO of Intelect7
Systems Corp.
Peter E. Ianace 1995 160,000 - - 350,000 0
Vice President of the 1996 240,000 - 4,750 - 0
Company; President and
CEO of Intelect Network
Technologies Company
R. Eugene Helms 1996 131,538 56,725 8,827 100,000 0
Vice President of the
Company; President and
CEO of DNA Enterprises
Peter G. Leighton(1) 1994 125,000 100,000 - 40,000 0
1995 150,000 150,000 - 150,000 0
1996 250,000 - - 50,000 0
Jeremy T. G. Posner(2) 1994 - - - 15,000 0
1995 - - 150,000 30,000 0
1996 - - 125,000 15,000 0
Rhianon M. Pedro(3) 1995 12,500 20,000 - 10,000 0
1996 83,333 - - 40,000 0
- ----------------------------
(1) Resigned as President and Director of the Company in March 1997.
(2) Resigned as Director of the Company in March 1997.
(3) Terminated as Treasurer, Chief Financial Officer, and Senior Vice
President of the Company in February 1997.
8
The following table sets forth stock options granted in 1996 to each of
the Named Executive Officers. The table also set forth the hypothetical gains
that would exist for the options at the end of their ten-year terms at assumed
compound rates of stock appreciation of 5% and 10%. The actual future value of
the options will depend on the market value of the Company's Common Shares.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Number of
Common % of Total Potential Realizable Value at
Shares Options/ Assumed Annual Rates of
Underlying SARS Stock Price Appreciation for
Options Granted to Exercise Option Terms(1)
/SARS Employees Price Expiration -----------------------------
Name Granted(#) in 1996 ($/Share) Date 5% ($) 10% ($)
- --------------------- ------------- ------------ ----------- ------------ ---------------------------
Herman M. Frietsch 50,000 3.97% 6.500 04/15/06 204,391 517,966
Peter E. Ianace -
R. Eugene Helms 100,000 7.94% 5.350 04/01/06 336,459 852,652
Peter G. Leighton 50,000 3.97% 6.500 04/15/06 204,391 517,966
Jeremy T. G. Posner 15,000 1.19% 6.500 04/15/06 61,317 155,390
Rhianon M. Pedro 20,000 1.59% 4.313 02/23/06 54,242 137,460
7,000 0.56% 6.500 04/15/06 28,615 72,515
13,000 1.03% 7.250 10/04/06 59,273 150,210
- ------------------------
(1) The amounts shown on this table represent hypothetical gains that could
be achieved for the respective options, if exercised at the end of the
option term. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration date. The gains
shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, on stock option exercises will depend on the
future performance of the Common Shares, the optionholders' continued
employment through the option period, and the date on which the options
are exercised. These amounts are not intended to forecast possible
future appreciation, if any, of the Company's stock price.
The following table sets forth the number of shares acquired on exercise
of stock options and the aggregate gains realized on exercise in 1996 by the
Named Executive Officers. The table also sets forth the number of shares covered
by exercisable and unexercisable options held by such executives on December 31,
1996 and the aggregate gains that would have been realized had these options
been exercised on December 31, 1996, even though these options were not
exercised, and the unexercisable options could not have been exercised, on
December 31, 1996.
9
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised In-
Number of Underlying Unexercised the-Money Options/
Common Options/SARS at Fiscal SARS at
Shares Value Year-End (#) Fiscal Year-End(2) ($)
Name Acquired on Realized(1) ------------ ---------------------
Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ------------- ------------ -------------------------- -------------------------
Herman M. Frietsch - - 226,667 63,333 590,667 28,333
Peter E. Ianace - - 70,000 280,000 105,000 420,000
R. Eugene Helms - - - 100,000 - -
Peter G. Leighton 135,000 692,525 91,667 63,333 176,267 28,333
Jeremy T. G. Posner - - 125,000 40,000 335,844 24,313
Rhianon M. Pedro - - 16,333 33,667 2,281 8,313
- ---------------------
(1) Market value on the date of exercise of shares covered by options
exercised, less the option exercise price.
(2) Market value of shares covered by in-the-money options on December 31,
1996 ($4.50), less the option exercise price. Options are in-the-money
if the market value of the shares covered thereby is greater than the
option exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company
during the last fiscal year consisted of Herman M. Frietsch and Peter G.
Leighton. During the last fiscal year, Mr. Frietsch served as the Chairman of
the Board and Mr. Leighton served as the President of the Company. Mr. Leighton
resigned as President and Director of the Company in March 1997. The
Compensation Committee is currently composed of Mr. Frietsch and Philip P.
Sudan, Jr. Mr. Sudan is a partner of Ryan & Sudan, L.L.P., outside counsel to
the Company. During 1996, no executive officer of the Company served as a
director or member of the Compensation Committee (or other committee serving an
equivalent function) of any other entity, one of whose executive officers served
as a director of or member of the Compensation Committee of the Company, nor has
such interlocking relationship existed in the past.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") designs and directs the
compensation policies of the Company. Members of the Committee as of December
31, 1996 were Herman M. Frietsch and Peter G. Leighton. The current members of
the Committee are Herman M. Frietsch and Philip P. Sudan, Jr. Committee members
do not participate in Board actions on compensation relating to themselves.
OVERVIEW AND PHILOSOPHY
The Committee in determining executive compensation follows the general
guideline of pay-for-performance while taking into account the need to provide
total compensation packages that will attract and retain qualified and effective
executives. Individual performance standards and accomplishments are reviewed
and considered in order
10
to relate the compensation of executives to the financial performance of the
Company.
Various elements of compensation fulfill different roles in the
attraction, retention and motivation of qualified officers and employees. For
Named Executive Officers, greater emphasis is given to variable and contingent
forms of compensation and less emphasis is given to perquisites and other
benefits. The Company's executive officer compensation is comprised of base
salary, cash incentive bonuses, long-term incentive compensation in the form of
stock options, and various benefits such as the Company's medical plan.
BASE SALARY
Subject to the provisions of any applicable employment agreements, base
salary levels in fiscal 1996 for the Company's executive officers, including the
Chief Executive Officer, were intended and believed to be competitive and
comparable relative to companies in the telecommunications industry and other
companies in similar or analogous circumstances. In determining base salaries,
the Compensation Committee took into account individual experience and
performance and specific issues particular to the Company and reviewed
independent compensation data to establish levels that were within the ranges of
persons holding positions of comparable responsibilities.
COMPENSATION OF CEO
The compensation arrangements for Messrs. Frietsch and Leighton were
established by the Company's Board of Directors based in part upon analyses and
guidelines prepared for the Board by the Performance and Compensation Management
Group of KPMG Peat Marwick, New York, N.Y., from an independent review and
evaluation of executive compensation in comparable circumstances and competitive
conditions. The KPMG analysis defined a peer group of companies based on sales,
size, and line of business and compared pay levels and practices at these
companies with those of the Company. The analysis compared the Company's
historic financial performance over the preceding three fiscal years relative to
the selected peer group on a range of performance criteria and analyzed all
levels of compensation.
ANNUAL CASH BONUS PROGRAM
The Company maintains annual incentive compensation arrangements for its
executive officers. R. Eugene Helms, President and CEO of DNA Enterprises, Inc.,
a subsidiary of the Company, earned a $56,725 bonus pursuant to his employment
contract for the performance and earnings of DNA Enterprises Inc. in fiscal year
1996. Otherwise, no bonuses were paid to executive officers with respect to
fiscal year 1996.
STOCK OPTIONS
To further link the interests of management with those of the Company's
shareholders, stock options are granted periodically to a significant number of
directors, officers, managers and qualified employees under the 1995 Stock
Incentive Plan. To encourage continued service, the options normally become
exercisable over three years in three equal annual installments from the date of
grant and expire after ten years. Stock options granted to executive officers
are considered to be appropriate in terms of the market value of the shares
covered by the options relative to performance, other forms of compensation and
taking into consideration the possible future value of the options.
BENEFITS
The Company provides medical benefits to its executive officers pursuant
to the Company's medical plan.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m).
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), enacted in 1993, generally disallows a tax deduction to public
companies for compensation over $1 million paid to the corporation's chief
executive officer and four other most highly compensated executive officers.
Qualifying performance compensation
11
will not be subject to the deduction limit if certain requirements are met. The
Company intends to structure the performance-based portion of the compensation
of its executive officers in a manner that complies with the new statute to
mitigate any disallowance of deductions.
This report of the Compensation Committee on executive compensation is
submitted by the current members of the committee as noted below:
Herman M. Frietsch
Philip P. Sudan, Jr.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers (as defined in Rule 16a-1(f)), directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such forms received by it and written
representations from persons required to file such reports ("Reporting
Persons"), the Company believes that all filing requirements applicable to such
Reporting Persons were timely complied with during the fiscal year ended
December 31, 1996, except that (i) Mr. Ianace filed a Form 5 rather than a
Statement of Changes in Beneficial Ownership on Form 4 due January 1997
reflecting one transaction; (ii) Mr. Ducayet filed a Form 5 rather than a
Statement of Changes in Beneficial Ownership on Form 4 due January 1997
reflecting one transaction; (iii) Mr. Frietsch filed late a Statement of Changes
in Beneficial Ownership on Form 4 due May 1996 reflecting one transaction; (iv)
Mr. Leighton filed late a Statement of Changes in Beneficial Ownership on Form 4
due May 1996 reflecting one transaction; (v) Ms. Pedro filed late a Statement of
Changes in Beneficial Ownership on Form 4 due November 1996 reflecting one
transaction; (vi) Mr. Posner filed late a Statement of Changes in Beneficial
Ownership on Form 4 due May 1996 reflecting one transaction; (vii) Nancy E. H.
Miracle, Vice President of Intelect Network Technologies Company, filed late a
Statement of Changes in Beneficial Ownership on Form 4 due May 1996 reflecting
one transaction; and (viii) Willard F. Barnett, Senior Vice President of
Intelect Network Technologies Company, filed late a Statement of Changes in
Beneficial Ownership on Form 4 due May 1996 reflecting one transaction.
EMPLOYEE AGREEMENTS
Mr. Frietsch is a party to a management contract with Intelect Systems
Corp. (a wholly-owned subsidiary of the Company), the terms of which provide,
effective January 1, 1997, for a minimum fee of $250,000 plus the possibility of
a discretionary bonus per annum and for a minimum term ending December 31, 1997,
thereafter the contract is automatically renewed, but may be terminated on the
next December 31 following three (3) years notice of termination.
Mr. Ianace is a party to an employment agreement with Intelect Network
Technologies Company the terms of which provide for a minimum salary of $240,000
for five years ending April 24, 2000.
During 1996, Mr. Leighton was a party to an employment contract with the
Company, the terms of which provided for a minimum salary of $250,000 plus the
possibility of a discretionary bonus per annum. Such agreement was amended in
January 1996 to provide, upon termination, for the continuation of Mr.
Leighton's salary for three years following the year of termination. Mr.
Leighton resigned as a director and officer of the Company in March 1997.
12
COMPARATIVE STOCK PERFORMANCE
The following graph compares the yearly percentage change in the
cumulative total shareholder return over the past five years on the Company's
Common Shares (Nasdaq National Market trading symbol ICOMF) through December 31,
1996 with the cumulative total return (including reinvested dividends) of the
Standard & Poor's Small Cap Index and the Nasdaq National Market Index ("NMS").
This graph assumes the investment of $100 in the Company's Common Shares,
Standard & Poor's Small Cap Index and NMS on January 1, 1991. Amounts have been
rounded to the nearest dollar.
The stock price performance on the following graph is not necessarily
indicative of future stock price performance.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1991 1992 1993 1994 1995 1996 CAGR(1)
- ------------------ ---------- ---------- ----------- ----------- ----------- ----------- ------------
ICOMF 100 146 433 281 742 600 43.1%
S&P SMALLCAP 100 121 144 137 176 216 16.6%
NMS 100 116 134 131 185 227 17.8%
- ------------------ ---------- ---------- ----------- ----------- ----------- ----------- ------------
(1) Compound Annual Growth Rate for the five years ending December 31, 1996.
13
CERTAIN TRANSACTIONS
On October 31, 1995, Intelect Network Technologies Company, a
wholly-owned subsidiary of the Company, loaned $135,000 to Pete Ianace, the
Company's Vice President of Sales and Marketing and President of Intelect
Network Technologies Company. The loan is secured by the shares of Company
stock issuable upon exercise of any options for the Company's stock issued to
Mr. Ianace. The loan was renewed and extended on October 31, 1996, and the
maturity date of the loan is October 31, 1997. The loan bears interest at the
rate of 5% per annum. As of July 2, 1997, $93,300 (including accrued interest)
remained outstanding on the loan.
On May 8, 1997, the Company executed a Loan Agreement with The Coastal
Corporation Second Pension Trust (the "Coastal Trust") pursuant to which the
Company borrowed $5million from the Coastal Trust. As of July 2, 1997, the
Coastal Trust owned warrants and shares of the Company's Series A Preferred
Stock which after August 31, 1997, will be convertible into more than five
percent (5%) of the outstanding Common Shares of the Company. The loan was at 2%
over prime with principal and interest due at maturity in March 1998. In
connection with the loan, the Coastal Trust received warrants to purchase
750,000 Common Shares at an exercise price of $2.00 per share and exercisable
over a five year period. Pursuant to the terms of the Loan Agreement, on May 31,
1997 the Company issued to the Coastal Trust 2,482,005 shares of the Company's
Series A Preferred Stock, $.01 par value, for $5 million. Pursuant to the Loan
Agreement, the Coastal Trust also cancelled $3.5 million of the $5 million loan
in exchange for the issuance by the Company to the Coastal Trust of 1,737,404
additional shares of the Company's Series A Preferred Stock. The Preferred Stock
has a 10% dividend rate, is convertible into the Company's Common Shares on a
one-for-one share basis, has no voting rights except in the event of three
quarters arrearage on quarterly dividends, and has preemptive rights. The
Company has the choice of paying dividends in cash or in Common Shares based on
the current market value of the Common Shares at the time the dividends are
payable. The Company may redeem the stock at 110%, 105%, and 100% of the issue
price after June 1, in years 1999, 2000, and years thereafter, respectively.
During 1996, the Company paid $120,000 to CFM Limited, a company
controlled by Peter G. Leighton, who at the time was the Company's President and
a director. The Company borrowed $500,000 from CFM Limited during 1996, and
repaid such loan in September 1996, including interest in the amount of $13,000.
Philip P. Sudan, Jr., a director of the Company since February 1997, is
a partner of Ryan & Sudan, L.L.P., counsel for the Company.
In January 1996, the Company amended employment agreements with Herman
M. Frietsch and with Peter G. Leighton which, generally upon termination,
provide for continuation of salaries for three years following the current year
of employment.
A corporation owned by R. Eugene Helms was paid $156,338 and entered
into a royalty agreement with DNA Enterprises, Inc., a wholly-owned subsidiary
of the Company, in exchange for certain intellectual property rights in
connection with a pocket terminal product and DSP products.
PROPOSAL TO FIX THE NUMBER OF DIRECTORS AT FIVE (5) AND TO
ELECT TWO (2) DIRECTORS TO SERVE FOR THREE YEARS AND UNTIL THEIR
SUCCESSORS HAVE BEEN DULY ELECTED AND SHALL QUALIFY
The Company currently has five (5) director seats. In accordance with
Section 4.03 of the Company's Bye-Laws, the directors are elected for staggered
three year terms. The terms of two of the director seats expire at the Meeting.
The term for the one director seat that remains vacant does not expire until the
next Annual General Meeting. Pursuant to the Company's Bye-Laws, the Board of
Directors intends to fill that vacancy when a suitable candidate is located.
14
It is proposed that, in accordance with Section 4.01 of the Company's
Bye-Laws, the shareholders fix the number of directors, and that such number be
fixed at the current number, that is, five (5). Because only two of the director
seats expire at the Meeting, it is proposed that the shareholders elect two
directors to fill the vacancies created by the expiry of the terms of two of the
directors at the Meeting as set forth in the table below. The Board of Directors
has concluded that the election of Herman M. Frietsch and Philip P. Sudan, Jr.
as directors is in the best interests of the Company and recommends their
election.
The following table states for each of the current directors all other
offices held with the Company, principal occupation, the year the post of
director of the Company was assumed, the expiry of term as a director of the
Company or, in the case of the two directors whose terms expire at the Meeting,
the term for which they are proposed to be elected, and the number of Common
Shares of the Company that the director has advised are beneficially owned,
directly or indirectly, or over which control or discretion is exercised, by him
as of the date hereof:
New Common
Name, Offices and Board Membership Principal Became Term Term Shares
with Company Occupation Director Expires Expires Held
- -------------------------------------- ------------ ---------- ----------- ----------- -----------
HERMAN M. FRIETSCH (3)(4) Chief 1988 1997 2000 645,334(5)
Chief Executive Officer, President, Executive
Executive Chairman since October 1995, Officer
Chairman of the Board since April 1989
ANTON LIECHTENSTEIN (2) Consultant, 1981 1999 N/A 377,400(6)
Chairman of Stock Option Committee, Private
Chairman of the Board from September Investor
1985 to March 1989
PHILIP P. SUDAN, JR. (1)(2)(3)(4) Partner, 1997 1997 2000 100,000(7)
Chairman of the Audit Committee Ryan &
Sudan,
L.L.P.
ROBERT E. GARRISON II (1)(2) Partner,
Harris
Webb &
Garrison,
Inc. 1997 1998 N/A 100,000(8)
(1) Member, Audit Committee.
(2) Member, Stock Option Committee.
(3) Member, Compensation Committee.
(4) To be Elected at the Annual General Meeting.
(5) Includes 243,334 shares issuable upon exercise of options which are
exercisable or become exercisable by August 31, 1997. Includes 6,000
shares owned beneficially by Mr. Frietsch's spouse as to which he
disclaims beneficial ownership.
(6) Includes 100,000 shares issuable upon exercise of options which are
exercisable or become exercisable by August 31, 1997.
(7) Includes 100,000 shares issuable upon exercise of options which are
exercisable or become exercisable by August 31, 1997.
(8) Includes 100,000 shares issuable upon exercise of options which are
exercisable or become exercisable by August 31, 1997.
For information relating to Common Shares owned by each of the directors, see
"Security Ownership of Certain Beneficial Owners and Management."
15
Unless otherwise instructed or unless authority to vote is withheld, the
enclosed proxy will be voted FOR the fixing of the number of directors at five
(5) and FOR the election of the nominees listed herein. Proxies may not be voted
for a greater number of persons than the number of nominees named. Although the
Board of Directors of the Company does not contemplate that any of such nominees
will be unable to serve, if such a situation exists prior to the Meeting, the
persons named in the enclosed proxy will vote for the election of such other
persons as may be nominated by the Board of Directors.
The Board of Directors unanimously recommends a vote FOR fixing of the
number of directors at five (5) and FOR the election of the nominees listed
above.
PROPOSAL TO INCREASE THE NUMBER OF ADDITIONAL SHARES AVAILABLE
FOR ISSUANCE UNDER THE COMPANY'S STOCK INCENTIVE PLAN
The Company's Stock Incentive Plan (the "Plan") is a principal component
of the Company's executive compensation program, tying executive compensation
directly to shareholder value, specifically the market price of the Common
Shares. The purposes of the Plan have been and continue to be to enable the
Company and its subsidiaries to attract and retain directors and key employees,
to provide them with strong incentive to advance the interests of the Company,
and to otherwise align the interests of management more closely with that of the
Company and its shareholders. The use of equity ownership is an important tool
to achieve these ends. The Company may grant options that are intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code or nonstatutory options not intended to qualify as
incentive options.
In order to continue and to enhance the effectiveness of the Plan, the
Board of Directors, in accordance with the recommendation of its Stock Option
Committee, adopted on July 2, 1997, subject to shareholder approval, an
amendment to increase the number of Common Shares available for issuance under
the Plan from 3,000,000 to 4,000,000.
The aggregate number of Common Shares which may be issued under the Plan
is currently set at 3,000,000 shares, which quantity was approved at the
December 13, 1995 Special General Meeting of Shareholders. Since that
authorization, the Company's capitalization has approximately doubled. As the
Company grows, the need to attract and maintain additional key employees
increases correspondingly. In light of the increase of outstanding shares and in
light of the recent vacancies created on the Board and of certain officerships,
both requiring the attraction of additional individuals of the highest caliber,
the Board of Directors and the Stock Option Committee have concluded that the
maximum number of Common Shares that may be issued under the Plan should be
increased from the current maximum of 3,000,000 to an aggregate of 4,000,000
shares.
The awards, if any, that will be made to eligible participants under the
Plan, as amended, are not determinable at this time.
The following is a summary of the material provisions of the Plan:
ADMINISTRATION AND ELIGIBILITY
The Plan is administered by the Board of Directors and by the Stock
Option Committee of the Board of Directors. Subject to the provisions of the
Plan, the Stock Option Committee has authority to construe the respective option
agreements, to prescribe, amend and rescind rules and regulations relating to
the Plan and to make all other determinations in the judgment of the Stock
Option Committee necessary or desirable for the administration of the Plan.
Options may be granted to persons who are, at the time of grant,
employees, officers or directors of, or consultants or advisors to, the Company;
provided that incentive stock options may be granted only to persons who are
eligible to receive such options under Section 422 of the Code. The granting of
options to directors and officers
16
shall be determined either (a) by the full Board of Directors, or (b) by a
committee consisting solely of two or more "Non-Employee" directors (as such
term is defined in Rule 16(b)(3)) promulgated under the Securities Exchange Act
of 1934.
NUMBER OF SHARES AND EXERCISE PRICE
Subject to adjustment as provided in the Plan, the maximum number of
Common Shares of the Company which currently may be issued and sold under the
Plan is 3,000,000 shares. As of July 2, 1997, options to purchase a total of
2,511,500 Common Shares were outstanding under the Plan. The maximum number of
Common Shares with respect to which an option may be granted to any participant
under the Plan is 350,000 per calendar year (subject to adjustment as provided
in the Plan).
The Stock Option Committee (or, in the alternative, the full Board of
Directors) selects the exercise price per share of stock, provided the exercise
price cannot be less than (a) 110% of fair market value for incentive stock
options granted to a holder of more than 10% of the Company's capital stock, (b)
100% of fair market value for incentive stock options generally and (c) 25% of
fair market value for nonstatutory options. The option price may be paid in cash
or Common Shares owned by the optionee as provided in the Plan. The Stock Option
Committee shall also determine the expiration of the option period, provided
that no stock options shall be exercisable later than 10 years after the date on
which the option is granted, provided, however, in the case of incentive stock
options granted to a holder of more than 10% of the Company's capital stock,
such date shall not be later than five years after the date on which the option
is granted. In all cases, options shall be subject to earlier termination as
provided in the Plan.
TERMS OF OPTIONS
All options are nontransferable other than by will or the laws of
descent and distribution. The Stock Option Committee has the authority under the
Plan to set the times within which the options vest. Unless the stock option
agreement with respect to any options otherwise provides, the options become
exercisable on a cumulative basis of 331/3% of the total number of shares
covered thereby on each of the first, second, and third anniversary dates of the
grant of the option. Holders of incentive stock options may generally exercise
such options up to three months after voluntary termination of employment (which
termination has been made with the consent of the Company), unless termination
results from death or disability in which case such options may be exercised at
any time prior to the expiration date of such stock option or within one year
after the date of termination of employment, whichever period is shorter.
Holders of nonstatutory options may exercise such options at any time prior to
the expiration date of such nonstatutory stock option or within one year after
the date of voluntary termination of employment (which termination has been made
with the consent of the Company), whichever period is shorter.
Notwithstanding the foregoing, if the employment terminates for any
reason other than voluntary termination with the consent of the Company,
retirement under a retirement plan of the Company, or death, all outstanding
stock options shall automatically terminate.
The Stock Option Committee determines when options granted under the
Plan become exercisable. The Stock Option Committee may accelerate the date on
which any option granted may be exercised, provided that no such extension shall
be permitted if it would cause the Plan to fail to comply with Section 422 of
the Code or with Rule 16b-3 promulgated under the Exchange Act.
The Stock Option Committee has authority, with the consent of the
effected optionee, to cancel or amend any outstanding options under the Plan and
to grant in substitution therefor new options covering the same or a different
number of Common Shares and having an exercise price per share which may be
lower or higher than the exercise price per share of the outstanding options.
17
AMENDMENT AND TERMINATION
The Board of Directors may at any time modify or amend the Plan in any
respect, provided that no such alteration or amendment of the Plan shall,
without shareholder approval (i) increase by more than 10% the total number of
shares which may be issued under the Plan to persons subject to Section 16 under
the Securities Exchange Act of 1934 ("Section 16 Persons"), (ii) materially
increase the benefits accruing under the Plan to Section 16 Persons, (iii)
materially modify the requirements as to eligibility for participation in the
Plan by Section 16 Persons, (iv) make any changes in the class of employees
eligible to receive incentive stock options under the Plan, or (v) increase the
number of shares with respect to which incentive stock options may be granted
under the Plan. Termination or any amendment of the Plan shall not, without the
consent of an optionee, adversely effect his or her rights under an option
previously granted.
The Plan provides that, in the event of any change in control of the
Company that is not approved by a majority of the Company's Board of Directors,
all options issued pursuant to the Plan shall become immediately exercisable.
The Plan shall terminate with respect to incentive stock options upon
the earlier of December 13, 2005, or the date on which all shares available for
issuance under the Plan shall have been issued pursuant to the exercise or
cancellation of options granted thereunder. The Plan shall terminate with
respect to nonstatutory options on December 13, 2005.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to awards granted under the
Plan and with respect to the sale of Common Shares acquired under the Plan.
INCENTIVE STOCK OPTIONS
In general, a participant will not recognize taxable income upon the
grant or exercise of an incentive stock option. Instead, a participant will
recognize taxable income with respect to an incentive stock option only upon the
sale of Common Shares acquired through the exercise of the option ("ISO
Shares"). The exercise of an incentive stock option may, however, subject the
participant to the alternative minimum tax.
Generally, the tax consequences of selling ISO Shares will vary with the
length of time that the participant has owned the ISO Shares at the time it is
sold. If the participant sells ISO Shares after having owned it for at least two
years from the date the option was granted (the "Grant Date") and one year from
the dated the option was exercised (the "Exercise Date"), then the participant
will recognize long-term capital gain in an amount equal to the excess of the
sale price of the ISO Shares over the exercise price.
If the participant sells ISO Shares for more than the exercise price
prior to having owned it for at least two years from the Grant Date and one year
from the Exercise Date (a "Disqualifying Disposition"), then all or a portion of
the gain recognized by the participant will be ordinary compensation income and
the remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the participant has held the ISO Shares for more than
one year prior to the date of sale.
If a participant sells ISO Shares for less than the exercise price, then
the participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Shares. This capital loss will be a
long-term capital loss if the participant has held the ISO Shares for more than
one year prior to the date of sale.
NONSTATUTORY STOCK OPTIONS
As in the case of an incentive stock option, a participant will not
recognize taxable income upon the grant of a nonstatutory stock option. Unlike
the case of an incentive stock option, however, a participant who exercises a
18
nonstatutory stock option generally will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of the Common Shares
acquired through the exercise of the option ("NSO Shares") on the Exercise Date
over the exercise price.
With respect to any NSO Shares, a participant will have a tax basis
equal to the exercise price plus any income recognized upon the exercise of the
option. Upon selling NSO Shares, a participant generally will recognize capital
gain or loss in an amount equal to the excess of the sale price of the NSO
Shares over the participant's tax basis in the NSO Shares. This capital gain or
loss will be a long-term gain or loss if the participant has held the NSO Shares
for more than one year prior to the date of the sale.
TAX CONSEQUENCES TO THE COMPANY
The grant of an option under the Plan will have no tax consequences to
the Company. Moreover, in general, neither the exercise of an incentive stock
option nor the sale of any Common Shares acquired under the Plan will have any
tax consequences to the Company. The Company generally will be entitled to a
business-expense deduction, however, with respect to any ordinary compensation
income recognized by a participant under the Plan, including as a result of the
exercise of a nonstatutory stock option or a Disqualifying Disposition. Any such
deduction will be subject to the limitations of Section 162(m) of the Code. The
Company will have a withholding obligation with respect to ordinary compensation
income recognized by participants with respect to nonstatutory stock options
under the Plan with are employees or otherwise subject to withholding.
BOARD RECOMMENDATION
The Board of Directors unanimously recommends a vote FOR the proposal to
increase the number of stock options available under the Plan as set forth
above.
Unless otherwise instructed or unless authority to vote is withheld, the
enclosed proxy will be voted FOR the proposed increase of the number of Common
Shares issuable under the Plan to 4,000,000.
PROPOSAL TO APPROVE ARTHUR ANDERSEN LLP
AS INDEPENDENT AUDITOR OF THE COMPANY
The Board of Directors, in accordance with the recommendation of its
Audit Committee, which is composed of non-employees of the Company, has
requested Arthur Andersen LLP ("Arthur Andersen") to act as independent auditors
of the Company for the 1997 fiscal year, subject to shareholder approval. If
approved by the shareholders, Arthur Andersen would replace the firm of KPMG
Peat Marwick, Chartered Accountants, Hamilton, Bermuda ("KPMG"), whose term as
independent auditors for the Company expires at the Meeting.
The KPMG report dated April 9, 1997 on the consolidated financial
statements of the Company for the year ended December 31, 1996 (the "KPMG
Report") noted that the consolidated financial statements and financial
statement schedule accompanying the report were prepared assuming that the
Company would continue as a going concern. The KPMG Report further noted that as
discussed in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from continuing operations and is dependent upon the
successful development and commercialization of its products and its ability to
secure adequate sources of capital until the Company is operating profitably.
The KPMG Report noted that these matters raise substantial doubt about the
Company's ability to continue as a going concern, and that management's plans
with regard to these matters were described in note 1 to the consolidated
financial statements.
During the two years ended December 31, 1995 and December 31, 1996,
there were no "disagreements" between the Company and KPMG as described in Item
304(a)(1)(iv) of Regulation S-K.
19
Representatives of Arthur Andersen are expected to be present at the
Meeting and will have the opportunity to make a statement if they so desire and
will be available to respond to appropriate questions from shareholders.
Representatives of KPMG are not expected to be present.
The Board of Directors unanimously recommends a vote FOR the selection
of Arthur Andersen as the Company's independent auditors.
ANNUAL REPORT
The 1997 Annual Report to Stockholders for the Company's fiscal year
ended December 31, 1996, is being mailed to each shareholder receiving this
Proxy Statement, but does not form any part of the proxy solicitation material.
THE COMPANY WILL PROVIDE, WITHOUT CHARGE, TO ANY PERSON RECEIVING A COPY
OF THIS PROXY STATEMENT, UPON WRITTEN REQUEST OF SUCH PERSON, A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDING DECEMBER 31, 1996,
INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL STATEMENT SCHEDULES
THERETO. SUCH REQUESTS SHOULD BE ADDRESSED TO INVESTOR RELATIONS, ATTENTION:
MARY GOZIOGLU, INTELECT COMMUNICATIONS SYSTEMS, LIMITED, 1100 EXECUTIVE DRIVE,
RICHARDSON, TEXAS 75081.
OTHER MATTERS
The Board of Directors does not intend to bring any other matters before
the Meeting nor does the Board of Directors know of any matters which
otherhlriglhlggoivihgrghfdurhhdshw persons intend to bring before the Meeting.
If, however, other matters not mentioned in this Proxy Statement properly come
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with the recommendation of the Board of Directors.
SHAREHOLDER PROPOSALS AND SUBMISSIONS FOR 1998 ANNUAL MEETING
If any Shareholder wishes to present a proposal to be considered for
inclusion in the proxy materials to be solicited by the Company's Board of
Directors with respect to the next Annual Meeting of Shareholders, such proposal
shall be presented to the Company's management by March 16, 1998. Such proposals
should be directed to the Company, 1100 Executive Drive, Richardson, Texas
75081, Attention: Chief Financial Officer.
THE BOARD OF DIRECTORS ENCOURAGES SHAREHOLDERS TO ATTEND THE MEETING.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE FILL IN, DATE,
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED ENVELOPE TO WHICH NO
POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES. YOUR VOTE IS IMPORTANT.
IF YOU ARE A SHAREHOLDER OF RECORD AND ATTEND THE MEETING AND WISH TO VOTE IN
PERSON, YOU MAY WITHDRAW YOUR PROXY AT ANYTIME PRIOR TO THE VOTE.
By Order of the Board of Directors
Dated: July 15, 1997 HERMAN M. FRIETSCH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
20
INTELECT COMMUNICATIONS SYSTEMS LIMITED
PROXY SOLICITED BY DIRECTORS FOR ANNUAL MEETING
AUGUST 13, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having received the notice of annual meeting, proxy
statement, and annual report for the year ended December 31, 1996, hereby
appoints Herman M. Frietsch and Edwin J. Ducayet, Jr., and each of them, with
full power of substitution, proxies of the undersigned to vote all shares of the
undersigned in Intelect Communications Systems Limited at the annual meeting of
shareholders to be held on August 13, 1997 and at any adjournments thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
A [X] Please mark your
votes as in this
example.
FOR ELECTION TO WITHHOLD
TERM EXPIRING 2000. AUTHORITY (to vote
(except as required in for all nominees
the contrary below) listed above)
2. Election of [ ] [ ]
Directors
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S).
PRINT THE NAME OF THE NOMINEE ON THE SPACE PROVIDED.
_____________________________________________________
NOMINEES: HERMAN M. FRIETSCH
PHILIP P. SUDAN, JR.
FOR AGAINST ABSTAIN
1. To fix the number of directors at five (5). [ ] [ ] [ ]
3. To increase the number of shares reserved for
issuance under the Company's Stock Incentive
Plan from 3,000,000 to 5,000,000. [ ] [ ] [ ]
4. Approval of appointment of Arthur Andersen, LLP,
as independent auditors for the year ending
December 31, 1997 [ ] [ ] [ ]
5. In their discretion, the proxies are authorized to vote upon matters not
known to the Board of Directors as of the date of the accompanying proxy
statement, matters incident to the conduct of the meeting and to vote for any
nominees of the Board whose nomination results from the inability of any of
the above named nominees to serve.
UNLESS OTHERWISE SPECIFIED IN THE SQUARES PROVIDED, THE PROXIES SHALL VOTE FOR
THE FIXING OF THE NUMBER OF DIRECTORS AT FIVE, THE ELECTION OF THE NOMINEES
LISTED ABOVE, THE INCREASE OF STOCK OPTIONS, AND THE APPROVAL OF THE APPOINTMENT
OF AUDITORS.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as name appears below.
Signature ______________________________________________________________________
Signature if held jointly ______________________________________________________
Dated __________________, 1997
Appendix to Proxy Statement of Intelect Communications Systems Limited filed
with the Securities and Exchange Commission on July 15, 1997, as required by
Schedule 14A, Item 10, Instruction 3:
Intelect Communications Systems Limited Stock Incentive Plan
INTELECT COMMUNICATIONS SYSTEMS LIMITED
STOCK INCENTIVE PLAN
1. PURPOSE.
The purposes of the Stock Incentive Plan (the "Plan") are to enable
Intelect Communications Systems Limited (the "Company") and its Subsidiaries, if
any, to attract and retain directors and key employees and to provide them with
additional incentive to advance the interests of the Company. For the purposes
of the Plan, the term "Subsidiary" means any corporation or other entity in
which the Company has, directly or indirectly, an equity interest representing
50% or more of the capital stock thereof or equity interests therein.
2. ADMINISTRATION.
(a) The Plan shall be administered by a committee (the
"Committee") appointed by the Board of Directors of the Company (the
"Board") and consisting of not less than two members of the Board.
(b) The Committee shall interpret the Plan and prescribe such
rules, regulations and procedures in connection with the Plan as it
shall deem to be necessary and advisable for the administration of the
Plan.
(c) Notwithstanding any provision contained in this Plan, the
Board of Directors shall have the authority, in addition to the
authority that the Board may delegate to the Committee, to issue options
in compliance with the terms of this Plan as the Board of Directors
shall in its discretion determine to be necessary or appropriate.
3. ELIGIBILITY.
(a) Officers and other key employees of the Company or any
Subsidiary shall be eligible to be granted stock options and to receive
restricted shares, restricted share units, performance units or bonus
share awards as described herein.
4. SHARES AVAILABLE.
The aggregate number of shares of the Company's Common Stock, $.01 par
value ("Common Stock"), which may be issued and as to which grants or awards of
stock options, restricted shares, restricted share units, performance units or
bonus shares may be made under the Plan is 3,000,000 shares (of which no more
than 1,000,000 shares shall be available for the grant of restricted shares or
restricted share units), subject to adjustment and substitution as set forth in
Section 8. If any stock option granted under the Plan is cancelled by mutual
consent or terminates or expires for any reason without having been exercised in
full, the number of shares subject thereto shall again be available for purposes
of the Plan. If Common Shares or the right to receive shares of Common Shares
are forfeited to the Company pursuant to the restrictions applicable to
restricted shares or restricted share units awarded under the Plan, the shares
so forfeited or covered by such right shall not again be available for the
purposes of the Plan. To the extent any award of performance units is not earned
or is paid in cash rather than shares, the number of shares covered thereby
shall again be available for purposes of the Plan. The shares which may be
issued under the Plan may be either authorized but unissued shares or treasury
shares or partly each, as shall be determined from time to time by the Board.
5. GRANTS AND AWARDS.
(a) With respect to officers and other key employees, the
Committee shall have authority, in its discretion, to grant incentive
stock options pursuant to Section 422 of the Code and non-qualified
stock options, and to award restricted shares, restricted share units,
performance units and bonus shares.
A 2
Notwithstanding any other provision contained in the Plan or in
any stock option agreement, the aggregate fair market value, determined
on the date of grant, of the shares with respect to which incentive
stock options are exercisable for the first time by an employee during
any calendar year under all plans of the corporation employing such
employee, any parent or subsidiary corporation of such corporation and
any predecessor corporation of any such corporation shall not exceed
$100,000; provided, however, that all or any portion of a stock option
which cannot be exercised because of such limitation shall be treated as
a non qualified option.
The maximum number of shares covered by all grants or awards in
any fiscal year of the Company to any participant shall not exceed
350,000 (subject to adjustment and substitution as set forth in Section
8).
(b) The Board of Directors or the Committee shall be authorized
to issue stock options to non-employee directors in such amounts and on
such terms as the Board or the Committee may in its discretion
determine, provided such grants are otherwise made in compliance with
the provisions of this Plan.
(c) If a grantee of a stock option, restricted share or
performance unit engages in the operation or management of a business
(whether as owner, partner, officer, director, employee or otherwise and
whether during or after termination of employment) which is in
competition with the Company or any of its Subsidiaries, the Committee
may immediately terminate all outstanding stock options held by the
grantee, declare forfeited all restricted shares or restricted share
units held by the grantee as to which the restrictions have not yet
lapsed and terminate all outstanding performance unit awards held by the
grantee for which the applicable Performance Period has not been
completed; provided, however, that this sentence shall not apply if the
exercise period of a stock option following termination of employment
has been extended as provided in Section 9(c), if the lapse of the
restrictions applicable to restricted shares or restricted share units
has been accelerated as provided in Section 9(d), or if a performance
unit has been deemed to have been earned as provided in Section 9 (e).
Whether a grantee has engaged in the operation or management of a
business which is in competition with the Company or any of its
Subsidiaries shall be determined by the Committee in its discretion, and
any such determination shall be final and binding.
6. TERMS AND CONDITIONS OF STOCK OPTIONS.
Stock options granted under the Plan shall be subject to the following
terms and conditions:
(a) The purchase price at which each stock option may be
exercised (the "option price") shall not be less than one hundred
percent (100%) of the fair market value per share of the Common Shares
covered by the stock option on the date of grant; provided, however,
that in the case of an incentive stock option granted to an employee
who, immediately prior to such grant, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Company or a Subsidiary (a "Ten Percent Employee"), the
option price shall not be less than one hundred ten percent (110%) of
such fair market value on the date of grant. For purposes of this
Section 6(a), an individual (i) shall be considered as owning not only
shares of stock owned individually but also all shares of stock that are
at the time owned, directly or indirectly. by or for the spouse,
ancestors, lineal descendants and brothers and sisters (whether by the
whole or half blood) of such individual and (ii) shall be considered as
owning proportionately any shares owned, directly or indirectly, by or
for any company, partnership, estate or trust in which such individual
is a shareholder, partner or beneficiary.
(b) The option price for each non-qualified stock option shall be
determined by the Committee but may not be less than 25% (twenty-five
percent) of the fair market value of the Common Shares on the date the
stock option is granted.
(c) The option price for each stock option shall be paid in full
upon exercise and shall be payable in cash in United States dollars
(including check, bank draft or money order), which may include
A 3
cash forwarded through a broker or other agent-sponsored exercise or
financing program; provided, however, that in lieu of such cash the
person exercising the stock option may pay the option price in whole or
in part by delivering to the Company Common Shares having a fair market
value on the date of exercise of the stock option equal to the option
price for the shares being purchased; except that (i) any portion of the
option price representing a fraction of a share shall in any event be
paid in cash and (ii) no Common Shares which have been held for less
than six months may be delivered in payment of the option price of a
stock option. Notwithstanding any procedure of a broker or other
agent-sponsored exercise or financing program, if the option price is
paid in cash, the exercise of the stock option shall not be deemed to
occur and no Common Shares will be issued until the Company has received
full payment in cash (including check, bank draft or money order) for
the option price from the broker or other agent. The date of exercise of
a stock option shall be determined under procedures established by the
Committee, and as of the date of exercise the person exercising the
stock option shall be considered for all purposes to be the owner of the
shares with respect to which the stock option has been exercised.
Payment of the option price with shares shall not increase the number of
Common Shares available for issuance under the Plan.
(d) No stock option shall be exercisable during the first six
months of its term, except that this limitation on exercise shall not
apply if Section 9(b) becomes applicable or if the issuance or grant of
the stock option has been approved by the Board of Directors. No stock
option shall be exercisable after the expiration of ten years (five
years in the case of an incentive stock option granted to a Ten Percent
Employee) from the date of grant. To the extent it is exercisable, a
stock option may be exercised at any time in whole or in part.
(e) The Committee shall have the power to set the time or times
within which each option shall be exercisable, and to accelerate the
time or times of exercise. Unless the stock option agreement otherwise
provides, the option shall become exercisable on a cumulative basis as
to 33-1/3% of the total number of shares covered thereby on each of the
first, second, and third anniversary dates of the date of grant of the
option.
(f) No stock option shall be transferable by the grantee
otherwise than by will, or if the grantee dies intestate, by the laws of
descent and distribution of the state of domicile of the grantee at the
time of death. All stock options shall be exercisable during the
lifetime of the grantee only by the grantee.
(g) Unless the Committee, in its discretion, shall otherwise
determine:
(i) If the employment or directorship of a grantee who is
not disabled within the meaning of Section 422 (c) (6) of the
Code (a "Disabled Grantee") is voluntarily terminated with the
consent of the Company or a Subsidiary or a grantee retires under
any retirement plan of the Company or a Subsidiary, any then
outstanding incentive stock option held by such grantee shall be
exercisable by the grantee (but only to the extent exercisable by
the grantee immediately prior to such termination) at any time
prior to the expiration date of such incentive stock option or
within three months after the date of such termination, whichever
is the shorter period;
(ii) If the employment or directorship of a grantee who is
not a Disabled Grantee is voluntarily terminated with the consent
of the Company or a Subsidiary or a grantee retires under any
retirement plan of the Company or a Subsidiary, any then
outstanding non-qualified stock option held by such grantee shall
be exercisable by the grantee (but only to the extent exercisable
by the grantee immediately prior to such termination) at any time
prior to the expiration date of such nonstatutory stock option or
within one year after the date of termination of employment,
whichever is the shorter period;
A 4
(iii) If the employment or directorship of a grantee who
is a Disabled Grantee is voluntarily terminated with the consent
of the Company or a Subsidiary, any then outstanding stock option
held by such grantee shall be exercisable by the grantee in full
(whether or not so exercisable by the grantee immediately prior
to such termination) by the grantee at any time prior to the
expiration date of such stock option or within one year after the
date of such termination, whichever is the shorter period;
(iv) Following the death of a grantee during employment or
while serving as a director, any outstanding stock option held by
the grantee at the time of death shall be exercisable in full
(whether or not so exercisable by the grantee immediately prior
to the death of the grantee) by the person entitled to do so
under the will of the grantee, or, if the grantee shall fail to
make testamentary disposition of the stock option or shall die
intestate, by the legal representative of the grantee at any time
prior to the expiration date of such stock option or within one
year after the date of death, whichever is the shorter period;
(v) Following the death of a grantee after termination of
employment or his or her directorship during a period within
which a stock option is exercisable, any outstanding stock option
held by the grantee at the time of death shall be exercisable by
such person entitled to do so under the will of the grantee or by
such legal representative (but only to the extent the stock
option was exercisable by the grantee immediately prior to the
death of the grantee) at any time prior to the expiration date of
such stock option or within one year after the date of death,
whichever is the shorter period; and
(vi) Unless the exercise period of a stock option
following termination of employment or directorship has been
extended as provided in Section 9(c), if the employment or
directorship of a grantee terminates for any reason other than
voluntary termination with the consent of the Company or a
Subsidiary, retirement under any retirement plan of the Company
or a Subsidiary or death, all outstanding stock options held by
the grantee at the time of such termination shall automatically
terminate.
Whether termination of employment or directorship is a voluntary
termination with the consent of the Company or a Subsidiary and whether a
grantee is a Disabled Grantee shall be determined in each case by the Committee
in its discretion and any such determination by the Committee shall be final and
binding.
(h) All stock options shall be confirmed by an agreement, which
shall be executed on behalf of the Company by an executive officer
authorized by the Committee and by the grantee.
(i) The term "fair market value" for all purposes of the Plan
shall mean the market price of the Common Shares, determined by the
Committee as follows:
(i) If the Common Shares are traded on a stock exchange,
then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such
date;
(ii) If the Common Shares are traded in the Nasdaq Stock
Market and is classified as a national market issue, then the
Fair Market Value shall be equal to the last-transaction price
quoted by the Nasdaq National Market system for such date;
(iii) If the Common Shares are traded in the Nasdaq Stock
Market, but is not classified as a national market issue, then
the Fair Market Value shall be equal to the mean between the last
reported representative bid and asked prices quoted by the Nasdaq
system for such date; and
A 5
(iv) If none of the foregoing provisions is applicable,
then the Fair Market Value shall be determined by the Committee
in good faith on such basis as it deems appropriate.
(j) The obligation of the Company to issue Common Shares under
the Plan shall be subject to (i) the effectiveness of a registration
statement under the Securities Act of 1933, as amended, with respect to
such shares, if deemed necessary or appropriate by counsel for the
Company, (ii) the condition that the shares shall have been listed (or
authorized for listing upon official notice of issuance) upon each stock
exchange, if any, on which the Common Shares may then be listed and
(iii) all other applicable laws, regulations, rules and orders which may
then be in effect.
Subject to the foregoing provisions of this Section and the other
provisions of the Plan, any stock option granted under the Plan may be exercised
at such times and in such amounts and be subject to such restrictions and other
terms and conditions, if any, as shall be determined, in its discretion, by the
Committee and set forth in the agreement referred to in Section 6(j), or an
amendment thereto.
7. TERMS AND CONDITIONS OF RESTRICTED SHARE, RESTRICTED SHARE UNIT,
PERFORMANCE UNIT AND BONUS SHARE AWARDS.
(a) RESTRICTED SHARES AND UNITS. Restricted share or restricted
share unit awards shall be evidenced by a written agreement in the form
prescribed by the Committee in its discretion, which shall set forth the
number of restricted Common Shares or restricted share units entitling
the holder to receive Common Shares awarded, the restrictions imposed
thereon (including, without limitation, restrictions on the right of the
grantee to sell, assign, transfer or encumber such shares or units while
such shares or units are subject to other restrictions imposed under
this Section 7), the duration of such restrictions, events (which may,
in the discretion of the Committee, include performance-based events)
the occurrence of which would cause a forfeiture of restricted shares or
restricted share units and such other terms and conditions as the
Committee in its discretion deems appropriate. Restricted share or
restricted share unit awards shall be effective only upon execution of
the applicable restricted share or restricted share unit agreement on
behalf of the Company by the Chief Executive Officer (if other than the
President), the President or any Vice President, and by the grantee.
Restricted shares or restricted share units may be issued for no
consideration other than for services to be rendered or for such
consideration as shall be determined at the time of award by the
Committee.
Except as otherwise specified by the Committee at the time of
award of restricted shares or restricted share units, restricted shares
or restricted share units issued shall vest (i.e., become
non-forfeitable,) as follows: 33 1/3% on the date of the first
anniversary of the date of issuance of the restricted shares or
restricted share units and an additional 33 1/3% on each anniversary
date thereafter. If prior to full vesting of the restricted shares or
restricted share units the employment of the holder thereof is
voluntarily terminated with the consent of the Company or Subsidiary or
the holder retires under any retirement plan of the Company or a
Subsidiary or dies during employment, the Committee may in its absolute
discretion determine to vest all or any part of the restricted shares or
restricted share units except as otherwise provided in Section 9(e). If
the employment of the holder of restricted shares or restricted share
units terminates for any reason other than voluntary termination with
the consent of the Company or a Subsidiary, retirement under any
retirement plan of the Company or a Subsidiary or death, all unvested
restricted shares or restricted share units shall be forfeited. Whether
the termination of employment is a voluntary termination with the
consent of the Company or a Subsidiary shall be determined by the
Committee in its discretion, and a determination by the Committee on any
matter with respect to restricted shares or restricted share units shall
be final and binding on both the Company and the holder of restricted
shares or restricted share units.
A 6
Following a restricted share award and prior to the lapse or
termination of the applicable restrictions, the Committee shall deposit
share certificates for such restricted shares in escrow (which may be an
escrow in the custody of an officer of the Company). Upon the lapse or
termination of the applicable restrictions (and not before such time),
the grantee shall be issued or transferred share certificates for such
restricted shares. From the date a restricted share award is effective,
the grantee shall be a shareholder with respect to all the shares
represented by such certificates and shall have all the rights of a
shareholder with respect to all such shares, including the right to vote
such shares and to receive all dividends and other distributions paid
with respect to such shares, subject only to the restrictions imposed by
the Committee. The grantee of restricted share units shall not have any
rights as a shareholder until the delivery to the grantee of shares on
lapse of the restrictions imposed.
(b) PERFORMANCE UNITS. The Committee may award performance units
which shall be earned by an awardee based on the level of performance
over a specified period of time by the Company, a Subsidiary or
Subsidiaries, any branch, department or other portion thereof or the
awardee individually, as determined by the Committee. For the purposes
of the grant of performance units, the following definitions shall
apply:
(i) "Performance unit" shall mean an award, expressed in
dollars or Common Shares, granted to an awardee with respect to a
Performance Period. Awards expressed in dollars may be
established as fixed dollar amounts, as a percentage of salary,
as a percentage of a pool based on earnings of the Company, a
Subsidiary or Subsidiaries or any branch, department or other
portion thereof or in any other manner determined by the
Committee in its discretion, provided that the amount thereof
shall be capable of being determined as a fixed dollar amount as
of the close of the Performance Period.
(ii) "Performance Period" shall mean an accounting period
of the Company or a Subsidiary of not less than one year, as
determined by the Committee in its discretion.
(iii) "Performance Target" shall mean that level of
performance established by the Committee which must be met in
order for the performance unit to be fully earned. The
Performance Target may be expressed in terms of earnings per
share, return on assets, asset growth, ratio of capital to assets
or such other level or levels of accomplishment by the Company, a
Subsidiary or Subsidiaries, any branch, department or other
portion thereof or the awardee individually as may be established
or revised from time to time by the Committee.
(iv) "Minimum Target" shall mean a minimal level of
performance established by the Committee which must be met before
any part of the performance unit is earned. The Minimum Target
may be the same as or less than the Performance Target in the
discretion of the Committee.
An awardee shall earn the performance unit in full by meeting the
Performance Target for the Performance Period. If the Minimum Target has
not been attained at the end of the Performance Period, no part of the
performance unit shall have been earned by the awardee. If the Minimum
Target is attained but the Performance Target is not attained, the
portion of the performance unit earned by the awardee shall be
determined on the basis of a formula established by the Committee.
Payment of earned performance units shall be made to awardees
following the close of the Performance Period as soon as practicable
after the time the amount payable is determined by the Committee.
Payment in respect of earned performance units, whether expressed in
dollars or shares, may be made in cash, in Common Shares, or partly in
cash and partly in Common Shares, as determined by the Committee at the
time of payment. For this purpose, performance units expressed in
dollars shall be converted to
A 7
shares, and performance units expressed in shares shall be converted to
dollars, based on the fair market value of the Common Shares, as of the
date the amount payable is determined by the Committee.
If prior to the close of the Performance Period the awardee of
performance units is voluntarily terminated with the consent of the
Company or a Subsidiary or the awardee retires under any retirement plan
of the Company or a Subsidiary or the awardee dies during employment,
the Committee may in its absolute discretion determine to pay all or any
part of the performance unit based upon the extent to which the
Committee determines the Performance Target or Minimum Target has been
achieved as of the date of termination of employment, retirement or
death, the period of time remaining until the close of the Performance
Period and/or such other factors as the Committee may deem relevant. If
the Committee in its discretion determines that all or any part of the
performance unit shall be paid, payment shall be made to the awardee or
his or her estate as promptly as practicable following such
determination and may be made in cash, in Common Shares, or partly in
cash and partly in Common Shares, as determined by the Committee at the
time of payment. For this purpose, performance units expressed in
dollars shall be converted to shares, and performance units expressed in
shares shall be converted to dollars, based on the fair market value of
the Common Shares as of the date the amount payable is determined by the
Committee.
Except as otherwise provided in Section 9(e), if the employment
of an awardee of performance units terminates prior to the close of a
Performance Period for any reason other than voluntary termination with
the consent of the Company or a Subsidiary or retirement under any
retirement plan of the Company or a Subsidiary or death, the performance
units of the awardee shall be deemed not to have been earned, and no
portion of such performance units may be paid. Whether termination of
employment is a voluntary termination with the consent of the Company or
a Subsidiary shall be determined, in its discretion, by the Committee.
Any determination by the Committee on any matter with respect to
performance units shall be final and binding on both the Company and the
awardee.
Performance unit awards shall be evidenced by a written agreement
in the form prescribed by the Committee which shall set forth the amount
or manner of determining the amount of the performance unit, the
Performance Period, the Performance Target and any Minimum Target and
such other terms and conditions as the Committee in its discretion deems
appropriate. Performance unit awards shall be effective only upon
execution of the applicable performance unit agreement on behalf of the
Company by the Chief Executive Officer (if other than the President),
the President or any Vice President, and by the awardee.
(C) BONUS SHARES. The Committee shall have the authority in its
discretion to award bonus Common Shares to eligible employees from time
to time in recognition of the contribution of the awardee to the
performance of the Company, a Subsidiary or Subsidiaries, or any branch,
department or other portion thereof, in recognition of the awardee's
individual performance or on the basis of such other factors as the
Committee may deem relevant.
8. ADJUSTMENT AND SUBSTITUTION OF SHARES.
If a dividend or other distribution shall be declared upon the Common
Shares payable in Common Shares, the number of Common Shares then subject to any
outstanding stock options, restricted share units or performance unit awards and
the number of Common Shares which may be issued under the Plan but are not then
subject to outstanding stock options or awards shall be adjusted by adding
thereto the number of Common Shares which would have been distributable thereon
if such shares had been outstanding on the date fixed for determining the
shareholders entitled to receive such stock dividend or distribution. Common
Shares so distributed with respect to any restricted shares held in escrow shall
be held by the Company in escrow and shall be subject to the same restrictions
as are applicable to the restricted shares on which they were distributed.
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If the outstanding Common Shares shall be changed into or exchangeable
for a different number or kind of shares of stock or other securities of the
Company or another company, whether through reorganization, reclassification,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for each share of the Common
Shares subject to any then outstanding stock option, restricted share unit or
performance unit award, and for each share of the Common Shares which may be
issued under the Plan but which is not then subject to any outstanding stock
option or award, the number and kind of shares of stock or other securities into
which each outstanding share of the Common Shares shall be so changed or for
which each such share shall be exchangeable. Unless otherwise determined by the
Committee in its discretion, any such stock or securities, as well as any cash
or other property, into or for which any restricted shares held in escrow shall
be changed or exchangeable in any such transaction shall also be held by the
Company in escrow and shall be subject to the same restrictions as are
applicable to the restricted shares in respect of which such stock, securities,
cash or other property was issued or distributed.
In case of any adjustment or substitution as provided for in this
Section 8, the aggregate option price for all shares subject to each then
outstanding stock option prior to such adjustment or substitution shall be the
aggregate option price for all shares of stock or other securities (including
any fraction) to which such shares shall have been adjusted or which shall have
been substituted for such shares. Any new option price per share shall be
carried to at least three decimal places with the last decimal place rounded
upwards to the nearest whole number.
No adjustment or substitution provided for in this Section 8 shall
require the Company to issue or sell a fraction of a share or other security.
Accordingly, all fractional shares or other securities which result from any
such adjustment or substitution shall be eliminated and not carried forward to
any subsequent adjustment or substitution. Owners of restricted shares held in
escrow shall be treated in the same manner as owners of Common Shares not held
in escrow with respect to fractional shares created by an adjustment or
substitution of shares, except that, unless otherwise determined by the
Committee in its discretion, any cash or other property paid in lieu of a
fractional share shall be subject to restrictions similar to those applicable to
the restricted shares exchanged therefor.
If any such adjustment or substitution provided for in this Section 8
requires the approval of shareholders in order to enable the Company to grant
incentive stock options, then no such adjustment or substitution shall be made
without the required shareholder approval. Notwithstanding the foregoing, in the
case of incentive stock options, if the effect of any such adjustment or
substitution would be to cause the stock option to fail to continue to qualify
as an incentive stock option or to cause a modification, extension or renewal of
such stock option within the meaning of Section 424 of the Code, the Committee
may elect that such adjustment or substitution not be made but rather shall use
reasonable efforts to effect such other adjustment of each then outstanding
stock option as the Committee, in its discretion, shall deem equitable and which
will not result in any disqualification, modification, extension or renewal
(within the meaning of Section 424 of the Code) of such incentive stock option.
9. ADDITIONAL RIGHTS IN CERTAIN EVENTS.
(a) DEFINITIONS. For purposes of this Section 9, the
following terms shall have the following meanings:
(i) The term "Person" shall be used as that term is used
in Sections 13(d) and 14(d) of the 1934 Act.
(ii) Beneficial ownership shall be determined as provided
in Rule 13d-3 under the 1934 Act as in effect on the effective
date of the Plan.
(iii) "Voting Shares" shall mean all securities of a
company entitling the holders thereof to vote in an annual
election of Directors (without consideration of the rights of any
class of stock other than the Common Shares to elect Directors by
a separate class vote); and a specified
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percentage of "Voting Power" of a company shall mean such number
of the Voting Shares as shall enable the holders thereof to cast
such percentage of all the votes which could be cast in an annual
election of directors (without consideration of the rights of any
class of stock other than the Common Shares to elect Directors by
a separate class vote).
(iv) "Tender Offer" shall mean a tender offer or exchange
offer to acquire securities of the Company (other than such an
offer made by the Company or any Subsidiary), whether or not such
offer is approved or opposed by the Board.
(v) "Section 9 Event" shall mean the date upon which any
of the following events occurs:
(A) The Company acquires actual knowledge that any
Person has acquired the Beneficial Ownership, directly or
indirectly, of securities of the Company entitling such
Person to 20% or more of the Voting Power of the Company,
other than the Company, a Subsidiary or any employee
benefit plan(s) sponsored by the Company, or a Person
approved by the Board that has acquired 20% or more but
less than 50% of the Voting Power of the Company; or
(B) A Tender Offer is made to acquire securities of
the Company entitling the holders thereof to 20% or more
of the Voting Power of the Company; or
(C) A solicitation subject to Rule 14a-11 under the
1934 Act (or any successor Rule) relating to the election
or removal of 50% or more of the members of any class of
the Board shall be made by any person other than the
Company; or
(D) The shareholders of the Company shall approve a
merger, consolidation, share exchange, division or sale or
other disposition of assets of the Company as a result of
which the shareholders of the Company immediately prior to
such transaction shall not hold, directly or indirectly,
immediately following such transaction a majority of the
Voting Power of (i) in the case of a merger or
consolidation, the surviving or resulting corporation,
(ii) in the case of a share exchange, the acquiring
corporation or (iii) in the case of a division or a sale
or other disposition of assets, each surviving, resulting
or acquiring corporation which, immediately following the
transaction, holds more than 20% of the consolidated
assets of the Company immediately prior to the
transaction;
provided, however, that (i) if securities beneficially owned by a
grantee are included in determining the Beneficial Ownership of a
Person referred to in Section 9(a)(v)(A), (ii) a grantee is
required to be named pursuant to Item 2 of the Schedule 14D-I (or
any similar successor filing requirement) required to be filed by
the bidder making a Tender Offer referred to in Section
9(a)(v)(B), or (iii) if a grantee is a "participant" as defined
in 14a-11 under the 1934 Act (or any successor Rule) in a
solicitation (other than a solicitation by the Company) referred
to in Section 9(a)(v)(C), then no Section 9 Event with respect to
such grantee shall be deemed to have occurred by reason of such
event.
(b) ACCELERATION OF THE EXERCISE DATE OF STOCK OPTIONS. Unless
the agreement referred to in Section 6 (g), or an amendment thereto,
shall otherwise provide, notwithstanding any other provision contained
in the Plan, in case any "Section 9 Event" occurs all outstanding stock
options (other than those held by a person referred to in the proviso to
Section 9(a) (v) ) shall become immediately and fully exercisable
whether or not otherwise exercisable by their terms.
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(C) EXTENSION OF THE EXPIRATION DATE OF STOCK OPTIONS. Unless the
agreement referred to in Sec tion 6(h), or an amendment thereto, shall
otherwise provide, notwithstanding any other provision contained in the
Plan, all stock options held by a grantee (other than a grantee referred
to in the proviso to Section 9(a)(v)) whose employment with the Company
or a Subsidiary terminates within one year of any Section 9 Event for
any reason other than voluntary termination with the consent of the
Company or a Subsidiary, retirement under any retirement plan of the
Company or a Subsidiary or death shall be exercisable for a period of
three months from the date of such termination of employment, but in no
event after the expiration date of the stock option.
(d) LAPSE OF RESTRICTIONS ON RESTRICTED SHARE OR RESTRICTED SHARE
UNIT AWARDS. If any "Section 9 Event" occurs prior to the scheduled
lapse of all restrictions applicable to restricted share or restricted
share unit awards under the Plan (other than those held by a person
referred to in the proviso to Section 9(a) (v)), all such restrictions
shall lapse upon the occurrence of any such "Section 9 Event" regardless
of the scheduled lapse of such restrictions.
(e) PAYMENT OF PERFORMANCE UNITS. If any "Section 9 Event" occurs
prior to the end of any Performance Period, all performance units
awarded with respect to such Performance Period (other than those held
by a person referred to in the proviso to Section 9(a)(v)) shall be
deemed to have been fully earned as of the date of such Section 9 Event,
regardless of the attainment or nonattainment of the Performance Target
or any Minimum Target, and shall be paid to the awardees thereof as
promptly as practicable thereafter. If the performance unit is not
expressed as a fixed amount in dollars or shares, the Committee may
provide in the performance unit agreement for the amount to be paid in
the case of a Section 9 Event.
10. EFFECT OF THE PLAN ON THE RIGHTS OF EMPLOYEES AND EMPLOYER.
Neither the adoption of the Plan nor any action of the Board or the
Committee pursuant to the Plan shall be deemed to give any employee any right to
be granted a stock option or to be awarded restricted shares, restricted share
units, performance units or bonus shares under the Plan. Nothing in the Plan, in
any stock option, in any restricted share, restricted share unit, performance
unit or bonus share award under the Plan or in any agreement providing for any
of the foregoing shall confer any right to any employee to continue in the
employ of the Company or any Subsidiary or interfere in any way with the rights
of the Company or any Subsidiary to terminate the employment of any employee at
any time.
11. AMENDMENT.
The right to alter and amend the Plan at any time and from time to time
and the right to revoke or terminate the Plan are hereby specifically reserved
to the Board; provided that no such alteration or amendment of the Plan shall,
without shareholder approval (i) increase by more than 10% the total number of
shares which may be issued under the Plan to persons subject to Section 16 under
the 1934 Act ("Section 16 Persons"), (ii) materially increase the benefits
accruing under the Plan to Section 16 Persons, (iii) materially modify the
requirements as to eligibility for participation in the Plan by Section 16
Persons, (iv) make any changes in the class of employees eligible to receive
incentive stock options under the Plan, or (v) increase the number of shares
with respect to which incentive stock options may be granted under the Plan;
approval of the Plan by the shareholders of the Company pursuant to Section 12
shall also be deemed to constitute approval of any amendments to Section 6(f)
that are designed to take advantage of changes in income tax or securities laws
or regulations adopted for the purpose of reducing or eliminating restrictions
on transferability of options. No alteration, amendment, revocation or
termination of the Plan shall, without the written consent of the holder of a
stock option, restricted shares, restricted share units, performance units or
bonus shares theretofore awarded under the Plan, adversely affect the rights of
such holder with respect thereto.
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12. EFFECTIVE DATE AND DURATION OF PLAN.
The effective date and date of adoption of the Plan shall be December
13, 1995, the date of approval of the Plan by the Shareholders. No stock option
may be granted, and no restricted shares, restricted share units, bonus shares
or performance units payable in performance shares may be awarded under the Plan
subsequent to December 13, 2005.
13. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have as
directors, the members of the Committee administering the Plan shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any rights granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding that
such member is liable for negligence or misconduct in the performance of such
member's duties; provided that within 60 days after institution of any such
action, suit or proceeding, the member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
14. APPROVAL OF PLAN; EFFECTIVE DATE.
The Plan was adopted by the Board of Directors on October 18, 1995 and
approved by the Shareholders and became effective on December 13, 1995.
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