UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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 [_] Soliciting Material Pursuant to
[_] Confidential, For Use of the SS.240.14a-11(c) or SS.240.14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
Data Systems & Software Inc.
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(Name of Registrant as Specified In Its Charter)
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(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.
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1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) 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
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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SEC 1913 (3-99)
DATA SYSTEMS & SOFTWARE INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 21, 2001
The Annual Meeting of Stockholders of Data Systems & Software Inc. (the
"Company") will be held at The Courtyard by Marriott, 140 Route 17 South,
Mahwah, New Jersey, on Thursday, June 21, 2001, at 9:30 a.m., for the following
purposes:
(1) To elect seven directors to hold office until the next annual
meeting of stockholders and until their successors have been duly elected
and qualified;
(2) To approve an amendment to the 1994 Stock Incentive Plan to
increase the number of shares subject thereto;
(3) To approve an amendment to the 1994 Stock Option Plan for Outside
Directors to increase the number of shares subject thereto; and
(4) To consider and act upon such other and further matters as may
properly come before the meeting or any postponements or adjournments
thereof.
Only stockholders of record at the close of business on April 25, 2001, are
entitled to notice of and to vote at the meeting or any postponements or
adjournments thereof.
Regardless of how many shares you own, your vote is very important. WHETHER
OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE. No
additional postage is required.
BY ORDER OF THE BOARD OF DIRECTORS,
SHELDON KRAUSE
SECRETARY
May 25, 2001
Mahwah, New Jersey
DATA SYSTEMS & SOFTWARE INC.
200 ROUTE 17
MAHWAH, NEW JERSEY 07430
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Data Systems & Software Inc., a
Delaware corporation (the "Company" or "DSSI"), to be voted at the Annual
Meeting of Stockholders of the Company (the "Annual Meeting") to be held at The
Courtyard by Marriott, 140 Route 17 South, Mahwah, New Jersey, on Thursday June
21, 2001, at 9:30 a.m., and any postponements or adjournments thereof. This
Proxy Statement and the accompanying materials are being mailed on or about May
25, 2001, to holders of record of the Common Stock, par value $.01 per share, of
the Company (the "Common Stock") as of the record date.
The record date (the "Record Date") for determining stockholders entitled
to notice of, and to vote at, the Annual Meeting has been established as the
close of business on April 25, 2001. On that date, 6,869,787 shares of Common
Stock of the Company were outstanding and entitled to vote. Holders of record of
Common Stock on the Record Date will be entitled to one vote for each share held
on all matters properly brought before the Annual Meeting.
The presence at the Annual Meeting, in person or represented by proxy, of a
majority of the outstanding shares of Common Stock entitled to vote thereat will
constitute a quorum for the transaction of business. If a share is deemed
present at the Annual Meeting for any one matter, it will be deemed present for
purposes of determining the presence of a quorum for all other matters presented
to the meeting. Votes withheld from any nominee for election as a director,
abstentions, and shares held by a nominee for a beneficial owner ("Broker
Shares") that are voted on any matter which may come before the meeting will be
deemed present for purposes of determining the presence of a quorum.
All properly executed proxies delivered pursuant to this solicitation and
not revoked will be voted at the Annual Meeting in accordance with the
directions given. With respect to the election of directors, stockholders may
vote in favor of all nominees, withhold their votes as to all nominees or
withhold their votes as to specific nominees. Stockholders should specify their
choices on the accompanying proxy card. If no specific instructions are given,
the shares represented by a signed proxy will be voted FOR the election of all
nominees for election as directors. Directors will be elected at the Annual
Meeting by a plurality of the votes cast. Any stockholder of record returning
the accompanying proxy may revoke such proxy at any time prior to its exercise
by (i) giving written notice to the Company of such revocation, (ii) voting in
person at the Annual Meeting or (iii) executing and delivering to the Company a
later-dated proxy. Written revocations and later-dated proxies should be sent to
Data Systems & Software Inc., 200 Route 17, Mahwah, New Jersey 07430, Attention:
Secretary.
Commencing on June 11, 2001, an alphabetical list of the names and
addresses of the stockholders of record of the Company as of the Record Date
will be available at the principal executive offices of the Company, 200 Route
17, Mahwah, New Jersey 07430, for inspection by any stockholder during normal
business hours for any purpose germane to the Annual Meeting.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the notes thereto set forth information, as of
March 31, 2001 (except as otherwise set forth herein), concerning beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of Common Stock by (i) each director of the Company, (ii) each of the executive
officers of the Company named in the Summary Compensation Table under "Executive
and Director Compensation," (iii) all executive officers and directors of the
Company as a group and (iv) each holder of 5% or more of the Company's
outstanding shares of Common Stock.
Number of Shares of Percentage of
Name and Address of Common Stock Common Stock
Beneficial Owner(1)(2) Beneficially Owned(2) Outstanding(2)
- ---------------------- --------------------- --------------
George Morgenstern 683,104(3) 9.36%
Howard Gutzmer 479,015(4) 6.97%
5550 Oberlin Drive
San Diego, CA 92121
Dimensional Fund Advisors Inc. 514,700(5) 7.49%
1299 Ocean Avenue
Santa Monica, CA 90401
Robert L. Kuhn 372,656(6) 5.29%
Harvey Eisenberger 10,000(7) *
Sheldon Krause 51,000(8) *
Susan L. Malley 22,500(7) *
Hon. Maxwell M. Rabb 50,000(7) *
Allen I. Schiff 50,200(9) *
Yacov Kaufman 116,667(7) 1.70%
Frank Magnotti -- --
Shlomie Morgenstern 29,167(7)
All executive officers and directors
of the Company as a group (11 people) 1,385,294 17.78%
- ----------
* Less than 1%
(1) Unless otherwise indicated, business address is in care of the Company.
(2) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. For purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of a given date which such person has the right to acquire within
60 days after such date. Percentage information is based on the number of
Shares outstanding as of the Record Date.
(3) Consists of (i) 255,854 shares held by Mr. Morgenstern, including 20,000
shares received by Mr. Morgenstern pursuant to a restricted stock grant
which are not yet fully vested, and (ii) 427,250 currently exercisable
options held by Mr. Morgenstern.
(4) As of December 31, 1999, based on information in a Schedule 13G filed on
May 2, 2000.
(5) As of December 31, 2000, based on information in a Schedule 13G filed on
February 2, 2001.
(6) Consists of 192,656 shares and 180,000 currently exercisable options held
by Dr. Kuhn.
(7) Consists of currently exercisable options.
(8) Consists of 1,000 shares and 50,000 currently exercisable options held by
Mr. Krause.
(9) Consists of 200 shares and 50,000 currently exercisable options held by Dr.
Schiff.
-2-
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors of the Company is currently comprised of seven
members. The entire Board of Directors of the Company is to be elected at the
Annual Meeting. The Board of Directors has nominated the seven current
directors, George Morgenstern, Robert L. Kuhn, Harvey Eisenberger, Sheldon
Krause, Maxwell M. Rabb, Allen I. Schiff and Susan L. Malley, for election as
directors at the Annual Meeting. All nominees have consented to be named and
serve if elected.
With respect to the election of directors, stockholders may vote in favor
of all nominees, withhold their votes as to all nominees or withhold their votes
as to specific nominees. Stockholders should specify their choices on the
accompanying proxy card. If no specific instructions are given, the shares
represented by a signed proxy will be voted FOR the election of all nominees for
election as directors. If any nominee becomes unavailable for any reason to
serve as a director at the time of the Annual Meeting (which event is not
anticipated), proxies will be voted in the discretion of the persons acting
pursuant to the proxy for any nominee who shall be designated by the current
Board of Directors as a substitute nominee. Only persons nominated in accordance
with the notice requirements of the Company's By-laws are eligible for election
as directors of the Company. Directors will be elected at the Annual Meeting by
a plurality of the votes cast (i.e., the seven nominees receiving the greatest
number of votes will be elected as directors).
CERTAIN INFORMATION REGARDING DIRECTORS AND OFFICERS
Set forth below is certain information concerning the nominees for director
and the executive officers of the Company:
Name Age Position
- ---- --- --------
George Morgenstern 67 Director; Chairman of the Board, President and Chief
Executive Officer of DSSI; Chairman of the Board and
Acting President of the Company's Decision Systems
Israel Ltd. subsidiary ("DSI Israel"); Chairman of
the Board of the Company's Comverge Technologies,
Inc. subsidiary ("Comverge")
Robert L. Kuhn 56 Director; Vice Chairman of the Board of DSSI
Harvey Eisenberger 56 Director
Sheldon Krause 46 Director and Secretary
Susan L. Malley 52 Director
Maxwell M. Rabb 90 Director
Allen I. Schiff 55 Director
Yacov Kaufman 43 Vice President and Chief Financial Officer of DSSI;
Vice President and Chief Financial Officer of DSI
Israel; Chief Financial Officer of Comverge
Frank Magnotti 40 President of Comverge
Joseph D. Esteves 40 Executive Vice President of Comverge
Shlomie Morgenstern 38 Vice President--Operations
-3-
GEORGE MORGENSTERN has been Chairman of the Board since June 1993, and has
been President and Chief Executive Officer of DSSI since its incorporation in
1986. Mr. Morgenstern also serves as Chairman of the Board and Acting President
of DSI Israel, and as Chairman of the Board of Comverge.
ROBERT L. KUHN has been a director of DSSI since 1986 and Vice Chairman of
the Board of DSSI since 1994. Since 1991, Dr. Kuhn has been President of Geneva
Financial Corporation, a company specializing in mergers and acquisitions.
HARVEY EISENBERGER has been a director of the Company since 1994. Since
March 1997, Mr. Eisenberger has been employed by the Company in an
administrative capacity. From 1986 to March 1997, Mr. Eisenberger was an account
executive with a New York investment firm.
SHELDON KRAUSE has served as Secretary of the Company since 1986 and as a
director since 1994. Since 1987, Mr. Krause has been engaged in the private
practice of law in New York City and is currently a member of the firm of
Ehrenreich Eilenberg & Krause LLP. From 1981 to 1986, Mr. Krause was associated
with the New York law firm of Cravath, Swaine & Moore. Mr. Krause is the
son-in-law of George Morgenstern, Chairman of the Board, President and Chief
Executive Officer of the Company.
SUSAN L. MALLEY has been a director of the Company since March 1998. Dr.
Malley has served since 1995 as President and Chief Investment Officer of Malley
Associates Capital Management, an asset management firm which Dr. Malley
founded. From 1995 to January 2001, Dr. Malley was also a Professor of Finance
at the Hofstra University School of Business. From 1990 until 1995, Dr. Malley
was Co-Chair of the Board of Directors and Chief Investment Officer of Citicorp
Investment Services, a retail brokerage subsidiary of Citibank, N.A.
HON. MAXWELL M. RABB has been a director of the Company since 1992.
Ambassador Rabb has been Of Counsel to the law firm of Kramer, Levin, Naftalis &
Frankel since 1991 and was Of Counsel to the law firm of Stroock & Stroock &
Lavan from 1989 to 1991. From 1981 to 1988, Ambassador Rabb was United States
Ambassador to Italy.
ALLEN I. SCHIFF has been a director of the Company since 1992. Since 1978,
Dr. Schiff has been a Professor of Accounting at Fordham University Graduate
School of Business Administration, serving as Chairman of the Accounting
Department from 1981 to 1983 and from 1985 to 1990.
YACOV KAUFMAN has been Vice President and Chief Financial Officer of DSSI
since February 1996. Mr. Kaufman has also served as a Vice President of DSI
Israel since 1992 and as Chief Financial Officer of DSI Israel since 1990,
having served as Controller of DSI Israel since 1986. Mr. Kaufman also serves as
Chief Financial Officer of Comverge.
FRANK MAGNOTTI has been the President of Comverge since October 1997. From
1993 to 1997, Mr. Magnotti was the founder and General Manager of the Utility
Solutions Division of Lucent Technologies, Inc.
JOSEPH D. ESTEVES has been the Executive Vice President of Comverge since
March 2001. From 1995 to March 2001, Mr. Esteves served as an officer of UBS
Warburg and its predecessor Union Bank of Switzerland, most recently serving as
Executive Director of Global Power & Pipelines. From 1991 to 1995 Mr. Esteves
served as a Vice President of Goldman, Sachs & Co., and from 1986 to 1991 he
served as a Vice President of Salomon Brothers.
SHLOMIE MORGENSTERN has been Vice President--Operations of the Company
since February 2000. Mr. Morgenstern also serves as President of the Company's
Databit subsidiary. Since 1996, Mr. Morgenstern has been employed by the Company
in various administrative capacities. Mr. Morgenstern is the son of George
Morgenstern, Chairman of the Board, President and Chief Executive Officer of the
Company.
-4-
MEETINGS OF THE BOARD OF DIRECTORS
During 2000, the Board of Directors of the Company met four times and acted
by written consent three times. Each person who served as a director in 2000
attended at least 75% of the aggregate of (i) the total number of meetings of
the Board of Directors held during 2000 and (ii) the total number of meetings
held during 2000 by each committee of the Board of Directors on which such
director served.
INFORMATION CONCERNING CERTAIN COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has a standing Audit Committee
comprised of Dr. Schiff, who serves as Chairman, Dr. Malley and Mr. Krause.
During 2000, the Audit Committee met seven times.
In accordance with recently adopted Nasdaq rules, the Company has adopted a
formal written audit committee charter setting forth the responsibilities of the
Audit Committee, a copy of which is attached as Appendix A to this Proxy
Statement. The Audit Committee is charged with assisting the directors in
fulfilling their responsibilities to stockholders and others relating to the
corporate accounting and reporting practices of the Company and the quality and
integrity of the financial reports of the Company. The Audit Committee is
responsible for selecting, evaluating and replacing the independent auditors and
with overseeing the independence of the auditors. The Audit Committee reviews
with the Company's independent auditors the Company's accounting practices and
policies; reviews the report of the Company's independent auditors on the
Company's year-end financial statements; examines from time to time, in
consultation with the Company's financial officers and its independent auditors,
the Company's overall accounting and financial controls; and is available to the
Company's independent auditors for consultation. The Audit Committee must have
at least three members, all of whom must be independent and must be financially
literate. At least one member of the Audit Committee must have a background in
finance or accounting. Dr. Schiff, Dr. Malley and Mr. Krause currently serve on
the Audit Committee, with Dr. Schiff acting as Chairman. All the members of the
Audit Committee have the requisite financial literacy and accounting or finance
background. Mr. Krause, who is not independent of management as defined in the
Nasdaq rules, may remain on the Audit Committee until June 14, 2001.
The Board of Directors has also established a Compensation and Stock Option
Committee (the "Compensation Committee") which administers the Company's
stock-based compensation plans and approves awards of stock options and other
stock-based compensation, as well as reviewing and approving the employment
terms and compensation of executive officers of the Company. Dr. Schiff, Dr.
Malley and Mr. Krause currently serve on the Compensation Committee, with Dr.
Schiff acting as Chairman. Ambassador Rabb serves on the Compensation Committee
as an alternate member. During 2000, the Compensation Committee met three times
and acted by written consent four times.
The Board of Directors does not have a nominating committee.
EXECUTIVE AND DIRECTOR COMPENSATION
COMPENSATION OF DIRECTORS
Each director of the Company is generally paid $1,000 for each Board or
committee meeting which such director attends and is reimbursed for associated
out-of-pocket expenses. Dr. Schiff is paid $24,000 per annum for his service as
Chairman of the Audit Committee and Compensation Committee, plus additional
amounts in the event of special committee assignments, and was paid a total of
$31,000 in 2000 in connection with his service on the Board of Directors and
Board committees. Dr. Kuhn was paid an additional $50,000 in 2000 in connection
with his service as Vice Chairman of the Company. Dr. Malley was paid a total of
$14,000 in 2000 in connection with her service on the Board of Directors and
-5-
Board committees. Mr. Eisenberger was paid a total of $11,000 in 2000 in
connection with his service on the Board of Directors.
In addition to the directors' fees described above, at the last Annual
Meeting of Stockholders each member of the Board of Directors who was not an
employee of the Company (Mr. Krause, Ambassador Rabb, Dr. Malley and Dr. Schiff)
was granted options to purchase 7,500 shares of Common Stock at an exercise
price of $4.69 per share (the fair market value of the Common Stock on such
date). These options were granted pursuant to the Company's 1994 Stock Option
Plan for Outside Directors described below.
The Company's 1994 Stock Option Plan for Outside Directors provides for
awards of non-qualified options to directors of the Company who are not
employees of the Company or its affiliates and who meet certain other
eligibility criteria. Pursuant to the plan, (i) upon first election or
appointment to the Board of Directors, each newly elected eligible director is
granted an option to purchase 7,500 shares of Common Stock and (ii) immediately
following each Annual Meeting of Stockholders of the Company, each eligible
director will generally be granted an option to purchase 7,500 shares of Common
Stock. Options granted under the plan have an exercise price per share equal to
the fair market value of the Common Stock on the date of issuance and are
exercisable beginning on the first anniversary of the date of the grant until
the earliest of (i) ten years from the date of grant and (ii) one year from the
date on which an optionee ceases to be a director. The maximum number of shares
of Common Stock in respect of which awards may be granted under the plan is
200,000 (400,000 if the 1994 Stock Option Plan for Outside Directors is amended,
as described below), of which 177,500 non-expired options have been granted to
date.
In addition to serving as a director of the Company, Mr. Eisenberger also
serves as an employee of the Company's Comverge subsidiary and was paid
approximately $92,000 during 2000 in connection with such employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The mandate of the Compensation Committee of the Board of Directors of the
Company encompasses all matters related to compensation, including determination
of stock option and other stock-based compensation and review and approval of
employment terms and compensation of executive officers. Certain matters related
to the compensation of the Chief Executive Officer are also considered by the
full Board of Directors.
The following persons served both as members of the Board of Directors and
officers or employees of the Company in 2000: George Morgenstern (Chairman of
the Board, President and Chief Executive Officer), Dr. Kuhn (Vice Chairman of
the Board), Mr. Krause (Secretary) and Mr. Eisenberger, who is employed by the
Company's Comverge subsidiary. During 2000, no member of the Board of Directors
who was also an officer of the Company participated in any deliberations of the
Board of Directors or any committee thereof relating to his own compensation or
to the compensation of any person to whom he is related. Except as described
above, each member of the Board of Directors participated in 2000 in
deliberations of the Board of Directors concerning executive officer
compensation. For information concerning transactions with the Company in which
directors or officers may be deemed to have an interest, see "Certain
Relationships and Related Transactions" below.
-6-
EMPLOYMENT ARRANGEMENTS
George Morgenstern serves as Chairman of the Board, President and Chief
Executive Officer of the Company pursuant to an employment agreement which
commenced on January 1, 1997 and was amended in March 2001 to extend through
December 31, 2002 (the "Employment Agreement"). The Employment Agreement
provides for a base salary of $420,000 per annum (currently $448,000 due to cost
of living adjustments), subject to annual review by the Board and an annual cost
of living adjustment, plus contributions to a nonqualified retirement fund equal
to 25% of his base salary. Mr. Morgenstern's compensation pursuant to the
Employment Agreement also includes the use of two company automobiles, premium
payments on a life insurance policy owned by Mr. Morgenstern and other fringe
benefits.
Pursuant to the Employment Agreement, Mr. Morgenstern may at any time prior
to December 31, 2002, elect to terminate his employment with the Company and
thereafter to continue to serve the Company as a consultant for a period (the
"Consulting Period") ending on December 31 of the seventh year following the
year in which he first commences to serve as a consultant. During the Consulting
Period, Mr. Morgenstern would be entitled to receive an annual consulting fee
plus contributions to a nonqualified retirement fund and fringe benefits on the
same basis as during the term of his employment as described above. Mr.
Morgenstern's annual consulting fee during the Consulting Period would be equal
to 50% of his annual salary in effect immediately prior to the Consulting Period
through the end of the fourth full calendar year of the Consulting Period, and
25% of such annual salary for the remainder of the Consulting Period (subject in
all cases to an annual cost of living adjustment). However, if Mr. Morgenstern
elects to become a consultant following a breach by the Company of its
obligations under the Employment Agreement or following a change in control of
the Company (as defined in the Employment Agreement), Mr. Morgenstern would be
entitled to receive his full annual salary until December 31, 2002, and
thereafter to receive an annual consulting fee as described above for the
balance of the Consulting Period. The Company is obligated under the Employment
Agreement to fund at the beginning of the Consulting Period all amounts to
become payable to Mr. Morgenstern for consulting services and to fund upon his
death all amounts payable to his estate. During the term of the Employment
Agreement (including any Consulting Period), Mr. Morgenstern may not engage in a
business that is in substantial and direct competition with the business of the
Company or any of its subsidiaries.
In addition to the compensation provided for Employment Agreement, in
January 2000 the Company awarded Mr. Morgenstern a bonus in the amount of
$550,000, at least half of which was required to be used to reduce the balance
of his outstanding loan from the Company discussed below under "Certain Related
Party Transactions." The Board also approved an additional bonus of up to
$300,000, $150,000 of which would have been payable only upon completion of an
equity financing of the Company's Comverge subsidiary of at least $10 million by
December 31, 2000 (which condition was not satisfied), and $150,000 of which is
payable only if Mr. Morgenstern remains employed full-time as President and
Chief Executive Officer of the Company through December 31, 2001. Under terms
approved by the Board, at least one-half of any bonus paid was required to be
used to reduce any then outstanding balance of the Company's loan to Mr.
Morgenstern. In February, the Board of Directors approved a purchase by the
Company of an aggregate of up to $300,000 of the Common Stock from Mr.
Morgenstern at fair market value, provided that the proceeds from such purchases
be applied to reduce the balance of his loans. The loans were fully repaid
during the first quarter of 2000 from the bonus and from the proceeds of sales
by Mr. Morgenstern of Common Stock to the Company on February 2, 2000 and March
2, 2000 at then current market prices.
Yacov Kaufman serves as Vice President and Chief Financial Officer of the
Company and of DSI Israel pursuant to an employment agreement entered into with
the Company on January 1, 1999. Although the employment agreement with Mr.
Kaufman expired by its terms on December 31, 2000 and has not been formally
renewed, the Company continues to employ Mr. Kaufman, and Mr. Kaufman
-7-
continues to serve as Vice President and Chief Financial Officer of the Company
and of DSI Israel, pursuant to the terms of such employment agreement.
The stock option agreements with the Company's executive officers generally
provide for accelerated vesting in the event of a change in control of the
Company.
EXECUTIVE COMPENSATION
The following table sets forth for the periods indicated information
concerning the compensation of the Chief Executive Officer and the three other
officers of the Company who received in excess of $100,000 in salary and bonus
during 2000.
SUMMARY COMPENSATION TABLE
Long Term All Other
Annual Compensation Compensation Awards Compensation ($)
-------------------- ------------------------------- ----------------
Securities
Name and Restricted Stock Underlying
Principal Position Year Salary ($) Bonus ($) Awards ($) Options (#)
- ------------------ ---- ---------- --------- ---------------- -----------
George Morgenstern 1998 427,600 -- 435,000(1) -- 146,000
Chief Executive Officer 1999 434,700 -- -- (2) 195,300
2000 446,600 550,000 193,900(3)
Yacov Kaufman 1998 124,200 -- -- -- 25,700
Chief Financial Officer 1999 127,200 -- -- (2) 22,000
2000 150,000 32,000 -- 27,400(4)
Shlomie Morgenstern 1998 122,700 -- -- -- --
Vice President 1999 131,400 -- -- -- --
2000 160,000 100,000 -- -- --
Frank Magnotti 1998 143,500 -- -- -- --
President, Comverge 1999 158,000 -- -- -- --
Technologies, Inc. 2000 175,400 -- -- -- --
- -------------
(1) Represents the fair market value of 155,000 shares of Common Stock awarded
in a restricted stock award pursuant to the Company's 1994 Stock Incentive
Plan, valued at the market price for the Common Stock on the date of the
award. The shares vested over a two-year period, commencing August 1998.
(2) In 1999, each of Mr. Morgenstern and Mr. Kaufman was awarded options to
purchase shares which after the combination of the Company's Comverge and
Powercom subsidiaries represented 0.5% of the outstanding stock of
Comverge, each at an aggregate exercise price of $9,925. Mr. Morgenstern
also serves as Chairman of Comverge, and Mr. Kaufman also serves as CFO of
Comverge.
(3) Consists of (i) $111,640 in contributions to a non-qualified retirement
fund, (ii) $24,250 in life insurance premiums, (iii) $42,260 paid for
accrued vacation, (iv) $6,000 in director's fees and (v) $9,750 with
respect to the imputed value of automobile fringe benefits.
(4) Represents primarily contributions to severance and pension funds. These
contributions are made on substantially the same basis as those made on
behalf of all Israeli employees.
-8-
The following tables summarize (i) the options granted in 2000 to the
executive officers named in the Summary Compensation Table above, (ii) the
potential value of these options at the end of the option term assuming certain
levels of appreciation of the Company's Common Stock, (iii) the number of shares
acquired by such named executive officers upon the exercise of options in 2000
and the value realized thereon, and (iv) the number and value of all options
held by such executive officers at the end of 2000.
OPTION/SAR GRANTS IN 2000
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants(1) for Option Terms(2) .
----------------------------------------------------------- --------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees in Exercise or
Options Fiscal Year Base Price Expiration
Name Granted (#) (%) ($/Share) Date 5% ($) 10% ($)
- ---- ----------- ------------ ---------- ----------- ------ -------
Yacov Kaufman 20,000(3) 4.9% $6.375 5/17/05 35,226 77,840
George Morgernstern 97,250(3) 23.6% $6.375 5/17/05 174,583 386,817
- -------------
(1) The Company did not grant any stock appreciation rights (SARs) in 2000.
(2) The dollar amounts under these columns are the result of calculations at
the 5% and 10% compounded annual appreciation rates prescribed by the
Securities and Exchange Commission and, therefore, are not intended to
forecast possible future price appreciation, if any, of the Common Stock.
(3) These options represent extensions of options previously granted and
scheduled to expire in April 2000. Such options were extended under their
original terms. These extended options became exercisable on December 31,
2000.
AGGREGATED OPTION EXERCISES IN 2000
AND FISCAL YEAR END STOCK OPTION VALUES
Number of
Shares Number of Securities Underlying
Acquired Unexercised Options Value of Unexercised
Upon Value at Year End (#) In-the-Money Options ($) (1)
Exercise Realized ------------------------------- ----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------- -------- ----------- ------------- ----------- -------------
George Morgenstern - - 347,250 100,000 - -
Yacov Kaufman - - 116,667 33,333 73,080 49,200
Shlomie Morgernstern 7,500 13,639 29,167 13,333 3,263 17,013
- ----------
(1) Based on the closing price for the Common Stock on December 31, 2000, of
$4.188.
-9-
CERTAIN RELATED PARTY TRANSACTIONS
During 1996 and 1997, the Company made a loan to George Morgenstern, its
Chairman, President and Chief Executive Officer. The principal of and interest
on such loan was payable in installments as follows: (i) 105 bi-weekly payments
of $3,000 each, commencing January 1998, (ii) four annual payments of $72,000
each, commencing December 1998, and (iii) a final payment on December 31, 2001
in an amount equal to the then remaining outstanding balance of the loan plus
accrued and unpaid interest. In addition, in 1998, the Company made a loan to
Mr. Morgenstern in the amount of $63,000 in connection with the payment of
income tax relating to the vesting of a restricted stock award. During 2000, the
highest total aggregate balance of loans to Mr. Morgenstern was $511,000. The
loans were fully repaid during the first quarter of 2000.
During 2000, the Company paid approximately $474,000 for legal services
rendered and reimbursement of out-of-pocket expenses to Ehrenreich Eilenberg &
Krause LLP, a law firm in which Sheldon Krause, a director and Secretary of the
Company, is a member. Such fees related to services rendered by Mr. Krause and
other members and employees of his firm, as well as certain special and local
counsel retained and supervised by his firm who performed services on behalf of
the Company. Mr. Krause is the son-in-law of George Morgenstern, Chairman,
President and Chief Executive Officer of the Company.
As reported on the Summary Compensation Table above, Shlomie Morgenstern,
the son of George Morgenstern, Chairman, President and Chief Executive Officer
of the Company, received compensation during 2000 in connection with his
position as Vice President--Operations.
In March 2001, the Company retained Malley Associates Capital Management,
an asset management firm that is controlled by Susan L. Malley, a director of
the Company, to provide discretionary asset management services to the Company
with respect to $2 million of the Company's funds. Investments may include fixed
income government and corporate securities, money market mutual funds,
short-term money market instruments and equity securities. Investments to date
have been limited to debt securities and commercial paper. The agreement
provides for a management fee of 1% per annum of the amount under management.
COMPENSATION REPORT OF THE BOARD OF DIRECTORS
The goals of the Company's compensation policy are to (i) attract, retain
and reward executives who contribute to the overall success of the Company by
offering compensation that is competitive, (ii) motivate executives to achieve
the Company's business objectives and (iii) align the interests of executives
with the long-term interests of stockholders. The Board of Directors believes
that there is necessarily an element of subjectivity in establishing
compensation levels for the Company's executives and does not follow specific
objective performance criteria when establishing such compensation levels.
Compensation decisions with respect to executive officers, other than the
chief executive officer, have been based upon the recommendation of the chief
executive officer. In 2000, the Company raised Yacov Kaufman's base salary to
$150,000, representing a $23,000 increase over Mr. Kaufman's 1999 base salary,
in order (i) to recognize Mr. Kaufman's long-term service to the Company, (ii)
to compensate him for his increased responsibilities within the Company and DSI
Israel, as well as in connection with his duties as CFO of Comverge, which
represents the Company's current strategic focus and (iii) to incentivise him to
remain with the Company given his key role in the affairs of the Company.
Additionally, in 2000 the Company granted Mr. Kaufman a $32,000 bonus to
recognize his role in facilitating the sale of the Company's interest in Tower
Semiconductor Ltd.
In 2000, Shlomie Morgenstern was appointed Vice President--Operations, and
in recognition of the increased responsibilities that were part of his new
position, the Company raised Mr. Morgenstern's
-10-
base salary to $160,000. Additionally, in 2000 the Company granted a $100,000
bonus to Mr. Morgenstern to recognize Mr. Morgenstern's role in increasing the
value of the CinNetic division of the Company's International Data Operations,
Inc. subsidiary, and in facilitating its sale.
In 2000, Frank Magnotti's base salary was raised to $175,400, reflecting
increased duties and responsibilities as Comverge expanded its activities with
the acquisition of the Scientific-Atlanta Control Systems business division.
During 2000, George Morgenstern, Chairman, President and Chief Executive
Officer of the Company, was paid pursuant to an employment agreement previously
entered into with the Company. In addition, the Company granted a $550,000 bonus
to Mr. Morgenstern to recognize Mr. Morgenstern's role in facilitating the sale
of the Company's interest in Tower Semiconductor Ltd., as well as in the
Company's acquisition of the Scientific-Atlanta Control Systems business
division. At least half of the $550,000 bonus was required to be used to reduce
the balance of his outstanding loan from the Company, and the loan was fully
repaid during the first quarter of 2000. The Board also approved an additional
bonus of up to $300,000 (the "Additional Bonus"), $150,000 of which would have
been payable only upon completion of an equity financing of the Company's
Comverge subsidiary of at least $10 million by December 31, 2000 (which
condition was not satisfied), and $150,000 of which is payable to Mr.
Morgenstern only if he remains employed full-time as President and Chief
Executive Officer of the Company through December 31, 2001. One half of the
Additional Bonus was meant to provide Mr. Morgenstern with additional incentive
to facilitate a Comverge financing and to reward him if successful, and one half
of the Additional Bonus is meant to provide Mr. Morgenstern with an incentive to
maintain his full-time employment with the Company and not elect consulting
status, for which Mr. Morgenstern is eligible under his employment agreement.
The Board believes that the use of stock options and other stock-based
compensation to compensate executive officers encourages and rewards effective
management that results in long-term corporate financial success, as measured by
stock price appreciation. The Board further believes that such use aligns the
interests of the Company's executives with those of the Company's stockholders.
No new grants were made in 2000, except that 20,000 options that were previously
granted to Mr. Kaufman and 97,250 options that were previously granted to George
Morgenstern, all of which were scheduled to expire in April 2000, were extended
on their original terms, including exercise price, together with all options of
employees of the Company which were expiring at the same time. In extending the
options, the Compensation Committee expressed its view that extending these
options on their original terms was in furtherance of the Company's overall
compensation goals.
BOARD OF DIRECTORS
George Morgenstern
Robert L. Kuhn
Harvey Eisenberger
Sheldon Krause
Susan L. Malley
Maxwell M. Rabb
Allen I. Schiff
-11-
AUDIT COMMITTEE REPORT
The Audit Committee is composed of three directors and operates under a
written charter adopted by the Board, and included as Appendix A to this Proxy
Statement.
Management is responsible for the Company's internal controls and financial
reporting process. The external auditors are responsible for performing an
independent audit of the Company's consolidated financial statements in
accordance with generally accepted auditing standards and to issue a report
thereon. The Audit Committee's responsibility is to monitor and oversee these
processes.
In this context, the Audit Committee has met and held discussions with
management and the external auditors. Management represented to the Audit
Committee that the Company's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee reviewed and discussed the consolidated financial statements with
management and the external auditors prior to their issuance. The Audit
Committee discussed with the external auditors matters required to be discussed
by Statement on Auditing Standards No. 61 (Communication with Audit Committees).
The Company's external auditors also provided to the Audit Committee the
disclosures required by Independent Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and the Audit Committee discussed with the
external auditors that firm's independence.
Based on the Audit Committee's discussion with management and the external
auditors and the Audit Committee's review of the representation of management
and the external auditors to the Audit Committee, the Audit Committee
recommended to the Board, and the Board approved, the inclusion of the audited
consolidated financial statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000. The Audit Committee and the Board have
also approved the selection of the Company's external auditors.
AUDIT COMMITTEE
Allen I. Schiff
Susan L. Malley
Sheldon Krause
-12-
STOCK PRICE PERFORMANCE GRAPH
The following stock price performance graph compares the cumulative total
return of the Company's Common Stock, during the period December 31, 1995 to
December 31, 2000, to the cumulative total return during such period of (i) the
Nasdaq Stock Market Index (United States and Foreign) and (ii) the Nasdaq
Computer & Data Processing Stock Index.
COMPARISON OF CUMULATIVE TOTAL RETURN
- ---------------------------------------- ------------ ------------ ----------- ------------ ------------ -----------
12/29/95 12/31/96 12/31/97 12/31/98 12/31/99 12/29/00
-------- -------- -------- -------- -------- --------
- ---------------------------------------- ------------ ------------ ----------- ------------ ------------ -----------
DSSI 100 81.257 60.714 37.500 48.214 59.829
- ---------------------------------------- ------------ ------------ ----------- ------------ ------------ -----------
Nasdaq Computer & Data Processing 100 141.696 169.973 309.778 635.130 353.691
Stock Index
- ---------------------------------------- ------------ ------------ ----------- ------------ ------------ -----------
Nasdaq Stock Market Index 100 122.706 149.254 208.405 386.769 234.811
- ---------------------------------------- ------------ ------------ ----------- ------------ ------------ -----------
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than 10% 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"). These persons are also required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on
its review of such forms received by it, or written representations from certain
reporting persons, the Company believes that during 2000 all applicable filing
requirements were complied with by its executive officers and directors.
-13-
PROPOSAL 2
AMENDMENT OF THE COMPANY'S 1994 STOCK INCENTIVE PLAN
The Board of Directors of the Company has adopted, subject to stockholder
approval, an amendment (the "Incentive Plan Amendment") to the Company's 1994
Stock Incentive Plan (the "Stock Incentive Plan"), as amended, authorizing the
issuance of an additional 250,000 shares under such plan, thereby increasing the
aggregate number of shares issuable under such plan from 1,350,000 to 1,600,000.
Options to purchase 1,332,500 shares of the Company's Common Stock have
been granted under the Stock Incentive Plan, and 500,000 of such options have
expired. Of such options that have not expired, 7,500 have been exercised.
Additionally, 255,000 shares of restricted stock have been issued under the
Stock Incentive Plan, all of which have been issued to George Morgenstern. Prior
to the adoption of the Incentive Plan Amendment, there were only 262,500 shares
available for issuance under the Stock Incentive Plan. As amended by the
Incentive Plan Amendment, subject to stockholder approval, an aggregate of
512,500 shares would be available for issuance under the Stock Incentive Plan.
The adoption of the Incentive Plan Amendment by the Board of Directors
reflects a determination by the Board that ensuring the continued availability
of a sufficient number of options available for grant under the Stock Incentive
Plan is important to the Company's ongoing and continuing efforts to attract and
retain key senior management personnel and align the interest of the Company's
executive officers with that of its stockholders.
The Stock Incentive Plan is an integral part of the Company's stock-based
compensation structure and has been used for grants to senior executives. The
825,000 unexercised, non-expired options that have been granted under the Stock
Incentive Plan include (i) an aggregate of 605,000 options granted to the all
executives named in the Summary Compensation Table under "Proposal 1--Election
of Directors--Executive Compensation" at a weighted average exercise price of
$5.522 per share (440,000 to George Morgenstern to purchase shares at a weighted
average exercise price of $6.418 per share, 130,000 to Mr. Kaufman to purchase
shares at a weighted average exercise price of $3.117 per share, and 35,000 to
Shlomie Morgenstern to purchase shares at a weighted average exercise price of
$3.196 per share), and (ii) an aggregate of 220,000 options granted to current
members of the Board of Directors who are not executive officers of the Company
to purchase shares at a weighted average exercise price of $6.477 per share
(200,000 to Dr. Kuhn to purchase shares at an exercise price of $6.75 per share,
and 20,000 to Mr. Eisenberger to purchase shares at a weighted exercise price of
$3.75 per share).
Since the granting of options under the Stock Incentive Plan is
discretionary, the Company cannot at present determine the number of options
that will be granted in the future to any person or group of persons or the
terms of any future grant. Future option grants and the terms thereof will be
determined by the Compensation Committee in accordance with the terms of the
Stock Incentive Plan.
No options have been granted under the Stock Incentive Plan to employees
who are not directors or executive officers of the Company. Options granted to
nonmanagement employees are made under the Company's 1995 Stock Option Plan for
Nonmanagement Employees.
Set forth below is certain information concerning the Stock Incentive Plan.
A copy of the Stock Incentive Plan is available upon written request to the
Company.
-14-
GENERAL
AUTHORIZED SHARES. The maximum number of shares of Common Stock in respect
of which awards may be granted under the Stock Incentive Plan is currently
1,350,000 (1,600,000 if the Incentive Plan Amendment is approved) of which no
more than 500,000 may be granted as restricted stock or delivered in payment of
restricted stock units. Shares of Common Stock subject to awards that are
forfeited, terminated, canceled or settled without the delivery of Common Stock
will again be available for awards. Also, shares tendered to the Company in
satisfaction or partial satisfaction of the exercise price of any award will
increase the number of shares available for awards under the Stock Incentive
Plan to the extent permitted by Rule 16b-3 under the Exchange Act.
ELIGIBILITY. Officers and employees of the Company and its existing or
future subsidiaries, as well as other individuals who perform services for the
Company, including consultants, who can make substantial contributions to the
successful performance of the Company are eligible to participate in the Stock
Incentive plan.
ADMINISTRATION. The Stock Incentive Plan is administered by the
Compensation Committee. No person eligible to participate in the Stock Incentive
Plan may serve on the Compensation Committee.
The Stock Incentive Plan may be amended or terminated at any time by the
Board of Directors, except that no amendment may be made without stockholder
approval if the Compensation Committee determines that such approval is
necessary to comply with any tax or regulatory requirement (including any
approval requirement which is a prerequisite for exemptive relief from Section
16 of the Exchange Act) with which the Compensation Committee determines that it
is desirable to comply.
AWARDS. The Stock Incentive Plan gives the Compensation Committee authority
to grant stock options and other stock-based awards, including stock
appreciation rights, restricted stock and restricted stock units, and
performance awards. To date, only stock option grants and restricted stock
awards have been made under the plan.
STOCK OPTIONS. Stock options may be granted under the Stock Incentive Plan
at the discretion of the Compensation Committee. Options granted under the plan
may be either incentive stock options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or options which do not qualify
as incentive stock options ("nonqualified stock options"). The exercise price of
a nonqualified stock option granted under the plan may not be less than 85% of
the fair market value of the Common Stock on the date of grant and the exercise
price of an incentive stock option granted under the plan may not be less than
100% of the fair market value of the Common Stock on the date of grant. Subject
to the foregoing, the Compensation Committee has discretion to fix the exercise
price of such options. The Compensation Committee also has broad discretion as
to the terms and conditions upon which options shall be exercisable.
The exercise price of options may be satisfied in cash or, in the
discretion of the Compensation Committee, by exchanging shares of Common Stock
owned by the optionee, or by a combination of cash and shares of Common Stock.
The ability to pay the option exercise price in shares of Common Sock would, if
permitted by the Compensation Committee, enable an optionee to engage in a
series of successive stock-for-stock exercises of an option and thereby fully
exercise an option with little or no cash investment.
In the event that a participant is permitted to and does exercise an option
granted under the Stock Incentive Plan by delivering shares of Common Stock, the
Compensation Committee is authorized to grant or provide for the automatic grant
of Restoration Option to such optionee, subject to the satisfaction of such
conditions or criteria as the Compensation Committee shall establish from time
to time. A Restoration Option shall entitle the participant to purchase a number
of shares of Common Stock equal to the number of such shares surrendered in
payment of the exercise price of the original option, at a per share exercise
price equal to not less than 100% of the per share fair market value of the
Common Stock
-15-
on the date of grant of such Restoration Option. Restoration Options shall have
a term not longer than the term remaining on the original option and shall
contain such other terms and conditions as the Compensation Committee shall
determine.
STOCK APPRECIATION RIGHTS. Stock appreciation rights may be granted in
conjunction with or unrelated to options and, if in conjunction with an
outstanding option, may be granted at the time of such option grant or
thereafter, at the exercise price of the option. Upon the exercise of a stock
appreciation right with respect to a share of Common Stock, a participant would
be entitled to receive the excess of the fair market value of such share over
the exercise price of such right. No stock appreciation right shall be
exercisable for six months after grant. The Compensation Committee has the
authority to determine whether the value of a stock appreciation right is paid
in cash or shares of Common Stock or a combination of both.
PERFORMANCE AWARDS. The Compensation Committee also has discretion to make
contingent grants of performance awards which are earned to the extent
performance goals established by the Compensation Committee are achieved over a
period of time specified by the Compensation Committee. The value of performance
awards that are earned may, in the discretion of the Compensation Committee, be
paid in the form of cash, shares of Common Stock, or a combination of both.
RESTRICTED STOCK. Awards of restricted stock or restricted stock units
under the Stock Incentive Plan may be made at the discretion of the Compensation
Committee. Such awards may consist of (i) shares of Common Stock or (ii) units
the value of which is equal to a share of Common Stock. Restricted stock and
restricted stock units may be granted to a participant subject to forfeiture and
restrictions on transfer. In general, a participant who has been granted
restricted stock will from the date of grant have the benefits of ownership in
respect of such shares, including the right to vote such shares and to receive
dividends and other distributions thereon, subject to the restrictions set forth
in the plan and in the instrument evidencing such award. The shares of
restricted stock may not be sold, assigned, transferred, pledged, or otherwise
encumbered until the restrictions have lapsed. The Compensation Committee has
authority to determine the duration of the restricted period and the conditions
under which restricted stock and restricted stock units may be forfeited, as
well as other terms and conditions of such awards. Restricted stock units may be
paid, in the discretion of the Compensation Committee, in cash or shares of
Common Stock or a combination of both upon the termination of the applicable
restriction period.
TERM OF PLAN. No award may be granted under the Stock Incentive Plan after
December 31, 2004, except for Restoration Options which may continue to be
granted as long as options under the Stock Incentive Plan are outstanding.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF OPTION GRANTS AND EXERCISES
When an optionee exercises a nonqualified stock option, the difference
between the option price and higher fair market value of the shares of Common
Stock, generally on the date of exercise, will be ordinary income to the
optionee and generally will be allowed as a deduction for federal income tax
purposes to the employer. Any gain or loss realized by an optionee on
disposition of the Common Stock acquired upon exercise of a nonqualified stock
option generally will be capital gain or loss to such optionee, long-term or
short-term depending on the holding period, and will not result in any
additional tax consequences to the employer. The optionee's basis in the shares
for determining gain or loss on the disposition will be the fair market value of
such shares determined generally at the time of exercise.
When an optionee exercises an incentive stock option while employed by the
Company or a subsidiary or within three months (one year for disability) after
termination of employment, no ordinary income will be recognized by the optionee
at that time, but the excess (if any) of the fair market value of the shares of
Common Stock acquired upon such exercise over the option exercise price will be
an adjustment to taxable income for purposes of the federal alternative minimum
tax applicable to
-16-
individuals. If the shares of Common Stock acquired upon exercise of the
incentive stock option are not disposed of prior to the expiration of one year
after the date of acquisition and two years after the date of the option, the
excess (if any) of the sales proceeds over the aggregate option exercise price
of such shares will be long-term capital gain, but the employer will not be
entitled to any tax deduction with respect to such gain. Generally, if the
shares of Common Stock are disposed of prior to the expiration of such periods
(a "disqualifying disposition"), the excess of the fair market value of such
shares at the time of exercise over the aggregate option exercise price (but not
more than the gain on the disposition if the disposition is a transaction on
which a loss, if realized, would be recognized) will be ordinary income at the
time of such disqualifying disposition (and the employer will generally be
entitled to a federal income tax deduction in a like amount). Any gain realized
by the optionee as the result of a disqualifying disposition that exceeds the
amount treated as ordinary income will be capital in nature, long-term or
short-term depending on the holding period. If an incentive stock option is
exercised more than three months (one year for disability) after termination of
employment, the tax consequences are the same as described above for
nonqualified stock options. To date, no incentive stock options have been
granted under the Stock Incentive Plan.
The foregoing discussion summarizes the federal income tax consequences of
the grant and exercise of stock options under the Stock Incentive Plan based on
current provisions of the Code which are subject to change. This summary does
not cover any state or local tax consequences of participation in the Stock
Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE STOCK
INCENTIVE AMENDMENT (DESIGNATED AS PROPOSAL 2 ON THE ENCLOSED PROXY CARD)
INCREASING THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE UNDER THE 1994 STOCK
INCENTIVE PLAN BY 250,000 FROM 1,350,000 TO 1,600,000.
-17-
PROPOSAL 3
AMENDMENT OF THE COMPANY'S 1994 STOCK OPTION PLAN
FOR OUTSIDE DIRECTORS
The Board of Directors of the Company has adopted, subject to stockholder
approval, an amendment (the "Outside Director Plan Amendment") to the Company's
1994 Stock Option Plan for Outside Directors, as amended (the "Outside Director
Plan"), increasing the aggregate number of shares issuable under such plan from
200,000 to 400,000 and extending the date until which options may be granted
under the Outside Director Plan to December 2008. The Outside Director Plan
Amendment reflects the belief of the Board of Directors that increasing the
proprietary and vested interest of non-employee directors in the growth and
performance of the Company will benefit the Company and its stockholders by more
strongly aligning the interests of such directors with those of stockholders.
Since the inception of the Outside Director Plan, an aggregate of 197,500
options have been granted to non-employee directors, and 20,000 of such options
have lapsed. Of those options that have not lapsed, a total of 5,000 options
granted under the Outside Director Plan have been exercised. Prior to the
adoption of the Outside Director Plan Amendment, there were only 22,500 shares
available for issuance under the Outside Director Plan.
The 172,500 currently outstanding options that have been granted under the
Outside Director Plan have exercise prices ranging from $2.44 to $11.125, with a
weighted average exercise price of $5.792 per share (including 50,000 to each of
Dr. Schiff, Mr. Krause and Ambassador Rabb at a weighted average exercise price
of $5.963 per share, and 22,500 to Dr. Malley at a weighted average exercise
price of $4.648 per Share). Mr. Morgenstern, Dr. Kuhn and Mr. Eisenberger are
not eligible to participate in the Outside Director Plan.
Set forth below is certain information concerning the Outside Director
Plan. A copy of the Outside Director Plan is available upon written request from
the Company.
GENERAL
The Outside Director Plan provides for awards of nonqualified stock options
to directors of the Company who are not employees of the Company or its
affiliates and who have not, within one year immediately preceding the
determination of such director's eligibility, received any award under any other
plan of the Company or its affiliates that entitles the participants therein to
acquire stock, stock options or stock appreciation rights of the Company or its
affiliates ("Eligible Directors"). The options granted under the plan are
exercisable in whole or in part at all times during the period beginning on the
first anniversary of the date of grant until the earliest of (i) 10 years from
the date of grant optionee and (ii) 90 days after the date an optionee ceases to
be a director. The exercise price per share of Common Stock is required to be
100% of the fair market value per share on the date the option is granted.
Pursuant to the terms of the Outside Director Plan, options are granted
under the Outside Director Plan as follows: (i) upon first election or
appointment to the Board, each newly elected or appointed Eligible Director will
be granted an option to purchase 7,500 Shares; and (ii) immediately following
each annual meeting of stockholders each Eligible Director, other than an
Eligible Director first elected to the Board within the 12 months immediately
preceding and including such meeting, will be granted an option to purchase
7,500 Shares as of the date of such meeting.
The maximum number of shares of Common Stock in respect of which options
may be granted under the Outside Director Plan is 200,000 (400,000 if the
Outside Director Plan Amendment is
-18-
approved). Shares of Common Stock subject to awards that are forfeited,
terminated, canceled, or settled without the delivery of Common Stock will again
be available for awards. Also, shares tendered to the Company in satisfaction or
partial satisfaction of the exercise price of any option will increase the
number of shares available for awards to the extent permitted by Rule 16b-3
under the Exchange Act. No option may be granted under the Outside Director Plan
after December 31, 2008.
The Outside Director Plan may be amended by the Board, as it shall deem
advisable or to conform to any change in any law or regulation applicable
thereto, except that the Board may not, without the authorization and approval
of stockholders: (i) increase the number of shares of Common Stock which may be
purchased pursuant to options, either individually or in the aggregate, (ii)
change the requirement that option grants be priced at fair market value, (ii)
modify in any respect the class of individuals who constitute Eligible Directors
or (iv) materially increase benefits.
The exercise price of options may be satisfied in cash or, unless otherwise
determined by the Board, by exchanging shares of Common Stock owned by the
optionee, or by a combination of cash and shares of Common Stock. The ability to
pay the option exercise price in shares of Common Stock would enable an optionee
to engage in a series of successive stock-for-stock exercises of an option and
thereby fully exercise an option with little or no cash investment.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE OUTSIDE DIRECTOR PLAN
When an optionee exercises an option, the difference between the option
price and any higher fair market value of the shares of Common Stock, generally
on the date of exercise, will be ordinary income to the optionee and generally
will be allowed as a deduction for federal income tax purposes to the Company.
Any gain or loss realized by an optionee on disposition of the Common Stock
acquired upon exercise of an option generally will be capital gain or loss to
such optionee, long-term or short-term depending on the holding period, and will
not result in any additional tax consequences to the Company. The optionee's
basis in the shares for determining gain or loss on the disposition will
generally be the fair market value of such fares determined generally at the
time of exercise.
The foregoing discussion summarizes the federal income tax consequences of
the Outside Director Plan based on current provisions of the Code which are
subject to change. This summary does not cover any state or local tax
consequences of participation in the Outside Director Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL
OF THE OUTSIDE DIRECTOR PLAN AMENDMENT (DESIGNATED AS PROPOSAL 3 ON THE ENCLOSED
PROXY CARD) INCREASING THE AGGREGATE NUMBER OF SHARES ISSUABLE UNDER THE 1994
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS FROM 200,000 TO 400,000 AND EXTENDING
THE DATE UNTIL WHICH OPTIONS MAY BE GRANTED UNDER THE OUTSIDE DIRECTOR PLAN TO
DECEMBER 2008.
-19-
INDEPENDENT PUBLIC ACCOUNTANTS AND AUDITORS
CHANGE IN ACCOUNTANT
On December 1, 2000, a representative of Deloitte & Touche LLP ("D&T")
notified the Company that it did not wish to stand for re-election as the
independent accountant for the Company for the 2000 fiscal year audit.
Thereafter, the Company retained KPMG LLP ("KPMG") as its independent certified
public accountants and auditors.
D&T audited the Company's financial statements for the years ended December
31, 1998 and December 31, 1999, and provided reviews relating to the Company's
quarterly reports on Form 10-Q for the first three quarters of 2000. The reports
of D&T on the Company's financial statements for the past two fiscal years did
not contain an adverse opinion or disclaimer of opinion, and were not qualified
or modified as to uncertainty, audit scope or accounting principles.
During the two most recent fiscal years and through December 1, 2000, there
were no disagreements between the Company and D&T as to any matter of accounting
principles or practices, financial statement disclosure, or audit scope or
procedure, which disagreement, if not resolved to the satisfaction of D&T, would
have caused it to make reference to the subject matter of the disagreement in
their reports on the financial statements for such periods within the meaning of
Item 304(a)(1)(iv) of Regulation S-K. During the two most recent fiscal years
and through December 1, 2000, no reportable events occurred (as defined in item
304(a)(1)(v) of Regulation S-K).
KPMG served as the Company's independent certified public accountants and
auditors for the year ended December 31, 2000, and has been selected as its
auditors for fiscal year 2001. A representative of KPMG has been invited to and
is expected to be present at the Annual Meeting. The decision to engage KPMG as
the independent accountants of the Company was approved by the Audit Committee
of the Company's Board.
AUDIT FEES
The aggregate fees billed by KPMG and D&T for professional services
rendered for the audit of the Company's annual financial statements for the year
ended December 31, 2000 and the reviews of the Company's quarterly financial
statements for that fiscal year totaled $159,500, and were billed to the Company
as follows: $135,500 by KPMG (for services rendered in connection with the
annual financial statements as well as services related to the presentation of
fiscal information from prior fiscal years in the Company's annual financial
statements for the fiscal year ended December 31, 2000); and $24,000 by D&T (for
services rendered in connection with the review of the quarterly financial
statements for the first three quarters of 2000).
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
The Company did not engage D&T or KPMG to provide systems design and
implementation services (as defined in paragraph (c) (4) (ii) of Rule 2-01 of
Regulation S-X under the Exchange Act) during the year ended December 31, 2000.
ALL OTHER FEES
The aggregate fees billed by KPMG for the year ended December 31, 2000 for
non-audit services, primarily fees relating to the Company's SEC filings,
totaled $69,000.
-20-
The Audit Committee of the Company's Board of Directors has considered
whether provision of the services covered under the caption "All Other Fees"
above is compatible with maintaining KPMG's independence, and has concluded that
the provision of such services was compatible with KPMG's independence as the
Company's auditors.
STOCKHOLDER PROPOSALS FOR THE 2001 ANNUAL MEETING
Stockholders may present proposals for inclusion in the Company's 2002
proxy statement provided that (in addition to other applicable requirements)
such proposals are received by the Company in writing at its principal executive
offices no later than February 21, 2002.
Pursuant to the By-laws of the Company, stockholders who wish to nominate
any person for election to the Board of Directors or bring any other business
before the 2002 Annual Meeting must generally give notice thereof to the Company
at its principal executive offices not less than 60 days nor more than 90 days
before the date of the meeting. A copy of the By-laws of the Company is
available upon request from the Secretary of the Company, 200 Route 17, Mahwah,
New Jersey 07430.
OTHER MATTERS
The Board of Directors of the Company does not know of any other matters to
be presented for action at the Annual Meeting other than those listed in the
accompanying Notice of Annual Meeting and described herein. If any other matters
not described herein should properly come before the meeting for stockholder
action, it is the intention of the persons named in the accompanying proxy to
vote, or otherwise act, in respect thereof in accordance with the Board of
Directors' recommendations.
ANNUAL REPORT
A copy of the Company's Annual Report, covering the fiscal year ended
December 31, 2000, including audited financial statements is enclosed with this
Proxy Statement. Such report is not incorporated in this Proxy Statement and is
not a part of the proxy soliciting material.
SOLICITATION OF PROXIES
The cost of soliciting proxies for the Annual Meeting will be borne by the
Company. In addition to use of the mails, proxies may be solicited by personal
interview, telephone, telex or facsimile. The Company will, upon request and in
accordance with applicable regulation, reimburse brokerage firms and others for
their reasonable expenses in forwarding solicitation material to the beneficial
owners of stock.
BY ORDER OF THE BOARD OF DIRECTORS,
SHELDON KRAUSE
SECRETARY
May 25, 2001
Mahwah, New Jersey
-21-
APPENDIX A
DATA SYSTEMS & SOFTWARE INC.
CHARTER
OF THE
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
PURPOSE
The primary purpose of the Audit Committee (the "Committee") is to assist the
Board of Directors (the "Board") in fulfilling its responsibility to oversee
management's conduct of the Company's financial reporting process, including by
overviewing the financial reports and other financial information provided by
the Company to any governmental or regulatory body, the public or other users
thereof, the Company's systems of internal accounting and financial controls,
and the annual independent audit of the Company's financial statements.
In discharging its oversight role, the Committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities and personnel of the Company and the power to retain outside counsel,
auditors or other experts for this purpose. The Board and the Committee are in
place to represent the Company's shareholders; accordingly, the outside auditor
is ultimately accountable to the Board and the Committee.
The Committee shall review the adequacy of this Charter on an annual basis.
MEMBERSHIP
The Committee shall be comprised of not less than three members of the Board,
and the Committee's composition will meet the requirements of the Audit
Committee Policy of the Nasdaq Stock Market, Inc.
Accordingly, all of the members will be directors:
1. Who have no relationship to the Company that may interfere with the
exercise of their independence from management and the Company; PROVIDED,
HOWEVER, that Sheldon Krause may continue to serve on the Committee until
June 14, 2001; and
2. Who are financially literate or who become financially literate within a
reasonable period of time after appointment to the Committee. In addition,
at least one member of the Committee will have accounting or related
financial management expertise.
KEY RESPONSIBILITIES
The Committee's job is one of oversight and it recognizes that the Company's
management is responsible for preparing the Company's financial statements and
that the outside auditors are responsible for auditing those financial
statements. Additionally, the Committee recognizes that financial management, as
well as the outside auditors, have more time, knowledge and more detailed
information on the Company than do Committee members; consequently, in carrying
out its oversight responsibilities, the Committee is not providing any expert or
special assurance as to the Company's financial statements or any professional
certification as to the outside auditor's work.
The following functions shall be the common recurring activities of the
Committee in carrying out its oversight function. These functions are set forth
as a guide with the understanding that the Committee may diverge from this guide
as appropriate given the circumstances.
o The Committee shall review with management and the outside auditors the
audited financial statements to be included in the Company's Annual Report
on Form 10-K (or the Annual Report to Shareholders if distributed prior to
the filing of Form 10-K) and review and consider with the outside auditors
the matters required to be discussed by Statement of Auditing Standards
("SAS") No. 61.
o As a whole, or through the Committee chair, the Committee shall review with
the outside auditors the Company's interim financial results to be included
in the Company's quarterly reports to be filed with Securities and Exchange
Commission and the matters required to be discussed by SAS No. 61; if
possible, this review should occur prior to the Company's filing of the
Form 10-Q.
o The Committee shall discuss with management and the outside auditors the
quality and adequacy of the Company's internal controls.
o The Committee shall:
o request from the outside auditors annually, a formal written statement
delineating all relationships between the auditor and the Company
consistent with Independence Standards Board Standard Number 1;
o discuss with the outside auditors any such disclosed relationships and
their impact on the outside auditor's independence; and
o recommend that the Board take appropriate action to oversee the
independence of the outside auditor.
The Committee, subject to any action that may be taken by the full Board, shall
have the ultimate authority and responsibility to select, evaluate and, where
appropriate, replace the outside auditor.
A-2
DATA SYSTEMS & SOFTWARE INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints George Morgenstern, Robert L. Kuhn and Sheldon
Krause, and each of them, with full power of substitution, as proxies, to vote
at the Annual Meeting of Stockholders of Data Systems & Software Inc. to be held
at The Courtyard by Marriott, 140 Route 17 South, Mahwah, New Jersey, on
Thursday, June 21, 2001, at 9:30 a.m., and any adjournments and postponements
thereof, hereby revoking all proxies heretofore given, to vote all shares of
Common Stock of the Company held or owned by the undersigned as directed on the
reverse, and, in their discretion, upon such other matters as may properly be
brought before the meeting. The proxy revokes all prior proxies given by the
undersigned.
(To be Signed on Reverse Side)
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
DATA SYSTEMS & SOFTWARE INC.
June 21, 2001
/ Please Detach and Mail in the Envelope Provided /
/X/ Please mark your
vote as in this example
1. Elections of FOR WITHHELD Nominees: George Morgenstern
Directors / / / / Robert L. Kuhn
Samuel Fogel
For, except vote withheld from the Harvey Eisenberger
following nominee(s): Sheldon Krause
Susan L. Malley
- ---------------------------------- Maxwell M. Rabb
Allen I. Schiff
2. Approval of Amendment of 1994 Stock Incentive Plan.
3. Approval of Amendment of 1994 Stock Option Plan for Outside Directors.
4. Act upon such other matters as may come before the meeting.
This proxy, when properly executed, will be voted as directed herein by the
undersigned stockholder. If no direction is indicated, the proxy will be voted
for the election of the directors indicated and for approval of the proposals
presented.