SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
MEGADATA CORPORATION
(Name of Registrant as Specified In Its Charter)
MEGADATA CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] 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:
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:
<PAGE>
================================================================================
MEGADATA
Notice of 1999
Annual Meeting
and
Proxy Statement
================================================================================
MEGADATA CORPORATION
<PAGE>
MEGADATA CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JULY 14, 1999
The Annual Meeting of the shareholders of Megadata Corporation (the "Company")
will be held at the LaGuardia Marriott Hotel, in East Elmhurst, New York, on
Wednesday, July 14, 1999, at 11:00 A.M., for the following purposes:
1. To elect directors for the ensuing year; and
2. To consider and vote on a proposal to approve the Company's 1999 Stock
Incentive Plan; and
3. To consider and vote on a proposal to amend the Company's Certificate of
Incorporation to increase the total number of shares of common stock, $0.01
par value, which the Company has authority to issue from 5,000,000 to
10,000,000; and
4. To ratify the appointment of Ernst & Young, LLP as the independent public
accountants of the Company for the fiscal year ended October 31, 1999; and
5. To consider and vote on an amendment to the Company's Certificate of
Incorporation that would establish restrictions on transfers of the
Company's common stock in order to protect the availability of a
substantial portion of the Company's net operating loss carryforwards under
the "ownership change" rules set forth in Section 382 of the Internal
Revenue Code of 1986, as amended; and
6. To transact such business as may properly come before the meeting or any
adjournment or adjournments thereof.
Only shareholders of record at the close of business on May 28, 1999 will be
entitled to vote at the Annual Meeting. A list of shareholders eligible to vote
at the Annual Meeting will be available for inspection at the Annual Meeting and
during business hours from June 7, 1999 to the date of the Annual Meeting at the
Company's headquarters in Connecticut.
Whether you expect to attend the Annual Meeting or not, your proxy vote is
important. To assure your representation at the meeting, please sign and date
the enclosed proxy card and return it promptly in the enclosed envelope, which
requires no additional postage if mailed in the United States or Canada.
By Order of the Board of Directors
John R. Keller
Executive Vice President and Secretary
47 Arch Street
Greenwich, CT 06830
June 7, 1999
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE COMPLETED
AND RETURNED PROMPTLY
<PAGE>
MEGADATA CORPORATION
PROXY STATEMENT
June 7, 1999
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Megadata Corporation ("Megadata" or the
"Company") for use at the Annual Meeting of its shareholders to be held at the
LaGuardia Marriott Hotel, 105-05 Ditmars Blvd., East Elmhurst, New York, on
Wednesday, July 14, 1999, at 11:00 A.M.
Shares cannot be voted at the Annual Meeting unless the owner thereof
is present in person or by proxy. All properly executed and unrevoked proxies in
the accompanying form that are received in time for the Annual Meeting will be
voted at the Annual Meeting or any adjournment thereof in accordance with any
specification thereon, or if no specification is made, will be voted "FOR" the
election of the named director nominees and approval of the other proposals set
forth in the Notice of Annual Meeting of Shareholders of the Company. The Board
of Directors of the Company knows of no other matters which may be brought
before the Annual Meeting. However, if any other matters are properly presented
for action, it is the intention of the named proxies to vote on them according
to their best judgment. Any person giving a proxy may revoke it by written
notice to the Company at any time prior to the exercise of the proxy. In
addition, although mere attendance at the Annual Meeting will not revoke the
proxy, a person present at the Annual Meeting may withdraw his or her proxy and
vote in person. Rights of appraisal or similar rights of dissenters are not
available to shareholders of the Company with respect to any matter to be acted
upon at the Annual Meeting.
The Annual Report on Form 10-K of the Company (which does not form a
part of these proxy solicitation materials), as filed with the Securities and
Exchange Commission and including the financial statements of the Company, is
enclosed herewith.
The mailing address of the principal executive office of the Company is
47 Arch Street, Greenwich, Connecticut, 06830. This Proxy Statement and the
accompanying form of proxy are expected to be mailed to the shareholders of the
Company on or about June 7, 1999.
VOTING SECURITIES
The Company's only class of voting securities outstanding, is its
Common Stock, par value $0.01 per share (the "Common Stock"). On May 28, 1999,
there were 2,511,600 shares of Common Stock outstanding. At the Annual Meeting,
each shareholder of record at the close of business on May 28, 1999 will be
entitled to one vote for each share of Common Stock owned on that date as to
each matter presented at the Annual Meeting.
ELECTION OF DIRECTORS
Unless otherwise directed, the persons named in the accompanying form
of proxy intend to vote at the Annual Meeting "FOR" the election of the nominees
named below as directors of the Company to serve until the next Annual Meeting
and until their successors are duly elected and qualified. THE BOARD OF
DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF SUCH NOMINEES.
If any nominee is unable to stand for election when the election takes
place, the shares represented by valid proxies will be voted in favor of the
remaining nominees and for such person, if any, as shall be designated by the
present Board of Directors to replace such nominee. The Board of Directors does
not presently anticipate that any nominee will be unable to stand for election.
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<PAGE>
INFORMATION CONCERNING DIRECTORS AND NOMINEES
The following information with respect to the principal occupation or
employment, other affiliations and business experience of each nominee during
the last five years has been furnished to the Company by such nominee. Except as
indicated, each of the nominees has had the same principal occupation for the
last five years. All of the nominees are currently directors of the Company.
G.S. Beckwith Gilbert, age 57, was elected Chairman of the Board in
1997 and was elected to the additional posts of President and Chief Executive
Officer in October of 1998. Mr. Gilbert has been a director of the Company since
1997. In addition, Mr. Gilbert is President and Chief Executive Officer of Field
Point Capital Management Company, a merchant banking firm, since 1988. He is a
partner of Wolsey & Co., a merchant banking firm. Mr. Gilbert is also a Director
and Chairman of the Executive Committee of DIANON Systems, Inc., as well as a
Director of Davidson Hubeny Brands.
Richard R. Schilling, Jr., age 73, is a member of the law firm of
Burns, Kennedy, Schilling & O'Shea, New York, New York . Mr. Schilling has been
a director of the Company since 1974.
Yitzhak N. Bachana, age 66, was President and Chief Executive Officer
of the Company from 1980 to October 2, 1998. Mr. Bachana has been a director of
the Company since 1976. Mr. Bachana is the President, Chief Executive Officer
and majority shareholder of Data Probe, Inc., a New York based computer service
bureau. Mr. Bachana is also President and a Director of Datatab, Inc., a market
research company since 1983. Data Probe, Inc. and Datatab, Inc. are
publicly-held corporations. Pursuant to an agreement between Data Probe, Inc.
and the Company, dated May 7, 1976, the President of Data Probe, Inc. is to be
nominated as a management nominee for Director.
Bruce N. Whitman, age 65, has been Executive Vice President and a
Director of FlightSafety International, an aviation and marine training company
since 1962. He is also a Director of FlightSafety Boeing Training International,
L.L.C., Petroleum Helicopters, Inc., and Aviall, Inc. Mr. Whitman has been a
director of the Company since 1997.
Paul L. Graziani, age 41, is the President and Chief Executive Officer
of Analytical Graphics, Inc., a leading producer of commercial analysis software
for the space industry. Mr. Graziani has been a director of the Company since
1997.
John R. Keller, age 59, has been with the Company since its inception
in 1967 and currently serves as Executive Vice President, Secretary, and
Treasurer of the Company. Mr. Keller has been a director of the Company since
1997.
COMMITTEES OF THE BOARD
The Company's Board of Directors presently has standing Audit,
Compensation, and Executive Committees, the current membership and principal
responsibilities of which are described below. The Board of Directors does not
have a Nominating Committee.
AUDIT COMMITTEE
Members: Mr. Graziani, Mr. Schilling, Mr. Whitman.
The Audit Committee's functions include reviewing with the independent
public accountants the plan for and results of their audit, the adequacy of the
Company's systems of internal accounting controls and any material breakdown in
such controls. In addition, the Audit Committee reviews the independence of the
independent public accountants and their fees for services rendered to the
Company.
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<PAGE>
COMPENSATION COMMITTEE
Members: Mr. Graziani, Mr. Schilling, Mr. Whitman.
The Compensation Committee's functions include setting compensation of
the directors and the executive officers. In addition, the Compensation
Committee has the authority to grant certain awards under the Stock Incentive
Plans in effect for the Company.
EXECUTIVE COMMITTEE
Members: Mr. Gilbert, Mr. Graziani, Mr. Keller, Mr. Whitman.
The Executive Committee was established in October 1998. The Executive
Committee's primary function is to assist management in formulating the
Company's strategy and such other corporate governance functions as may be
required and such other duties as may be designated by the Board of Directors.
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS
During the 1998 fiscal year the Board of Directors held 4 regular
meetings and special meetings. The Audit, Compensation, and Executive Committees
did not meet separately from the Board during Fiscal 1998. During the 1998
fiscal year each Director attended all the regular and special meetings of the
Board, except Mr. Graziani, who attended 2 meetings in person and one by
telephone.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are currently paid
$1,000 for each meeting of the Board of Directors attended in person or by
phone. Directors are also reimbursed for expenses to attend meetings of the
Board and its committees. Mr. Gilbert (effective October 3, 1998) and Mr.
Keller, who are employees of the Company, receive no additional compensation for
their services as Directors of the Company. If the 1999 Stock Incentive Plan is
approved by the Company's shareholders, Directors who are not employees of the
Company will receive options to purchase 15,000 shares of common stock which
will vest over a three year period beginning on July 1, 2000. If the 1999 Stock
Incentive Plan is approved, directors will be paid $500 for each Board or
Committee meeting attended.
VOTING FOR DIRECTORS
Abstentions are included in the determination of the existence of a
quorum. Directors are elected by a plurality of the votes of the shares present
in person or represented by proxy at the meeting and entitled to vote on the
election of Directors. An automated system administered by the Company's
transfer agent tabulates the votes. Abstentions are not counted for purposes of
election of directors.
EXECUTIVE OFFICERS
For information with respect to Mr. Gilbert and Mr. Keller, who are
also Directors, see "Election of Directors - Information Concerning Directors
and Nominees."
Dr. James A. Cole, age 58, is a Senior Vice President and the Director
of Research and Development of the Company since 1974. Dr. Cole earned a Ph.D.
in physics from Johns Hopkins University in 1966.
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<PAGE>
James T. Barry, age 37, has been a Vice President since 1998. He is
also a Vice President of Field Point Capital Management Company. From 1989 to
1998, he was with DIANON Systems, Inc., most recently as Vice President of
Marketing.
Herbert E. Shaver, age 45, has been a consultant serving as Controller
of the Company since 1993 and an employee since September 1998. From 1973 until
1998, Mr. Shaver was a Vice President and Controller of Datatab, Inc. He has
been a Director of Datatab, Inc. since 1985, and from 1983 until 1998, was the
Controller of Data Probe, Inc.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the
following named executive officers: the person who served as Chief Executive
Officer ("CEO") during 1998, and the two executive officers other than the CEO
serving at October 31, 1998 whose total salary exceeded $100,000. The Company
did not award or pay out any long term compensation during 1996, 1997, or 1998.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------
Other All
Name and Principal Annual Other
Position Year(*) Salary Bonus Compensation Compensation
- -------- ------- ------ ----- ------------ ------------
G.S Beckwith Gilbert-
<S> <C> <C> <C> <C> <C>
President 1998 $ -- -- -- $ 12,173(1)
Yitzhak N. Bachana (7) 1998 $ 189,038(2) -- -- $ 66,231(3)
1997 100,000 -- -- $ 26,923(5)
1996 11,538(6) -- -- --
John R. Keller -
Executive Vice Pres. 1998 $ 119,423 -- -- --
1997 90,000 -- -- --
1996 93,462 -- -- --
Dr. James Cole -
Sr. Vice Pres. -R&D 1998 $ 120,000 -- -- --
1997 96,346 -- -- --
1996 93,462 -- -- --
<FN>
(1) Represents earned but unpaid salary through October 31, 1998. Mr. Gilbert
became the Company's President and Chief Executive Officer in October 1998.
(2) Includes repayment of all earned and previously accrued salary through date
of his resignation on October 2, 1998.
(3) Includes earned but unpaid salary as well as a severance settlement through
October 2, 1998.
(4) Does not include earned but unpaid salary of $ 84,615 as of October 31,
1997.
(5) Represents partial repayment of earned and previously accrued salary, the
balance of which was paid in 1998 (see Footnote 2 above).
(6) Does not include earned but unpaid salary of $111,538 as of October 31,
1996.
(7) Mr. Bachana resigned as President on October 2, 1998.
(*) Information is provided for the Company's fiscal year which ends on October
31.
</FN>
</TABLE>
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<PAGE>
STOCK OPTION GRANTS
The following table shows, as to the named executive officers of the
Company, information about option grants in fiscal year 1998. The Company, in
fiscal year 1998, did not grant any Stock Appreciation Rights to officers.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation Grant Date
Individual Grants for Option Term Value
- -------------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying option/SARs
Options/ Granted to Exercise or Grant Date
SAR's Employees Base Price Expiration Present
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($) Value $ (1)
- ---- ----------- ----------- ------ ---- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Yitzhak N. Bachana 20,000(2) 33% $0.38 29-Jan-03 $ 2,000 $ 4,600 $ 6,000
Dr. James A. Cole 20,000 33% $0.38 29-Jan-08 $ 4,800 $12,200 $ 7,000
John R. Keller 20,000 33% $0.38 29-Jan-08 $ 4,800 $12,200 $ 7,000
<FN>
(1) The fair value for these options was estimated at the date of
grant, using a Black Scholes option pricing model with the following weighted
average assumptions: risk-free interest rate of 5.0%, no dividend yields on the
Common Stock, volatility factors of the expected market price of the Company's
Common Stock of .029 and the weighted average expected life of the options of
approximately 8 years.
(2) The options granted Mr. Bachana in 1998 expired with his
resignation on October 2, 1998.
</FN>
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
The following table shows the aggregate option exercises in the last
fiscal year and fiscal year-end option values for the named executive officers.
<TABLE>
<CAPTION>
Value
Realized
(Market Value of Unexercised
Price at Number of Securities In-The-Money Options at FY-
Exercise Underlying Unexercised End 1998 (based on FY-End Price
Shares less Options at FY-end 1998 of $0.375/share ($) (1)
Acquired on Exercise
Name Exercise (#) Price)($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dr. James A. Cole -- -- 25,000 -- $ -- --
John R. Keller -- -- 27,500 -- $ -- --
<FN>
(1) Computed based upon difference between aggregate fair market value
and aggregate exercise price.
</FN>
</TABLE>
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<PAGE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors of Megadata
Corporation (the "Committee") sets forth its report on executive compensation
below. The Committee report documents the components of the Company's executive
compensation programs and describes the basis on which fiscal 1998 compensation
determinations were made by the Committee with respect to the executive officers
of the Company, including the executive officers that are named in the
compensation tables below.
COMPENSATION PROGRAM COMPONENTS
The Committee is responsible for setting and monitoring the
effectiveness of the compensation provided to the Company's executive officers.
In its decision-making, the Committee is guided by a compensation philosophy
designed to reward employees for the achievement of business goals and the
maximization of shareholder returns. Specific levels of pay and incentive
opportunity are determined by the competitive market for executive talent, and,
where appropriate, the need to invest in the future growth of the business. The
compensation program, which provides incentives for executive officers to
achieve the short-term and long-term goals of the Company, comprises two
components: base salary and stock option awards.
BASE SALARY - Base pay levels are largely determined through
comparisons with companies of similar size. Actual salaries are based on
individual performance contributions within a tiered salary range for each
position that is established through job evaluation and competitive comparisons.
STOCK OPTION PROGRAM - the Committee strongly believes that by
providing executives an opportunity to own shares of the Company stock, the best
interests of shareholders and executives will be closely aligned. Therefore, all
executives are eligible to receive stock options from time to time giving them
the right to purchase shares of Common Stock of the Company at a specific price
in the future. The number of stock options granted to executive officers is
determined at the discretion of the Committee based on the accomplishments of
such executives, their length of service with the Company, the number of prior
awards received by such officer, the relative value as well as the exercise
price of such awards, and the competitive practices. No options can be currently
issued since the 1988 Stock Option Plan expired in April 1998. A new plan must
be approved by the shareholders in order to make this important form of
compensation available to key managers.
DISCUSSION OF 1999 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
Mr. Bachana, President and CEO of the Company until October 2, 1998,
received a salary at an annual rate of $140,000. No review of Mr. Bachana's
performance or compensation was conducted by the Compensation Committee in 1998.
However, the Board of Directors, at its meeting of January 28, 1998, did restore
a salary reduction of $40,000 taken voluntarily by Mr. Bachana in 1994. Mr.
Gilbert, elected President and CEO on October 2, 1998, currently receives a
salary at an annual rate of $140,000. Since Mr. Gilbert has only held this
position since the resignation of Mr. Bachana on October 2, 1998, the Committee
has deferred evaluation of his performance for a future period.
This report has been provided by the Compensation Committee of the
Board of Directors:
Mr. Graziani
Mr. Schilling
Mr. Whitman
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are not officers or employees
of the Company and receive no compensation other than in their capacity as
Directors. They have no other relationship with the Company other than as
directors and shareholders.
EMPLOYMENT AND SEVERANCE AGREEMENTS
All of the officers of the Company are employed on an at-will basis.
A severance agreement was entered into between the Company and Mr.
Bachana on October 2, 1998 and has been filed with the Securities and Exchange
Commission separately under a current report on Form 8-K.
That Agreement provides the following remuneration to Mr. Bachana (i)
severance in the amount of $50,000 with payments ending in March 1999, (ii) the
surrender of a Company owned automobile to Mr. Bachana at its fair market value
established at the termination date, (iii) the payment by the Company by March
31, 1999 of any accrued but unpaid salary owed to Mr. Bachana through his
termination date of October 2, 1998. On March 31, 1999, the Company fulfilled
its payment obligations under the terms of the severance agreement.
Mr. Bachana remains a Director and a Shareholder of the Company.
PERFORMANCE GRAPH
The following graph compares the percentage changes in the Company's
cumulative total stockholder return on the Company's Common Stock for the five
year period ended October 31, 1998, with the cumulative total return on the
NASDAQ index and a peer group index for the same period. In accordance with the
rules of the Securities and Exchange Commission, the returns are indexed to a
value of $100 at November 30, 1993 and assume that all dividends were
reinvested.
CUMULATIVE TOTAL RETURN OF MEGADATA CORPORATION,
PEER GROUP AND NASDAQ MARKET INDEX
Date Megadata $400.00 NASDAQ $234.81 Peer Group $131.19
- ---- ----------------- ---------------- --------------------
11/30/93 $100.00 $100.00 $100.00
01/31/94 $116.67 $106.11 $100.21
04/30/94 $116.67 $ 97.28 $100.11
07/31/94 $166.67 $ 95.73 $ 98.39
10/31/94 $400.00 $103.06 $ 97.11
01/31/95 $466.67 $100.11 $ 89.40
04/30/95 $283.33 $111.88 $102.51
07/31/95 $266.67 $132.72 $114.98
10/31/95 $266.67 $137.34 $124.30
01/31/96 $200.00 $140.48 $144.10
04/30/96 $ 66.67 $157.81 $181.07
07/31/96 $400.00 $143.24 $168.45
10/31/96 $800.00 $161.92 $161.05
01/31/97 $466.67 $182.91 $183.79
04/30/97 $600.00 $167.12 $169.74
07/31/97 $333.33 $211.27 $216.11
10/31/97 $533.33 $211.24 $195.84
031/31/98 $400.00 $214.66 $174.78
04/30/98 $666.67 $247.67 $196.70
07/31/98 $666.67 $248.20 $141.95
10/31/98 $400.00 $234.81 $131.19
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<PAGE>
Information is presented on a quarterly basis, beginning with November
30, 1993, and assumes $100 was invested on November 30, 1993, and reinvestment
of dividends, if any.
The peer group of Megadata Corporation consists of the following
corporations: Stanford Communications (STII), Rockwell International Corporation
(ROK), and BF Goodrich Company (GR). Peer group companies were selected without
respect to size when compared to the Company (they are all significantly larger
than the Company), but because the peer group company's product lines include
products or services that are similar to the products or services offered by the
Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equities of the Company.
Officers, directors and greater than ten percent shareholders are required to
furnish the Company with copies of all Sections 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and representations that no other reports
were required during the fiscal year ended October 31, 1998, all Section 16(a)
reporting requirements applicable to its officers, directors and greater than
ten percent beneficial shareholders were complied with.
OWNERSHIP OF VOTING STOCK BY MANAGEMENT
The following table sets forth the number of the shares of the
Company's common stock, $0.01 par value, beneficially owned by all of the
directors and executive officers of the Company and by the directors and
officers of the Company as a group as of May 28, 1999. Unless otherwise
indicated below, each person indicated in the table has sole voting and
investment power with respect to all shares included therein.
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (6) Class (1)
- ---------------- ------------------------ ---------
<S> <C> <C>
G.S. Beckwith Gilbert 846,000 32.99
Yitzhak N. Bachana 10,000(3) .39
John R. Keller 124,500 4.85
Richard R. Schilling, Jr. 3,000 0.11
James A. Cole 44,000 1.71
Bruce N. Whitman 113,000 4.41
Paul L. Graziani 7,000 0.27
Officers and Directors
as a Group (7 persons) 1,147,500 44.75
<FN>
(1) For the purposes of this table, "percent of class" held by each person has
been calculated based on a total class equal to the sum of (i) 2,511,600
shares of common stock issued and outstanding on May 28, 1999 plus (ii) for
such person the number of shares of common stock subject to stock options
or warrants presently exercisable, or exercisable within 60 days after May
28, 1999, held by that person.
</FN>
</TABLE>
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<PAGE>
(2) Mr. Gilbert has shared voting and investment power with respect to 70,000
shares included in the table above.
(3) Mr. Bachana is President, Chairman of the Board, and majority shareholder
of Data Probe, Inc. which owns 479,400 common shares of the Company which
are excluded from the foregoing table. See "Ownership of Voting Stock by
Certain Beneficial Owners".
(4) Includes Mr. Keller's options to purchase an aggregate of 27,500 shares,
all of which options are immediately exercisable.
(5) Includes Dr. Cole's options to purchase an aggregate of 25,000 shares, all
of which options are immediately exercisable.
(6) Does not include stock option amounts granted under the proposed 1999 Stock
Incentive Plan Proposal which is subject to shareholder approval at the
Annual Meeting.
OWNERSHIP OF VOTING STOCK BY CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the only
persons who, to the best knowledge of the Company as derived from such persons
filings with the Securities and Exchange Commission, beneficially owned more
than 5% of the common stock of the Company as of May 28, 1999. Unless otherwise
indicated below, each person included in the table has sole voting and
investment power with respect to all shares included therein.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent of
Title of Class of Beneficial Owner of Ownership Class (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common G.S. Beckwith Gilbert 846,000 (2) 32.99
Stock 47 Arch Street
Greenwich, CT 06830
Common Data Probe, Inc. 479,400 (3) 18.70
Stock 49 East 21 Street
New York, NY 10010
- --------------------------------------------------------------------------------
<FN>
(1) For the purposes of this table, "Percent of Class" held by each person has
been calculated based on a total class equal to the sum of (i) 2,511,600
shares of common stock issued and outstanding on May 28, 1999 plus (ii) for
such person the number of shares of common stock subject to stock options
or warrants presently exercisable, or exercisable within 60 days after May
28, 1999, held by that person.
(2) Mr. Gilbert has shared voting and investment power with respect to 70,000
shares included in the table above.
(3) Yitzhak N. Bachana, a Director of the Company, owns 57.22% of the
outstanding shares of Data Probe, Inc. and by virtue thereof may be deemed
to be the beneficial owner of more than 5% of the Company's outstanding
shares. This amount does not include 10,000 shares personally held by Mr.
Bachana.
</FN>
</TABLE>
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the period between September 18, 1996 and June 6, 1997 the
Company signed agreements with a private investor (the "Investor") that provided
for three loans of $100,000 each, of which $200,000 was received in 1996 and
$100,000 was received in 1997. The three notes bore interest at a rate of 9% per
annum, and were payable by July 30, 1997. In addition, as part of the above
financings, stock warrants were awarded for the purchase of up to 1,400,000
common shares at prices between $0.71 and $1.25 per share. The warrants for
200,000 of such shares (at $0.75 per share) would only be exercisable after the
purchase by the Investor of the first 700,000 shares. The warrant for an
additional 500,000 of such shares (at $1.25 per share) becomes exercisable from
November 1, 2000 through October 31, 2001, assuming the prior exercise of the
200,000 share warrant.
On June 6, 1997, the Investor and his affiliate purchased 700,000
shares for $0.71 per share, for a total of $500,000 ($400,000 in cash and
$100,000 by cancellation of the first $100,000 note).
On October 31, 1997, the Investor and two other directors purchased
200,000 shares for $150,000. The purchase of these shares made effective the
stock purchase warrant, that gives the Investor and his affiliates the right to
purchase 500,000 shares at $1.25 per share. This warrant expires October 31,
2001, and is exercisable during the year preceding expiration.
On July 30, 1997, the remaining notes totaling $200,000 were amended
and restated by a new note bearing interest at 9% per annum, with quarterly
payments of $25,000 plus accrued interest due on the last business day of each
calendar quarter, commencing December 31, 1997, with any remaining balance being
due July 30, 1999. The note is secured by the Company's assets excluding its
building.
During 1997, the Investor was elected a director of the Company and
Chairman of the Board. On October 2, 1998, the Investor was named to the
additional post of President and Chief Executive Officer.
During the first quarter of fiscal 1999, the Investor made additional
loans to the Company aggregating $400,000 The loans are evidenced by promissory
notes issued by the Company which are payable quarterly, maturing at various
dates from March 31, 2000 through December 31, 2000. The Investor advanced the
Company $525,000 subsequent to January 31, 1999. As of May 28, 1999, after
making the required principal payments on December 31, 1998, and March 31, 1999,
together aggregating $75,000, the total notes payable due to the Investor is
$1,050,000.
During the quarter ended January 31, 1999, the Company reimbursed Field
Point Capital Management Company ("FPCM"), an entity controlled by the Investor,
for sales and marketing services rendered by an employee of FPCM approximating
$27,000.
The Company is also leasing space from FPCM. During the first quarter
of fiscal 1999, the rent to be paid by the Company to FPCM aggregated $3,000.
Effective February 1, 1999, the Company will pay FPCM rent of $1,000 per month
on a month to month basis.
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS APPOINTMENT
For the Fiscal year ended 1997, and for at least the five years prior,
Ghassemi, Phoel & Company had been the independent public auditors of the
Company's accounts. Along with the changes of the Company's management on
October 2, 1998, the Board of Directors voted to engage Ernst & Young, LLP to
audit the Company's accounts.
-10-
<PAGE>
Ernst & Young, LLP has been the independent public auditors of the
Company's accounts since 1998. Such firm has no financial interest, either
direct or indirect, in the Company. Selection of Ernst & Young, LLP as the
auditors for the fiscal year ending October 31, 1999 was made by the Board of
Directors, subject to shareholder ratification. A representative of Ernst &
Young, LLP is expected to attend the annual meeting and have an opportunity to
make a statement and/or respond to appropriate questions from shareholders.
The Company's Board of Directors recommends that shareholders vote
"FOR" ratification of Ernst & Young, LLP as the Company's independent public
accountants for 1999. Approval of the ratification of the independent public
accountants' appointment requires the affirmative vote of a majority of the
votes cast at the meeting. Abstentions will have no effect on the vote.
1999 STOCK INCENTIVE PLAN PROPOSAL
The Company's 1998 Stock Option Plan expired in April 1998. On March
23, 1999, the Board of Directors adopted, subject to stockholder approval, the
1999 Stock Incentive Plan (the "Plan"). The Plan, a copy of which is attached as
Exhibit A, will authorize the Company to grant to its employees, outside
(non-employee) directors and consultants stock options, stock appreciation
rights, restricted stock, deferred stock and bonus stock for up to 250,000
shares of the Company's Common Stock, of which 175,000 shares will be available
for awards for employees and 75,000 shares will be available for awards to
outside directors and consultants.
The purposes of the Plan are (i) to enable the Company and its related
companies to attract, retain and reward employees and strengthen the existing
mutuality of interest between such employees and the Company's stockholders by
offering such employees an equity interest in the company; (ii) to enable the
Company to pay all or part of the compensation of its outside directors in
shares of the Company's Common Stock and options to purchase the Company's
Common Stock, thereby increasing such director's proprietary interest in the
Company; and (iii) to enable the Company to pay part of the compensation of its
consultants in shares of the Company's Common Stock and options to purchase the
Company's Common Stock, thereby increasing such consultant's proprietary
interest in the Company. The Plan is intended to comply with the requirements of
Section 162(m) of the Internal Revenue Code of 1986 as amended (the "Code").
DESCRIPTION OF THE PLAN
The Plan will be administered by the Board of Directors or such
committee of directors as the Board shall designate. The Board of Directors or
such committee will determine whether and to what extent awards will be granted
under the Plan.
Employees, including officers, are eligible to participate in the Plan
on the terms and conditions of the Plan. Outside directors and consultants may
also participate in the Plan, but outside directors are eligible to receive only
non-qualified stock options, limited stock appreciation rights and stock grants
as provided in the Plan, and consultants are eligible to receive only
non-qualified stock options and stock grants as provided in the Plan.
Awards granted by the Compensation Committee after approval by the
Board of Directors may include: (i) options to purchase shares of Common Stock
in the form of incentive stock options within the meaning of Section 422 of the
Code or any successor provision thereto ("ISO's") or non-qualified stock options
("NQSO's"); (ii) stock appreciation rights ("SAR's"); (iii) restricted stock;
(iv) deferred stock; (v) bonus stock; (vi) loans; and/or (vii) tax offset
payments.
-11-
<PAGE>
No employee will be granted awards under the Plan with respect to more
than 100,000 shares of common stock in any fiscal year.
Under the Plan, each outside director will automatically be granted the
following:
(i) On the date of adoption of the Plan by the stockholders (if a
current director) or on the date elected by the board of (if not a current
director), options to acquire 15,000 shares unless a lesser amount is approved
by the Board for outside directors who are not currently on the Board. The
current directors' options will be priced at $0.15, the price on March 24, 1999;
and
(ii) A limited stock appreciation right ("LSAR") in tandem with each
stock option granted, which may be exercised only within the 60-day period
following a change in control (as defined in the Plan) of the Company. Upon
exercising an LSAR, the holder will receive an amount equal to the excess of the
change of control price (as defined in the Plan) over the exercise price of the
option.
The exercise price per share of an outside director's option will be
the closing sales price of the common stock on the date the option is granted.
Each director's option will have a term of 10 years from the date of grant, and
will vest with respect to 33-1/3% of the shares subject to such option on the
first, second, and third anniversaries of the date of grant , provided the
optionee is a director of the Company on each such vesting date.
The option price per share of options granted to employees and
consultants under the Plan will be determined by the Board of Directors as
recommended by the Compensation Committee. However, the per share option price
of an ISO will not be less than 100% of the fair market value of a share of the
Company's Common Stock at the time the ISO is granted. In addition, no ISO will
be exercisable more than ten years after the date of grant.
In the event of an employee's termination of employment with the
Company, any outstanding options will be exercisable to the extent determined by
the Board of Directors as recommended by the Compensation Committee.
If an outside director ceases to be a director for any reason, the
director's options may be exercised for three years following termination of
service but only to the extent such options were vested on the date of
termination of service.
Stock options or stock grants may be awarded to Consultants on such
terms and conditions as the Board of Directors may determine.
The Board of Directors may award Bonus Stock to eligible employees upon
the attainment of specified performance objectives. The Board of Directors as
recommended by the Compensation Committee may also provide that the Company make
a loan to an employee or provide for a Tax Offset Payment with respect to the
exercise of any stock option award under the Plan.
In the event of a Change of Control of the Company (as defined in the
Plan) and unless otherwise determined by the Board of Directors, (i) all
outstanding ISO's and NQSO's and all outstanding SAR's awarded under the Plan
will become fully exercisable and vested; (ii) the restrictions and deferral
limitations applicable to any outstanding restricted stock and deferred stock
awards under the Plan shall lapse and such shares and awards shall be deemed
fully vested; and (iii) to the extent the cash payment of any award is based on
the fair market value of Common Stock, such fair market value will be the
highest price per share paid in any market transaction or the price paid or
offered in the transaction related to the change in control at any time during
the 90-day period ending with the Change of Control. All outside directors'
options outstanding at the time of a change in control will become immediately
vested and exercisable for three years after the director's termination of
service.
-12-
<PAGE>
The Board may discontinue the Plan at any time and may amend it from
time to time. No amendment or discontinuation of the Plan shall adversely affect
any award previously granted without the award holder's written consent.
Amendments made be made to the Plan without stockholder approval except as may
be required under the Securities Exchange Act of 1934, as amended, the Internal
Revenue Code of 1986, as amended, or other regulatory requirements. Unless
earlier terminated, the Plan will expire ten years from March 23, 2009.
The following table sets forth the number of stock options and the
value thereof that will be granted under Section 6 of the Plan to the persons
specified if the Plan is approved by the Company's stockholders.
<TABLE>
<CAPTION>
NUMBER OF STOCK
NAME AND POSITION OPTIONS GRANTED DOLLAR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Yitzhak N. Bachana, Director 15,000 $ 2,250.00
Paul L. Graziani, Director 15,000 $ 2,250.00
Richard Schilling, Director 15,000 $ 2,250.00
Bruce N. Whitman, Director 15,000 $ 2,250.00
John R. Keller, Executive Vice President 12,500 $ 1,875.00
James A. Cole, Sr. Vice President 15,000 $ 2,250.00
James T. Barry, Vice President 40,000 $ 6,000.00
Herbert E. Shaver, Controller 15,000 $ 2,250.00
All Non-Employee Directors as a group 60,000 $ 9,000.00
All Executive Officers as a group 82,500 $ 12,375.00
All Employees (other than executive officers) -- $ --
</TABLE>
Certain United States Federal Income Tax Consequences
-----------------------------------------------------
The following discussion applies primarily to participating employees
that are citizens or resident aliens (as defined in the Code) of the United
States whose tax home or abode (as defined in the Code) is in the United States.
The discussion is based on the Code and applicable regulations thereunder in
effect on the date hereof. Any subsequent changes in the Code or such
regulations may affect the accuracy of this discussion. In addition, this
discussion does not consider any state, local or foreign tax consequences or any
circumstances that are unique to a particular Plan participant that may affect
the accuracy or applicability of this discussion.
ISO's
-----
(a) Neither the grant nor the exercise of an ISO will result in taxable
income to the employee or an income tax deduction to the Company. The amount by
which the fair market value of the shares issued upon exercise exceeds the
option price will constitute an item of adjustment that must be taken into
account in determining the employee's alternative minimum tax.
(b) If the employee holds shares acquired by him or her upon the
exercise of an ISO until the later of two years from the date of grant of the
option and one year from such exercise and has been an employee of the Company
at all times from the date of grant of the ISO to the day three months before
such exercise (or twelve months in the case of termination of employment due to
disability), then any gain realized by the employee on a later sale or exchange
of such shares will be a capital gain and any loss sustained will be a capital
loss. The Company will not be entitled to a tax deduction with respect to any
such sale or exchange of ISO shares.
-13-
(c) If the employee disposes of any shares acquired upon the exercise
of an ISO during the two-year period from the date of grant of the option or the
one-year period beginning on the day after such exercise (i.e., a "disqualifying
disposition"), the employee will generally be obligated to report as ordinary
income, for the year in which the disposition occurred, the amount by which the
fair market value of such shares on the date of exercise of the option (or, as
noted in clause (d) below, in the case of certain sales or exchanges of such
shares for less than such fair market value, the amount realized upon such sale
or exchange) exceeds the option price, and the Company will be entitled to an
income tax deduction equal to the amount of such ordinary income reported by the
employee on his or her federal income tax return.
(d) If an ISO holder who has acquired stock upon the exercise of an ISO
makes a disqualifying disposition of any such stock, and the disposition is a
sale or exchange with respect to which a loss (if sustained) would be recognized
by the ISO holder, then the amount includable in the ISO holder's gross income,
and the amount deductible by the Company, will not exceed the excess (if any) of
the amount realized on the sale or exchange over the tax basis of the stock.
NQSO's
------
In the case of an NQSO, the grant of the option will not result in
taxable income to the option holder or an income tax deduction to the Company.
The NQSO holder generally recognizes ordinary income at the time the NQSO is
exercised in the amount by which the fair market value of the shares acquired
exceeds the option price. The Company is generally entitled to a corresponding
ordinary income tax deduction, at that time, equal to the amount of such
ordinary income.
SAR's
-----
The granting of SAR's will not result in taxable income to
participating employees or an income tax deduction to the Company. The exercise
of a SAR for cash is immediately taxable to the grantee and deductible by the
Company. The exercise of a SAR for shares of Common Stock is generally taxable
and deductible in the same manner as the exercise of a NQSO.
Restricted Stock
----------------
An employee generally will not recognize any taxable income upon the
award of any restricted stock which is not vested. Dividends paid with respect
to restricted stock prior to the vesting of such stock will be taxable as
compensation income to the employee. Generally, an employee will recognize
ordinary income upon the vesting of restricted stock in an amount equal to the
fair market value of the shares of Common Stock on the date they become vested.
However, pursuant to Section 83(b) of the Code, an employee may elect to
recognize compensation income upon the award of restricted stock based on the
fair market value of the shares of the Common Stock subject to such award on the
award date. If an employee makes such an election, dividends paid with respect
to such restricted stock will not be treated as compensation, but rather as
dividend income, and the employee will not recognize additional income when the
restricted shares vest.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income included by the employee on his or her federal income
tax return for the year when the restricted stock vests (or year in which an
applicable Code Section 83(b) election is made). The Company will also be
entitled to a compensation deduction for the dividends that are paid on
restricted stock that has not yet vested (as described in the immediately
preceding paragraph) when such dividends are reported by the employee on his or
her federal income tax return.
-14-
<PAGE>
Limitations on Company Deductions; Parachute Payments
-----------------------------------------------------
Under Section 162(m) of the Code, certain compensation payments in
excess of $1 million are subject to a limitation on deductibility by the
Company. This limitation on deductibility applies with respect to that portion
of a compensation payment for a taxable year in excess of $1 million to either
the chief executive officer of the Company or any one of the other four highest
paid executive officers who are employed by the Company on the last day of the
taxable year. However, certain "performance-based compensation" the material
terms of which are disclosed to and approved by stockholders is not subject to
this limitation on deductibility. The Company has structured the stock option
and SAR portions of the Plan with the intention that compensation resulting
therefrom would be such performance-based compensation and would be deductible.
To qualify, the Company is seeking stockholder approval of the Plan. It is not
intended that compensation resulting from restricted stock awarded, or bonuses
payable in stock under the Plan, will be performance-based compensation within
the meaning of Section 162(m) of the Code.
Under certain circumstances, accelerated vesting or exercise of options
or SAR's, or the accelerated lapse of restrictions on restricted stock, in
connection with a "change in control" of the Company might be deemed an "excess
parachute payment" for purposes of the golden parachute tax provisions of
Section 280G of the Code. If Section 280G applies, the optionee or grantee may
be subject to an excise tax equal to 20% of the amount of the excess parachute
payment and the Company may be denied a tax deduction.
Approval of the 1999 Stock Incentive Plan requires the affirmative vote
of a majority of the votes cast at the meeting. The Company's Board of Directors
recommends that shareholders vote "FOR" approval of the 1999 Stock Incentive
Plan.
INCREASE OF AUTHORIZED SHARES PROPOSAL
The Company's Certificate of Incorporation currently authorizes the
issuance of 5,000,000 shares of Common Stock. As of May 28, 1999, the Company
had issued and outstanding 2,511,600 shares of Common Stock and 552,500 shares
of Common Stock were reserved for issuance pursuant to outstanding options and
warrants. The Company's Board of Directors has proposed the approval and
adoption of an amendment to the Company's Certificate of Incorporation to
increase the total number of shares of Common Stock which the Company has the
authority to issue from 5,000,000 shares of Common Stock to 10,000,000 shares of
Common Stock (the "Increased Shares Amendment"). The form of amendment approved
by the Board and to be considered at the annual meeting is attached as Exhibit B
to this Proxy Statement.
If the Increased Shares Amendment is approved by the Company's
stockholders, the increased number of authorized shares of common stock will be
available for such purposes and consideration as the Board may approve without
further stockholder approval, except such approval as is required by law or the
regulations of any securities exchange on which the Company's shares may trade.
Such purposes may include additional public or private issuances of Common Stock
or other securities convertible into Common Stock in connection with financing
transactions, acquisitions and other corporate transactions as well as stock
dividends, warrants, stock option plans and other stock-based incentive
compensation programs (including the Incentive Equity Plan). The availability of
additional shares of Common Stock for issuance, without the delay and expense of
obtaining stockholder approval, will afford the Company greater flexibility in
acting upon opportunities and transactions, if any, which may arise in the
future. The Company has no immediate plans, arrangements, commitments or
understandings with respect to the issuance of any of the additional shares of
Common Stock which would be authorized by the Increased Shares Amendment.
-15-
<PAGE>
Stockholders do not have preemptive rights with respect to the Common
Stock, except that pursuant to a Securities Purchase Agreement, dated as of
September 18, 1996, the Company has agreed to notify the Investor (as defined
earlier in "Certain Relationships and Related Transactions") of future equity
issuances and offer the Investor the opportunity to acquire a portion of such
future issuances equal to the Investor's proportionate share interest in the
Company on the same terms and conditions that are offered to other parties in
connection with such issuance. The issuance of Common Stock, or securities
convertible into common stock, on other than a pro rata basis would result in
the dilution of a present stockholder's interest in the Company.
The Company's Board of Directors has not proposed the Increased Shares
Amendment with the intention of using the additional shares for anti-takeover
purposes, although the additional shares could be used to make it more difficult
or to discourage an attempt to acquire control of the Company.
The affirmative vote of a majority of all outstanding shares of Common
Stock voting at the annual meeting is required for the adoption of the proposed
amendment.
The Company's Board of Directors recommends that shareholders vote
"FOR" approval of the Amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock of the Company.
TRANSFER RESTRICTION PROPOSAL
SUMMARY
The Board of Directors believes that the best interests of the Company
and its stockholders will be served by adopting provisions in its Certificate of
Incorporation that are designed to restrict, until November 30, 2000, direct and
indirect transfers of Common Stock that could result in the imposition of
limitations on the use by the Company, for federal income tax purposes, of net
operating loss carryforwards ("NOLs") and other tax attributes that are and will
be available to the Company. Therefore, the Board of Directors has unanimously
approved and is recommending that the shareholders approve and adopt an
amendment to the Company's Certificate of Incorporation in the form attached as
Exhibit B to this Proxy Statement (the "Transfer Restriction Amendment"). All
the Directors have indicated they will vote their shares in favor of this
Amendment. SHAREHOLDERS ARE ENCOURAGED TO CAREFULLY READ EXHIBIT B WHICH SETS
FORTH THE TRANSFER RESTRICTIONS.
The purpose of the Transfer Restriction Amendment is to help ensure the
continued availability of the Company's NOLs by seeking to prevent an "Ownership
Change", as defined under current Treasury Department income tax regulations. In
the event of an "Ownership Change", the Company's ability to use its NOLs as
offsets against its future taxable income would be severely limited. Under
current federal and state laws and regulations, the Company is able to realize
tax deductions in an amount of up to 100% of the taxable income which it offsets
with NOLs. As of October 31, 1998, the Company had estimated NOLs of $5.3
million for federal income tax purposes.
THE COMPANY'S NOLS AND SECTION 382
As of October 31, 1998, the Company had available NOLs of $5.3 million
to offset taxable income recognized by the Company in periods after November 1,
1998. For federal income tax purposes, these NOLs will expire in material
amounts beginning in 2005. NOLs benefit the Company by offsetting taxable income
dollar-for-dollar by the amount of the NOLs, thereby eliminating the federal
corporate tax on such income. The maximum federal corporate tax rate is
currently 35%.
-16-
<PAGE>
The benefit of a company's NOLs can be reduced or eliminated under
Section 382 of the Code. Section 382 limits the use of losses and other tax
benefits by a company that has undergone an "ownership change," as defined in
Section 382 (an "Ownership Change"). Generally, an Ownership Change occurs if
one or more shareholders, each of whom owns 5% or more in value of a company's
capital stock, increase their aggregate percentage ownership by more than 50
percentage points over the lowest percentage of stock owned by such shareholders
over the preceding three-year period. For this purpose, all holders who each own
less than 5% of a company's capital stock are generally treated together as one
or more 5 percent shareholders. In addition, certain constructive ownership
rules, which generally attribute ownership of stock to the ultimate beneficial
owner thereof without regard to ownership by nominees, trusts, corporations,
partnerships or other entities, or to related individuals, are applied in
determining the level of stock ownership of a particular shareholder. Special
rules, described below, can result in the treatment of options (including
warrants) as exercised if such treatment would result in an Ownership Change.
All percentage determinations are based on the fair market value of a company's
capital stock, including any preferred stock that is voting or convertible or
otherwise participates in corporate growth.
Transactions in the public markets among shareholders owning less than
5% of the equity securities are not included in the calculation, but
acquisitions by a shareholder causing that person to become a 5% or more
shareholder are treated as a 5 percentage point change in ownership, regardless
of the size of the purchase that caused the threshold to be exceeded. For
example, if a single shareholder owning 10% of the equity securities of the
Company acquired an additional 50% of the equity securities in a three-year
period, an Ownership Change would occur. Similarly, if ten persons, none of whom
owned 5% or more of the equity securities at the beginning of the period, each
became an owner of at least 5% of the Company's equity securities within the
three-year period, an Ownership Change would have occurred.
If an Ownership Change of the Company were to occur, the amount of
taxable income in any year (or portion of a year) subsequent to the Ownership
Change that could be offset by NOLs or other carryovers existing (or "built-in")
prior to such Ownership Change could not exceed the product obtained by
multiplying (i) the aggregate value of the Company's stock immediately prior to
the ownership change with certain adjustments by (ii) the federal long-term tax
exempt rate (4.78% for April 1999). The Company would incur corporate income tax
on any taxable income during a given year in excess of such limitation. Because
the value of the Company's stock, as well as the federal long-term tax-exempt
rate, fluctuate, it is impossible to state exactly the annual limitation upon
the amount of taxable income of the Company that could be offset by such NOLs or
other items if an Ownership Change were to occur on or subsequent to the Closing
Date. However, at current values and rates, an Ownership Change would result in
the Company's having available approximately $56,000 of NOLs for each year of
the NOLs' remaining life. As the Company's NOLs begin to expire in material
amounts in seven years, an Ownership Change at the current value of the
Company's stock would mean that the Company would lose the availability of a
very substantial portion of its existing NOLs. If an Ownership Change were to
occur based on current values and rates, a maximum of $560,000 in NOLs would be
available to the Company over a twenty-year period, as opposed to the current
$5.3 million. The effect of such an Ownership Change would be to significantly
defer the utilization of the NOLs, cause a substantial portion of the NOLs to
expire prior to their use, accelerate the payment of federal income tax, and
reduce stockholders' equity.
DESCRIPTION OF THE TRANSFER RESTRICTION
THE FOLLOWING IS A BRIEF SUMMARY OF THE PROPOSED TRANSFER RESTRICTIONS.
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
PROPOSED TRANSFER RESTRICTIONS. ALL SHAREHOLDERS ARE URGED TO READ THE TRANSFER
RESTRICTIONS SET FORTH IN THE ACCOMPANYING EXHIBIT B IN THEIR ENTIRETY.
-17-
<PAGE>
Pursuant to the Transfer Restriction Amendment, a provision (the
"Prohibited Transfer Provision") will be added to the Company's Certificate of
Incorporation to protect against certain transfers of equity securities which
could cause an Ownership Change prior to November 30, 2000. The Prohibited
Transfer Provision would apply to all classes of the Company's stock, except
stock of the Company specifically exempted. See "Prohibited Transfer Provision -
Exceptions to Prohibited Transfer Provision".
PROHIBITED TRANSFER PROVISION
The Prohibited Transfer Provision contained in Article Eighth of the
Company's Certificate of Incorporation applies to transfers of the Common Stock
and any other instrument that would be treated as "stock" (collectively, "382
Stock") prior to the expiration date of the NOLs. Under the Prohibited Transfer
Provision, if a shareholder transfers or agrees to transfer 382 Stock, the
transfer will be prohibited and void to the extent that (i) such transfer would
cause the transferee to hold a "Prohibited Ownership Percentage" (as defined in
the Certificate of Incorporation) (ii) such transfer would result in the
tranferee's ownership increasing if the transferee has held a Prohibited
Ownership Percentage within the three prior years or (iii) such transferee's
ownership percentage already exceeds the Prohibited Ownership Percentage under
applicable federal income tax rules.
A "Prohibited Ownership Percentage" is defined under the Prohibited
Transfer Provision by reference to complex federal tax laws and regulations, but
generally means the direct and indirect ownership of 4.5% or more (based on
value) of 382 Stock or any other percentage that would cause a transferee to be
considered to own 5 percent or more of the Company's 382 Stock (such
shareholder, a 5-Percent Shareholder) under applicable federal income tax rules.
This transfer restriction is intended to prevent any person or group of persons
from becoming a "5-Percent Shareholder" of the Company and to prevent an
increase in the percentage of ownership of any existing person or group of
persons that constitutes a 5-Percent Shareholder. The Prohibited Transfer
Provision does not prevent the transfer of 382 Stock between persons who do not
hold a Prohibited Ownership Percent and contains certain exceptions. The use of
a 4.5% limitation rather that a 5% limitation is intended to provide a margin of
safety for market value fluctuations in avoiding an Ownership Change. All
certificates representing 382 Stock that is subject to the restrictions of the
Prohibited Transfer Provision will bear a conspicuous legend reflecting such
restrictions.
The acquisition of 382 Stock from an individual or entity that is a
5-percent Shareholder would be deemed to result in the identification of a
separate, segregated "Public Group" which is a new 5-Percent Shareholder.
Consequently, the Prohibited Transfer Provision will prohibit certain transfers
of equity interests by, and other actions involving, persons having a Prohibited
Ownership Percentage, unless the transfer or other action is approved by the
Company's Board of Directors in advance or permitted by a Company Board
resolution.
Transfers covered by the Prohibited Transfer Provision include sales to
persons whose resulting percentage ownership of shares would exceed the
thresholds discussed above, or to persons whose ownership of shares would, by
attribution, cause another person to exceed such thresholds, as well as sales by
persons who exceeded such thresholds prior to the effectiveness of the
restrictions. Numerous rules of attribution, aggregation and calculation
prescribed under the Code (and related regulations) will be applied in
determining whether the 4.5 % threshold has been met and whether a group of less
than 5% shareholders will be treated as a "public group" that is a 5-Percent
Shareholder under Section 382. As a result of these attribution rules, the
transfer restrictions could result in prohibiting ownership of the Company's
stock as a result of a change in the relationship between two or more persons or
entities, or a transfer of an interest other than the Company's stock, such as
an interest in an entity that, directly or indirectly, owns the Company's stock.
The transfer restrictions may also apply to proscribe the creation or transfer
of certain "options" in respect of the Company's stock generally to the extent
that the exercise of the option would result in a proscribed level of ownership.
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The transfer restrictions provide that the Company's transfer agent
shall not record any transfer of the Company's stock purportedly transferred in
excess of the threshold established in the restrictions. The transfer agent also
has the right, prior to and as a condition to registering any transfers of the
Company's stock on the Company's stock transfer records, to request an affidavit
from the purported transferee regarding such transferee's actual and
constructive ownership of the Company's stock, and if the transfer agent does
not receive such affidavit or the affidavit evidences that the transfer would
violate the transfer restrictions, the transfer agent is required to notify the
Company and not to enter the transfer in the Company's stock transfer records.
These provisions may result in the delay or refusal of certain requested
transfers of the Company's stock.
Although the Prohibited Transfer Provision is intended to prevent
transfers which would cause an Ownership Change, the Company may not be able to
prevent every transaction that would cause an Ownership Change.
EXCEPTIONS TO THE PROHIBITED TRANSFER PROVISION. The Prohibited
Transfer Provision does not apply to any transfer that has been approved in
advance by the Company's Board of Directors, which is made in compliance with
certain exceptions set forth in the Prohibited Transfer Provision or exceptions
established from time to time by resolutions of the Company's Board of
Directors. The Board may permit an otherwise prohibited transfer if it
reasonably and in good faith determines that a waiver would be in the best
interests of the Company.
TREATMENT OF PROHIBITED TRANSFERS. In addition to avoiding prohibited
transfers, the Prohibited Transfer Provision provides a method of nullifying the
effect of certain prohibited transfers after the transfers have purportedly
occurred. If such a purported transfer is made in violation of the Prohibited
Transfer Provision, the transferee (the "Purported Transferee") will not be
recognized as the owner of the 382 Stock, including for purposes of voting and
receiving dividends or other distributions in respect of such 382 Stock. If the
Company's Board of Directors determines that such a purported transfer has
violated the Prohibited Transfer Provision, the Company shall require the
purported transferee to surrender the relevant 382 Stock and any dividends he or
she has received on them to an agent designated by the Board (the "Agent"). The
Agent will sell the 382 Stock in an arm's length transaction (on NASDAQ, if
possible). If the Purported Transferee has resold the 382 Stock before receiving
the Company's demand to surrender such 382 Stock, the Purported Transferee
generally will be required to transfer to the Agent the proceeds of the sale and
any distributions he or she has received on the 382 Stock. The net proceeds of
the sale, after deduction of all costs incurred by the Company and the Agent,
will be distributed first to the violating shareholder in an amount equal to the
lesser of such proceeds or the cost incurred by the shareholder to acquire the
382 Stock, and the balance of the proceeds, if any, will be distributed to
charities designated by the Company.
The Board may generally act as it deems advisable to prevent or to
refuse to give effect to transfers in violation of the Prohibited Transfer
Provision. For example, the Board may refuse to recognize a transfer on the
books of the Company or the Company may institute proceedings to enjoin a
transfer. In addition, if any person knowingly violates the Prohibited Transfer
Provision, then the Company may collect from that person and all other persons
controlling, controlled by or under common control with such person the amount
necessary to put the Company in the same financial position as it would have
been in had such violation not occurred.
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ENFORCEABILITY OF THE PROHIBITED TRANSFER PROVISION
Pursuant to New York State law, a restraint on alienation of corporate
stock is generally enforceable so long as it effectuates a lawful purpose, is
reasonable and is in accordance with public policy. The Company believes the
Prohibited Transfer Provision is enforceable and is in the best interests of the
Company and its shareholders. The Company will act vigorously to enforce the
Prohibited Transfer Provision against all current and future holders of the
Company's stock regardless of how they vote on the Prohibited Transfer
Provision. However, provisions similar to the Prohibited Transfer Provision have
not been tested in New York courts. Therefore, no assurance can be given that
the Prohibited Transfer Provision will be enforceable against the Company's
shareholders.
ANTI-TAKEOVER EFFECT
Because some corporate takeovers occur through the purchase, in the
public market or otherwise, by a potential acquirer of sufficient stock to give
it control of a company, any provision that restricts the transferability of
shares can have the effect of preventing such a takeover. Prior to its
expiration on November 30, 2000, the Prohibited Transfer Provision therefore may
be deemed to have an "anti-takeover" effect because it will restrict the ability
of a person, entity or group from accumulating 4.5% or more of the stock of the
Company in the aggregate and the ability of persons, entities or groups now
owning 4.5% or more of the stock of the Company from acquiring additional
securities. The Prohibited Transfer Provision would discourage or prohibit
accumulations of substantial blocks of shares for which shareholders might
receive a premium above market value.
The indirect "anti-takeover" effect of the Prohibited Transfer
Provision is not the purpose of the Prohibited Transfer Provision. The Board of
Directors considers the Prohibited Transfer Provision to be reasonable and in
the best interests of the Company and its shareholders because the Prohibited
Transfer Provision reduces the risk that the Company will be unable to utilize
its available NOLs. In the opinion of the Board of Directors, the fundamental
importance to the Company's shareholders of maintaining the availability of the
NOLs to the Company is a more significant consideration than the indirect
"anti-takeover" effect the Prohibited Transfer Provision may have.
POSSIBLE EFFECT ON LIQUIDITY OF STOCK
The Prohibited Transfer Provision will restrict a shareholder's ability
to acquire, directly or indirectly, additional stock of the Company in excess of
the specified limitations. Furthermore, a shareholder's ability to dispose of
his stock of the Company may be restricted as a result of the Prohibited
Transfer Provision, and a shareholder's ownership of stock of the Company may
become subject to the Prohibited Transfer Provision as a result of actions taken
by persons related to that shareholder.
The affirmative vote of a majority of all outstanding shares of Common
Stock entitled to vote at the annual meeting is required for the adoption of the
proposed amendment.
The Company's Board of Directors recommends that shareholders vote
"FOR" approval of the Amendment to the Company's Certificate of Incorporation to
incorporate the Prohibited Transfer Provision.
SHAREHOLDER PROPOSALS
The eligibility of shareholders to submit proposals, the proper
subjects of shareholder proposals and other governing shareholder proposals are
regulated by the rules (the "Shareholder Proposal Rules") adopted under Section
14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Shareholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act
for inclusion in the Company's proxy materials for the 2000 Annual Meeting of
Shareholders must be received by the Company at its principal executive office,
47 Arch Street, Greenwich, CT 06830, no later than Friday, April 21, 2000.
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In addition, in accordance with recent amendments to the Shareholder
Proposal Rules, written notice of the shareholder proposals to be submitted
outside of Rule 14a-8 described above for consideration at the 2000 Annual
Meeting of Shareholders but not to be included in the Company's proxy materials
must be received by the Company, at the address set forth in the preceding
paragraph, on or before Tuesday, February 8, 2000, in order to be considered
timely for purposes of the Shareholder Proposal Rules. The persons designated as
proxies by the Company in connection with 2000 Annual Meeting of Shareholders
will have discretionary voting authority with respect to any shareholder
proposal of which the Company did not receive timely notice.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company. The
Company will also reimburse brokerage firms and other custodians, nominees and
fiduciaries, if any, for reasonable out-of-pocket expenses incurred by them in
connection with forwarding solicitation materials to beneficial owners of Common
Stock held of record by such persons. Solicitation by the Company will be
primarily by mail.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
A copy of the Company's Form 10-K for the fiscal year ended October 31,
1998, including all statements and schedules (but without exhibits), as filed
with the Securities and Exchange Commission, is included herewith.
The information under the headings "Compensation Committee Report",
Compensations Program Components", "Discussion of 1998 Compensation for the
Chief Executive Officer" and "Performance Graph" above shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission or subject to Regulation 14A or 14C, other than as provided in Item
402 of Regulation S-K, or to the liabilities of Section 18 of the Securities
Exchange Act of 1934, as amended, and , unless specific references is made
therein to such headings, shall not be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.
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EXHIBIT A
MEGADATA CORPORATION
1999 STOCK INCENTIVE PLAN
SECTION 1. PURPOSES
The purposes of the Megadata Corporation 1999 Stock Incentive Plan (the
"Plan") are (i) to enable Megadata Corporation (the "Company") and its Related
Companies (as defined below) to attract, retain, and reward employees and
strengthen the existing mutuality of interests between such employees and the
Company's stockholders by offering such employees an equity interest in the
Company, and (ii) to enable the Company to pay part of the compensation of its
Outside Directors (as defined in Section 5.2) in shares of the Company's common
stock and options to purchase the Company's common stock, thereby increasing
such director's proprietary interests in the Company, and (iii) to enable the
Company to pay all or part of the compensation of its Consultants (as defined in
Section 5.2) in shares of the Company's common stock and options to purchase the
Company's common stock, thereby increasing such Consultants proprietary
interests in the Company. For purposes of the Plan, a "Related Company" means
any corporation, partnership, joint venture or other entity in which the Company
owns, directly or indirectly, at least a 20% beneficial ownership interest.
SECTION 2. TYPES OF AWARDS
2.1 Awards to employees under the plan may be in the form of (i)
Stock Options; (ii) Stock Appreciation Rights; (iii) Restricted
Stock; (iv) Deferred Stock; (v) Bonus Stock: (vi) Loans; and/or
(vii) Tax Offset Payments. Outside Directors may receive only
Stock Options and Limited Stock Appreciation Rights as provided
in Section 15; Consultants may receive only Stock Options and
Consultants' Stock Grants as provided in Section 15.6.
2.2 An eligible employee, Outside Director or Consultant may be
granted one or more types of awards, which may be independent or
granted in tandem. If two awards are granted in tandem, the
employee, Outside Director or Consultant may exercise (or
otherwise receive the benefit of) one award only to the extent he
or she relinquishes the tandem award.
SECTION 3. ADMINISTRATION
3.1 The Plan shall be administered by the Company's Board of
Directors (the "Board") or such committee of Directors as the
Board shall designate (the "Committee"), which shall consist of
not less than three Directors each of whom is (a) a disinterested
person, as such term is defined in Rule 16b-3 under the
Securities Exchange Act of 1934 or any successor rule, and (b) an
outside director satisfying the requirements of Section 162(m) of
the Internal Revenue Code of 1986, as amended, or any successor
thereto (the "Code"). The members of the Committee shall serve at
the pleasure of the Board.
3.2 The Committee shall have the following authority with respect to
awards under the Plan other than awards to Outside Directors: to
recommend awards to eligible employees and Consultants under the
Plan; to adopt, alter and repeal such administrative rules,
guidelines and practices governing the Plan as it shall deem
advisable; to interpret the terms and provisions of the Plan and
awards granted under the Plan; and to otherwise supervise the
administration of the Plan. In particular, and without limiting
its authority and powers, except with respect to awards to
Outside Directors, the Committee shall have the authority:
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(a) to recommend whether and to what extent any award or combination
of awards will be granted hereunder, including whether any awards
will be granted in tandem with each other;
(b) to recommend the employees and Consultants to whom awards will be
granted;
(c) to recommend the number of shares of the common stock of the
Company (the "Stock") to be covered by each award granted
hereunder subject to the limitations contained herein;
(d) to recommend the terms and conditions of any award granted
hereunder, including, but not limited to, any vesting or other
restrictions based solely on such performance objectives (the
"Performance Objectives");
(e) to recommend the treatment of awards upon an employee's (or
Consultant's) retirement, disability, death, termination for
cause or other termination of employment;
(f) to recommend pursuant to a formula or otherwise the fair market
value of the Stock on a given date; provided, however, that if
the Committee fails to recommend or the Board of Directors fails
to make a determination, fair market value of the Stock on a
given date shall be the closing sale price on a given date, or if
no such sale of Stock occurs on such date, the weighted average
of the closing sale price on the nearest trading dates before and
after such date;
(g) to recommend that awards equal to the amount of any dividends
declared with respect to the number of shares covered by an award
(i) will be paid to the grantee currently or (ii) will be
deferred and deemed to be reinvested or (iii) will otherwise be
credited to the grantee, or that the grantee has no rights with
respect to such dividends;
(h) to recommend whether, to what extent, and under what
circumstances Stock and other amounts payable with respect to an
award will be deferred either automatically or at the election of
a grantee, including providing for and determining the amount (if
any) of deemed earnings on any deferred amount during any
deferral period;
(i) to recommend that the shares of Stock received as a result of an
award shall be subject to a right of first refusal, pursuant to
which the grantee shall be required to offer to the Company any
shares that the grantee wishes to sell, subject to such terms and
conditions as the Committee may specify;
(j) to recommend amendment of the terms of any award, prospectively
or retroactively; provided, however, that no amendment shall
impair the rights of the award holder without his or her written
consent; and;
(k) to recommend substitute new Stock Options for previously granted
Stock Options, or for options granted under other plans or
agreements, in each case including previously granted options
having higher option prices.
All awards and the other matters identified above will require the
approval of the Company's Board of Directors, and the Board of Directors shall
have the authority to take any of the actions identified above regardless of
whether such action is recommended by the Committee. The Board may delegate to
the Committee any of the powers of the Board specified herein.
Each option or Stock or other award granted under this Plan shall be
evidenced by an Option Agreement or Award Agreement between the Company and the
grantee of the award.
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3.3 The Board shall have the right to designate awards as
"Performance Awards." Awards so designated shall be granted and
administered in a manner designed to preserve the deductibility
of the compensation resulting from such awards in accordance with
Section 162(m) of the Code. The grant or vesting of a Performance
Award shall be subject to the achievement of Performance
Objectives established by the Board based on one or more of the
following criteria, in each case applied to the Company on a
consolidated basis and/or to a business unit, and which the Board
may use as an absolute measure, as a measure of improvement
relative to prior performance, or as a measure of comparable
performance relative to a peer group of companies; sales,
operating profits, operating profits before interest expense and
taxes, net earnings, earnings per share, return on equity, return
on assets, return on invested capital, total shareholder return,
cash flow, debt to equity ratio, market share, stock price,
economic value added, and market value added.
The Performance Objectives for a particular Performance Award
relative to a particular fiscal year shall be established by the
Board in writing no later than 90 days after the beginning of
such year. The Board's determination as to the achievement of
Performance Objectives relating to a Performance Objective shall
be made in writing. The Board shall have discretion to modify the
Performance Objective or vesting conditions of a Performance
Award only to the extent that the exercise of such discretion
would not cause the Performance Award to fail to qualify as
"performance-based compensation" within the meaning of Section
162(m) of the Code.
3.4 With respect to awards to Outside Directors, the Board shall have
the authority to interpret the Plan; to adopt, amend, and rescind
administrative regulations to further the purposes of the Plan;
and to take any other action necessary to the proper operation of
the Plan. However, the Board shall have no discretion to vary the
amount or terms of awards as set forth in Section 15, except as
provided in Section 4.4.
3.5 All determinations made by the Board pursuant to the provisions
of the Plan shall be final and binding on all persons, including
the Company and Plan participants.
3.6 The Board may from time to time delegate to one or more officers
of the Company any or all of its authorities granted hereunder
except with respect to awards granted to persons subject to
Section 16 of the Securities and Exchange Act of 1934 or
Performance Awards. The Board shall specify the maximum number of
shares that the officer or officers to whom such authority is
delegated may award.
SECTION 4. STOCK SUBJECT TO PLAN
4.1 The total number of shares with respect to which awards may be
issued under the Plan shall be 250,000 shares of the Company's
common stock, of which 175,000 shares shall be used for awards
for employees and 75,000 shares shall be used for awards to
Outside Directors and Consultants ( all subject to adjustments as
provided below). Such shares may consist of authorized but
unissued shares or treasury shares. The exercise of a Stock
Appreciation Right for cash or the payment of any other award in
cash shall not count against this share limit.
4.2 To the extent a Stock Option terminates without having been
exercised, or an award terminates without the award holder having
received payment of the award, or shares awarded are forfeited,
the shares subject to such award shall again be available for
distribution in connection with future awards under the Plan.
Shares of Stock equal in number to the shares surrendered in
payment of the option price, and shares of Stock which are
withheld in order to satisfy federal, state or local tax
liability, shall not count against the above limit, and shall
again be available for grants under the Plan.
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4.3 No employee shall be granted Stock Options, Stock Appreciation
Rights, Restricted Stock, Deferred Stock, and/or Bonus Stock, or
any combination of the foregoing with respect to more than
100,000 shares of Stock under the Plan in any fiscal year
(subject to adjustment as provided in Section 4.4). No employee
shall be granted a Tax Offset Payment in any fiscal year with
respect to more than the number of shares of Stock covered by
awards granted to such employee in such fiscal year.
4.4 In the event of any merger, reorganization, consolidation, sale
of substantially all assets, recapitalization, stock dividend,
stock split, spin-off, split-up, split-off, distribution of
assets or other change in corporate structure affecting the
Stock, a substitution or adjustment, as may be determined to be
appropriate by the Board in its sole discretion, shall be made in
the aggregate number of shares reserved for issuance under the
Plan, the number of shares as to which awards may be granted to
any individual in any calendar year, the number of shares subject
to outstanding awards and the amounts to be paid by award holders
or the Company, as the case may be, with respect to outstanding
awards; provided, however, that no such adjustment shall increase
the aggregate value of any outstanding award. In the event of a
change described in this Section 4.4 occurs, the Board shall make
the appropriate adjustment in the awards previously granted and
to be granted to Outside Directors under the Plan; provided that
no such adjustment shall increase the aggregate value of any
outstanding award.
SECTION 5. ELIGIBILITY
5.1 Employees of the Company or a Related Company, including
employees who are officers and/or directors of the Company, are
eligible to be granted awards under the Plan, other than under
Section 15. Except as provided in Section 5.2, persons who are
not employees are not eligible to be granted awards under the
Plan. The participants under the Plan shall be selected from time
to time by the Committee, in its sole discretion, from among
those eligible.
5.2 Awards under Section 15 of the Plan shall be made solely to
Outside Directors and Consultants. "Outside Director" shall mean
any director of the Company other than one who is an employee of
the Company or a Related Company. "Consultant" shall mean a
person (other than an Outside Director) who provides services to
the Company or a Related Company in a capacity other than that of
an employee.
SECTION 6. STOCK OPTIONS
6.1 The Stock Options awarded to employees under the Plan may be of
two types: (i) Incentive Stock Options within the meaning of
Section 422 of the Code or any successor provision thereto; and
(ii) Non-Qualified Stock Options. To the extent that any Stock
Option does not qualify as an Incentive Stock Option, it shall
constitute a Non-Qualified Stock Option.
6.2 Subject to the following provisions, Stock Options awarded to
employees under the Plan shall be in such form and shall have
such terms and conditions as the Board may determine:
(a) OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Board, and may
not be less than the fair market value of the Stock on the date
of the award of the Stock Option.
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(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Board. However, unless determined to the contrary, the term of
the stock option shall be ten years from the date of grant,
subject to earlier termination in the event of termination of
service.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time
or times and subject to such terms as shall be determined by the
Board. The Board may waive such exercise provisions or accelerate
the exercisability of the Stock Option at any time in whole or in
part. However, unless determined to the contrary, all options
shall vest 33-1/3% on each of the first, second, and third
anniversary of the grant provided however, that no option shall
vest in whole or in part prior to November 30, 2000. Any option
granted prior to November 30, 1999, shall have its first
anniversary date on November 30, 2000, with subsequent
anniversaries on each November 30th of the following years.
(d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in
part at any time during the option period by giving written
notice of exercise to the Company specifying the number of shares
to be purchased, accompanied by payment of the purchase price.
Payment of the purchase price shall be made in such manner and on
such terms as the Board may provide in the award, which may
include cash (including cash equivalents), delivery of shares of
Stock already owned by the optionee or subject to awards
hereunder, "cashless exercise", any other manner permitted by law
determined by the Board, or any combination of the foregoing. If
the Board determines that a Stock Option may be exercised using
shares of Restricted Stock, then unless the Board provides
otherwise, a number of the shares received upon such exercise
equal to the number of shares of restricted Stock so used shall
be restricted in accordance with the original terms of the
Restricted Stock award.
(e) NO STOCKHOLDER RIGHTS. An optionee shall have neither rights to
dividends nor other rights of a stockholder with respect to
shares subject to a Stock Option until the optionee has given
written notice of exercise and has paid for such shares.
(f) NON-TRANSFERABILITY. Unless otherwise provided by the Board, (i)
Stock Options shall not be transferable by the optionee other
than by will or by the laws of descent and distribution, and (ii)
during the optionee's lifetime, all Stock Options shall be
exercisable only by the optionee or by his or her guardian or
legal representative.
(g) TERMINATION OF EMPLOYMENT. Following the termination of an
optionee's employment with the Company or a Related Company, the
Stock Option shall be exercisable to the extent determined by the
Board and the Board may provide that upon termination of
employment all options and awards are forfeited and are no longer
exercisable. The Board may provide different post-termination
exercise provisions with respect to termination of employment for
different reasons. The Board may provide that, notwithstanding
the option term fixed pursuant to Section 6.2(b), a Stock Option
which is outstanding on the date of an optionee's death shall
remain outstanding for an additional period after the date of
such death.
6.3 Notwithstanding the provisions of Section 6.2, no Incentive Stock
Option shall (i) have an option price which is less than 100% of
the fair market value of the Stock on the date of the award of
the Incentive Stock Option, (ii) be exercisable more than ten
years after the date such Incentive Stock Option is awarded, or
(iii) be awarded more than ten years after the effective date of
the Plan specified in Section 19. No Incentive Stock Option
granted to an employee who owns more than 10% of the total
combined voting power of all classes of stock of the Company or
any of its parent or subsidiary corporations, as defined in
Section 424 of the Code, shall (a) have an option price which is
less than 110% of the fair market value of the Stock on the date
of award of the Incentive Stock Option or (b) be exercisable more
than five years after the date such Incentive Stock Option is
awarded.
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SECTION 7. STOCK APPRECIATION RIGHTS
7.1 A Stock Appreciation Right awarded to an employee shall entitle
the holder thereof to receive payment of an amount, in cash,
shares of Stock or a combination thereof, as determined by the
Board, equal in value to the excess of the fair market value of
the number of shares of Stock as to which the award is granted on
the date of exercise over an amount specified by the Board. Any
such award shall be in such form and shall have such terms and
conditions as the Board may determine. The grant shall specify
the number of shares of Stock as to which the Stock Appreciation
Right is granted.
7.2 The Board may provide that a Stock Appreciation Right awarded to
an employee may be exercised only within the 60-day period
following occurrence of a Change of Control (as defined in
Section 17.2)(such Stock Appreciation Right being referred to
herein as a Limited Stock Appreciation Right). The Board may also
provide that in the event of a Change of Control the amount to be
paid upon an employee's exercise of a Stock Appreciation Right
shall be based on the Change of Control Price (as defined in
Section 17.3)
SECTION 8. RESTRICTED STOCK
Subject to the following provisions, all awards of Restricted Stock to
employees shall be in such form and shall have such terms and conditions as the
Board may determine:
(a) The Restricted Stock award shall specify the number of shares of
Restricted Stock to be awarded, the price, if any, to be paid by
the recipient of the Restricted Stock and the date or dates on
which, or the conditions upon the satisfaction of which, the
Restricted Stock will vest. The grant and/or the vesting of
Restricted Stock may be conditioned upon the completion of a
specified period of service with the Company or a Related
Company, upon the attainment of specified Performance Objectives
or upon such other criteria as the Board may determine.
(b) Stock certificates representing the Restricted Stock awarded to
an employee shall be registered in the employee's name, but the
Board may direct that such certificates be held by the Board on
behalf of the employee. Except as may be permitted by the Board,
no share of Restricted Stock may be sold, transferred, assigned,
pledged or otherwise encumbered by the employee until such share
has vested in accordance with the terms of the Restricted Stock
award. At the time Restricted Stock vests, a certificate for such
vested shares shall be delivered to the employee (or his or her
designated beneficiary in the event of death), free of all
restrictions.
(c) The Board may provide that the employee shall have the right to
vote or receive dividends on Restricted Stock. Unless the Board
provides otherwise, Stock received as a dividend on, or in
connection with a stock split of, Restricted Stock shall be
subject to the same restrictions as the Restricted Stock.
(d) Except as may be provided by the Board, in the event of an
employee's termination of employment before all of his or her
Restricted Stock has vested, or in the event any conditions to
the vesting of Restricted Stock have not been satisfied prior to
any deadline for the satisfaction of such conditions set forth in
the award, the shares of Restricted Stock which have not vested
shall be forfeited, and the Board may provide that (i) any
purchase price paid by the employee shall be returned to the
employee or (ii) a cash payment equal to the Restricted Stock's
fair market value on the date of forfeiture, if lower, shall be
paid to the employee.
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(e) The Board may waive, in whole or in part, any or all of the
conditions to receipt of, or restrictions with respect to, any or
all of the employee's Restricted Stock, other than Performance
Awards whose vesting was made subject to satisfaction of one or
more Performance Objectives (except that the Board may waive
conditions or restrictions with respect to Performance Awards if
such waiver would not cause the Performance Award to fail to
qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code).
SECTION 9. DEFERRED STOCK AWARDS
Subject to the following provisions, all awards of Deferred Stock to
employees shall be in such form and shall have such terms and conditions as the
Board may determine:
(a) The Deferred Stock award shall specify the number of shares of
Deferred Stock to be awarded to any employee and the duration of
the period (the "Deferral Period") during which, and the
conditions under which, receipt of the Stock will be deferred.
The Board may condition the grant or vesting of Deferred Stock,
or receipt of Stock or cash at the end of the Deferral Period,
upon the attainment of specified Performance Objectives or such
other criteria as the Committee may determine.
(b) Except as may be provided by the Board, Deferred Stock awards may
not be sold, assigned, transferred, pledged or otherwise
encumbered during the Deferral Period.
(c) At the expiration of the Deferral Period, the employee (or his or
her designated beneficiary in the event of death) shall receive
(i) certificates for the number of shares of Stock equal to the
number of shares covered by the Deferred Stock award, (ii) cash
equal to the fair market value of such Stock, or (iii) a
combination of shares and cash, as the Committee may determine.
(d) In the event of an employee's termination of employment before
the Deferred Stock has vested, his or her Deferred Stock award
shall be forfeited.
(e) The Board may waive, in whole or in part, any or all of the
conditions to receipt of, or restrictions with respect to, Stock
or cash under a Deferred Stock award, other than with respect to
Performance Awards (except that the Board may waive conditions or
restrictions with respect to Performance Awards if such waiver
would not cause the Performance Award to fail to qualify as
"performance-based compensation" within the meaning of Section
162(m) of the Code).
SECTION 10. BONUS STOCK
The Committee may award Bonus Stock to an eligible employee subject to
such terms and conditions as the Committee shall determine, provided no person
who is the beneficial owner of 5% or more of the outstanding shares of the
Company shall be entitled to receive such an award. The grant of Bonus Stock may
be conditioned upon the attainment of specified Performance Objectives or upon
such other criteria as the Committee may determine. The Board may waive such
conditions in whole or in part other than with respect to Performance Awards
(except that the Board may waive conditions or restrictions with respect to
Performance Awards if such waiver would not cause the Performance Award to fail
to qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code). The Board shall also have the right to eliminate or reduce
the amount of Bonus Stock otherwise payable under an award. Unless otherwise
specified by the Board, no money shall be paid by the recipient for Bonus Stock.
Alternatively, the Board may offer eligible employees the opportunity to
purchase Bonus Stock at a discount from its fair market value. The Bonus Stock
award shall be satisfied by the delivery of the designated number of shares of
Stock which are not subject to restriction.
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SECTION 11. LOANS
The Board may provide (except with respect to a person who is the
beneficial owner of 5% or more of the outstanding shares of the Company) that
the Company shall make, or arrange for, a loan or loans to an employee with
respect to the exercise of any Stock Option award under the Plan, with respect
to the payment of the purchase price, if any, of any Restricted Stock awarded
hereunder or with respect to any taxes arising from an award hereunder:
provided, however, that the Company shall not loan to an employee more than the
sum of (i) the excess of the purchase or exercise price of an award over the par
value of any shares of Stock awarded plus (ii) the amount of any taxes arising
from such award. The Board shall have full authority to decide whether a loan
will be made hereunder and to determine the amount, term and provisions of any
such loan, including the interest rate to be charged, whether the loan will be
with or without recourse against the borrower, any security for the loan, the
terms on which the loan is to be repaid and the conditions, if any, under which
the loan may be forgiven.
SECTION 12. TAX OFFSET PAYMENTS
The Board may provide for a Tax Offset Payment by the Company to an
employee (except with respect to a person who is the beneficial owner of 5% or
more of the outstanding shares of the Company) with respect to one or more
awards granted under the Plan. The Tax Offset Payment shall be in an amount
specified by the Board, which shall not exceed the amount necessary to pay the
federal, state, local and other taxes payable with respect to the applicable
award and the receipt of the Tax Offset Payment, assuming that the employee is
taxed at the maximum tax rate applicable to such income. The Tax Offset Payment
shall be paid solely in cash.
SECTION 13. ELECTION TO DEFER AWARDS
The Board may permit an employee to elect to defer receipt of an award
for a specified period or until a specified event, upon such terms as are
determined by the Board.
SECTION 14. TAX WITHHOLDING
14.1 Each employee shall, no later than the date as of which the value
of an award first becomes includable in such person's gross
income for tax purposes, pay to the Company, or make arrangements
satisfactory to the Board regarding payment of any federal,
state, local or other taxes of any kind required by law to be
withheld with respect to the award. The obligations of the
Company under the Plan shall be conditional on such payment or
arrangements, and the Company (and, where applicable, any Related
Company), shall, to the extent permitted by law, have the right
to deduct any such taxes from any payment of any kind otherwise
due to the employee.
14.2 To the extent permitted by the Board, and subject to such terms
and conditions as the Board may provide, an employee may elect to
have the withholding tax obligations, or any additional tax
obligation with respect to any awards hereunder, satisfied by (i)
having the Company withhold shares of Stock otherwise deliverable
to such person with respect to the award or (ii) delivering to
the Company shares of unrestricted Stock. Alternatively, the
Board may require that a portion of the shares of Stock otherwise
deliverable be applied to satisfy the withholding tax obligations
with respect to the award.
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Section 15. Stock Options, Limited Stock Appreciation Rights and Stock
Grants for Outside Directors and Consultants
15.1 (a) Initial Grant. Each person who is an Outside Director on the
date of adoption of the Plan by the Stockholders shall be granted
automatically (without action of the Board) on such date a Stock
Option to purchase 15,000 shares. Each person who becomes an
Outside Director after such date shall be granted, on the first
trading day coincident with or immediately following the
effective date of his or her election as an Outside Director, a
Stock Option to purchase 15,000 shares, or such lesser amount as
is approved by the Board of Directors.
(b) For purposes of this Section 15.1, the term trading day shall
mean a day on which the Stock is traded on a national securities
exchange, on the NASDAQ National Market, or in the
over-the-counter market.
15.2 Stock Options granted under this Section 15 shall be
Non-Qualified Stock Options, and shall have the following terms
and conditions:
(a) OPTION PRICE. The option price per share of Stock purchasable
under the Stock Option shall be equal to the closing sales price
of the Stock on the date the Stock Option is granted.
(b) TERM OF OPTION. The term of the Stock Option shall be ten years
from the date of grant, subject to earlier termination in the
event of termination of service, as set forth in paragraphs (e)
and (f) below.
(c) EXERCISABILITY. Subject to paragraphs (e) and (f) below, each
Stock Option granted to an Outside Director currently serving
shall vest with respect to 33-1/3% of the underlying shares on
November 30, 2000, and an additional 33-1/3% on November 30,
2001, and the balance on November 30, 2002, provided that the
optionee is a director of the Company on each such date. The
minimum number of shares with respect to which a Stock Option may
be exercised is the lesser of 100 shares or the number of shares
then subject to the Stock Option. Options granted subsequently
shall vest 33-1/3% on each of the first, second, and third
anniversaries of the date of grant, but in no event prior to
November 30, 2000. Any option granted prior to November 30, 1999,
shall have its first anniversary date on November 30, 2000, with
subsequent anniversaries on each November 30th of the following
years.
(d) METHOD OF EXERCISE. The Stock Options may be exercised in whole
or in part at any time during the option period by giving written
notice of exercise to the Company specifying the number of shares
to be purchased, accompanied by payment of the purchase price.
Payment of the purchase price shall be made in cash (including
cash equivalents) or by delivery of shares of Stock already owned
by the optionee for at least six months, or by any combination or
the foregoing. Shares delivered upon payment of the exercise
price shall be valued at the average of the high and low sales
price of the Stock on the date of exercise (or, if the Stock is
not traded on such date, at the weighted average of the high and
low prices on the nearest trading dates before and after such
date).
(e) TERMINATION OF SERVICE OF DIRECTORS. If an Outside Director's
status as a director is terminated for any reason, such
director's Stock Options may be exercised for three years
following such termination of service (but not beyond the Option
term), but only to the extent such Options were vested on the
date of termination of service.
(f) CHANGE OF CONTROL. Notwithstanding any other provision of the
Plan, upon the occurrence of a Change of Control (as defined in
Section 17.2), all Outside Directors' Stock Options outstanding
at the time of such Change of Control shall become immediately
vested and exercisable for three years after the director's
termination service (but not beyond the option term).
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(g) NON-TRANSFERABILITY. Outside Directors' Stock Options shall not
be transferable by the optionee other than by laws of descent and
distribution. During an optionee's lifetime, all Outside
Directors' Stock Options shall be exercisable only by the
optionee or by his or her guardian or legal representative.
(h) SHAREHOLDER RIGHTS. The holder of an Outside Directors' Stock
Option shall, as such, have none of the rights of a shareholder.
15.3 LIMITED STOCK APPRECIATION RIGHTS IN TANDEM WITH OPTIONS. Each
Stock Option granted to an Outside Director under this Section 15
shall be granted in tandem with a Limited Stock Appreciation
Right which may be exercised only within the 60-day period
following a Change of Control (as defined in Section 17.2). Upon
exercise of the Limited Stock Appreciation Right, the holder
shall receive, for each share with respect to which the Limited
Stock Appreciation Right is exercised, an amount equal in value
to the excess of the Change of Control Price (as defined in
Section 17.3) over the exercise price of the related Stock
Option. The Limited Stock Appreciation Right shall be payable
solely in cash, and shall be within 30 days of the exercise of
the Limited Stock Appreciation Right.
15.4 Notwithstanding the foregoing, if on any date on which awards are
to be granted under this Section 15 the remaining shares
available for issuance to Outside Directors and consultants are
insufficient to enable each Outside Director to receive the Stock
Option and/or Quarterly Stock Grant to which he or she is
entitled, then: (a) no award shall be made on such date to any
Consultant; and (b) each Outside Director who is entitled to be
granted an award pursuant to this Section 15 on such date shall
be granted a Stock Option to purchase and/or a Quarterly Stock
Grant with respect to, his or her pro rata portion of such
remaining shares.
15.5 From time to time the Board, at its sole discretion, may elect to
award to Consultants of the Company, Stock Options to purchase
shares of the Company's Stock. In addition, the Board, at its
sole discretion, may award shares of Stock to such Consultants.
These awards may be granted whenever the Board determines that
issuing such options or shares will be in the best interests of
the Company, or as a direct payment to be made the Consultant in
lieu of a cash payment for services to be rendered to the
Company. Such Awards granted to Consultants under this section
will be considered non repetitive, "one time" awards, and will
carry with them such terms, conditions, and restrictions as the
Board shall prescribe, provided however, that Stock options
granted to Consultants shall also be subject to Section 15.2 (as
applicable).
SECTION 16. AMENDMENTS AND TERMINATION
The Board may discontinue the Plan at any time and may amend it from
time to time. No amendment or discontinuation of the Plan shall adversely affect
any award previously granted without the award holder's written consent. The
provisions of Section 15 shall not be amended more than once every six months,
other than to conform with the Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder. Amendments may be made without
stockholder approval except as required to satisfy Rule 16b-3 under the
Securities Exchange Act of 1934 (or any successor rule), Sections 162(m) or 422
of the Code, or other regulatory requirements.
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SECTION 17. CHANGE OF CONTROL
17.1 In the event of a Change of Control, unless otherwise determined
by the Board at the time of grant or by amendment (with the
holder's consent) of such grant:
(a) all outstanding Stock Options and all outstanding Stock
Appreciation Rights (including Limited Stock Appreciation Rights)
awarded under the Plan shall become fully exercisable and vested;
(b) the restrictions and deferral limitations applicable to any
outstanding Restricted Stock and Deferred Stock awards under the
Plan shall lapse and such shares and awards shall be deemed fully
vested; and
(c) to the extent the cash payment of any award is based on the fair
market value of Stock, such fair market value shall be the Change
of Control Price.
17.2 A "Change of Control" shall be deemed to occur subsequent to the
date of the Plan on:
(a) the date that any person or group deemed a person under Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934
(other than the Company and its subsidiaries as determined
immediately prior to that date) has become the beneficial owner,
directly or indirectly (with beneficial ownership determined as
provided in Rule 13d-3, or any successor rule, under the
Securities Exchange Act of 1934) of securities of the Company
representing 25% or more of the total combined voting power of
all classes of stock of the Company having the right under
ordinary circumstances to vote at an election of the Board,
unless such person has acquired 80% or more of such securities
directly from the Company;
(b) the date on which one-third or more of the members of the Board
shall consist or persons other than Current Directors (for these
purposes, a "Current Director" shall mean a member of the Board
on the effective date of the Plan, as well as any member of the
Board whose nomination or election has been approved by a
majority of the Current Directors then on the Board);
(c) consummation of a merger or consolidation of the Company with
another corporation where the Company is not the surviving entity
and where (i) the stockholders of the Company, immediately prior
to the merger or consolidation, would not beneficially own,
immediately after the merger or consolidation, shares entitling
such stockholders to 50% or more of all votes (without
consideration of the rights of any class of stock to elect
directors by a separate class vote) to which all stockholders of
the corporation issuing cash or securities in the merger or
consolidation would be entitled in the election of directors, or
(ii) where the members of the Board, immediately prior to the
merger or consolidation, would not, immediately after the merger
or consolidation constitute a majority of the Board of Directors
of the corporation issuing cash or securities in the merger; or
(d) consummation of an agreement providing for the sale or
disposition of all or substantially all of the assets of the
Company.
17.3 "Change of Control Price" means the highest price per share paid
in any transaction reported in the NASDAQ National Market or on
any national securities exchange where the Stock is traded, or
paid or offered in any transaction related to a Change of Control
at any time during the 90-day period ending with the Change of
Control. Notwithstanding the foregoing sentence, in the case of
Stock Appreciation Rights granted in tandem with Incentive Stock
Options, the Change of Control Price shall be the highest price
paid on the date on which the Stock Appreciation Right is
exercised.
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SECTION 18. GENERAL PROVISIONS
18.1 Each award under the Plan shall be subject to the requirement
that, if at any time the Board shall determine that (i) the
listing, registration or qualification of the Stock subject or
related thereto upon any securities exchange or under any state
or federal law, or (ii) the consent or approval of any government
regulatory body or (iii) an agreement by the recipient of an
award with respect to the disposition of Stock is necessary or
desirable (in connection with any requirement or interpretation
of any federal or state securities law, rule or regulation) as a
condition of, or in connection with, the granting of such award
or the issuance, purchase or delivery of Stock thereunder, such
award shall not be granted or exercised, in whole or in part,
unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free
of any conditions not acceptable to the Board.
18.2 Nothing set forth in this Plan shall prevent the Board from
adopting other or additional compensation arrangements. Neither
the adoption of the Plan nor any award hereunder shall confer
upon any employee, Outside Director or Consultant any right to
continued service in any capacity.
18.3 Determinations by the Board under the Plan relating to the form,
amount, and terms and conditions of awards need not be uniform,
and may be made selectively among persons who receive or are
eligible to receive awards under the Plan, whether or not such
persons are similarly situated.
18.4 No member of the Board or the Committee, nor any officer or
employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action,
determination or interpretation taken or made with respect to the
Plan, and all members of the Board or the Committee and all
officers or employees of the Company acting on their behalf
shall, to the extent permitted by law, be fully indemnified and
protected by the Company in respect of any such action,
determination or interpretation.
18.5 This Plan shall be governed by and construed in accordance with
the laws of the State of New York.
SECTION 19. EFFECTIVE DATE OF PLAN
The provisions of the Plan with respect to Outside Directors were
adopted and shall be effective on March 23, 1999, and the provisions of the Plan
with respect to employees were adopted and shall be effective on March 23, 1999,
and the provisions of the Plan with respect to Consultants were adopted and
shall be effective on March 23, 1999, in each case subject to the approval by
the Company's stockholders at the 1999 Annual Meeting of Stockholders.
SECTION 20. DURATION
The Plan shall terminate on the earliest to occur of: (i) the adoption
of a resolution of the Company's Board of Directors terminating the Plan; (ii)
the date all shares of Common Stock subject to the Plan are purchased according
to the Plan's provisions; or (iii) ten years from the effective date of the
Plan.
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EXHIBIT B
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
MEGADATA CORPORATION
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
The undersigned, President and Secretary of MEGADATA CORPORATION, a
corporation organized and existing under the Business Corporation Law of the
State of New York (the "Corporation"), hereby certify that
FIRST. The name of the Corporation is MEGADATA CORPORATION, and the name under
which the Corporation was originally incorporated is BELLOK DEVICES INC.
SECOND. The Certificate of Incorporation of the Corporation was filed by the
Department of State of the State of New York on January 3, 1967 and amendments
to the Certificate of Incorporation were subsequently duly filed and recorded.
THIRD. To increase the total number of shares which the Corporation is
authorized to issue, ARTICLE FOURTH, which provides the Corporation with the
authority to issue five million (5,000,000) common shares, having a par value of
$0.01 per share, is amended to read in full as follows: "The aggregate number of
shares which the Corporation shall have authority to issue is ten million
(10,000,000) common shares, having a par value of $0.01 per share."
FOURTH. An ARTICLE EIGHTH is added to the Certificate of Incorporation to read
in full as follows:
EIGHTH:
I. Certain Restrictions on the Transfer of Stock. In order to preserve
the Tax Benefits (as such term is hereinafter defined), the restrictions set
forth below shall apply for the period beginning on the ARTICLE EIGHTH Effective
Date (as such term is hereinafter defined) and ending on the Expiration Date (as
such term is hereinafter defined), unless the Board of Directors shall fix an
earlier or later date in accordance with Section VI of this ARTICLE EIGHTH:
A. DEFINITIONS.
(1) ARTICLE EIGHTH EFFECTIVE DATE. __________ __, 1999, which date is
the date of the filing of this Amendment to the Corporation's
Certificate of Incorporation with the Department of State of the
State of New York.
(2) CONTROL. The possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
Person (as such term is hereinafter defined), whether through the
ownership of voting securities, by contract, or otherwise. Such
definition shall also apply to the terms "controlling,"
"controlled by" and "under common control with."
(3) EXPIRATION DATE. November 30, 2000.
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(4) INTERNAL REVENUE CODE. The Internal Revenue Code of 1986, as
amended. Any reference to a particular Section or provision of
the Internal Revenue Code shall be deemed to also refer to any
successor Section or provision having similar effect.
(5) OWNERSHIP CHANGE. An "ownership change" with respect to the
Company, as that term is used in Section 382(g) of the Internal
Revenue Code and Treasury Regulations Section 1.382-2T(a)(1).
(6) OTHER PERMITTED HOLDERS. Any Person which has a Prohibited
Ownership Percentage permitted under this Section I, whether
pursuant to a consent of the Board of Directors or otherwise.
(7) PERSON. Any individual, corporation, estate, trust, association,
company, partnership, joint venture, or similar organization, or
any other entity described in Treasury Regulations Section
1.382-3(a)(l)(i).
(8) PROHIBITED OWNERSHIP PERCENTAGE. Any ownership in the Company
that would cause a Person or Public Group (as such term is
hereinafter defined) to be a "5-percent shareholder" of the
Company within the meaning of Treasury Regulations Section
1.382-2T(g)(l)(i) or (ii). For this purpose, whether a Person or
Public Group would be a "5-percent shareholder" shall be
determined (u) by substituting "4.5 percent" for "5 percent" each
place it appears in such provisions, (v) without giving effect to
the following provisions: Treasury Regulations Sections
1.382-2T(g)(2), 1.382-2T(g)(3), 1.382-2T(h)(2)(iii) and
1.382-2T(h)(6)(iii), (w) by treating every Person or Public Group
which owns Stock, whether directly or by attribution, as directly
owning such Stock notwithstanding any further attribution of such
Stock to other Persons and notwithstanding Treasury Regulations
Section 1.382-2T(h)(2)(i)(A), (x) by substituting the term
"Person" in place of "individual" in Treasury Regulations Section
1.382-2T (g)(1)(i), (y) by taking into account ownership of Stock
at any time during the "testing period' as defined in Treasury
Regulations Section 1.382-2T(d)(1), and (z) by treating each day
during the testing period as if it were a "testing date" as
defined in Treasury Regulations Section 1.382-2(a)(4). In
addition, for the purpose of determining whether any Person or
Public Group has a Prohibited Ownership Percentage as of any
date, the definition of Stock set forth in Subparagraph A(10) of
this Section I shall be applied in lieu of the definition in
Treasury Regulations Section 1.382-2T(f)(18), except that any
option shall be treated as Stock only to the extent that treating
it as Stock would cause an increase in ownership of such Person
and such option would be deemed exercised pursuant to Treasury
Regulations in effect from time to time (disregarding whether
treating such option as exercised would cause an ownership
change).
(9) PUBLIC GROUP. A "public group" with respect to the Company, as
that term is used in Treasury Regulations Section
1.382-2T(f)(13), excluding any "direct public group" with respect
to the Company, as that term is used in Treasury Regulations
Section 1.382-2T(j)(2)(ii).
(10) STOCK. All classes of stock of the Company, all options to
acquire stock of the Company and all other interests that would
be treated as stock in the Company pursuant to Treasury
Regulations Section 1.382-2T(f)(18)(iii), other than (x) stock
described in Section 1504(a)(4) of the Internal Revenue Code and
(y) stock that would be described in such Section 1504(a)(4) but
is not so described solely because it is entitled to vote as a
result of dividend averages. As used in this ARTICLE EIGHTH, the
term "option" shall have the meaning set forth in Treasury
Regulations Section 1.382-2T(h)(4).
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(11) TAX BENEFITS. The net operating loss carryovers and capital loss
carryovers to which the Company is entitled under the Internal
Revenue Code, free of restrictions under Section 382 of the
Internal Revenue Code.
(12) TESTING DATE ACTION. Any Transfer or acquisition of Stock or any
other action (including the acquisition or issuance of an option
to Transfer or acquire Stock), if the effect of such Transfer,
acquisition or other action would be to cause a "testing date"
with respect to the Company within the meaning of Treasury
Regulations Section 1.382-2(a)(4), determined by treating every
Person and Public Group which has a Prohibited Ownership
Percentage as a 5-percent shareholder as used in such Section.
(13) TRANSFER. Any means of conveyance of legal or beneficial
ownership of Stock, whether such ownership is direct or indirect,
voluntary or involuntary, including, without limitation, an
indirect transfer of ownership through the transfer of any
ownership interest of any entity that owns Stock.
(14) TRANSFEREE UNDERTAKING. A duly executed written undertaking for
the benefit of the Company by any transferee pursuant to which
the transferee agrees that (i) it will not take any of the
following actions without the prior consent of the Board of
Directors: (x) acquire any additional Stock, (y) Transfer any
Stock in violation of Paragraph B of this Section I, or (z) take
or cause to be taken any Testing Date Action, (ii) upon request
by the Company, it will furnish or cause to be furnished to the
Company all certificates representing Stock held of record or
beneficially, directly or indirectly, by it or by any Person,
controlling, controlled by or under common control with it for
the purpose of placing a legend on such certificates to reflect
the undertakings described in clause (i) above, (iii) it
acknowledges that "stop transfer" orders may be entered with the
transfer agent (or agents) and the registrar (or registrars) of
Stock against the transfer of Stock subject to the undertakings
described in clause (i) above except in compliance with the
requirements of such undertakings, and (iv) it will agree to such
other actions and remedies as the Company may reasonably request
in order to preserve the Tax Benefits.
(15) TREASURY REGULATIONS. The regulations promulgated by the
Secretary of the Treasury under the Internal Revenue Code. Any
reference to a particular Treasury Regulation or Section or
provision thereof shall be deemed to also refer to any successor
Regulation or Section or provision having similar effect.
B. TRANSFER RESTRICTIONS.
The following Transfers and actions shall be prohibited, unless (i) the
Board of Directors has consented to such transfer and (ii) the transferee has
entered into a Transferee Undertaking:
(1) GENERAL. No Person shall Transfer any Stock to any other Person
to the extent that such Transfer, if effected, (i) would cause
the transferee or any Person or Public Group to have a Prohibited
Ownership Percentage, or (ii) would increase the ownership
percentage of any transferee or any Person or Public Group having
a Prohibited Ownership Percentage within the three-year period
ending on and including the date of such Transfer.
(2) ADDITIONAL RESTRICTIONS ON TRANSFERS INVOLVING OTHER PERMITTED
HOLDERS. In addition to the restrictions under Subparagraph B(1)
above, (i) no Other Permitted Holder shall Transfer any Stock,
and no other Person shall Transfer any Stock to an Other
Permitted Holder, if, in either case, such Transfer would
constitute a Testing Date Action, and (ii) no Other Permitted
Holder shall take any other action that would constitute a
Testing Date Action.
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(3) ADDITIONAL RESTRICTIONS UNDER TRANSFEREE UNDERTAKINGS. In
addition to the restrictions under Subparagraph B(l) above, (i)
no Person who has delivered a Transferee Undertaking shall
Transfer any Stock, and no Person shall Transfer any Stock to any
Person who has delivered a Transferee Undertaking, if, in either
case, such Transfer would result in a violation of such
Transferee Undertaking, and (ii) no Person who has delivered a
Transferee Undertaking shall take or cause to be taken any other
action that would constitute a Testing Date Action.
C. PERMITTED TRANSFERS. Unless otherwise restricted under Paragraph
B of Section I or under a Transferee Undertaking or other
agreement, Transfers of Stock may be made without the consent of
the Board of Directors.
D. WAIVERS. Notwithstanding anything herein to the contrary, the
Board of Directors may waive any of the restrictions contained in
Paragraph B of this Section I of this ARTICLE EIGHTH: (1) in the
event of a tender or exchange offer within the meaning of the
Securities Exchange Act of 1934, as amended, to acquire Stock
constituting more than fifty percent in value of the outstanding
Common Stock of the Company, so long as such waiver shall apply
to all Transfers pursuant to such tender or exchange offer; (2)
in connection with any Transfers of Stock in connection with
underwritten offerings of such Stock; (3) in connection with any
investment in or acquisition of a business or any business
combination involving the Company or any subsidiary of the
Company; and (4) in any other instance in which the Board of
Directors reasonably and in good faith determines that a waiver
would be in the best interests of the Company.
II. ATTEMPTED TRANSFER IN VIOLATION OF TRANSFER RESTRICTIONS. Unless
the consent or waiver of the Board of Directors is obtained and except as
provided in Paragraph C of Section II below, any attempted Transfer of shares of
Stock of the Company in excess of the shares that could be Transferred to the
transferee without restriction under Paragraph B of Section I above shall not be
effective to transfer ownership of such excess shares (the "Prohibited Shares")
to the purported acquiror thereof (the "Purported Acquiror"), and the Purported
Acquiror shall not be entitled to any rights as a shareholder of the Company
with respect to the Prohibited Shares, including, without limitation, the right
to vote or to receive dividends with respect thereto. Nothing contained in this
ARTICLE EIGHTH shall preclude the settlement of any transaction involving Stock
entered into through the facilities of any national securities exchange. The
application of the provisions and remedies described in the first sentence of
this Section II and in Paragraphs A, B and C of this Section II this shall be
deemed not to so preclude any such settlement. Paragraphs A, B and C below shall
apply only in the case of violations of the restrictions contained in
Subparagraph B(l) of Section I above.
A. TRANSFER OF CERTIFICATES; SALE OF STOCK. Upon demand by the Company, the
Purported Acquiror shall transfer any certificate or other evidence of purported
ownership of the Prohibited Shares within the Purported Acquiror's possession or
control, together with any dividends or other distributions paid by the Company
with respect to the Prohibited Shares that were received by the Purported
Acquiror (the "Prohibited Distributions"), to an agent to be designated by the
Company (the "Agent"). If the Purported Acquiror has sold the Prohibited Shares
to an unrelated party in an arm's-length transaction after purportedly acquiring
them, the Purported Acquiror shall be deemed to have sold the Prohibited Shares
for the Agent, and in lieu of transferring the Prohibited Shares and Prohibited
Distributions to the Agent shall transfer to the Agent the Prohibited
Distributions and the proceeds of such sale (the "Resale Proceeds") except to
the extent that the Agent grants written permission to the Purported Acquiror to
retain a portion of the Resale Proceeds not exceeding the amount that would have
been payable by the Agent to the Purported Acquiror pursuant to Paragraph B of
this Section II if the Prohibited Shares had been sold by the Agent rather than
by the Purported Acquiror. Any purported Transfer of the Prohibited Shares by
the Purported Acquiror, other than a transfer described in one of the two
preceding sentences (unless such transfer itself violates the provisions of this
ARTICLE EIGHTH), shall not be effective to transfer any ownership of the
Prohibited Shares.
B-4
<PAGE>
B. ALLOCATION AND DISTRIBUTION OF PROCEEDS. The Agent shall sell to a Person
whose ownership of such shares would not exceed the Prohibited Owner Percentage
in an arm's-length transaction any Prohibited Shares transferred to the Agent by
the Purported Acquiror, and the proceeds of such sale (the "Sales Proceeds"), or
the Resale Proceeds, if applicable, shall be allocated to the Purported Acquiror
up to the following amount: (1) where applicable, the purported purchase price
paid or value of consideration surrendered by the Purported Acquiror for the
Prohibited Shares and (2) where the purported Transfer of the Prohibited Shares
to the Purported Acquiror was by gift, inheritance, or any similar purported
transfer, the fair market value of the Prohibited Shares at the time of such
purported Transfer. Any Resale Proceeds or Sales Proceeds in excess of the
amount allocable to the Purported Acquiror pursuant to the preceding sentence,
together with any Prohibited Distributions (such excess amount and Prohibited
Distributions are collectively the "Subject Amounts"), shall be transferred to
an entity designated by the Company that is described in Section 501(c)(3) of
the Internal Revenue Code (the "Designated Charity"). In no event shall any such
Prohibited Shares or Subject Amounts inure to the benefit of the Company or the
Agent, but such Subject Amounts may be used to cover expenses incurred by the
Agent in performing its duties.
C. LIMITATION ON ENFORCEABILITY. Notwithstanding anything herein to the
contrary, with respect to any Transfer of Stock which would cause a Person or
Public Group (the "Prohibited Party") to violate a restriction provided for in
Subparagraph B(l) of Section I above only on account of the attribution to the
Prohibited Party of the ownership of Stock by a Person or Public Group which is
not controlling, controlled by or under common control with the Prohibited
Party, which ownership is nevertheless attributed to the Prohibited Party,
Subparagraph B(l) of Section I above shall not apply in a manner that would
invalidate such Transfer. In such case, the Prohibited Party and any Persons
controlling, controlled by or under common control with the Prohibited Party
(collectively the "Prohibited Party Group") shall automatically be deemed to
have disposed of, and shall be required to dispose of, sufficient shares of
Stock (which shares shall consist only of shares held legally or beneficially,
whether directly or indirectly, by any member of the Prohibited Party Group, but
not shares held through another Person, other than shares held through a Person
acting as agent or fiduciary for any member of the Prohibited Party Group, and
which shares shall be disposed of in the inverse order in which they were
acquired by members of the Prohibited Party Group) to cause the Prohibited
Party, following such disposition, not to be in violation of Subparagraph B(1)
of Section I above, provided that in the event no member of the Prohibited Party
Group (i) is an Other Permitted Holder and (ii) had any actual knowledge that
such Transfer was prohibited under Subparagraph 8(1) of Section I above, such
disposition shall only be effected to the extent necessary in order to prevent
an Ownership Change. Such disposition shall be deemed to occur simultaneously
with the Transfer giving rise to the application of this provision, and such
number of shares which are deemed to be disposed of shall be considered
Prohibited Shares and shall be disposed of through the Agent as provided in
Paragraph B of this Section II, except that the maximum amount payable to the
Prohibited Party in connection with such sale shall be the fair market value of
the Prohibited Shares at the time of the Prohibited Transfer.
D. OTHER REMEDIES. In the event that the Board of Directors determines that a
Person proposes to take any action in violation of Paragraph B of Section I
above, or in the event that the Board of Directors determines after the fact
that an action has been taken in violation of Paragraph B of Section I, the
Board of Directors, subject to the second and third sentences of the
introductory paragraph of this Section II, may take such action as it deems
advisable to prevent or to refuse to give effect to any Transfer or other action
which would result, or has resulted, in such violation, including, but not
limited to, refusing to give effect to such Transfer or other action on the
books of the Company or instituting proceedings to enjoin such Transfer or other
action. If any Person shall knowingly violate Paragraph B of Section I, then
that Person and all other Persons controlling, controlled by or under common
control with such Person shall be jointly and severally liable for, and shall
pay to the Company, such amount as will, after taking account of all taxes
imposed with respect to the receipt or accrual of such amount and all costs
incurred by the Company as a result of such loss, put the Company in the same
financial position as it would have been in had such violation not occurred.
B-5
<PAGE>
III. PROMPT ENFORCEMENT AGAINST PURPORTED ACQUIROR. Within 30 business
days of learning of a purported Transfer of Prohibited Shares to a Purported
Acquiror or a Transfer of Stock to a Prohibited Party, the Company through its
Secretary shall demand that the Purported Acquiror or Prohibited Party surrender
to the Agent the certificates representing the Prohibited Shares, or any Resale
Proceeds, and any Prohibited Distributions, and if such surrender is not made by
the Purported Acquiror or Prohibited Party within 30 business days from the date
of such demand, the Company shall institute legal proceedings to compel such
surrender provided, however, that nothing in this Section III shall preclude the
Company in its discretion from immediately bringing legal proceedings without a
prior demand, and also provided that failure of the Company to act within the
time periods set out in this Section III shall not constitute a waiver of any
right of the Company to compel any transfer required by Section II above. Upon a
determination by the Board of Directors that there has been or is threatened a
purported Transfer of Prohibited Shares to a Purported Acquiror or a Transfer of
Stock to a Prohibited Party or any other violation of Paragraph B of Section I
above, the Board of Directors may authorize such additional action as it deems
advisable to give effect to the provisions of this ARTICLE EIGHTH, including,
without limitation, refusing to give effect on the books of the Company to any
such purported Transfer or instituting proceedings to enjoin any such purported
Transfer.
IV. OBLIGATION TO PROVIDE INFORMATION. The Company may require as a
condition to the registration of the Transfer of any Stock that the proposed
transferee furnish to the Company all information reasonably requested by the
Company with respect to all the direct or indirect ownership of Stock by the
proposed transferee and by Persons controlling, controlled by or under common
control with the proposed transferee.
V. LEGENDS. All certificates evidencing Stock that is subject to the
restrictions on transfer set forth in this ARTICLE EIGHTH shall bear a
conspicuous legend referencing such restrictions.
VI. FURTHER ACTIONS. Subject to the second and third sentences of the
introductory paragraph of Section II, nothing contained in this ARTICLE EIGHTH
shall limit the authority of the Board of Directors to take such other action to
the extent permitted by law as it deems necessary or advisable to protect the
Company and the interests of the holders of its securities in preserving the Tax
Benefits. Without limiting the generality of the foregoing, in the event of a
change in law (including applicable regulations) making one or more of the
following actions necessary, in the case of actions described in clauses (B),
(C) and (D) below, or desirable, in the case of actions described in clause (A)
below, the Board of Directors may (A) accelerate the Expiration Date, (B) extend
the Expiration Date, (C) conform any terms or numbers set forth in the transfer
restrictions in Section I above to make such terms consistent with the Internal
Revenue Code and the Treasury Regulations following any changes therein to the
extent necessary to preserve the Tax Benefits, or (D) conform the definitions of
any terms set forth in this ARTICLE EIGHTH to the definitions in effect
following such change in law; provided that the Board of Directors shall
determine in writing that such acceleration, extension, change or modification
is reasonably necessary to preserve the Tax Benefits or that the continuation of
these restrictions is no longer reasonably necessary for the preservation of the
Tax Benefits, which determination shall be based upon an opinion of legal
counsel to the Company and which determination shall be filed with the Secretary
of the Company and mailed by the Secretary to all stockholders of the Company
within ten days after the date of any such determination.
VII. SEVERABILITY. If any provision of this ARTICLE EIGHTH or the application of
any such provision to any Person or under any circumstance shall be held
invalid, illegal, or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision of this ARTICLE EIGHTH.
B-6
<PAGE>
FIFTH. The aforesaid amendments were duly authorized by vote of the Board of
Directors, followed by vote of the holders of a majority of all outstanding
shares entitled to vote thereon at a meeting of shareholders, in accordance with
the provisions of Section 803(a) of the Business Corporation Law.
IN WITNESS WHEREOF, the undersigned have made and signed this
Certificate of Amendment of the Certificate of Incorporation on _______________,
19__ and affirm that the statements made herein are true under penalties of
perjury.
MEGADATA CORPORATION
By: --------------------------
G.S. Beckwith Gilbert
President
[Corporate Seal]
Attest:
By:---------------------------
John R. Keller
Secretary
B-7
<PAGE>
MEGADATA
================================================================================
MEGADATA CORPORATION
<PAGE>
PROXY
MEGADATA CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF MEGADATA CORPORATION
The undersigned stockholder hereby appoints G.S.Beckwith
Gilbert and John R. Keller or either of them, each with power of substitution,
as proxy or proxies for the undersigned, to attend the Annual Meeting of the
Stockholders of Megadata Corporation (the "Company"), to be held at 11:00 a.m.,
local time, on Wednesday, July 14, 1999, at The LaGuardia Marriott Hotel, 105-05
Ditmars Blvd, East Elmhurst, NY, or at any adjournment or adjournments thereof,
and to vote all shares of common stock of the Company owned of record by the
undersigned at the close of business on May 28, 1999, hereby revoking any proxy
or proxies heretofore given and ratifying and confirming all that said proxies
may do or cause to be done by virtue hereof, for the purposes more fully
described in the accompanying Proxy Statement, and in their discretion, on other
matters which properly come before the meeting:
(1) ELECTION OF DIRECTORS
FOR all nominees listed below WITHHOLD AUTHORITY to vote for all
(except as marked to the contrary) nominees listed below
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST
BELOW.)
G.S. Beckwith Gilbert
Richard R. Schilling, Jr.
Yitzhak N. Bachana
Bruce N. Whitman
Paul L. Graziani
John R. Keller
(2) ADOPTION OF THE COMPANY'S 1999 STOCK INCENTIVE PLAN
FOR AGAINST ABSTAIN
(3) AMENDMENT TO THE MEGADATA CORPORATION'S CERTIFICATE OF INCORPORATION TO
INCREASE THE TOTAL NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE,
WHICH THE COMPANY HAS AUTHORITY TO ISSUE FROM 5,000,000 to 10,000,000
FOR AGAINST ABSTAIN
(Continued and to be Signed and Dated on the Reverse Side)
<PAGE>
(4) TO RATIFY THE APPOINTMENT OF ERNST & YOUNG, LLP AS
INDEPENDENT AUDITORS
FOR AGAINST ABSTAIN
(5) AMENDMENT TO THE MEGADATA CORPORATION'S CERTIFICATE OF INCORPORATION TO
ESTABLISH RESTRICTIONS ON TRANSFERS OF THE COMPANY'S COMMON STOCK IN
ORDER TO PROTECT THE AVAILABILITY OF A SUBSTANTIAL PORTION OF THE
COMPANY'S NET OPERATING LOSS CARRYFORWARDS.
FOR AGAINST ABSTAIN
(6) IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE ON OTHER
MATTERS WHICH PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR
ADJOURNMENTS THEREOF.
FOR AGAINST ABSTAIN
UNLESS OTHERWISE INDICATED ABOVE OR UNLESS THIS PROXY IS
REVOKED, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED
FOR THE NOMINEES, FOR THE APPOINTMENT OF INDEPENDENT
AUDITORS, FOR THE COMPANY'S 1999 STOCK INCENTIVE PLAN, AND
FOR THE AMENDMENTS TO THE CERTIFICATE OF INCORPORATION.
Date: ____________________________________
X ________________________________________
X ________________________________________
(IMPORTANT: Please sign exactly as your name or
names appear on the label affixed hereto, and when
signing as an attorney, executor, administrator,
trustee or guardian, give your full title as such.
If the signatory is a corporation, sign the full
corporate name by duly authorized officer, or if a
partnership, sign in partnership name by
authorized person.)
