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
INTELECT COMMUNICATIONS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: ____________
(2) Aggregate number of securities to which transaction applies: _______________
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined: ________________________________
(4) Proposed maximum aggregate value of transaction: ___________________________
(5) Total fee paid: ____________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ____________________________________________________
(2) Form, Schedule or Registration Statement No.: ______________________________
(3) Filing Party: ______________________________________________________________
(4) Date Filed: ________________________________________________________________
<PAGE>
INTELECT COMMUNICATIONS, INC.
To the Stockholders of Intelect Communications, Inc.:
You are requested to vote on the matters being presented
for action at the 1999 Annual Meeting of Stockholders of
Intelect Communications, Inc. Our meeting is called for June
18, 1999 at the Company's offices located at 1240 East
Campbell Road, Richardson, Texas 75081.
The attached Notice of Annual Meeting and Proxy Statement
describe the business of the meeting. There will also be a
review of the Company's progress and plans. Directors and
officers of the Company will be present to respond to
shareholder inquiries.
We cordially invite you to attend the meeting. Whether or
not you plan to attend the meeting, please sign, date, and
return the enclosed proxy promptly in the envelope provided.
If you attend the meeting, you may, at your discretion,
withdraw the proxy and vote in person.
Thank you for your time and consideration to respond to
this request.
Sincerely,
/s/ Herman M. Frietsch
Herman M. Frietsch
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Enclosures
April 30, 1999
<PAGE>
INTELECT COMMUNICATIONS, INC.
NOTICE OF THE
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 18, 1999
To the Stockholders of Intelect Communications, Inc.
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders of
Intelect Communications, Inc. (the "Company") will be held on June 18, 1999,
at 1:30 p.m. at the Company's offices located at 1240 East Campbell Road,
Richardson, Texas 75081 (the "Meeting") for the purpose of considering and
voting upon the following matters:
1. To elect one (1) director of the Company;
2. To approve an amendment to increase the number of shares reserved for
issuance under the Company's Stock Incentive Plan;
3. To approve a Non-Employee Directors' Stock Plan;
4. To consider and act upon a proposal to approve the appointment of Grant
Thornton LLP as independent auditor of the Company for 1999;
5. To consider and vote upon a proposal to approve the issuance of the
Common Stock issuable upon conversion of the Company's Series E
Convertible Preferred Stock, $0.01 par value per share (the "Series E
Preferred Stock") and the shares issuable upon exercise related
warrants; and
6. To transact such other business as may properly come before the Meeting
or any adjournment thereof.
The Board of Directors of the Company has fixed the close of business on
April 20, 1999 as the record date for the meeting, and only holders of Common
Stock of record at such time will be entitled to vote at the meeting or any
adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
EDWIN J. DUCAYET, JR.,
ASSISTANT SECRETARY
Richardson, Texas
April 30, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO POSTAGE NEED
BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
<PAGE>
INTELECT COMMUNICATIONS, INC.
1100 EXECUTIVE DRIVE
RICHARDSON, TEXAS 75081
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
JUNE 18, 1999
This Proxy Statement accompanies the Notice (the "Notice") of the Annual
Meeting of Stockholders of Intelect Communications, Inc. (the "Company") and
is furnished in connection with the solicitation by the Board of Directors of
the Company of proxies to be voted at the Annual Meeting of Stockholders of the
Company (the "Meeting") and at any and all adjournments of such Meeting. The
Meeting is to be held on June 18, 1999, at the Company's offices located at 1240
East Campbell Road, Richardson, Texas 75081 at 1:30 p.m.
The Company's Annual Report on Form 10-K for the year ended December 31,
1998 is being mailed to stockholders with the mailing of the Notice of Meeting
and Proxy Statement. The Notice of Meeting, this Proxy Statement, the Annual
Report, and the enclosed proxy are being first mailed to stockholders on or
about April 30, 1999.
EXERCISE OF DISCRETION BY PROXIES
Each properly executed proxy received at or before the Meeting on June 18,
1999 or any adjournments thereof will be voted at the meeting as specified
therein. A proxy may be revoked at any time prior to its exercise by delivering
written notice of its revocation to the Secretary of the Company, by a later
dated proxy, or by attending the Meeting and voting in person. If a stockholder
does not specify otherwise, the shares represented by proxy will be voted as
recommended by the Board of Directors. Thus, if no directions are given, the
proxy will be voted FOR: (1) the election of management's nominee as director;
(2) an amendment to the Company's Stock Incentive Plan to increase the number of
shares reserved for issuance under the plan; (3) approval of the Non-Employee
Directors' Stock Plan, (4) the appointment of Grant Thornton LLP as auditor of
the company for 1999; and (5) the approval of the issuance of the Common Stock
issuable upon conversion of the Company's Series E Convertible Preferred Stock,
$0.01 par value per share (the "Series E Preferred Stock") and the shares
issuable upon exercise of related warrants.
The enclosed form of proxy confers discretionary authority upon the persons
named therein with respect to amendments or variations to matters identified in
the Notice and with respect to other matters which are appropriately brought
before the Meeting. Except as disclosed herein, at the date hereof, the
management of the Company knows of no such amendments, variations or other
matters.
The expense of this proxy solicitation, including the cost of preparing and
mailing the Proxy Statement and the proxy, will be paid by the Company. Such
expense may also include the charges and expenses of banks, brokerage firms and
other custodians, nominees or fiduciaries for forwarding proxies and proxy
material to beneficial owners of the Company's Common Stock. The Company expects
to solicit proxies primarily by mail, but directors, officers, employees, and
agents of the Company may also solicit proxies in person or by telephone or by
other electronic means. In addition, the Company has retained Regan & Associates
to assist in the solicitation of proxies for which the Company will pay an
estimated $10,000 in fees, plus expenses and disbursements. The Proxy Statement
and the accompanying proxy were first mailed to stockholders on or about April
30, 1999.
VOTING SHARES, QUORUM AND VOTES REQUIRED
The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock entitled to vote at the Meeting shall constitute a quorum
for the transaction of business. Proposals to be voted on at the Meeting require
the affirmative vote of a majority of the voting power present and entitled to
vote at the
1
<PAGE>
meeting. Votes cast by proxy or in person at the Meeting will be tabulated by
the election inspectors appointed for the meeting. Abstentions and broker
non-votes (as hereafter defined) will be counted as present by the election
inspectors for the purpose of determining the presence of a quorum. For the
purpose of computing the vote required for approval of matters to be voted on at
the Meeting, the election inspectors will treat shares held by a stockholder who
abstains from voting as being "present" and "entitled to vote"on the matter
and, thus, an abstention has the same legal effect as a vote against the matter.
However, in the case of a broker non-vote or where a stockholder withholds
authority from his proxy to vote the proxy as to a particular matter, such
shares will not be treated as "present" and "entitled to vote" on the
matter, and, thus, a broker non-vote or the withholding of a proxy's authority
will have no effect on the outcome of the vote on the matter. A "broker
non-vote" refers to shares of the Company's Common Stock represented at the
Meeting in person or by proxy by a broker or nominee, where such broker or
nominee does not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to such proposal and has not received
voting instructions on a particular matter from the beneficial owners or persons
entitled to vote. Under the rules of the National Association of Securities
Dealers, generally, brokers holding stock for the accounts of their clients who
have not been given specific voting instructions as to a matter by their clients
may vote their clients' proxies in their own discretion.
A stockholder may, with respect to the election of directors: (i) vote for
the election of the nominee named herein; or (ii) withhold authority to vote for
such nominee. A stockholder may, with respect to each other matter to be voted
upon: (i) vote for the matter; (ii) vote against the matter; or (iii) abstain
from voting on the matter.
Only holders of the Company's Common Stock of record at the close of
business on April 20, 1999, will be entitled to receive notice of and to vote at
the Meeting. The Company had 37,524,584 shares of Common Stock outstanding on
the record date which are entitled to vote, and each such share is entitled to
one vote.
PROPOSAL 1: ELECTION OF DIRECTOR
The Company currently has five director seats, one of which is currently
vacant. Pursuant to the Company's By-Laws, the Board of Directors intends to
fill that vacancy when a suitable candidate is located. The Board of Directors
is grouped into three classes. In accordance with the Company's Restated By-Laws
and its Amended and Restated Certificate of Incorporation, the directors are
elected for staggered three year terms. One of three classes is elected each
year to succeed the directors whose terms are expiring. At this Meeting, the
term of one of the director seats, that of Anton von Liechtenstein, expires. The
director nominated for election at this Meeting would hold office for a three
year term expiring in 2002. Other directors are not up for election this year
and will continue in office for the remainder of their terms.
DIRECTOR NOMINATED THIS YEAR FOR TERM EXPIRING IN 2002.
PRINZ ANTON VON AND ZU LIECHTENSTEIN, 58, is a private investor and has
been so for the past five years; Director of the Company and the Company's
predecessor Intelect Communications Systems Limited ("Intelect (Bermuda)")
since 1980; First Managing Director of Intelect (Bermuda); Chairman of the Stock
Option Committee.
The Board of Directors recommends a vote FOR this nominee, and unless
otherwise instructed or unless authority to vote is withheld, the enclosed proxy
will be voted FOR the election of the nominee. Proxies may not be voted for a
greater number of persons than the one nominee named. Although the Board of
Directors of the Company does not contemplate that the nominee will be unable to
serve, if such a situation exists prior to the Meeting, the persons named in the
enclosed proxy will vote for the election of such other person as may be
nominated by the Board of Directors.
DIRECTORS UP FOR ELECTION IN 2000.
HERMAN M. FRIETSCH, 59, Chairman of the Board of the Company and Intelect
(Bermuda) since 1989; Chief Executive Officer since February 1997; Director
since 1988; Executive Chairman from October 1995 to February 1997; Mr. Frietsch
also serves as Chairman of the Compensation Committee.
2
<PAGE>
PHILIP P. SUDAN, JR., 48, is a partner with Ryan & Sudan, L.L.P. and has
been so for the past five years. Mr. Sudan has been a director of the Company
and Intelect (Bermuda) since February 1997. Mr. Sudan is Chairman of the Audit
Committee, and is also a member of the Stock Option Committee and the
Compensation Committee.
DIRECTORS UP FOR ELECTION IN 2001.
ROBERT E. GARRISON II, 57, is President and Chief Executive Officer of
Pinnacle Global Group, Inc., a publicly traded financial services company since
January 1999. Mr. Garrison served as Executive Vice President of Investment
Banking with Harris, Webb & Garrison, Inc., a regional investment banking and
brokerage firm, from February 1994 to January, 1999, at which time Harris, Webb
& Garrison became part of Pinnacle Global Group, Inc. Mr. Garrison also served
as the Chairman and Chief Executive Officer of Pinnacle Management & Trust
Company, a state chartered independent trust company, from June 1994 to January,
1999, at which time Pinnacle Management & Trust Company became part of Pinnacle
Global Group, Inc. From October 1992 to February 1994, Mr. Garrison served as
Chief Executive Officer of Health Care Capital Group, Inc., a regional
investment bank focusing on the health care industry. From 1991 until October
1992, Mr. Garrison served as Chairman and Chief Executive Officer of Med Center
Bank & Trust Company, an independent bank located in Houston, Texas. Mr.
Garrison serves on the Board of Directors of Pinnacle Global Group, Inc. Mr.
Garrison has been a director of the Company and Intelect (Bermuda) since July
1997 and serves as a member of the Audit Committee and the Stock Option
Committee.
For information relating to Common Stock owned by each of the directors,
see "Security Ownership of Certain Beneficial Owners and Management."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 20, 1999
unless otherwise noted, with respect to the beneficial ownership of the
Company's Common Stock by (i) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock; (ii) each director
and nominee for director; (iii) each executive officer named in the Summary
Compensation Table under the heading "Executive Compensation" below; and (iv)
all directors and executive officers of the Company as a group. Unless otherwise
indicated, the information included below is based upon the Company's stock
transfer records as maintained by the Company's stock transfer agent.
The number of shares of Common Stock beneficially owned by each director or
executive officer is determined under the rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire within 60 days after April 20, 1999 through the exercise of any stock
option or other right. Unless otherwise indicated, each person has sole
investment and voting power (or shares such power with his or her spouse) with
respect to the shares set forth in the following table. The inclusion herein of
any shares deemed beneficially owned does not constitute admission of beneficial
ownership of those shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------- -------------------- ----------------
<S> <C> <C>
Herman M. Frietsch................... 867,503(1) 2.29%
Peter E. Ianace...................... 218,095(2) *
R. Eugene Helms...................... 155,000(3) *
Edwin J. Ducayet, Jr. ............... 122,337(4) *
Anton Liechtenstein.................. 402,400(5) 1.07%
Philip P. Sudan, Jr. ................ 298,155(6) *
Robert E. Garrison II................ 150,000(7) *
The Coastal Corporation Second
Pension Trust(11).................. 5,217,667(8) 12.51%
SJMB, L.P. (12)...................... 4,383,741(9) 10.46%
All Directors and Executive Officers
as a group (7 persons)............... 2,213,490(10) 5.90%
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
3
<PAGE>
- ------------
* Indicates holdings of less than one percent.
(1) Includes 306,666 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1999. Includes
50,617 shares which assumes the conversion of outstanding principal and
interest of a loan made by Mr. Frietsch to the Company at a price of $2.00
per share. See "Certain Transactions". Includes 6,000 shares owned
beneficially by Mr. Frietsch's spouse as to which he disclaims beneficial
ownership.
(2) Includes 210,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1999.
(3) Includes 140,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1999.
(4) Includes 99,999 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1999.
(5) Includes 125,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1999. Does not
include shares of stock that may become issuable in payment of director's
fees pursuant to Proposal 2 hereof.
(6) Includes 120,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1999. Includes
78,155 shares which assumes the conversion of outstanding principal and
interest of a loan made by Mr. Sudan to the Company at a price of $2.00 per
share. See "Certain Transactions". Does not include shares of stock that
may become issuable in payment of director's fees pursuant to Proposal 2
hereof, if such proposal is approved.
(7) Represents 150,000 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1999. Does not
include shares of stock that may become issuable in payment of director's
fees pursuant to Proposal 2 hereof.
(8) Based solely upon information supplied to the Company on March 31, 1999 by
The Coastal Corporation Second Pension Trust, includes 3,719,409 shares of
Common Stock issuable upon exercise of the Company's Series A Preferred
Stock and 450,000 shares issuable upon conversion of a currently
exercisable warrant. See "Certain Transactions."
(9) Includes (i) 956,740 shares of common stock issuable upon conversion of
convertible debt as of June 19, 1999, (ii) 3,002,001 shares of Common Stock
issuable upon exercise of warrants, which represents 1,200,000 shares
issuable upon exercise of warrants issued on April 2, 1998 and an
additional 1,802,001 shares pursuant to anti-dilution provisions of such
warrant as of November 10, 1998 and (iii) 425,000 shares issuable upon
conversion of that certain warrant dated January 13, 1999. Except as set
forth herein, does not include any additional shares which may be acquired
pursuant to anti-dilution provisions in the warrants.
(10) Includes 1,151,665 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 19, 1998. Does not
include shares of stock that may become issuable in payment of director's
fees pursuant to Proposal 2 hereof.
(11) The principal address of the Coastal Corporation Second Pension Trust is
Nine Greenway Plaza, Houston, Texas 77046.
(12) The general partner of SJMB, L.P., is SJMB, L.L.C. The directors of SJMB,
L.L.C. are Charles E. Underbrink, John L. Thompson, Alan D. Feinsilver,
Titus H. Harris, Jr. and Edward R. Naumes. The principal address of SJMB,
L.P. is 777 Post Oak Blvd., Suite 950, Houston, Texas 77056.
4
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers is set forth below.
The executive officers of the Company are elected by the Board of Directors.
<TABLE>
<CAPTION>
OFFICE AND EMPLOYMENT DURING LAST
NAME AGE FIVE YEARS
- ------------------------- -----------------------------------------
<S> <C> <C>
Herman M. Frietsch....... 59 Chairman of the Board since 1989;
Chief Executive Officer since
February 1997; Director since 1988;
Executive Chairman from October 1995
to February 1997.
Peter E. Ianace.......... 50 Resigned from all positions with the
Company and its subsidiaries
effective March 12, 1999. Immediately
prior to his resignation, Mr. Ianace
served as Executive Vice President
since June 1998; Vice President,
Sales and Marketing from February
1997 to June 1998, Vice President,
Marketing and Distribution from June
1996 to February 1997; President of
Intelect Network Technologies Company
(a subsidiary of the Company) since
November 1993; Chief Executive
Officer of Intelect Network
Technologies Company since July 1995.
R. Eugene Helms.......... 48 Vice President, Chief Technology
Officer since June 1996; President
and Chief Executive Officer of DNA
Enterprises, Inc. (a subsidiary of
the Company) since April 1996;
President and Owner of TeleSolutions
Inc., a consulting firm, since
January 1990; Vice President,
Engineering of Mizar, Inc., a DSP
products manufacturer, from March
1994 to October 1995.
Edwin J. Ducayet, Jr..... 59 Vice President and Chief Financial
Officer since February 1997; Vice
President and Chief Financial Officer
of Intelect Network Technologies
Company since December 1991.
</TABLE>
BOARD AND COMMITTEE MEETINGS
The business of the Company is managed under the direction of the Board of
Directors. The Directors will serve for the remainder of their respective terms
or until their successors are elected. The Directors frequently discuss and
informally review significant developments affecting the Company and act on
matters requiring Board approval. It also holds special meetings and acts by
written consent. The Board of Directors held 10 formal meetings during 1998.
Each incumbent director attended at least 75% of the aggregate of the total
number of meetings of the Board of Directors during the period for which he was
a director and the total number of meetings held by all committees of the Board
of Directors on which the director served during the period he served.
The Company's Board of Directors has three standing committees: the Audit
Committee, the Compensation Committee, and the Stock Option Committee.
The Audit Committee is responsible for approving the scope of the annual
audit and for making recommendations to the Board of Directors concerning the
selection of the Company's independent accountants. The Audit Committee also
reports to the Board of Directors concerning the Company's internal accounting
controls, factors that may affect the integrity of the Company's financial
reports, compliance by the Company's management and employees with Company
policies, and other matters. The members of the Audit Committee are Mr. Garrison
and Mr. Sudan. The Audit Committee met 8 times during 1998.
The Compensation Committee is responsible for determining the compensation
of the Company's senior management and establishing compensation policies for
the Company's employees generally. The members of the Compensation Committee are
Mr. Frietsch and Mr. Sudan. The Compensation Committee met 9 times during 1998.
See "Compensation Committee Report on Executive Compensation" below.
The Stock Option Committee is responsible for administering the Company's
stock option plans. The members of the committee are Messrs. Garrison,
Liechtenstein and Sudan. Meetings of the Stock Option
5
<PAGE>
Committee generally are adjunct to meetings of the Board. Actions of the Stock
Option Committee are formalized by documentation signed by all members. The
Stock Option Committee met 12 times during 1998.
The Company does not have a nominating committee or a committee serving a
similar function. Nominations are made by and through the full Board of
Directors.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Currently, employee directors receive no compensation for their services as
directors, however, each non-employee, outside director is entitled to receive a
cash fee of $1,000 per month for service as a director, and members of the
Audit, Compensation, and the Stock Option Committees each are entitled to
receive a cash fee of up to $1,000 per month for work on each committee. The
outside directors have elected to defer the receipt of fees earned during 1997,
1998 and the first quarter of 1999 in a non-qualified, unfunded, deferred
compensation arrangement. Such amounts are payable by issuance of shares of
Common Stock at the market price in a one time payment for all fees accrued and
payable as of March 31, 1998. All subsequent fees are payable in cash or in
Common Stock, at the election of the director at the beginning of each year. See
"Non-Employee Directors Stock Plan," below. Non-employee, outside directors
also may receive grants of stock options in the discretion of the Board.
For a discussion of certain transactions between the Company and certain
directors and their affiliates, see "Certain Transactions."
6
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes the annual and long-term compensation paid
to Herman M. Frietsch, Chief Executive Officer of the Company, and the other
executive officers who have earned more than $100,000 in salary and bonus during
the last three completed fiscal years ended December 31, 1998 (the Chief
Executive Officer and such other executive officers are hereinafter referred to
as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION OTHER SECURITIES
--------------------------------- ANNUAL UNDERLYING ALL OTHER
FISCAL COMPEN- OPTIONS/ COMPEN-
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) SATION ($) SARS (#) SATION ($)
- ------------------------------------- ------ ---------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Herman M. Frietsch................... 1998 250,000 -- 587 660,000(1) 3,742(6)
Chairman and Chief 1997 250,000 -- 360 250,000(2) 3,736
Executive Officer of the 1996 250,000 -- -- 50,000(2) --
Company
Peter E. Ianace...................... 1998 240,000 -- -- 320,000(3) 4,965(7)
Former Vice President of the 1997 240,000 17,009 748 50,000(2) 5,122
Company; Former President 1996 240,000 -- -- -- 4,750
and CEO of Intelect Network
Technologies Company
R. Eugene Helms...................... 1998 210,000 (10) -- 350,000(4) 4,000(8)
Vice President of the 1997 180,000 66,000 -- 150,000(11) 4,000
Company; President and
CEO of DNA Enterprises 1996 131,538 56,725 6,577 100,000(2) 2,250
Edwin J. Ducayet, Jr................. 1998 150,000 -- 934 55,000(5) 4,483(9)
Vice President, CFO, 1997 138,740 -- 530 100,000 3,851
Treasurer and Assistant
Secretary of the Company
</TABLE>
- ------------
(1) Includes options covering 230,000 shares which were granted in 1998, of
which options covering 180,000 shares do not vest and are therefore not
exercisable until August 2008. Also, includes 430,000 shares underlying
options granted in replacement of, and upon surrender of, an equal number
of options previously granted, due to an option repricing transaction in
September of 1998. See "Options/SAR Grants in Last Fiscal Year" table and
notes thereto.
(2) These options were surrendered and replaced in a repricing transaction in
1998. See notes (1), (3) and (5).
(3) Includes options covering 160,000 shares which were granted in 1998 which
do not vest and are therefore not exercisable until August 2008. Under the
terms of the Company's Stock Incentive Plan, Mr. Ianace is entitled to
excise options granted to him only for up to one year after his termination
which occurred effective March 12, 1999. Also, includes 160,000 shares
underlying options granted in replacement of, and upon surrender of, an
equal number of options previously granted, due to an option repricing
transaction in September of 1998. See "Options/SAR Grants in Last Fiscal
Year" table and notes thereto.
(4) Includes options covering 125,000 shares which were granted in 1998, of
which options covering 90,000 shares do not vest and therefore not
exercisable until August 2008. Also, includes 225,000 shares underlying
options granted in replacement of, and upon surrender of, an equal number
of options previously granted, due to an option repricing transaction in
September of 1998. See "Options/SAR Grants in Last Fiscal Year" table and
notes thereto. Also includes 90,000 shares
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
7
<PAGE>
underlying options with performance requirements which were not achieved in
1998. As a result, such options will not be exercisable until August 2008.
(5) Includes options covering 45,000 shares which were granted in 1998, of
which options covering 20,000 shares are not exercisable until August 2008.
Also, includes 55,000 shares underlying options granted in replacement of,
and upon surrender of, an equal number of options previously granted, due
to an option repricing transaction in September of 1998. See "Options/SAR
Grants in Last Fiscal Year" table and notes thereto. Also includes 20,000
shares underlying options with performance requirements which were not
achieved in 1998. As a result, such options will not be exercisable until
August 2008.
(6) Consists of matching contributions to 401(k) defined contribution plan in
the amount of $3,161, and insurance premiums for term life insurance in the
amount of $581.
(7) Consists of matching contributions to 401(k) defined contribution plan in
the amount of $4,965.
(8) Consists of matching contributions to 401(k) defined contribution plan in
the amount of $4,000.
(9) Consists of matching contributions to 401(k) defined contribution plan in
the amount of $4,483.
(10) Mr. Helms is due to receive a bonus for 1998, the amount of which has yet
to be determined.
(11) 50,000 of these options were surrendered and replaced in a repricing
transaction in 1998. See note (4)
The following table sets forth stock options granted in 1998 to each of the
Named Executive Officers. The table also sets forth the hypothetical gains that
would exist for the options at the end of their ten-year terms at assumed
compound rates of stock appreciation of 5% and 10%. The actual future value of
the options will depend on the market value of the Company's Common Stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS/ STOCK PRICE
UNDERLYING SARS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERMS(1)
NAME AND PRINCIPAL /SARS EMPLOYEES PRICE EXPIRATION --------------------
POSITIONS GRANTED(#) IN 1998 ($/SHARE) DATE 5%($) 10%($)
- ------------------------------------- ---------- ----------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Herman M. Frietsch................... 130,000(2) 3.7% N/A N/A N/A N/A
Chairman and Chief 300,000(3) 8.6% 2.00 9/2/08 377,340 956,220
Executive Officer of 50,000(4) 1.4% 2.00 9/2/08 62,890 159,370
the Company 40,000(5) 1.2% 2.00 9/2/08 50,312 127,496
40,000(5) 1.2% 2.00 9/2/08 50,312 127,496
100,000(6) 2.9% 2.00 9/2/08 125,780 318,740
Peter E. Ianace...................... 110,000(2) 3.2% N/A N/A N/A N/A
Former Vice President 50,000(7) 1.4% 2.00 9/2/08 62,890 159,370
of the Company; Former 50,000(5) 1.4% 2.00 9/2/08 62,890 159,370
President and CEO 60,000(5) 1.7% 2.00 9/2/08 75,468 191,244
of Intelect Network 50,000(6) 1.4% 2.00 9/2/08 62,890 159,370
Technologies Company
R. Eugene Helms...................... 75,000(2) 2.2% N/A N/A N/A N/A
Vice President of the 150,000(8) 4.3% 2.00 9/2/08 188,570 478,110
Company; President and 35,000(5) 1.0% 2.00 9/2/08 44,023 111,559
CEO of DNA 40,000(5) 1.2% 2.00 9/2/08 50,312 127,496
Enterprises 50,000(6) 1.4% 2.00 9/2/08 62,890 159,370
Edwin J. Ducayet, Jr. ............... 45,000(2) 1.3% N/A N/A N/A N/A
Vice President, CFO, 10,000(9) 0.3% 2.00 9/2/08 12,578 31,874
Treasurer and Assistant 25,000(10) 0.7% 2.00 9/2/08 31,445 79,685
Secretary of the 10,000(5) 0.3% 2.00 9/2/08 12,578 31,874
Company 10,000(5) 0.3% 2.00 9/2/08 12,578 31,874
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
8
<PAGE>
- ------------
(1) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options, if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5%
and 10% compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
option holders' continued employment through the option period, and the
date on which the options are exercised. These amounts are not intended to
forecast possible future appreciation, if any, of the Company's stock
price.
(2) Options granted on January 29, 1998 and subsequently surrendered in
exchange for new options pursuant to the September 1998 option repricing.
Accordingly, these options are no longer outstanding.
(3) Includes three repriced options granted on September 3, 1998, replacing
surrendered options that had originally been granted on April 15, 1996, May
2, 1997 and August 22, 1997. Each repriced option has a three year vesting
schedule, vesting at the rate of one-third per year, until fully vested on
the third anniversary of the date of grant.
(4) Repriced option granted on September 3, 1998, replaced surrendered option
which was originally granted on January 29, 1998. Repriced option vested
one third in February 1999, and will vest one third in February 2000 and
one third in February 2001.
(5) Repriced option granted on September 3, 1998, replaced surrendered option
which was originally granted on January 29, 1998. Repriced option vests in
August, 2008, due to unmet performance vesting requirements.
(6) This option vests in August, 2008, due to unmet performance vesting
requirements.
(7) Repriced option granted on September 3, 1998, replaced surrendered option
which was originally granted on August 22, 1997. Each repriced option has a
three year vesting schedule, vesting at the rate of one-third per year,
until fully vested on the third anniversary of the date of grant.
(8) Includes two repriced options granted on September 3, 1998, replacing
surrendered options that had originally been granted on April 1, 1996 and
August 22, 1997. Each repriced option has a three year vesting schedule,
vesting at the rate of one-third per year, until fully vested on the third
anniversary of the date of grant.
(9) Repriced option granted on September 3, 1998, replaced surrendered option
which was originally granted on September 10, 1996. Each repriced option
has a three year vesting schedule, vesting at the rate of one-third per
year, until fully vested on the third anniversary of the date of grant.
(10) Repriced option granted on September 3, 1998, replaced surrendered option
which was originally granted on August 22, 1997. Vesting of option was
based on timely completion of 1997 financial audits, which performance
objective was met. As a result, the option vests one third per year
beginning March 31, 1999.
9
<PAGE>
The following table sets forth the number of shares acquired on exercise of
stock options and the aggregate gains realized on exercise in 1998 by the Named
Executive Officers. The table also sets forth the number of shares covered by
exercisable and unexercisable options held by such executives on December 31,
1998 and the aggregate gains that would have been realized had these options
been exercised on December 31, 1998, even though these options were not
exercised, and the unexercisable options could not have been exercised, on
December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS/
UNDERLYING UNEXERCISED SARS AT
NUMBER OF OPTIONS/SARS AT FISCAL FISCAL
COMMON STOCK VALUE YEAR-END (#) YEAR-END(1)($)
ACQUIRED ON REALIZED ------------------------------ ------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------- ------------- --------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Herman M. Frietsch................... 100,000 100,000 306,666 513,334 --
Peter E. Ianace...................... -- -- 210,000 350,000 --
R. Eugene Helms...................... -- -- 140,000 235,000 --
Edwin J. Ducayet, Jr. ............... -- -- 99,999 80,001 --
<CAPTION>
NAME UNEXERCISABLE
- ------------------------------------- --------------
<S> <C>
Herman M. Frietsch................... --
Peter E. Ianace...................... --
R. Eugene Helms...................... --
Edwin J. Ducayet, Jr. ............... --
</TABLE>
- ------------
(1) Market value of shares covered by in-the-money options on December 31, 1998,
less the option exercise price. Options are in-the-money if the market value
of the shares covered thereby is greater than the option exercise price.
OPTION REPRICING
The following table sets forth information concerning all repricings of
options held by executive officers of the Company since the Company became
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All such repricings were effected by the grant
of replacement options in exchange for the surrender of existing options for the
same number of underlying shares.
<TABLE>
<CAPTION>
EXERCISE LENGTH OF
NUMBER OF PRICE AT ORIGINAL
SECURITIES MARKET PRICE TIME OF OPTION TERM
UNDERLYING OF STOCK AT REPRICING REMAINING AT
OPTIONS TIME OF OR NEW DATE OF
REPRICED OR REPRICING AMENDMENT EXERCISE REPRICING OR
NAME DATE AMENDMENT $ $ PRICE AMENDMENT
- ------------------------------------- ------- ----------- ------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Herman M. Frietsch................... 9/3/98 50,000 1.97 6.50 2.00 7.6 years
9/3/98 200,000 1.97 4.00 2.00 8.7 years
9/3/98 50,000 1.97 6.25 2.00 9 years
9/3/98 50,000 1.97 5.50 2.00 9.4 years
9/3/98 40,000 1.97 5.50 2.00 9.4 years
9/3/98 40,000 1.97 5.50 2.00 9.4 years
Peter E. Ianace...................... 9/3/98 50,000 1.97 6.25 2.00 9 years
9/3/98 50,000 1.97 5.00 2.00 9.4 years
9/3/98 60,000 1.97 5.00 2.00 9.4 years
R. Eugene Helms...................... 9/3/98 100,000 1.97 5.31 2.00 7.6 years
9/3/98 50,000 1.97 6.25 2.00 9 years
9/3/98 35,000 1.97 5.00 2.00 9.4 years
9/3/98 40,000 1.97 5.00 2.00 9.4 years
Edwin J. Ducayet, Jr................. 9/3/98 10,000 1.97 7.50 2.00 8 years
9/3/98 25,000 1.97 5.00 2.00 9 years
9/3/98 10,000 1.97 5.00 2.00 9.4 years
9/3/98 10,000 1.97 5.00 2.00 9.4 years
</TABLE>
10
<PAGE>
STOCK OPTION COMMITTEE REPORT ON OPTION REPRICING
Effective September 3, 1998, the Board of Directors approved the repricing
of certain outstanding options (the "Designated Options"), pursuant to which
the holders of the Designated Options were entitled to surrender such
outstanding options in exchange for the grant of new options (the "Repriced
Options") with an exercise price of $2.00 per share of Common Stock. In keeping
with the Company's philosophy of utilizing equity incentives to motivate and
retain qualified employees, and because of the decline in the market value of
the Company's Common Stock, the Board of Directors approved a repricing of the
Designated Options effective September 3, 1998. The Board of Directors and the
Stock Option Committee determined that because the exercise prices of the
Designated Options substantially exceeded the market value of the Common Stock,
that it was important to regain the incentive intended to be provided by options
to purchase shares of the Company's Common Stock. The repricing was effected by
cancelling any Designated Options surrendered for cancellation by the holders,
at the holders' election, and granting such persons Repriced Options,
exercisable at $2.00 per share. Each Repriced Option covers the same number of
shares of Common Stock as the Designated Option it replaced. The vesting
schedule restarted as of September 3, 1998. The closing bid price for the
Company's Common Stock on September 3, 1998 was $1.97 per share.
Anton Von Liechtenstein, Chairman
Philip P. Sudan, Jr.
Robert E. Garrison II
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company
consists of Herman M. Frietsch and Philip P. Sudan, Jr. Mr. Frietsch serves as
the Chairman of the Board and Chief Executive Officer of the Company and Mr.
Sudan is a partner of Ryan & Sudan, L.L.P., outside counsel to the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") designs and directs the
compensation policies of the Company. The current members of the Committee are
Herman M. Frietsch and Philip P. Sudan, Jr. Committee members do not participate
in Board actions on compensation relating to themselves.
OVERVIEW AND PHILOSOPHY
The Committee in determining executive compensation follows the general
guideline of pay-for-performance while taking into account the need to provide
total compensation packages that will attract and retain qualified and effective
executives. Individual performance standards and accomplishments are reviewed
and considered in order to relate the compensation of executives to the
financial performance of the Company.
Various elements of compensation fulfill different roles in the attraction,
retention and motivation of qualified officers and employees. For Named
Executive Officers, greater emphasis is given to variable and contingent forms
of compensation and less emphasis is given to perquisites and other benefits.
The Company's executive officer compensation is comprised of base salary, cash
incentive bonuses, long-term incentive compensation in the form of stock
options, and various benefits such as the Company's standard medical plans.
BASE SALARY
Subject to the provisions of any applicable employment agreements, base
salary levels in fiscal 1998 for the Company's executive officers, including the
Chief Executive Officer, were intended and believed to be competitive and
comparable relative to companies in the telecommunications industry and other
companies in similar or analogous circumstances. In determining base salaries,
the Compensation
Commit-
11
<PAGE>
tee took into account individual experience and performance and specific issues
particular to the Company and reviewed independent compensation data to
establish levels that were within the ranges of persons holding positions of
comparable responsibilities.
COMPENSATION OF CEO
The compensation arrangements for Mr. Frietsch was established by the
Company's Board of Directors based in part upon analyses and guidelines prepared
for the Board by the Performance and Compensation Management Group of KPMG Peat
Marwick, New York, N.Y. ("KPMG"), and updated in the last part of 1997 and the
first quarter of 1998 by the compensation group of Arthur Andersen LLP from an
independent review and evaluation of executive compensation in comparable
circumstances and competitive conditions. Both reviews considered a comparable
group of companies based on sales, size, and line of business and compared pay
levels and practices at these companies with those of the Company. It is the
policy of the Board of Directors to continue such process of review, analysis
and determination of compensation arrangements of the Company's CEO.
ANNUAL CASH BONUS PROGRAM
The Company maintains annual incentive compensation arrangements for its
executive officers. R. Eugene Helms, President and CEO of DNA Enterprises, Inc.,
a subsidiary of the Company ("DNA"), is a party to an employment agreement
which provides for incentive pay based on the performance of DNA. Pursuant to
such agreement, Mr. Helms is entitled to a bonus for 1998 in an amount which has
not yet been determined. Otherwise, no bonuses were paid to executive officers
with respect to 1998.
STOCK OPTIONS
To further link the interests of management with those of the Company's
stockholders, stock options are granted periodically to directors, officers,
managers and qualified employees under the Stock Incentive Plan. Occasionally,
rather than granting new options under the plan, the Company reprices previous
options and resets the performance-based conditions to vesting of the options.
To encourage continued service, the options normally vest upon the fulfillment
by the employee of certain performance-based criteria, and become exercisable
over three years in three equal annual installments, and expire after ten years.
When the performance criteria are not achieved, the options normally vest one
month prior to their expiration (ten years after the grant). Stock options
granted to executive officers are considered to be appropriate in terms of the
market value of the shares covered by the options relative to performance, other
forms of compensation and taking into consideration the possible future value of
the options.
BENEFITS
The Company provides medical benefits to its executive officers pursuant to
the Company's medical plans.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M).
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), enacted in 1993, generally disallows a tax deduction to public
companies for compensation over $1 million paid to the corporation's chief
executive officer and four other most highly compensated executive officers.
Qualifying performance compensation will not be subject to the deduction limit
if certain requirements are met. The Company intends to structure the
performance-based portion of the compensation of its executive officers in a
manner that complies with the statute to mitigate any disallowance of
deductions.
This report of the Compensation Committee on executive compensation is
submitted by the current members of the committee as noted below:
Herman M. Frietsch, Chairman
Philip P. Sudan, Jr.
12
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers (as defined in Rule 16a-1(f)), directors, and persons who own more than
ten percent of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on
its review of the copies of such forms received by it and written
representations from persons required to file such reports ("Reporting
Persons"), the Company believes that all filing requirements applicable to such
Reporting Persons were timely complied with during the fiscal year ended
December 31, 1998, except that (i) Eugene Helms filed a late Statement of
Changes in Beneficial Ownership on Form 5 due February 1999 reflecting the
September 1998 option repricing and the grant of one additional option; (ii)
Pete Ianace filed a late Statement of Changes in Beneficial Ownership on Form 5
due February 1999 reflecting the September 1998 option repricing and the grant
of one additional option; (iii) Ed Ducayet filed a late Statement of Changes in
Beneficial Ownership on Form 4 due March 1998 reflecting one transaction and a
late Statement of Changes in Beneficial Ownership on Form 5 due February 1999
reflecting the September 1998 option repricing; (iv) Herman M. Frietsch filed
and a late Statement of Changes in Beneficial Ownership on Form 5 due February
1999 reflecting the September 1998 option repricing and one other transaction.
EMPLOYEE AGREEMENTS
Mr. Frietsch is a party to a management contract with the Company, the
terms of which provide for an annual salary of $250,000 plus the possibility of
an annual discretionary bonus. The agreement may be terminated by either party
on the next December 31 following three (3) years notice of termination.
Mr. Ianace is a party to an employment agreement with Intelect Network
Technologies Company ("INT"), the terms of which provide for a minimum salary
of $240,000 for five years ending April 24, 2000 and a discretionary bonus. The
Company may terminate the employment agreement and upon such termination Mr.
Ianace is entitled to six (6) months of his base salary. Mr. Ianace's employment
with the Company terminated March 12, 1999 and he resigned from all positions
with the Company and its subsidiaries on that date. The Company and Mr. Ianace
are currently negotiating a separation agreement which terms are expected to
include a resolution of Mr. Ianace's indebtedness to the Company. See "Certain
Transactions."
Mr. Helms is a party to an employment agreement with DNA Enterprises, Inc.,
a wholly owned subsidiary of the Company ("DNA"), the terms of which provide
for a minimum salary of $180,000 for five years ending April 1, 2001 and
incentive pay based on the performance of DNA.
CERTAIN TRANSACTIONS
On October 31, 1995, Intelect Network Technologies Company, a wholly-owned
subsidiary of the Company, loaned $135,000 to Peter Ianace, at that time the
Company's Vice President of Sales and Marketing and President and CEO of
Intelect Network Technologies Company. The loan is secured by the shares of
Company stock issuable upon exercise of any options for the Company's stock
issued to Mr. Ianace. The loan was renewed and extended on October 31, 1997,
remains outstanding, payable upon demand by the Company. The loan bears interest
at the rate of 5% per annum. As of April 6, 1999, approximately $175,100
(including accrued interest) remained outstanding on the loan.
In May 1997, the Company executed a loan agreement with The Coastal
Corporation Second Pension Trust (the "Coastal Trust") whereby the Company
borrowed $5,000,000 (the "Coastal Note") and the Coastal Trust purchased
2,482,005 shares of the Company's Series A Preferred Stock. In connection with
the Coastal Note, the Company also issued to the Coastal Trust a warrant to
purchase 750,000 shares of Common Stock at an exercise price of $2.00. The
Coastal Note, together with accrued interest was converted into 2,517,986 shares
of Series A Preferred Stock of the Company and the warrant to purchase 750,000
shares was exercised in full by the Coastal Trust. The Series A Preferred Stock
is convertible on a one for one basis into shares of Common Stock beginning on
August 31, 1997. In August 1997, after having
13
<PAGE>
converted the Coastal Note into preferred stock, the Company and the Coastal
Trust amended and restated the loan agreement to provide for a new borrowing, on
a revolving basis, of up to $5 million (the "Revolving Loan"), and the Company
borrowed $3,000,000. Borrowings under the Revolving Loan bore interest at 2%
over prime, and the balance was paid in May, 1998 in connection with a credit
financing with a private lender. In connection with the advance under the
Revolving Loan, the Company issued to the Coastal Trust warrants to purchase
450,000 shares of Common Stock at an exercise price of $6.00 per share,
exercisable at any time until August 26, 2002.
In September, 1998, the Company executed with the Coastal Trust a revolving
credit agreement to borrow an aggregate principal balance outstanding at any one
time of up to $5,000,000 secured primarily by accounts receivable and related
assets of the Company and its material subsidiaries and a second lien on all
outstanding shares of the Company's U.S. subsidiaries (the "Receivables
Loan"). The principal balance due at December 31, 1998 was $5,000,000.
Borrowings under the Receivables Loan bear interest at the rate of 3.5% over
prime. The loan is subject to customary covenants and restrictions, including a
prohibition on incurring additional indebtedness (as defined), prohibitions on
liens on property, and contains customary cross-default and acceleration
provisions in case of certain events of default. Effective January 13, 1999, the
Coastal Trust agreed to extend the maturity date of the Receivables Loan which
previously matured on August 31, 1999, to February 12, 2000.
In November, 1998, the Company executed with the Coastal Trust a credit
agreement for $750,000 secured primarily by inventory of the Company's U.S.
subsidiaries (the "Inventory Loan"). The principal balance due at December 31,
1998 was $750,000. Borrowings under the Inventory Loan bear interest at the rate
of 3.5% over prime. The loan is subject to customary covenants and restrictions,
including a prohibition on incurring additional indebtedness (as defined),
prohibitions on liens on property, and contains customary cross-default and
acceleration provisions in the event of defaults. Effective January 13, 1999,
the Coastal Trust agreed to extend the maturity date of the Inventory Loan to
May 1, 1999, with payments of $250,000 plus accrued interest due on each of
March 1, April 1 and May 1, 1999.
On February 12, 1998, the Company entered into a secured credit facility
with St. James Capital L.P., a private lender. No payments of principal and
interest are due under the credit facility until maturity. Effective January 13,
1999, as permitted under the terms of the facility, the Company elected to
extend the maturity date of the Convertible Promissory Notes issued pursuant the
facility in favor of each of St. James Capital Partners, L.P. and SJMB, L.P.
(collectively "St. James") to February 12, 2000. The aggregate principal
amount outstanding under such notes is $10,000,000. The notes bear interest at
7% per annum. In connection with such extension, the Company issued to St. James
warrants to purchase an aggregate of 535,000 shares of common stock of the
Company. The exercise price of such warrants is $1.50 over the volume weighted
average of the closing price of the common stock for the ten (10) day period
prior to January 13, 1999. Such warrants are subject to antidilution provisions
which are triggered in the event that the Company issues or sells common stock
or securities convertible or exercisable into common stock at a price less than
the exercise price then in effect. Such provisions would enable the holder to
obtain a reduction in the warrant exercise price as well as an increase in the
applicable number of warrant shares.
In December 1997, the Company entered into loan transactions with the
following persons in the indicated original principal amounts: Edwin J. Ducayet,
Jr., Chief Financial Officer and Treasurer, $200,000; Herman M. Frietsch,
Chairman and Chief Executive Officer, $100,000; and a partnership of which
Philip P. Sudan, Jr., a director of the Company, is a general partner. The
partnership then transferred $133,000 of the original principal amount to Mr.
Sudan and the remainder to the other partner. The terms of each of the
promissory notes which evidence the transactions provide for the Company to pay
to each payee on demand the aggregate principal amount loaned to the Company,
together with accrued interest. The payee can elect to have the promissory note
paid in cash or shares of Common Stock, originally at the rate of $5.25 per
share for each dollar of principal and interest outstanding. In August and
September, 1998, in light of the market price of the Common Stock and as an
inducement for the holders to refrain from demanding repayment of the loans, the
Company repriced the conversion rate first to $4.00 per share, then to $2.00 per
share. Interest on the promissory notes accrues at the prime rate (as defined in
the promissory
14
<PAGE>
note) plus three percent. As of February 10, 1998, the loan by Mr. Ducayet to
the Company was paid in full. As of April 20, 1999, the loans by Messrs.
Frietsch and Sudan remain outstanding. The principal and interest due and owing
to Messrs. Frietsch and Sudan as of June 5, 1999 is approximately $117,200 and
$156,300, respectively.
Mr. Sudan is a partner of Ryan & Sudan, L.L.P., counsel for the Company.
During 1998, the Company paid approximately $970,700 in legal fees to Ryan &
Sudan, L.L.P.
15
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The following graph compares the cumulative total stockholder return over
the past five years on the Company's Common Stock (Nasdaq Stock Market trading
symbol ICOM) through December 31, 1998 with the cumulative total return
(including reinvested dividends) of the Nasdaq Telecommunications Industry
Segment Total Return Index ("Nasdaq-Telecom") and the Nasdaq Stock Market
Total Return Index for United States stocks ("Nasdaq-US"). This graph assumes
the investment of $100 at the market close on December 31, 1993. Amounts have
been rounded to the nearest dollar. The stock price performance on the following
graph is not necessarily indicative of future stock price performance.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998 CAGR(1)
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ICOM................................. 100 65 171 138 158 46 -14.3 %
Nasdaq Telecom....................... 100 83 109 112 166 273 22.2 %
Nasdaq-US............................ 100 98 138 170 209 294 24.1 %
</TABLE>
- ------------
(1) Compound Annual Growth Rate for the five years ending December 31, 1998.
16
<PAGE>
PROPOSAL 2: INCREASE THE NUMBER OF ADDITIONAL SHARES AVAILABLE
FOR ISSUANCE UNDER THE COMPANY'S STOCK INCENTIVE PLAN
The Company's Stock Incentive Plan (the "Plan") is a principal component
of the Company's compensation program for the purpose of tying compensation
results directly to stockholder value, specifically the market price of the
Common Stock. The purposes of the Plan have been and continue to be to attract,
retain, motivate and incentivize directors, executives, and key employees, to
provide them with a strong incentive to advance the interests of the Company,
and to otherwise align the interests of management more closely with that of the
Company and its stockholders. The Company may grant options that are intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code or nonstatutory options not intended to qualify as
incentive options, award restricted stock, restricted stock units, performance
units and bonus stock.
In 1995, the Board of Directors of Intelect (Bermuda) adopted the Plan and
it was approved by its stockholders in December 1995. The Plan was adopted by
the Company in connection with the reorganization in December 1998 and all
previously outstanding options to acquire common stock of Intelect (Bermuda)
became options to acquire Common Stock of the Company. No stock option may be
granted, and no restricted stock, restricted stock units, bonus stock or
performance units payable in shares of Common Stock may be awarded under the
Plan after December 13, 2005.
The aggregate number of shares of Common Stock which may be issued under
the Plan, before the amendment, is set at 5,000,000 shares, which quantity was
approved at the 1998 Annual Meeting of Stockholders of the Company. In order to
continue and to enhance the effectiveness of the Plan, the Board of Directors
adopted by unanimous consent on April 21, 1999, in accordance with the
recommendation of its Stock Option Committee (the "Committee"), subject to
stockholder approval, an amendment to increase the number of shares of Common
Stock available for issuance under the Plan from 5,000,000 to 6,000,000.
The Board believes this amendment is necessary in order to make shares
available for future awards under the Plan. It is anticipated that meeting the
objectives and requirements of the Plan will likely utilize all of the shares
presently available for awards under the Plan prior to the 2000 Annual Meeting
of Stockholders. Further, since the prior share authorization, the Company has
continued to expand and its capitalization has increased significantly. As the
Company expands, the need to attract and maintain additional key employees
increases correspondingly. In view of the limited number of shares remaining for
grants under the Plan and the continuing need to attract and maintain
individuals of the highest caliber to positions on the Board, management and
employment, the Board of Directors and the Committee have concluded that the
maximum number of shares of Common Stock that may be issued under the Plan
should be increased from the current maximum of 5,000,000 to an aggregate of
6,000,000 shares.
BOARD RECOMMENDATION
The Board of Directors unanimously recommends a vote FOR the proposal to
amend the Plan to increase the number of shares of Common Stock issuable under
the Plan to 6,000,000. Unless otherwise instructed, the enclosed proxy will be
voted FOR such proposal.
The following is a summary of the material provisions of the Plan. The
summary is subject to the terms of the Plan. The Company will provide, upon
request, a copy of the full text of the Plan to each person to whom a copy of
this proxy statement is delivered. Requests should be directed to Mr. Edwin J.
Ducayet, Jr., Assistant Secretary, Intelect Communications, Inc., 1100 Executive
Drive, Richardson, Texas 75081.
ADMINISTRATION AND ELIGIBILITY
The Plan is administered by the Board of Directors and by the Committee.
Subject to the provisions of the Plan, the Committee has authority to construe
the respective option agreements, award restricted stock, restricted stock
units, performance units and bonus stock, to prescribe, amend and rescind rules
and regulations relating to the Plan and to make all other determinations in the
judgment of the Committee necessary or desirable for the administration and
purposes of the Plan.
17
<PAGE>
Options may be granted to persons who are, at the time of grant, employees,
officers or directors of, or consultants or advisors to, the Company; provided
that incentive stock options may be granted only to persons who are eligible to
receive such options under Section 422 of the Code. The granting of options to
directors and officers shall be determined either (a) by the full Board of
Directors, or (b) by a committee consisting solely of two or more directors.
NUMBER OF SHARES
Subject to adjustment as provided in the Plan, the proposed amendment would
increase the aggregate number of shares of Common Stock authorized for issuance
under the Plan by 1,000,000, to 6,000,000. Of the 6,000,000 shares, no more than
1,000,000 shares will be available for the grant of restricted stock or
restricted stock units. As of April 20, 1999, options to purchase a total of
4,491,876 shares of Common Stock were outstanding under the Plan. The maximum
number of shares of Common Stock with respect to all grants or awards which may
be granted to any participant under the Plan is 350,000 per calendar year
(subject to adjustment as provided in the Plan). The types of awards which the
Committee has authority to grant consists of (1) stock options, (2) restricted
stock, (3) restricted stock units, (4) performance units, and (5) bonus stock.
Each of these are described herein.
EXERCISE PRICE AND TERMS OF STOCK OPTIONS
The Committee has the authority to grant incentive stock options and
non-qualified stock options to officers and key employees of the Company, and
non-qualified stock options to non-employee directors. The Committee (or, in the
alternative, the full Board of Directors) selects the exercise price per share
of stock, provided the exercise price cannot be less than (a) 110% of fair
market value per share for incentive stock options granted to a holder of more
than 10% of the Company's capital stock, (b) 100% of fair market value for
incentive stock options generally, and (c) 25% of fair market value for
non-qualified options. The option price may be paid in cash or Common Stock
owned by the optionee as provided in the Plan. The Committee shall also
determine the expiration of the option period, provided that no stock options
shall be exercisable later than 10 years after the date on which the option is
granted, provided, however, in the case of incentive stock options granted to a
holder of more than 10% of the Company's capital stock, such date shall not be
later than five years after the date on which the option is granted. In all
cases, options shall be subject to earlier termination as provided in the Plan.
All options are nontransferable other than by will or the laws of descent
and distribution. The Committee has the authority under the Plan to set the
times within which the options vest. Unless the stock option agreement with
respect to any options otherwise provides, the options become exercisable on a
cumulative basis of 33 1/3% of the total number of shares covered thereby on
each of the first, second, and third anniversary dates of the grant of the
option. Holders of incentive stock options may generally exercise such options
up to three months after voluntary termination of employment (which termination
has been made with the consent of the Company), unless termination results from
death or disability in which case such options may be exercised at any time
prior to the expiration date of such stock option or within one year after the
date of termination of employment, whichever period is shorter. Holders of
non-qualified options may exercise such options at any time prior to the
expiration date of such non-qualified stock option or within one year after the
date of voluntary termination of employment (which termination has been made
with the consent of the Company), whichever period is shorter.
Notwithstanding the foregoing, if the employment terminates for any reason
other than voluntary termination with the consent of the Company, retirement
under a retirement plan of the Company, or death, all outstanding stock options
shall automatically terminate.
The Committee determines when options granted under the Plan become
exercisable. The Committee may accelerate the date on which any option granted
may be exercised, provided that no such extension shall be permitted if it would
cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3
promulgated under the Exchange Act.
18
<PAGE>
The Committee has authority, with the consent of the effected optionee, to
cancel or amend any outstanding options under the Plan and to grant in
substitution therefor new options covering the same or a different number of
shares of Common Stock and having an exercise price per share which may be lower
or higher than the exercise price per share of the outstanding options.
RESTRICTED STOCK OR RESTRICTED STOCK UNITS
Restricted Common Stock or restricted stock units awarded by the Committee
will be subject to such restrictions as the Committee may impose thereon and
will be subject to forfeiture if certain events (which may, in the discretion of
the Committee, include termination of employment or directorship and/or
performance-based events) specified by the Committee occur prior to the lapse of
the restrictions. The agreement between the Company and the grantee will set
forth the number of shares of restricted stock or restricted stock units awarded
to the grantee, the restrictions imposed thereon, the duration of such
restrictions, the events the occurrence of which would cause a forfeiture and
such other terms and conditions as the Committee in its discretion deems
appropriate. Unless otherwise provided in the agreement, shares of restricted
stock or restricted stock units will vest at the rate of 33 1/3% on each of the
first three anniversaries of the date of grant of the award.
Following a restricted stock award and prior to the lapse or termination of
the applicable restrictions, stock certificates for the shares of restricted
stock will be held in escrow. Upon the lapse or termination of the restrictions,
the stock certificates will be delivered to the grantee. From the date a
restricted stock award is effective, however, the grantee will be a stockholder
with respect to the shares of restricted stock and will have all the rights of a
stockholder with respect to such shares, including the right to vote the shares
and to receive all dividends and other distributions paid with respect to the
shares, subject only to the restrictions imposed by the Committee.
Restricted stock or restricted stock units may be issued for no
consideration or for such consideration as shall be determined at the time of
the award by the Committee.
PERFORMANCE UNITS
The Committee may award performance units (expressed in dollars or shares)
to be earned by an awardee based on the level of performance of the Company, a
subsidiary or subsidiaries, a branch, department or other unit thereof or the
awardee individually over a specified period of not less than one year
("Performance Period"). For each Performance Period the Committee will
establish a Performance Target, and a Minimum Target which may be the same or
less than the Performance Target. Targets may be expressed in terms of earnings
per share, return on assets, return on equity, asset growth, ratio of capital to
assets or such other level or levels of performance by the Company, a subsidiary
or subsidiaries, a branch, department or other unit thereof or the awardee
individually as the Committee may establish.
An awardee shall earn the performance unit in full by meeting the
Performance Target for the Performance Period. If the Minimum Target has not
been attained at the end of the Performance Period, no part of the performance
unit shall have been earned by the awardee. If the Minimum Target is attained
but the Performance Target is not attained, the portion of the performance unit
earned by the awardee shall be determined on the basis of a formula established
by the Committee.
Payment in respect of earned performance units, whether expressed in
dollars or shares, may be made in cash, in Common Stock, or partly in cash and
partly in Common Stock as determined by the Committee at the time of payment.
For this purpose, performance units expressed in dollars will be converted to
shares, and performance units expressed in shares will be converted to dollars,
based on the fair market value of the Common Stock as of the date the amount
payable is determined by the Committee.
Except as otherwise provided below under "Additional Rights in Certain
Events", if the employment of an awardee terminates prior to the close of a
Performance Period for any reason other than voluntary termination with the
consent of the Company or a subsidiary, retirement under any retirement plan of
the Company or a subsidiary of death, the performance units of the awardee will
be deemed not to have been earned, and no portion of such performance units may
be paid. If prior to the close of the Performance
19
<PAGE>
Period the employment of an awardee is voluntarily terminated with the consent
of the Company or a subsidiary or the awardee retires under any retirement plan
of the Company or a subsidiary or the awardee dies during employment, the
Committee may in its discretion determine to pay all or any part of the
performance unit based upon the extent to which the Committee determines the
Performance Target or Minimum Target has been achieved as of the date of
termination of employment, retirement or death, the period of time remaining
until the close of the Performance Period and/or such other factors as the
Committee may deem relevant.
Performance unit awards may have such other terms and conditions as the
Committee in its discretion deems appropriate.
BONUS STOCK
The Committee will have the authority in its discretion to award bonus
shares of Common Stock to eligible individuals in recognition of the
contribution of the awardee to the performance of the Company, a subsidiary or
subsidiaries, or a branch, department or other unit, in recognition of the
awardee's individual performance or on the basis of such other factors as the
Committee may deem relevant. Any bonus stock awarded would not be subject to any
restrictions or possibilities of forfeiture.
ADDITIONAL RIGHTS IN CERTAIN EVENTS
The Plan provides for certain additional rights upon the occurrence of one
or more events described in Section 9 of the Plan ("Section 9 Events"). Such
an event is deemed to have occurred when (1) the Company acquires actual
knowledge that any person (other than the Company, a subsidiary or any employee
benefit plan sponsored by the Company or a person approved under certain
circumstances by the Board of Directors) has acquired beneficial ownership,
directly or indirectly, of securities of the Company representing 20% or more of
the voting power of the Company, (2) a tender offer is made to acquire
securities of the Company representing 20% or more of the voting power of the
Company, (3) a person other than the Company solicits proxies relating to the
election or removal of 50% or more of any class of the Board of Directors, or
(4) the stockholders of the Company approve a merger, consolidation, share
exchange, division or sale or other disposition of assets of the Company as a
result of which the stockholders of the Company immediately prior to the
transaction will not own a majority of the voting power of the surviving or
resulting company or any company which acquires the stock of the Company or more
than 20% of its consolidated assets.
Unless the agreement between the Company and the awardee otherwise
provides, if any Section 9 Event occurs (1) all outstanding stock options will
become immediately and fully exercisable, (2) all stock options held by an
awardee whose employment with the Company or a subsidiary terminates within one
year of any Section 9 Event for any reason (other than voluntary termination
with the consent of the Company or a subsidiary, retirement under any retirement
plan of the Company or subsidiary, or death) will be exercisable for a period of
three months from the date of such termination of employment, but in no event
after the expiration date of the stock option, (3) all restrictions applicable
to restricted stock awarded under the Plan will lapse, and (4) all performance
units for which the Performance Period has not yet expired will be deemed to
have been fully earned as of the date of the Section 9 Event, regardless of the
attainment or non-attainment of the Performance Target or any Minimum Target.
AMENDMENT AND TERMINATION
The Board of Directors may at any time modify or amend the Plan in any
respect, provided that no such alteration or amendment of the Plan shall,
without stockholder approval (i) increase by more than 10% the total number of
shares which may be issued under the Plan to persons subject to Section 16 under
the Securities Exchange Act of 1934 ("Section 16 Persons"), (ii) materially
increase the benefits accruing under the Plan to Section 16 Persons, (iii)
materially modify the requirements as to eligibility for participation in the
Plan by Section 16 Persons, (iv) make any changes in the class of employees
eligible to receive incentive stock options under the Plan, or (v) increase the
number of shares with respect to which
20
<PAGE>
incentive stock options may be granted under the Plan. Termination or any
amendment of the Plan shall not, without the consent of an optionee, adversely
effect his or her rights under an option previously granted.
If an awardee engages in a business which is in competition with the
Company or any of its subsidiaries, the Company may immediately terminate all
outstanding stock options held by the awardee, declare forfeited all restricted
stock held by the awardee as to which the restrictions have not yet lapsed and
terminate all outstanding performance unit awards held by the awardee for which
the applicable Performance Period has not been completed. The preceding sentence
shall not apply if the exercise period of the stock option upon termination of
employment or a directorship has been extended, the lapse of the restrictions
applicable to the restricted stock has been accelerated or the performance unit
has been deemed to have been earned as a result of the occurrence of a Section 9
Event.
The Plan shall terminate with respect to incentive stock options upon the
earlier of December 13, 2005, or the date on which all shares available for
issuance under the Plan shall have been issued pursuant to the exercise or
cancellation of options granted thereunder. The Plan shall terminate with
respect to non-qualified options on December 13, 2005.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to awards granted under the
Plan and with respect to the sale of shares of Common Stock acquired under the
Plan.
INCENTIVE STOCK OPTIONS
In general, a participant will not recognize taxable income upon the grant
or exercise of an incentive stock option. Instead, a participant will recognize
taxable income with respect to an incentive stock option only upon the sale of
Common Stock acquired through the exercise of the option ("ISO Shares"). The
exercise of an incentive stock option may, however, subject the participant to
the alternative minimum tax.
Generally, the tax consequences of selling ISO Shares will vary with the
length of time that the participant has owned the ISO Shares at the time it is
sold. If the participant sells ISO Shares after having owned it for at least two
years from the date the option was granted (the "Grant Date") and one year
from the date the option was exercised (the "Exercise Date"), then the
participant will recognize long-term capital gain in an amount equal to the
excess of the sale price of the ISO Shares over the exercise price.
If the participant sells ISO Shares for more than the exercise price prior
to having owned it for at least two years from the Grant Date and one year from
the Exercise Date (a "Disqualifying Disposition"), then all or a portion of
the gain recognized by the participant will be ordinary compensation income and
the remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the participant has held the ISO Shares for more than
one year prior to the date of sale.
If a participant sells ISO Shares for less than the exercise price, then
the participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Shares. This capital loss will be a
long-term capital loss if the participant has held the ISO Shares for more than
one year prior to the date of sale.
NON-QUALIFIED STOCK OPTIONS
As in the case of an incentive stock option, a participant will not
recognize taxable income upon the grant of a non-qualified stock option. Unlike
the case of an incentive stock option, however, a participant who exercises a
non-qualified stock option generally will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of the Common Stock
acquired through the exercise of the option ("NSO Shares") on the Exercise
Date over the exercise price.
With respect to any NSO Shares, a participant will have a tax basis equal
to the exercise price plus any income recognized upon the exercise of the
option. Upon selling NSO Shares, a participant generally will recognize capital
gain or loss in an amount equal to the excess of the sale price of the NSO
Shares over the
21
<PAGE>
participant's tax basis in the NSO Shares. This capital gain or loss will be a
long-term gain or loss if the participant has held the NSO Shares for more than
one year prior to the date of the sale.
RESTRICTED STOCK. A participant granted shares of restricted stock will
not recognize any taxable income for Federal income tax purposes until the first
time such participant's rights in the shares are transferable or are not subject
to a substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an election under Section 83(b) of the Code to be taxed
on receipt of the shares. In either case, the amount of such income will be
equal to the excess of the fair market value of the stock the time the income is
recognized over the amount (if any) paid for the stock. The Company or one of
its subsidiaries generally will be entitled to a deduction for compensation paid
in the same amount treated as compensation income to the grantee.
PERFORMANCE UNITS. A participant granted performance units recognizes
income in the amount of the award of those units when they vest and are no
longer subject to substantial risk of forfeiture and such person is entitled to
receive the value of the award. Any cash or Common Stock received pursuant to
the award will be treated as compensation income received by the awardee
generally in the year in which the awardee receives such cash or shares of
Common Stock. In each case, the amount of compensation income will equal the
amount of cash and the fair market value of the Common Stock on the date
compensation income is recognized. The Company or one of its subsidiaries
generally will be entitled to a deduction for compensation paid in the same
amount treated as compensation income to the awardee.
BONUS STOCK. Any Common Stock received pursuant to an award of shares of
bonus stock will generally be treated as compensation income received by the
awardee in the year in which the awardee receives such shares. In such case, the
amount of compensation income will equal the fair market value of the Common
Stock on the date compensation income is recognized. The Company or one of its
subsidiaries generally will be entitled to a corresponding deduction in the same
amount for compensation paid.
OTHER TAX MATTERS. The exercise of a stock option by an awardee, the lapse
of restrictions on restricted stock, or the deemed earnout of performance units
following the occurrence of a Section 9 Event, in certain circumstances, may
result in (i) a 20% Federal excise tax (in addition to Federal income tax) to
the awardee on certain payments of Common Stock or cash resulting from such
exercise or deemed earnout of performance units or, in the case of shares of
restricted stock, on all or a portion of the fair market value of the Common
Stock on the date the restrictions lapse, and (ii) the loss of a compensation
deduction which would otherwise be allowable to the Company or one of its
subsidiaries as explained above.
TAX CONSEQUENCES TO THE COMPANY. The grant of an option under the Plan
will have no tax consequences to the Company. Moreover, in general, neither the
exercise of an incentive stock option nor the sale of any Common Stock acquired
under the Plan will have any tax consequences to the Company. The Company
generally will be entitled to a business-expense deduction, however, with
respect to any ordinary compensation income recognized by a participant under
the Plan. Any deduction will be subject to the limitations of Section 162(m) of
the Code, which provides for certain limitations on the deductibility of
non-performance based compensation. The Company will have a withholding
obligation with respect to ordinary compensation income recognized by
participants.
AMENDED AND RESTATED PLAN: NEW PLAN BENEFITS
Grants and awards under the Plan which may be made to Company executive
officers, directors and other employees are not presently determinable. If the
stockholders approve the Plan, such grants and awards will be made at the
discretion of the Committee or the Board of Directors in accordance with the
compensation policies of the Compensation Committee, which are discussed in the
"Compensation Committee Report on Executive Compensation" above.
22
<PAGE>
PROPOSAL 3: PROPOSAL TO APPROVE THE COMPANY'S DIRECTORS' STOCK PLAN FOR
NON-EMPLOYEE DIRECTORS
BACKGROUND
As of March 31, 1999, the Board of Directors adopted, subject to the
approval of the stockholders, the Directors' Stock Plan which provides, at the
election of each non-employee director at the beginning of each year, for the
payment of the director's fees in shares of Common Stock. The Directors' Stock
Plan is only available to non-employee directors. Its purpose is to promote the
interests of the Company and stockholders by providing non-employee directors a
greater financial stake in the Company through ownership of Common Stock in
addition to underscoring their common interest with stockholders in increasing
the value of the Common Stock over the long term.
DESCRIPTION OF THE DIRECTORS STOCK PLAN
The Directors Stock Plan became effective March 31, 1999, subject to
stockholder approval, and calls for the non-employee directors, at their
election, to receive, in lieu of cash, all of their annual retainer, if any, as
well as their monthly directors fees and meeting fees in the "fair market
value" of the Common Stock. The director must make the election at the
beginning of the fiscal year, except with respect to the initial plan year.
During the initial plan year, within 30 days after stockholder approval of the
proposal, the directors may make a one time written election to the Company to
receive all of their accrued and unpaid directors' fees in the form of Common
Stock of the Company. The number of shares which the director will receive will
be based on the closing bid price of the Common Stock of the Company at the end
of the month immediately preceding the date of the election. At such time, the
directors also can elect to receive fees for the remainder of the year in the
form of Common Stock. The number of shares which the directors will be entitled
to receive will based on the "fair market value" of the Common Stock. The
"fair market" value is determined based upon the closing bid price of the
Common Stock as reported on the Nasdaq Stock Market or such other exchange on
which the Company's Common Stock is then trading on the last trading day of the
month the fee is payable. The director may elect to defer recognition of the
compensation by deferring issuance of Common Stock until a later period, but in
no event may such issuance be earlier than January 1 of the next fiscal year.
Such deferral must be made at the time the director elects to receive his fees
in stock. At any time, on thirty (30) days prior notice, the director may elect
to no longer receive his fees in stock and receive cash instead. The director's
account will also be credited with fair market value of Common Stock equal to
cash dividends on Common Stock, if any, that would have been received had the
Common Stock been issued when earned. A total of 750,000 shares of Common Stock
have been reserved for issuance under this plan.
23
<PAGE>
In connection with the plan, during the initial plan year the directors
have a one time election to receive shares of Common Stock in lieu of payment in
cash of all directors' fees which are accrued and unpaid.. The amount of unpaid
directors' fees due to each director and the number of shares that would be
issued as of March 31, 1999 are set forth in the table below. The table sets
forth the number of shares which would be issued to each director who elects to
receive the payment of his unpaid fees in the form of shares of Common Stock is
based on the closing bid price of the Common Stock as reported on the Nasdaq
Stock Market as of March 31, 1999, $0.97.
<TABLE>
<CAPTION>
UNPAID COMPENSATION NUMBER OF SHARES FOR SUBSTITUTE
NAME AND POSITION OWED TO DIRECTOR ($) STOCK PAYMENT(1)
- ------------------------------------- -------------------- --------------------------------
<S> <C> <C>
Robert E. Garrison II................ $ 63,000(2) 64,948
Non-employee Director
Philip P. Sudan, Jr.................. $104,000(3) 107,216
Non-employee Director
Anton Liechtenstein.................. $ 25,000(4) 25,773
Non-employee Director
</TABLE>
- ------------
(1) Based on closing bid price of the Company's Common Stock on March 31, 1999.
(2) Includes unpaid directors' fees from July 1, 1997 through March 31, 1999.
(3) Includes unpaid directors' fees from February 1, 1997 through March 31,
1999.
(4) Includes unpaid directors' fees from July 1, 1997 through March 31, 1999,
plus $1,000 in unpaid directors' fees for June, 1997.
REQUIRED VOTE FOR APPROVAL
The approval of the Directors Stock Plan requires the affirmative vote of a
majority of the votes cast at the Annual Meeting.
The Board of Directors recommends a vote FOR the approval of the Directors
Stock Plan.
PROPOSAL 4: APPROVAL OF AUDITORS
The Board of Directors, in accordance with the recommendation of its Audit
Committee, which is composed of non-employees of the Company, has unanimously
approved and requests you to vote FOR the appointment of Grant Thornton LLP
("Grant Thornton") to act as independent auditors of the Company until the
next annual meeting of stockholders, subject to terms of engagement acceptable
to the Audit Committee. Proxies will be so voted unless stockholders specify
otherwise in their proxies.
Representatives of Grant Thornton are expected to be present at the Meeting
and will have the opportunity to make a statement if they so desire and will be
available to respond to appropriate questions from stockholders. Representatives
of Peat Marwick ("KPMG") and Arthur Andersen LLP ("Arthur Andersen") are not
expected to be present.
The Company's Board of Directors, in accordance with the recommendation of
its Audit Committee, which is composed of non-employees of the Company, has
requested Grant Thornton to act as independent auditors of the Company for the
1999 fiscal year, subject to shareholder approval, in replacement of Arthur
Andersen.
As disclosed in the Form 10-Q of the Company filed on November 16, 1998,
the Company's previous independent auditors, Arthur Andersen, resigned on
November 13, 1998. The report by Arthur Andersen for the year ended December 31,
1997 contained no adverse opinion or disclaimer of opinion, nor was it qualified
or modified as to audit scope or accounting principles. There were no
disagreements by the Company with Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedure, which disagreement(s), if not resolved to the satisfaction of Arthur
Andersen would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report. There were no "reportable
events" as set forth in Regulation S-K, Item
24
<PAGE>
304(a)(1)(v)(A)-(D) except as follows: (1) Arthur Andersen informed the Company
that it appeared likely its auditor's report for 1998 would have contained a
qualification as to the Company's ability to continue as a going concern, (2)
Arthur Andersen informed the Audit Committee Chairman, the Chairman of the Board
and the Chief Financial Officer that with respect to Capitalized Software
Development Costs, compliance with SFAS #86 had not been evaluated particularly
as it relates to current year additions and realizability of such asset and (3)
Arthur Andersen informed the Audit Committee Chairman, the Chairman of the Board
and the Chief Financial Officer that as a result of the revenue restatement for
the quarter ended June 30, 1998, they would have had to expand the scope of the
1998 audit if they had not resigned. Arthur Andersen encouraged the Audit
Committee Chairman, the Chairman of the Board and the Chief Financial Officer to
closely monitor these matters. Substantive audit tests and further investigation
into these matters would have been a necessary part of Arthur Andersen's audit
procedures for the year-end December 31, 1998 financial statements had the
client/auditor relationship not terminated. Arthur Andersen was authorized by
the Company to respond to any and all inquiries by the successor auditors,
without limitation. The Company indicated that it would cooperate fully with its
new auditors to address these matters. Arthur Andersen provided to the Company a
letter to the Securities and Exchange Commission stating that it reviewed the
disclosure provided in the Form 10-Q for the quarter ended September 30, 1998
and had no disagreement with relevant portions of the disclosure contained
therein, pursuant to the requirements of Item 304(a)(3) of Regulation S-K. A
copy of such letter, dated November 16, 1998, was filed as an exhibit to the
Form 10-Q.
As disclosed in the Form 8-K of the Company filed on August 18, 1997, the
term of the Company's independent auditors prior to Arthur Andersen, KPMG,
expired at the Company's annual general meeting of its stockholders held August
13, 1997. The KPMG report dated April 9, 1997 on the consolidated financial
statements of the Company for the year ended December 31, 1996, noted that the
Company has suffered recurring losses from continuing operations and is
dependent upon the successful development and commercialization of its products
and its ability to secure adequate sources of capital until the Company is
operating profitably and noted that these matters raise substantial doubt about
the Company's ability to continue as a going concern, and that management's
plans with regard to these matters were described in Note 1 to the consolidated
financial statements.
During the two years ended December 31, 1995 and December 31, 1996, and the
subsequent interim period through the date of the appointment of Arthur Andersen
as the Company's new outside auditors, there were no "disagreements" between
the Registrant and KPMG as described in Item 304(a)(1)(iv) of Regulation S-K.
The Registrant requested KPMG to furnish it with a letter addressed to the SEC
stating whether or not it agreed with the above statements. A copy of such
letter, dated August 14, 1997, was filed as an Exhibit to the Form 8-K of the
Company filed on August 18, 1997.
PROPOSAL 5: TO APPROVE THE ISSUANCE OF THE SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF THE SERIES E PREFERRED STOCK
AND RELATED WARRANTS
BOARD APPROVAL OF THE SERIES E PREFERRED STOCK PRIVATE PLACEMENT
During the first quarter of 1999, the Company required additional working
capital for current and prospective operations. Due to the operational set-back
and resultant financial difficulties during 1998 which the Company experienced
following the collapse at the end of 1997 of the Company's market for its
SonetLynx product in Korea, the Company concluded that an underwritten public
offering of its Common Stock was not attainable and that a private placement
would be the most likely feasible approach for raising additional capital.
Although the Company was successful in completing several small-scale private
placements of Common Stock to "accredited investors" during the fourth quarter
of 1998 and in January of 1999, the Company's ongoing capital requirements could
not be met in this manner. In addition, the Company was restricted pursuant to
agreements with its lenders from incurring any additional indebtedness without
prior consent. The Company did not believe that the terms of such indebtedness
as well as a reluctance of lenders to consent to the Company incurring any
additional indebtedness would warrant entering into additional debt obligations.
The Company explored a number of possibilities, but ultimately
25
<PAGE>
determined that a private placement transaction whereby the Company would issue
preferred stock which was convertible into Common Stock at either a fixed or
variable conversion price would be the only security the Company could expect to
issue in order to raise the working capital it required, and also given the
contractual constraints described. The security that the Board ultimately
decided to approve was a new series of convertible preferred stock designated as
the Series E Convertible Preferred Stock (the "Series E Preferred Stock") to
be issued to a series of investment funds managed by the Citadel Investment
Group, L.L.C. ("Citadel"), Promethean Investments, L.L.C. ("Promethean"),
and Angelo, Gordon & Company, L.P. ("Angelo Gordon"). Among other things, the
Board considered primarily the economic terms of the proposed transaction;
namely, the amount of funds which could be raised, whether the security was a
debt or equity instrument, any required dividends, whether or not the securities
were convertible and if so, the conversion provisions. The Board also considered
the risk factors associated with a security with a variable conversion formula,
registration obligation, Nasdaq requirements, and the possible triggering of
penalty and redemption provisions in certain circumstances. In the final
analysis, the Board decided that considering the Company's operating and
financial situation, the risk factors did not outweigh the benefits of the
funding to be secured by the issuance of the Series E Preferred Stock.
NASDAQ RULES AND STOCKHOLDER APPROVAL
Under Nasdaq rules, as a condition of listing, the Company is required to
obtain stockholder approval of the sale or issuance of Common Stock (or
securities convertible into Common Stock) by the Company equal to 20% or more of
the Common Stock before the issuance at a price less than the greater of book or
market value (the "Nasdaq 20% Rule"). In addition, stockholder approval is
also required in connection with transactions which are deemed to be a "change
in control" under Nasdaq rules. Although the Company does not believe that the
issuance of the Series E Preferred Stock constitutes a "change in control", if
the transaction were to be so construed, the approval being sought would also be
effective to satisfy the Nasdaq requirement. In addition, as noted, the Company
has agreed with the purchasers of the Series E Preferred Stock that the Company
will use its best efforts to obtain stockholder approval under the Nasdaq
requirement at the Meeting.
The exact number of shares of Common Stock issuable upon conversion of each
of the shares of Series E Preferred Stock issued (and to be issued at the
Additional Closings, if any, as more fully described below) cannot currently be
determined for the future because the Series E Preferred Stock is also subject
to adjustment mechanisms in the applicable conversion price which cause the
number of shares issuable to be dependent on future events, namely the future
trading prices of the Common Stock and the decisions on conversions made by the
holders of the Series E Preferred Stock. The operation of the variable
conversion price formulas will cause the number of shares of Common Stock to be
issued to increase with declines in the market price of the Common Stock. Due to
the decline in the market price of the Common Stock and because the Series E
Preferred Stock is convertible into Common Stock at rates or prices that vary or
move by formulas which are tied to the market price of the Common Stock, the
Company may be required to issue shares of Common Stock equal to 20% or more of
the shares of Common Stock outstanding on the date of the Initial Closing of the
Series E Preferred Stock (i.e., March 5, 1999) and at prices less than the
greater of book or market value at the time of the Initial Closing (i.e., $1.344
per share on March 5, 1999). In order to assure continued compliance with the
Nasdaq requirements, the terms of the Series E Preferred Stock and the related
warrants (as more fully described below) provide that shares of Common Stock
issuable upon conversion of the Series E Preferred Stock may not be issued if
such issuance would violate Nasdaq rules (i.e., issuances of Common Stock in
excess of approximately 6,917,265 shares without stockholder approval). Thus,
upon approval of the proposal, the Company may be required to issue shares of
Common Stock equal to 20% or more of the shares of Common Stock outstanding on
the date of the Initial Closing. If the approval sought is not obtained, the
Company may be required to redeem the Series E Preferred Stock. See "Summary of
Transaction Terms" and "Consequences if Stockholder Approval Not Obtained".
26
<PAGE>
SUMMARY OF TRANSACTION TERMS
The following is a summary of the material terms of the Series E Preferred
Stock, which terms are qualified by reference to the full text of the underlying
documents which are filed as exhibits to the Form 8-K of the Company filed on
March 2, 1999 (the "Form 8-K"). The underlying documents for the Series E
Preferred Stock are a Securities Purchase Agreement, Registration Rights
Agreement and a Certificate of Designations, Preferences and Rights, all filed
as exhibits to the Form 8-K. In addition, a Form of Warrant is also filed as an
exhibit to the Form 8-K.
As described above, the Company entered into a Securities Purchase
Agreement dated February 24, 1999 pursuant to which the Company agreed to issue
from time to time in separate private placements shares of Series E Preferred
Stock and warrants to purchase Common Stock based on the number of shares of
Series E Preferred Stock purchased. The purchasers represented to the Company
that they were "accredited investors". None of the purchasers represented that
it was an affiliate of the Company. None of the purchasers are an officer or
director of the Company.
THE CLOSINGS. The transaction is divided into several separate closings
which could result in the issuance of up to 9,600 shares of Series E Preferred
Stock and warrants to purchase Common Stock based on the number of shares
purchased. At the initial closing of the transaction (the "Initial Closing"),
which occurred on March 5, 1999, Citadel purchased from the Company an aggregate
of 3,000 shares of Series E Preferred Stock for total gross proceeds to the
Company of $3,000,000 (the "Initial Shares"). The Company issued to Citadel
warrants to purchase 300,000 shares of Common Stock, which represented a warrant
to purchase 100 shares of Common Stock for each Initial Share purchased. On
April 20, 1999, Promethean and Angelo Gordon purchased from the Company at a
subsequent closing (the "Mandatory Closing") an additional 3,000 shares of the
Series E Preferred Stock for an additional $3,000,000 (the "Mandatory
Shares"). Each of these purchasers received warrants to purchase 100 shares of
Common Stock for each Mandatory Share purchased. The Company has also granted
each of the Purchasers of the Series E Preferred Stock the right to purchase up
to an additional 3,600 shares of Series E Preferred Stock beginning six months
after the Initial Closing and ending eighteen months after the Initial Closing.
These additional closings (the "Additional Closings") are to occur only if the
purchasers provide five days prior written notice to the Company of their
intention to purchase, and are subject to the satisfaction or waiver of certain
conditions to closing. Should such Additional Closings occur, the purchasers
will be entitled to receive warrants to purchase 100 shares of Common Stock for
each share of Series E Preferred Stock purchased at each Additional Closing. The
proceeds from the offering, including the Initial Closing, the Mandatory
Closing, and the Additional Closings, if any, will be used by the Company for
working capital and general corporate purposes.
CONVERSION. Each share of Preferred Stock is convertible into that number
of shares of Common Stock equal to (i) $1,000 (the "Stated Value"), plus any
accrued premium of 8% per annum, divided by (ii) the applicable conversion
price. The applicable conversion price is the lesser of (i) a "fixed conversion
price", or (ii) a "variable conversion price". The fixed conversion price for
the 3,000 shares of Series E Preferred Stock purchased at the Initial Closing is
$1.80. The fixed conversion price for the 3,000 shares of Series E Preferred
Stock purchased at the Mandatory Closing is $0.906, which price represents the
lowest closing bid price for the ten (10) consecutive trading days before the
date of the filing of the registration statement with the SEC (i.e., April 2,
1999) covering the resale of the shares of Common Stock issuable upon conversion
of the Series E Preferred Stock. The fixed conversion price at the Additional
Closings, if any, would be $3.00. The variable conversion price is 83.5% of the
average of the two lowest closing bid prices of the Common Stock as reported on
Bloomberg for the forty (40) consecutive trading days before the date of
conversion (the "Variable Conversion Price"). Under the terms of the
transaction documents, in the event that the Company or the transfer agent do
not timely effect a conversion or reissuance of the remaining shares of Series E
Preferred Stock, the Company is subject to certain liquidated damage penalties,
adjustments to the applicable fixed conversion price, a potential required
redemption of all of the remaining shares of Series E Preferred Stock and
certain other penalties as more fully described in the Certificate of
Designations.
27
<PAGE>
In addition, if the holders of the Series E Preferred Stock submit a
conversion request and the Company is not able to issue the required amount of
shares of Common Stock due to the Company's inability to comply with the rules
of Nasdaq, under the Certificate of Designations, a Triggering Event would
occur. In such event, the Company could be required by the holders to redeem all
of the remaining shares of Series E Preferred Stock at a price equal to 120% of
the Liquidation Preference. In addition, upon the Triggering Event, the holders
of the Series E Preferred Stock could attempt to require the Company to delist
its Common Stock from Nasdaq and begin trading on the electronic bulletin board
or pink sheets.
DISCONTINUANCE OF CONVERSIONS; TRIGGERING EVENTS AND OTHER REMEDIES.
As disclosed in the Form 8-K of the Company filed on April 26, 1999, the
Company is discontinuing indefinitely conversions of its outstanding shares of
Series C Convertible Preferred Stock (the "Series C Preferred Stock"), Series
D Convertible Preferred Stock (the "Series D Preferred Stock"), and Series E
Preferred Stock. The Company believes, among other things, that purchasers of
the Series C and Series D Preferred Stock violated representations and
warranties regarding investment purpose and intent. The purchasers of the Series
E Preferred Stock made the same representations regarding investment purpose and
intent as they made in connection with their purchase of the Series C and D
Preferred Stock. Accordingly, should shares of Series E Preferred Stock be
submitted for conversion, the Company also will not effect conversions of such
shares for an indefinite period of time. As of the date hereof, no shares of
Series E Preferred Stock have been submitted for conversion. Should the Company
resolve the matter of conversions with holders of the Series E Preferred Stock,
or if no such resolution is reached and the Company is otherwise required to
convert shares when submitted for conversion, the Company will issue the full
amount of shares it is required to issue.
Although the terms and conditions of the Series E Preferred Stock provide
that the holders may be entitled to significant penalties and damages, the
Company believes there are significant defenses to any claims to enforce such
remedies. In addition, the Company believes there are significant affirmative
claims available to the Company including violations of investment intent, among
other claims.
The transaction documents provide that the Company could be subject to
significant penalties for not effecting conversions or for announcing its
intention to not comply with any conversion requests, in addition to whatever
legal or equitable remedies the holders have. First, the Certificate of
Designations provides that if conversion notices are submitted and are not
honored by the Company within three days of submission, the holder is entitled
to liquidated damages. The amount of the liquidated damages per day would be 1%
of an amount equal to the number of shares of Common Stock not issued to the
holder to which he is entitled plus the shares of common stock issuable upon
conversion of the remaining shares of Series E Preferred Stock times the Closing
Sales Price of the Common Stock (as defined). Under the Certificate of
Designations, if the Company did not pay the amount due within five days of when
owed, the holder could elect to receive the amount in shares of Common Stock,
based on the Conversion Price on the date specified in the conversion notice.
The holder could also elect to void conversion notices after ten days and
receive a re-set of the fixed conversion price to the lesser of (a) the fixed
conversion price as in effect on the date on which the holder voided the
conversion notice and (b) the lowest Closing Bid Price (as defined) during the
period beginning on the conversion date and ending on the date the holder voided
the conversion notice.
By virtue of the Company publicly announcing its intention to not convert
any of the shares of the Series E Preferred Stock, under the Certificate of
Designations, a "Triggering Event" may be claimed to have occurred and a
holder could elect to require the Company to redeem all of the remaining shares
of Series E Preferred Stock at the greater of (A) 120% of the Liquidation
Preference (or slightly in excess of $7.2 million based on the 6,000 shares of
Series E Preferred Stock presently outstanding), or (B) the product of the
conversion rate in effect at such time the holder delivers a notice of
redemption and the Closing Sale Price of the Common Stock on the date
immediately preceding such Triggering Event. If the Company does not effect such
a redemption, interest would accrue on the value of the unredeemed shares at the
rate of 2.5% per month.
28
<PAGE>
The Company does not presently have the funds available to pay the
redemption price for all or any significant portion of the Series E Preferred
Stock, required interest payments, or any significant part of liquidated damages
to which any holder may ultimately be entitled. However, the Company believes
that it could obtain the required amounts through the issuance of additional
equity securities or the sale of certain assets or divisions of the Company,
although no assurances can be given that the Company will be successful in such
efforts should they be necessary. In addition, as noted, the Company believes it
has significant defenses and claims in connection with claims by a holder.
However, if the holders of the Series E Preferred Stock were ultimately
successful in enforcing their claims in connection with the cessation of
conversions, there could be material adverse financial consequences to the
Company which could severely impair its ability to continue as a going concern.
The following table sets forth certain information relating to the holders
of the Series E Preferred Stock as of April 30, 1999 for shares issued at the
Initial Closing and to be issued at the Mandatory Closing only. The table does
not include shares that may be issued at the Additional Closings since there can
be no assurances that any Additional Closings will occur, or should they occur,
the timing or amount of shares which may be issued. The shares of Common Stock
assumed issuable upon the conversion of the Series E Preferred Stock is computed
based on a conversion price of $0.56112 as of April 30, 1999 (which is 83.5% of
the average of the two lowest closing bid prices of the common stock for the
forty (40) consecutive trading days ended April 29, 1999). The aggregate number
of shares thus deemed issuable upon conversion is computed by dividing the
aggregate stated value of the Series E Preferred Stock (i.e., $1,000 per share
multiplied by the applicable number of shares of Series E Preferred Stock) plus
accrued premium of 8% per year, by the conversion price being applied.
<TABLE>
<CAPTION>
COMMON STOCK
COMMON ISSUABLE ON
SERIES E STOCK TOTAL NUMBER
SERIES E PREFERRED ISSUABLE ON PREFERRED SHARES -
PREFERRED SHARES - TOTAL NUMBER PERCENTAGE
SHARES - INITIAL MANDATORY OF PREFERRED OF SHARES
PURCHASER CLOSING SHARES CLOSING SHARES(1) OUTSTANDING(1)
- ------------------------------------- ---------------- --------- ------------ ------------------
<S> <C> <C> <C> <C>
Olympus Securities Ltd............... 1,228 2,215,342 5.85%
NP Partners.......................... 688 1,241,169 3.28%
Fisher Capital Ltd................... 664 1,197,872 3.16%
Wingate Capital Ltd. ................ 342 616,976 1.63%
CCG Capital Ltd. .................... 39 70,357 0.19%
CCG Investment Fund Ltd. ............ 39 70,357 0.19%
HFTP Investment LLC.................. 1,500 2,673,225 7.06%
Leonardo, L.P. ...................... 1,000 1,782,150 4.70%
GAM Arbitrage Investments, Inc. ..... 100 178,215 0.47%
AG Super Fund International Partners,
L.P. .............................. 100 178,215 0.47%
Raphael, L.P. ....................... 100 178,215 0.47%
Ramius Fund, Ltd. ................... 200 356,430 0.94%
------ --------- ------------ ------
TOTALS........................... 3,000 3,000 10,758,522 28.41%
====== ========= ============ ======
</TABLE>
- ------------
(1) Does not include any additional shares beneficially owned by the holders,
including shares deemed beneficially owned by virtue of their ownership of
shares of Series C and D Convertible Preferred Stock of the Company.
With respect to the Preferred Stock, subject to the Nasdaq 20% Rule, as the
price of the Common Stock decreases, the number of shares of Common Stock
underlying the Series E Preferred Stock continues to increase. For instance,
assuming a hypothetical conversion price of $0.28056 (which is 50% of the
conversion price of $0.56112 as of April 30, 1999), the total number of shares
of Common Stock which would underlie the 6,000 shares of Series E Preferred
Stock in connection with the Initial and Mandatory Closings would be
approximately 21,517,044 shares, or approximately 56.8% of the total number of
shares of Common Stock outstanding as of such date. The foregoing table does not
include shares which may be issued at the Additional Closings, if any, or shares
issuable upon exercise of the warrants issued in connection with the Series E
Preferred Stock. The approval sought hereby would be sufficient to approve
29
<PAGE>
the full amount of shares issuable upon conversion of shares issued at the
Initial Closing, the Mandatory Closing, and the Additional Closings, if any, as
well as the shares issuable upon exercise of the related warrants.
The shares of Series E Preferred Stock issued at the Initial Closing and
Mandatory Closing are presently convertible. The holders of the Series E
Preferred Stock are prohibited in the Certificate of Designations from
converting their respective holdings of the Series E Preferred Stock if after
giving effect to such conversion the holder would "beneficially own" (as such
term is defined in the Certificate of Designations) in excess of 4.99% of the
outstanding shares of Common Stock of the Company. The Series E Preferred Stock
will convert automatically into Common Stock at the applicable Conversion Price
then in effect on the fifth anniversary date of issuance, to the extent any
shares of the applicable issuance of Series E Preferred Stock remain
outstanding.
In connection with the Series E Preferred Stock, the following risks are
associated with Series E Preferred Stock conversions:
o because the Variable Conversion Price of the Series E Preferred Stock
is a function of the market price of the Common Stock upon conversion,
the lower the price of the Common Stock at the time the holder
converts, the greater number of shares of Common Stock received upon
conversion;
o to the extent that Common Stock received upon conversion is sold into
the market, and disregarding the manner in which such shares are sold
as well as any other factors such as reactions to the Company's
operating results and general market conditions which may be operative
in the market at such time, such sales may cause a decrease in the
market price of the Common Stock, which in turn relative to additional
conversions of the Series E Preferred Stock would reduce the Variable
Conversion Price and increase the number of shares of Common Stock
issued upon conversion and available for sale into the market for the
Common Stock;
o short sales of the Common Stock may be attracted by or accompany
conversions and sales of Common Stock from conversions, which sales in
the aggregate could cause downward pressure upon the price of the
Common Stock, excluding the effect of other market factors possibly
operative at the time; and
o conversions of the Series E Preferred Stock may result in substantial
dilution of the interests of the other holders of Common Stock. In
this regard, the ownership limitation which prohibits the purchasers
from owning more than 4.99% of the Common Stock of the Company only
applies to shares of Common Stock held at one time and does not
prevent purchasers from converting and selling some of their holdings
and then later converting the rest of the holdings.
In addition, the Company's Common Stock could be delisted by Nasdaq in the
event that the Company's stock price decreases below the $1 minimum bid price as
required by Nasdaq or the Company otherwise fails to satisfy the minimum listing
requirements of Nasdaq, including tangible net worth requirements. In such an
event, should such a delisting extend for five or more consecutive trading days,
a Triggering Event would occur and the holders of the Series E Preferred Stock
could require the Company to redeem the outstanding shares of Series E Preferred
Stock. See "Redemption". In addition, should the Company fail to satisfy
minimum listing requirements of Nasdaq, the investors are not obligated to
purchase shares of Series E Preferred Stock in any Additional Closings.
DIVIDENDS. The holders of the Series E Preferred Stock are not entitled to
receive dividends. The holders are entitled to receive upon conversion, payable
in cash or Common Stock at the election of the Company, an annual premium of 8%
on the aggregate "Stated Value" (i.e., $1,000 per share) (the "Additional
Amount"). The Company does not presently intend to pay such Additional Amount
in cash.
VOTING RIGHTS. The holders of the Series E Preferred Stock have no voting
rights except as provided by law, except to the extent such holders own shares
of Common Stock.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the Series
E Preferred Stock shall be entitled to receive in cash
30
<PAGE>
out of the assets of the Company, whether from capital or from earnings
available for distribution to its stockholders ("Liquidation Funds") before
any amount shall be paid to any class junior in rank to the Series E Preferred
Stock an amount per share of Series E Preferred Stock equal to $1,000 plus any
Additional Amount (the "Liquidation Preference"). In addition to the
Liquidation Preference, in the event of any involuntary liquidation, dissolution
or winding up, the holders will also be entitled to receive any Liquidation
Funds distributed to the holders of the Common Stock, after the Liquidation
Preference has been paid, to the same extent as if such holders of the Series E
Preferred Stock had converted their shares into Common Stock (without regard to
any limitations on conversion) and had held such shares of Common Stock on the
record date for the distribution of the remaining Liquidation Funds.
REDEMPTION. Under the terms of the Certificate of Designations, the
holders of the Series E Preferred Stock may require the Company to redeem the
Series E Preferred Stock upon the consummation of a "Major Transaction" or a
"Triggering Event", as defined.
Major Transactions
o certain mergers, consolidations, tender offers, or the sale of
substantially all the assets of the Company
Triggering Events
o failure of the registration statement covering the resale of the
conversion shares and the shares issuable upon exercise of the
warrants to be declared effective within 120 days after the Initial
Closing Date or the effectiveness of the registration statement lapses
for five or more consecutive days (subject to applicable grace
periods);
o the registration statement is unavailable for the sale of all of the
"Registrable Securities" (as defined) for five or more consecutive
days in accordance with the terms of the applicable registration
rights agreement;
o the delisting of the Company's Common Stock by Nasdaq for five
consecutive trading days or for more than an aggregate of 10 trading
days per year;
o certain failures of the Company or its transfer agent to comply with
conversions of the Series E Preferred Stock within 10 business days
after a conversion notice is submitted or the announcement by the
Company of its intention to not comply with a conversion request;
o the inability of the Company to issue conversion shares due to
limitations imposed by the requirements of Nasdaq; and
o certain breaches of representations, warranties, covenants or terms of
the transaction documents which would have a Material Adverse Effect
(as defined).
Redemption and Other Remedies
The Certificate of Designations also contains the following provisions:
o The holders can send a notice of redemption upon the occurrence of
such a Triggering Event or Major Transaction, requiring the Company to
redeem the Series E Preferred Stock at (a) 120% of the Stated Value of
the Series E Preferred Stock, or (b) the product of the applicable
conversion rate in effect on the date of the "Major Transaction" or
the date a notice of redemption is delivered in the case of a
"Triggering Event", and the closing sales price of the Common Stock
on the trading date immediately preceding such date on which the
"Major Transaction" or "Triggering Event" occurred.
o If the Company is unable to effect a redemption, interest will
accumulate on the value of the shares the Company is unable to redeem
at the rate of 2.5% per month.
o If the Company is unable to effect a redemption, the holders could
also void their redemption notices and receive a reset of their
applicable Conversion Price. The fixed conversion price on the Series
E Preferred Stock would be reset to the lesser of (A) the Fixed
Conversion Price as in effect
31
<PAGE>
on the date the void optional redemption notice is sent to the Company
and (B) the lowest Closing Bid Price (as defined) during the period
beginning on the date on which the date of notice of redemption is
sent and the date on which the void optional redemption notice is
received. In addition, the holders would also be entitled to have the
formula for the Variable Conversion Price to be reduced by a number of
percentage points equal to the product of (A) .25 and (B) the number
of days in the period beginning on the date which is five business
days after the date on which the notice of redemption is delivered to
the Company and ending on the date on which the void optional
redemption notice is received.
REGISTRATION OF SHARES; POSSIBLE ADJUSTMENT OF CONVERSION PRICE AND
EXERCISE PRICE. The Company is required by agreement to initially register with
the SEC the resale of at least 200% of the number of shares of Common Stock
issuable upon conversion of the Series E Preferred Stock issued in the Initial
Closing and the Mandatory Closing, which is based on the Conversion Price of the
Series E Preferred Stock at the time of the filing of the registration
statement. Further, the Company has agreed to register the resale of at least
125% of the number of shares of Common Stock which may be issued upon exercise
of the warrants issued to the purchasers in the Initial Closing and in the
Mandatory Closing. The Company agreed to use its best efforts to file the
registration statement as soon as possible but no later than April 2, 1999 and
have the registration statement declared effective by the SEC no later than 90
days after the Initial Closing. The registration statement was timely filed and
declared effective by the SEC as required. In addition, after the registration
statement is filed and during the period the registration statement is
effective, the Company has agreed that the resale of at least 150% of the shares
issuable upon conversion of the remaining shares of Series E Preferred Stock
will remain registered (which is based on the conversion price in effect at that
time), and the resale of at least 100% of the shares of Common Stock issuable
upon exercise of the warrants will remain registered.
REDEMPTION AT COMPANY'S OPTION. As more fully set forth in the applicable
Certificate of Designations, the Company may redeem the shares of Series E
Preferred Stock submitted for conversion but only if the conversion price for
the shares submitted for conversion is less than or equal to 90% of the "Market
Price" (as defined) on the issuance date of such shares. If the Company elects
to redeem such shares, the redemption price is equal to the product of (A) 105%,
(B) the conversion rate of the Series E Preferred Stock on the date such shares
are submitted for conversion, and (C) the closing sales price of the Common
Stock on the date the applicable shares are submitted for conversion.
OTHER TERMS. The transaction documents relating to the Series E Preferred
Stock also contain certain other representations, warranties, agreements, and
indemnification obligations of the Company. These include, among other things,
the obligation of the Company to hold a stockholders meeting on or before June
30, 1999 where it includes a proposal recommending the approval of the issuance
of the Series E Preferred Stock and the warrants. If the Company fails to hold
such meeting by the required deadline, it will be subject to certain liquidated
damages as set forth in the Securities Purchase Agreement. The operative
agreements also contain (i) a right of first refusal in favor of the investors
which applies to certain private equity financings of the Company and would
commence on the Initial Closing and ends one year thereafter, subject to an
existing right of first refusal in favor of The Coastal Corporation Second
Pension Trust, (ii) prohibit the Company from redeeming any of its Common Stock,
paying any cash dividends on its Common Stock, and making certain distributions
on its Common Stock, (iii) limit the ability of the Company to issue any senior
preferred stock, and (iv) prohibit the Company from entering into certain
related party transactions except in accordance with Delaware law. The shares of
Series E Preferred Stock are also subject to antidilution provisions which are
triggered in the event of certain stock splits, recapitalizations, or other
dilutive transactions, as well as issuances of Common Stock at a price below the
market price or the fixed conversion price in effect, or the issuance of
warrants, options, rights, or convertible securities which have an exercise
price or conversion price less than the market price on the date of issuance or
the fixed conversion price, other than for certain previously outstanding
securities and certain "excluded securities" (as defined). In the event that
the Company issues securities in the future which have a conversion price or
exercise price which varies with the market price and the terms of such variable
price are more favorable than the Variable Conversion Price in the Series E
Preferred Stock, the purchasers may
32
<PAGE>
elect to substitute the more favorable variable price when making conversions of
the Series E Preferred Stock.
WARRANTS. In connection with the closings of the Series E Preferred Stock,
the Company will issue to the purchasers a warrant to purchase 100 shares of
Common Stock for each share of Series E Preferred Stock purchased. Thus, in
connection with the Initial Closing on March 5, the Company issued warrants to
purchase 300,000 shares of Common Stock, and at the Mandatory Closing on April
20 the Company issued warrants to purchase an additional 300,000 shares of
Common Stock. The warrants expire five years after the issuance date and have an
exercise price equal to 110% of the Market Price (as defined) on the issuance
date. The "Market Price" is the average of the two lowest closing bid prices
in the 40 trading days prior to the date of issuance. In addition, the exercise
price of the warrants is subject to reset on the last day of July and January of
each year in the event that 110% of the Market Price of the Common Stock on any
such date is less than the exercise price then in effect. In such case, the
warrant exercise price shall be reset to 110% of the Market Price on such reset
date. The warrants are also subject to certain antidilution provisions in the
event the Company sells Common Stock or securities convertible or exercisable
into Common Stock at a price less than the exercise price of such warrants or
the market price of the Common Stock.
PLACEMENT AGENT COMPENSATION
The placement agent for the Series E Preferred Stock was Overlook
Consulting, L.L.C. ("Overlook"). Overlook will receive a placement fee equal
to 3.5% of the funds raised. The placement agent will be able to retain its fees
whether or not stockholder approval sought hereby is obtained.
OTHER TRANSACTIONS
In connection with the Initial Closing, the Company agreed to allow Citadel
to sell all of its remaining 1,843 shares of Series C Convertible Preferred
Stock of the Company (the "Series C Preferred Stock") and 1,144 shares of
Series D Convertible Preferred Stock of the Company (the "Series D Preferred
Stock") to Angelo Gordon and Promethean. In connection with the issuance of the
Series E Preferred Stock, the holders of the Series C and Series D Preferred
Stock exercised the right under the Certificates of Designations of such
securities to use the Variable Conversion Price of the Series E Preferred Stock
as the variable conversion price of such securities when they submit a
conversion notice. In addition, the Company has also agreed that Promethean and
Angelo Gordon are not required to limit their conversions of the Series C and
Series D Preferred Stock to 1,200,000 shares of Common Stock in any continuing
thirty (30) day period. Citadel will continue to be subject to contractually
agreed conversion restrictions.
CONSEQUENCES IF STOCKHOLDER APPROVAL NOT OBTAINED
The Company is obligated to use its best efforts to obtain stockholder
approval by June 30, 1999. If the stockholder approval sought hereby is not
obtained, in accordance with the Nasdaq 20% Rule, the Company will be prohibited
under the terms of its listing agreement with Nasdaq from issuing more than an
aggregate of approximately 6,917,265 shares of Common Stock. If the Company
would be unable to issue any additional shares of Common Stock due to the Nasdaq
20% Rule, as noted, the Company could be required by the holders to redeem the
shares at a price per share equal to the greater of (i) 120% of the Liquidation
Preference of such shares and (ii) the product of the applicable conversion rate
in effect on the date a notice of redemption is delivered by the holders and the
closing sales price of the Common Stock on the trading day immediately preceding
such event. Further, the holders could argue that failure to obtain such
stockholder approval was a breach of the Company's obligations under the
operative transaction documents which had a Material Adverse Effect. If such an
argument were successful, the Company may be obligated to redeem all of the
outstanding shares of Series E Preferred Stock without regard to whether or not
the Company was able to issue any additional shares of Common Stock. As noted,
if the Company is required to redeem all of the shares of Series E Preferred
Stock submitted for redemption within five business days, the holders can
attempt to require the Company to redeem those shares it is able to redeem and
have the Company pay interest to the holders on any shares which were not
redeemed as required at 2.5% per month. In addition, the holders are also
entitled to void their redemption notices and receive a reset of their
33
<PAGE>
applicable Fixed Conversion Price, as more fully set forth in the applicable
Certificate of Designations. See "Summary of Transaction Terms -- Redemption",
"Available Information" and "Discontinuance of Conversions; Triggering Events
and Other Remedies.
USE OF PROCEEDS
The aggregate gross proceeds received by the Company from the shares issued
at the Initial and Mandatory Closings was $6,000,000. The net proceeds of the
Series E Preferred Stock will be used for working capital and general corporate
purposes which are expected to include the funding of programs to develop and
advance the Company's products and technology and the payment of salaries and
obligations owned to the Company's employees, vendors, and customers during such
development process.
INTERESTS OF CERTAIN PERSONS
None of the investors in the Series E Preferred Stock transactions is a
director, executive officer or, based upon representations to the Company by
such investors, a five percent or greater shareholder of the Company or an
affiliate of any such person or entity.
VOTE REQUIRED
The proposal requires the approval of a majority of the votes cast at the
Meeting by the holders of Common Stock. THE COMPANY'S BOARD RECOMMENDS THAT YOU
VOTE FOR THE PREFERRED STOCK PROPOSAL.
ANNUAL REPORT
The 1998 Annual Report on Form 10-K for the Company's fiscal year ended
December 31, 1998, is being mailed to each stockholder receiving this Proxy
Statement, but does not form any part of the proxy solicitation material.
OTHER MATTERS
The Board of Directors does not intend to bring any other matters before
the Meeting nor does the Board of Directors know of any matters which other
persons intend to bring before the Meeting. If, however, other matters not
mentioned in this Proxy Statement properly come before the Meeting, the persons
named in the accompanying form of proxy will vote thereon in accordance with the
recommendation of the Board of Directors.
STOCKHOLDER PROPOSALS AND SUBMISSIONS FOR 2000 ANNUAL MEETING
If any stockholder wishes to present a proposal to be considered for
inclusion in the proxy materials to be solicited by the Company's Board of
Directors with respect to the next annual meeting of stockholders, such proposal
shall have been presented to the Company's management by January 1, 2000,
pursuant to Regulation 14a-8 under the Securities Exchange Act of 1934. Such
proposals should be directed to the Company, 1100 Executive Drive, Richardson,
Texas 75081, Attention: Chief Financial Officer and Assistant Secretary.
With respect to stockholder proposals not included in the Company's proxy
statement and form of proxy, the Company may utilize discretionary authority
conferred by proxy in voting on any such proposals if, among other situations,
the stockholder does not give timely notice of the matter to the company by the
date determined under the Company's By-Laws for the submission of business by
stockholders. The Company's By-Laws state that to be timely, notice and certain
related information must be received at the principal executive offices not less
than 60 and no more than 90 days prior to the anniversary date of previous
year's annual meeting of stockholders; provided, however, that in the event that
the annual meeting is called for a date that is not within 30 days before or
after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting is
mailed or such public disclosure
34
<PAGE>
of the date of the annual meeting is made, whichever first occurs. It is
currently expected that the 2000 annual meeting of stockholders will be held on
or about June 18, 2000.
THE BOARD OF DIRECTORS ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE FILL IN, DATE,
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED ENVELOPE TO WHICH NO
POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES. YOUR VOTE IS IMPORTANT.
IF YOU ARE A STOCKHOLDER OF RECORD AND ATTEND THE MEETING AND WISH TO VOTE IN
PERSON, YOU MAY WITHDRAW YOUR PROXY AT ANYTIME PRIOR TO THE VOTE.
By Order of the Board of Directors
HERMAN M. FRIETSCH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Dated: April 30, 1999
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON WHOSE PROXY IS BEING
SOLICITED, UPON THE WRITTEN REQUEST OF ANY SUCH PERSON, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE FINANCIAL STATEMENTS
AND SCHEDULES THERETO. REQUESTS FOR COPIES OF SUCH REPORT SHOULD BE DIRECTED TO
ED DUCAYET, JR., VICE PRESIDENT AND ASSISTANT SECRETARY, INTELECT
COMMUNICATIONS, INC., 1100 EXECUTIVE DRIVE, RICHARDSON, TEXAS 75081.
35
<PAGE>
Appendix to Proxy Statement of Intelect Communications, Inc. filed with the
Securities and Exchange Commission on April 30, 1999, as required by Schedule
14A, Item 10, Instruction 3:
Intelect Communications, Inc. Stock Incentive Plan.
INTELECT COMMUNICATIONS, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
1. PURPOSE.
The purposes of the Stock Incentive Plan (the "Plan") are to enable
Intelect Communications, Inc. (the "Company") and its Subsidiaries, if any, to
attract and retain directors and key employees and to provide them with
additional incentive to advance the interests of the Company. For the purposes
of the Plan, the term "Subsidiary" means any corporation or other entity in
which the Company has, directly or indirectly, an equity interest representing
50% or more of the capital stock thereof or equity interests therein.
2. ADMINISTRATION.
(a) The Plan shall be administered by a committee (the "Committee")
appointed by the Board of Directors of the Company (the "Board") and
consisting of not less than two members of the Board.
(b) The Committee shall interpret the Plan and prescribe such rules,
regulations and procedures in connection with the Plan as it shall deem to be
necessary and advisable for the administration of the Plan.
(c) Notwithstanding any provision contained in this Plan, the Board of
Directors shall have the authority, in addition to the authority that the Board
may delegate to the Committee, to issue stock options, and to award restricted
stock, restricted stock units, performance units and bonus stock, in compliance
with the terms of this Plan as the Board of Directors shall in its discretion
determine to be necessary or appropriate.
3. ELIGIBILITY.
(a) Officers and other key employees of the Company or any Subsidiary
shall be eligible to be granted incentive stock options and non-qualified stock
options (collectively "stock options") and to receive restricted stock,
restricted stock units, performance units or bonus stock awards as described
herein.
(b) Non-employee directors of the Company shall be eligible to be granted
non-qualified stock options and to receive restricted stock, restricted stock
units, performance units or bonus stock awards as described herein.
4. SHARES AVAILABLE.
The aggregate number of shares of the Company's Common Stock, $.01 par
value ("Common Stock"), which may be issued and as to which grants or awards
of stock options, restricted stock, restricted stock units, performance units or
bonus stock may be made under the Plan is 6,000,000 shares (of which no more
than 1,000,000 shares shall be available for the grant of restricted stock or
restricted stock units), subject to adjustment and substitution as set forth in
Section 8. If any stock option granted under the Plan is canceled by mutual
consent or terminates or expires for any reason without having been exercised in
full, the number of shares subject thereto shall again be available for purposes
of the Plan. If shares of Common Stock or the right to receive shares of Common
Stock are forfeited to the Company pursuant to the restrictions applicable to
restricted stock or restricted stock units awarded under the Plan, the shares so
forfeited or covered by such right shall not again be available for the purposes
of the Plan. To the extent any award of performance units is not earned or is
paid in cash rather than shares, the number of shares covered thereby shall
again be available for purposes of the Plan. The shares which may be issued
under the Plan may be either authorized but unissued shares or treasury shares
or partly each, as shall be determined from time to time by the Board.
5. GRANTS AND AWARDS.
(a) With respect to officers and other key employees, the Committee shall
have authority, in its discretion, to grant incentive stock options pursuant to
Section 422 of the Internal Revenue Code (the "Code") and non-qualified stock
options, and to award restricted stock, restricted stock units, performance
A-1
<PAGE>
units and bonus stock, provided such grants or awards are otherwise made in
compliance with the provisions of this Plan.
Notwithstanding any other provision contained in the Plan or in any stock
option agreement, the aggregate fair market value, determined on the date of
grant, of the shares with respect to which incentive stock options are
exercisable for the first time by an employee during any calendar year under all
plans of the corporation employing such employee, any parent or subsidiary
corporation of such corporation and any predecessor corporation of any such
corporation shall not exceed $100,000; provided, however, that all or any
portion of a stock option which cannot be exercised because of such limitation
shall be treated as a non-qualified option.
(b) With respect to non-employee directors, the Board or the Committee
shall be authorized to grant non-qualified stock options and to award restricted
stock, restricted stock units, performance units, and bonus stock in such
amounts and on such terms as the Board or the Committee may in its discretion
determine, provided such grants or awards are otherwise made in compliance with
the provisions of this Plan.
(c) The maximum number of shares covered by all grants or awards in any
fiscal year of the Company to any participant shall not exceed 350,000 (subject
to adjustment and substitution as set forth in Section 8).
(d) If a grantee of a stock option, restricted stock or performance unit
engages in the operation or management of a business (whether as owner, partner,
officer, director, employee or otherwise and whether during or after termination
of employment or directorship) which is in competition with the Company or any
of its Subsidiaries, the Committee may immediately terminate all outstanding
stock options held by the grantee, declare forfeited all restricted stock or
restricted stock units held by the grantee as to which the restrictions have not
yet lapsed and terminate all outstanding performance unit awards held by the
grantee for which the applicable Performance Period has not been completed;
provided, however, that this sentence shall not apply if the exercise period of
a stock option following termination of employment or directorship has been
extended as provided in Section 9(c), if the lapse of the restrictions
applicable to restricted shares or restricted share units has been accelerated
as provided in Section 9(d), or if a performance unit has been deemed to have
been earned as provided in Section 9 (e). Whether a grantee has engaged in the
operation or management of a business which is in competition with the Company
or any of its Subsidiaries shall be determined by the Committee in its
discretion, and any such determination shall be final and binding.
6. TERMS AND CONDITIONS OF STOCK OPTIONS.
Stock options granted under the Plan shall be subject to the following
terms and conditions:
(a) The purchase price at which each incentive stock option may be
exercised (the "option price") shall not be less than one hundred percent
(100%) of the fair market value per share of Common Stock covered by the
incentive stock option on the date of grant; provided, however, that in the
case of an incentive stock option granted to an employee who, immediately
prior to such grant, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or a
Subsidiary (a "Ten Percent Employee"), the option price shall not be less
than one hundred ten percent (110%) of such fair market value on the date
of grant. For purposes of this Section 6(a), an individual (i) shall be
considered as owning not only shares of stock owned individually but also
all shares of stock that are at the time owned, directly or indirectly by
or for the spouse, ancestors, lineal descendants and brothers and sisters
(whether by the whole or half blood) of such individual and (ii) shall be
considered as owning proportionately any shares owned, directly or
indirectly, by or for any company, partnership, estate or trust in which
such individual is a stockholder, partner or beneficiary.
(b) The option price for each non-qualified stock option shall be
determined by the Committee but may not be less than 25% (twenty-five
percent) of the fair market value of the Common Stock on the date the
non-qualified stock option is granted.
A-2
<PAGE>
(c) The option price for each stock option shall be paid in full upon
exercise and shall be payable in cash in United States dollars (including
check, bank draft or money order), which may include cash forwarded through
a broker or other agent-sponsored exercise or financing program; provided,
however, that in lieu of such cash the person exercising the stock option
may pay the option price in whole or in part by delivering to the Company
Common Stock having a fair market value on the date of exercise of the
stock option equal to the option price for the shares being purchased;
except that any portion of the option price representing a fraction of a
share shall in any event be paid in cash. Notwithstanding any procedure of
a broker or other agent-sponsored exercise or financing program, if the
option price is paid in cash, the exercise of the stock option shall not be
deemed to occur and no Common Stock will be issued until the Company has
received full payment in cash (including check, bank draft or money order)
for the option price from the broker or other agent. The date of exercise
of a stock option shall be determined under procedures established by the
Committee, and as of the date of exercise the person exercising the stock
option shall be considered for all purposes to be the owner of the shares
with respect to which the stock option has been exercised. Payment of the
option price with shares shall not increase the number of shares of Common
Stock available for issuance under the Plan.
(d) No stock option shall be exercisable during the first six months
of its term, except that this limitation on exercise shall not apply if
Section 9(b) becomes applicable or if the issuance or grant of the stock
option has been approved by the Board. No stock option shall be exercisable
after the expiration of ten years (five years in the case of an incentive
stock option granted to a Ten Percent Employee) from the date of grant. To
the extent it is exercisable, a stock option may be exercised at any time
in whole or in part.
(e) The Committee shall have the power to set the time or times
within which each option shall be exercisable, and to accelerate the time
or times of exercise. Unless the stock option agreement otherwise provides,
the option shall become exercisable on a cumulative basis as to 33 1/3% of
the total number of shares covered thereby on each of the first, second,
and third anniversary dates of the date of grant of the option.
(f) No stock option shall be transferable by the grantee otherwise
than by will, or if the grantee dies intestate, by the laws of descent and
distribution of the state of domicile of the grantee at the time of death.
All stock options shall be exercisable during the lifetime of the grantee
only by the grantee.
(g) Unless the Committee, in its discretion, shall otherwise
determine:
(i) If the employment or directorship of a grantee who is not
disabled within the meaning of Section 422 (c) (6) of the Code (a
"Disabled Grantee") is voluntarily terminated with the consent of the
Company or a Subsidiary or a grantee retires under any retirement plan
of the Company or a Subsidiary, any then outstanding incentive stock
option held by such grantee shall be exercisable by the grantee (but
only to the extent exercisable by the grantee immediately prior to such
termination) at any time prior to the expiration date of such incentive
stock option or within three months after the date of such termination,
whichever is the shorter period;
(ii) If the employment or directorship of a grantee who is not a
Disabled Grantee is voluntarily terminated with the consent of the
Company or a Subsidiary or a grantee retires under any retirement plan
of the Company or a Subsidiary, any then outstanding non-qualified stock
option held by such grantee shall be exercisable by the grantee (but
only to the extent exercisable by the grantee immediately prior to such
termination) at any time prior to the expiration date of such
non-qualified stock option or within one year after the date of such
termination, whichever is the shorter period;
(iii) If the employment or directorship of a grantee who is a
Disabled Grantee is voluntarily terminated with the consent of the
Company or a Subsidiary, any then outstanding stock option held by such
grantee shall be exercisable by the grantee in full (whether or not so
exercisable by the grantee immediately prior to such termination) by the
grantee at any time prior to the
A-3
<PAGE>
expiration date of such stock option or within one year after the date
of such termination, whichever is the shorter period;
(iv) Following the death of a grantee during employment or while
serving as a director, any outstanding stock option held by the grantee
at the time of death shall be exercisable in full (whether or not so
exercisable by the grantee immediately prior to the death of the
grantee) by the person entitled to do so under the will of the grantee,
or, if the grantee shall fail to make testamentary disposition of the
stock option or shall die intestate, by the legal representative of the
grantee at any time prior to the expiration date of such stock option or
within one year after the date of death, whichever is the shorter
period;
(v) Following the death of a grantee after termination of
employment or directorship during a period within which a stock option
is exercisable, any outstanding stock option held by the grantee at the
time of death shall be exercisable by such person entitled to do so
under the will of the grantee or by such legal representative (but only
to the extent the stock option was exercisable by the grantee
immediately prior to the death of the grantee) at any time prior to the
expiration date of such stock option or within one year after the date
of death, whichever is the shorter period; and
(vi) Unless the exercise period of a stock option following
termination of employment or directorship has been extended as provided
in Section 9(c), if the employment or directorship of a grantee
terminates for any reason other than voluntary termination with the
consent of the Company or a Subsidiary, retirement under any retirement
plan of the Company or a Subsidiary or death, all outstanding stock
options held by the grantee at the time of such termination shall
automatically terminate.
(h) In each subparagraph of Section 6(g), whether termination of
employment or directorship is a voluntary termination with the consent of
the Company or a Subsidiary and whether a grantee is a Disabled Grantee
shall be determined in each case by the Committee in its discretion and any
such determination by the Committee shall be final and binding.
(i) All stock options shall be confirmed by an agreement, which shall
be executed on behalf of the Company by an executive officer authorized by
the Committee and by the grantee, and shall contain such provisions,
restrictions and conditions as are not inconsistent with this Plan but need
not be identical. The provisions of this Plan shall be deemed to be set
forth in full or incorporated by reference in each such agreement.
(j) The term "fair market value" for all purposes of the Plan shall
mean the market price of the Common Stock, determined by the Committee as
follows:
(i) If the Common Stock is traded on a stock exchange, then the
Fair Market Value shall be equal to the closing price reported by the
applicable composite-transactions report for such date;
(ii) If the Common Stock is traded in the Nasdaq Stock Market and
is classified as a national market issue, then the Fair Market Value
shall be equal to the last-transaction price quoted by the Nasdaq
National Market system for such date;
(iii) If the Common Stock is traded in the Nasdaq Stock Market,
but is not classified as a national market issue, then the Fair Market
Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the Nasdaq system for such
date; and
(iv) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
(k) The obligation of the Company to issue shares of Common Stock
under the Plan shall be subject to (i) the effectiveness of a registration
statement under the Securities Act of 1933, as amended, with respect to
such shares, if deemed necessary or appropriate by counsel for the Company,
(ii) the condition that the shares shall have been listed (or authorized
for listing upon official notice of
A-4
<PAGE>
issuance) upon each stock exchange, if any, on which the Common Stock may
then be listed and (iii) all other applicable laws, regulations, rules and
orders which may then be in effect.
(l) Subject to the foregoing provisions of this Section and the other
provisions of the Plan, any stock option granted under the Plan may be
exercised at such times and in such amounts and be subject to such
restrictions and other terms and conditions, if any, as shall be
determined, in its discretion, by the Committee and set forth in the
agreement referred to in Section 6(i), or an amendment thereto.
(m) The Company may, at the time any distribution is made under the
Plan, whether in cash or in Common Stock, or at the time any stock option
is exercised, withhold from such distribution or Common Stock issuable upon
the exercise of a stock option, any amount necessary to satisfy federal,
state or local tax withholding requirements with respect to such
distribution or exercise of such stock option. Such withholding may be
satisfied, at the Company's option, either by cash or the Company's
withholding of shares of Common Stock. Agreements may contain withholding
provisions applicable only to participants who are subject to the
Securities and Exchange Act of 1934, as amended (the "1934 Act"), Section
16 ("Section 16 Persons").
7. TERMS AND CONDITIONS OF RESTRICTED STOCK, RESTRICTED STOCK UNIT,
PERFORMANCE UNIT AND BONUS STOCK AWARDS.
(a) RESTRICTED STOCK AND UNITS. Restricted stock or restricted stock unit
awards shall be evidenced by a written agreement in the form prescribed by the
Committee in its discretion, which shall set forth the number of shares of
restricted Common Stock or restricted stock units entitling the holder to
receive Common Stock awarded, the restrictions imposed thereon (including,
without limitation, restrictions on the right of the grantee to sell, assign,
transfer or encumber such shares or units while such shares or units are subject
to other restrictions imposed under this Section 7), the duration of such
restrictions, events (which may, in the discretion of the Committee, include
performance-based events) the occurrence of which would cause a forfeiture of
restricted Stock or restricted share units and such other terms and conditions
as the Committee in its discretion deems appropriate. Restricted stock or
restricted stock unit awards shall be effective only upon execution of the
applicable restricted stock or restricted stock unit agreement on behalf of the
Company by the Chief Executive Officer (if other than the President), the
President or any Vice President, and by the grantee.
Restricted stock or restricted stock units may be issued for no
consideration other than for services to be rendered or for such consideration
as shall be determined at the time of award by the Committee.
Except as otherwise specified by the Committee at the time of award of
restricted stock or restricted stock units, restricted stock or restricted stock
units issued shall vest (i.e., become non-forfeitable,) as follows: 33 1/3% on
the date of the first anniversary of the date of issuance of the restricted
stock or restricted stock units and an additional 33 1/3% on each anniversary
date thereafter. If prior to full vesting of the restricted stock or restricted
stock units the employment or directorship of the holder thereof is voluntarily
terminated with the consent of the Company or Subsidiary or the holder retires
under any retirement plan of the Company or a Subsidiary or dies during
employment or directorship, the Committee may in its absolute discretion
determine to vest all or any part of the restricted stock or restricted stock
units except as otherwise provided in Section 9(e). If the employment or
directorship of the holder of restricted stock or restricted stock units
terminates for any reason other than voluntary termination with the consent of
the Company or a Subsidiary, retirement under any retirement plan of the Company
or a Subsidiary or death, all unvested restricted stock or restricted stock
units shall be forfeited. Whether the termination of employment or directorship
is a voluntary termination with the consent of the Company or a Subsidiary shall
be determined by the Committee in its discretion, and a determination by the
Committee on any matter with respect to restricted stock or restricted stock
units shall be final and binding on both the Company and the holder of
restricted stock or restricted stock units.
Following a restricted stock award and prior to the lapse or termination of
the applicable restrictions, the Committee shall deposit share certificates for
such restricted stock in escrow (which may be an escrow in the custody of an
officer of the Company). Upon the lapse or termination of the applicable
restrictions
A-5
<PAGE>
(and not before such time), the grantee shall be issued or transferred share
certificates for such restricted stock. From the date a restricted share award
is effective, the grantee shall be a stockholder with respect to all the shares
represented by such certificates and shall have all the rights of a stockholder
with respect to all such shares, including the right to vote such shares and to
receive all dividends and other distributions paid with respect to such shares,
subject only to the restrictions imposed by the Committee. The grantee of
restricted share units shall not have any rights as a stockholder until the
delivery to the grantee of shares on lapse of the restrictions imposed.
(b) PERFORMANCE UNITS. The Committee may award performance units which
shall be earned by an awardee based on the level of performance over a specified
period of time by the Company, a Subsidiary or Subsidiaries, any branch,
department or other portion thereof or the awardee individually, as determined
by the Committee. For the purposes of the grant of performance units, the
following definitions shall apply:
(i) "Performance unit" shall mean an award, expressed in dollars or
shares of Common Stock of, granted to an awardee with respect to a
Performance Period. Awards expressed in dollars may be established as fixed
dollar amounts, as a percentage of salary, as a percentage of a pool based
on earnings of the Company, a Subsidiary or Subsidiaries or any branch,
department or other portion thereof or in any other manner determined by
the Committee in its discretion, provided that the amount thereof shall be
capable of being determined as a fixed dollar amount as of the close of the
Performance Period.
(ii) "Performance Period" shall mean an accounting period of the
Company or a Subsidiary of not less than one year, as determined by the
Committee in its discretion.
(iii) "Performance Target" shall mean that level of performance
established by the Committee which must be met in order for the performance
unit to be fully earned. The Performance Target may be expressed in terms
of earnings per share, return on assets, asset growth, ratio of capital to
assets or such other level or levels of accomplishment by the Company, a
Subsidiary or Subsidiaries, any branch, department or other portion thereof
or the awardee individually as may be established or revised from time to
time by the Committee.
(iv) "Minimum Target" shall mean a minimal level of performance
established by the Committee which must be met before any part of the
performance unit is earned. The Minimum Target may be the same as or less
than the Performance Target in the discretion of the Committee.
An awardee shall earn the performance unit in full by meeting the
Performance Target for the Performance Period. If the Minimum Target has not
been attained at the end of the Performance Period, no part of the performance
unit shall have been earned by the awardee. If the Minimum Target is attained
but the Performance Target is not attained, the portion of the performance unit
earned by the awardee shall be determined on the basis of a formula established
by the Committee.
Payment of earned performance units shall be made to awardees following the
close of the Performance Period as soon as practicable after the time the amount
payable is determined by the Committee. Payment in respect of earned performance
units, whether expressed in dollars or shares, may be made in cash, in Common
Stock, or partly in cash and partly in Common Stock, as determined by the
Committee at the time of payment. For this purpose, performance units expressed
in dollars shall be converted to shares, and performance units expressed in
shares shall be converted to dollars, based on the fair market value of the
Common Stock, as of the date the amount payable is determined by the Committee.
If prior to the close of the Performance Period the awardee of performance
units is voluntarily terminated with the consent of the Company or a Subsidiary
or the awardee retires under any retirement plan of the Company or a Subsidiary
or the awardee dies during employment or directorship, the Committee may in its
absolute discretion determine to pay all or any part of the performance unit
based upon the extent to which the Committee determines the Performance Target
or Minimum Target has been achieved as of the date of termination of employment,
or directorship, retirement or death, the period of time remaining until the
close of the Performance Period and/or such other factors as the Committee may
deem relevant. If the Committee in its discretion determines that all or any
part of the performance unit shall be paid, payment
A-6
<PAGE>
shall be made to the awardee or his or her estate as promptly as practicable
following such determination and may be made in cash, in Common Stock, or partly
in cash and partly in Common Stock, as determined by the Committee at the time
of payment. For this purpose, performance units expressed in dollars shall be
converted to shares, and performance units expressed in shares shall be
converted to dollars, based on the fair market value of the Common Stock as of
the date the amount payable is determined by the Committee.
Except as otherwise provided in Section 9(e), if the employment or
directorship of an awardee of performance units terminates prior to the close of
a Performance Period for any reason other than voluntary termination with the
consent of the Company or a Subsidiary or retirement under any retirement plan
of the Company or a Subsidiary or death, the performance units of the awardee
shall be deemed not to have been earned, and no portion of such performance
units may be paid. Whether termination of employment or directorship is a
voluntary termination with the consent of the Company or a Subsidiary shall be
determined, in its discretion, by the Committee. Any determination by the
Committee on any matter with respect to performance units shall be final and
binding on both the Company and the awardee.
Performance unit awards shall be evidenced by a written agreement in the
form prescribed by the Committee which shall set forth the amount or manner of
determining the amount of the performance unit, the Performance Period, the
Performance Target and any Minimum Target and such other terms and conditions as
the Committee in its discretion deems appropriate. Performance unit awards shall
be effective only upon execution of the applicable performance unit agreement on
behalf of the Company by the Chief Executive Officer (if other than the
President), the President or any Vice President, and by the awardee.
(c) BONUS STOCK. The Committee shall have the authority in its discretion
to award shares of bonus Common Stock to eligible individuals from time to time
in recognition of the contribution of the awardee to the performance of the
Company, a Subsidiary or Subsidiaries, or any branch, department or other
portion thereof, in recognition of the awardee's individual performance or on
the basis of such other factors as the Committee may deem relevant.
8. ADJUSTMENT AND SUBSTITUTION OF SHARES.
If a dividend or other distribution shall be declared upon the Common Stock
payable in Common Stock, the number of shares of Common Stock then subject to
any outstanding stock options, restricted stock units or performance unit awards
and the number of shares of Common Stock which may be issued under the Plan but
are not then subject to outstanding stock options or awards shall be adjusted by
adding thereto the number of shares of Common Stock which would have been
distributable thereon if such shares had been outstanding on the date fixed for
determining the stockholders entitled to receive such stock dividend or
distribution. Common Stock so distributed with respect to any restricted stock
held in escrow shall be held by the Company in escrow and shall be subject to
the same restrictions as are applicable to the restricted stock on which they
were distributed.
If the outstanding Common Stock shall be changed into or exchangeable for a
different number or kind of shares of stock or other securities of the Company
or another company, whether through reorganization, reclassification,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for each share of the Common
Stock subject to any then outstanding stock option, restricted stock unit or
performance unit award, and for each share of the Common Stock which may be
issued under the Plan but which is not then subject to any outstanding stock
option or award, the number and kind of shares of stock or other securities into
which each outstanding share of the Common Stock shall be so changed or for
which each such share shall be exchangeable. Unless otherwise determined by the
Committee in its discretion, any such stock or securities, as well as any cash
or other property, into or for which any shares of restricted stock held in
escrow shall be changed or exchangeable in any such transaction shall also be
held by the Company in escrow and shall be subject to the same restrictions as
are applicable to the shares of restricted stock in respect of which such stock,
securities, cash or other property was issued or distributed.
In case of any adjustment or substitution as provided for in this Section
8, the aggregate option price for all shares subject to each then outstanding
stock option prior to such adjustment or substitution shall be
A-7
<PAGE>
the aggregate option price for all shares of stock or other securities
(including any fraction) to which such shares shall have been adjusted or which
shall have been substituted for such shares. Any new option price per share
shall be carried to at least three decimal places with the last decimal place
rounded upwards to the nearest whole number.
No adjustment or substitution provided for in this Section 8 shall require
the Company to issue or sell a fraction of a share or other security.
Accordingly, all fractional shares or other securities which result from any
such adjustment or substitution shall be eliminated and not carried forward to
any subsequent adjustment or substitution. Owners of shares of restricted stock
held in escrow shall be treated in the same manner as owners of Common Stock not
held in escrow with respect to fractional shares created by an adjustment or
substitution of shares, except that, unless otherwise determined by the
Committee in its discretion, any cash or other property paid in lieu of a
fractional share shall be subject to restrictions similar to those applicable to
the restricted stock exchanged therefor.
If any such adjustment or substitution provided for in this Section 8
requires the approval of stockholders in order to enable the Company to grant
incentive stock options, then no such adjustment or substitution shall be made
without the required stockholder approval. Notwithstanding the foregoing, in the
case of incentive stock options, if the effect of any such adjustment or
substitution would be to cause the stock option to fail to continue to qualify
as an incentive stock option or to cause a modification, extension or renewal of
such stock option within the meaning of Section 424 of the Code, the Committee
may elect that such adjustment or substitution not be made but rather shall use
reasonable efforts to effect such other adjustment of each then outstanding
stock option as the Committee, in its discretion, shall deem equitable and which
will not result in any disqualification, modification, extension or renewal
(within the meaning of Section 424 of the Code) of such incentive stock option.
9. ADDITIONAL RIGHTS IN CERTAIN EVENTS.
(a) DEFINITIONS. For purposes of this Section 9, the following terms
shall have the following meanings:
(i) The term "Person" shall be used as that term is used in
Sections 13(d) and 14(d) of the 1934 Act.
(ii) Beneficial ownership shall be determined as provided in Rule
13d-3 under the 1934 Act as in effect on the effective date of the Plan.
(iii) "Voting Stock" shall mean all securities of a corporation
entitling the holders thereof to vote in an annual election of directors
(without consideration of the rights of any class of stock other than the
Common Stock to elect directors by a separate class vote); and a specified
percentage of "Voting Power" of a company shall mean such number of
shares of Voting Stock as shall enable the holders thereof to cast such
percentage of all the votes which could be cast in an annual election of
directors (without consideration of the rights of any class of stock other
than the Common Stock to elect directors by a separate class vote).
(iv) "Tender Offer" shall mean a tender offer or exchange offer to
acquire securities of the Company (other than such an offer made by the
Company or any Subsidiary), whether or not such offer is approved or
opposed by the Board.
(v) "Section 9 Event" shall mean the date upon which any of the
following events occurs:
(A) The Company acquires actual knowledge that any Person has
acquired the Beneficial Ownership, directly or indirectly, of securities
of the Company entitling such Person to 20% or more of the Voting Power
of the Company, other than the Company, a Subsidiary or any employee
benefit plan(s) sponsored by the Company, or a Person approved by the
Board that has acquired 20% or more but less than 50% of the Voting
Power of the Company; or
(B) A Tender Offer is made to acquire securities of the Company
entitling the holders thereof to 20% or more of the Voting Power of the
Company; or
A-8
<PAGE>
(C) A solicitation subject to Rule 14a-11 under the 1934 Act (or
any successor Rule) relating to the election or removal of 50% or more
of the members of any class of the Board shall be made by any person
other than the Company; or
(D) The stockholders of the Company shall approve a merger,
consolidation, share ex-change, division or sale or other disposition of
assets of the Company as a result of which the stockholders of the
Company immediately prior to such transaction shall not hold, directly
or indirectly, immediately following such transaction a majority of the
Voting Power of (i) in the case of a merger or consolidation, the
surviving or resulting corporation, (ii) in the case of a share
exchange, the acquiring corporation or (iii) in the case of a division
or a sale or other disposition of assets, each surviving, resulting or
acquiring corporation which, immediately following the transaction,
holds more than 20% of the consolidated assets of the Company
immediately prior to the transaction;
provided, however, that (i) if securities beneficially owned by a grantee
are included in determining the Beneficial Ownership of a Person referred
to in Section 9(a)(v)(A), (ii) a grantee is required to be named pursuant
to Item 2 of the Schedule 14D-I (or any similar successor filing
requirement) required to be filed by the bidder making a Tender Offer
referred to in Section 9(a)(v)(B), or (iii) if a grantee is a
"participant" as defined in Rule 14a-11 under the 1934 Act (or any
successor Rule) in a solicitation (other than a solicitation by the
Company) referred to in Section 9(a)(v)(C), then no Section 9 Event with
respect to such grantee shall be deemed to have occurred by reason of such
event.
(b) ACCELERATION OF THE EXERCISE DATE OF STOCK OPTIONS. Unless the
agreement referred to in Section 6(i), or an amendment thereto, shall otherwise
provide, notwithstanding any other provision contained in the Plan, in case any
Section 9 Event occurs all outstanding stock options (other than those held by a
person referred to in the proviso to Section 9(a) (v)) shall become immediately
and fully exercisable whether or not otherwise exercisable by their terms.
(c) EXTENSION OF THE EXPIRATION DATE OF STOCK OPTIONS. Unless the
agreement referred to in Section 6(i), or an amendment thereto, shall otherwise
provide, notwithstanding any other provision contained in the Plan, all stock
options held by a grantee (other than a grantee referred to in the proviso to
Section 9(a)(v)) whose employment or directorship with the Company or a
Subsidiary terminates within one year of any Section 9 Event for any reason
other than voluntary termination with the consent of the Company or a
Subsidiary, retirement under any retirement plan of the Company or a Subsidiary
or death shall be exercisable for a period of three months from the date of such
termination of employment or directorship, but in no event after the expiration
date of the stock option.
(d) LAPSE OF RESTRICTIONS ON RESTRICTED STOCK OR RESTRICTED STOCK UNIT
AWARDS. If any Section 9 Event occurs prior to the scheduled lapse of all
restrictions applicable to restricted stock or restricted stock unit awards
under the Plan (other than those held by a person referred to in the proviso to
Section 9(a) (v)), all such restrictions shall lapse upon the occurrence of any
such Section 9 Event regardless of the scheduled lapse of such restrictions.
(e) PAYMENT OF PERFORMANCE UNITS. If any Section 9 Event occurs prior to
the end of any Performance Period, all performance units awarded with respect to
such Performance Period (other than those held by a person referred to in the
proviso to Section 9(a)(v)) shall be deemed to have been fully earned as of the
date of such Section 9 Event, regardless of the attainment or non-attainment of
the Performance Target or any Minimum Target, and shall be paid to the awardees
thereof as promptly as practicable thereafter. If the performance unit is not
expressed as a fixed amount in dollars or shares, the Committee may provide in
the performance unit agreement for the amount to be paid in the case of a
Section 9 Event.
10. EFFECT OF THE PLAN ON THE RIGHTS OF EMPLOYEES AND EMPLOYER.
Neither the adoption of the Plan nor any action of the Board or the
Committee pursuant to the Plan shall be deemed to give any employee any right to
be granted a stock option or to be awarded restricted stock, restricted stock
units, performance units or bonus stock under the Plan. Nothing in the Plan, in
any
A-9
<PAGE>
stock option, in any restricted stock, restricted stock unit, performance unit
or bonus share award under the Plan or in any agreement providing for any of the
foregoing shall confer any right to any employee to continue in the employ of
the Company or any Subsidiary or interfere in any way with the rights of the
Company or any Subsidiary to terminate the employment of any employee at any
time.
11. AMENDMENT.
(a) The right to alter and amend the Plan at any time and from time to
time and the right to revoke or terminate the Plan are hereby specifically
reserved to the Board; provided that no such alteration or amendment of the Plan
shall, without stockholder approval (i) increase by more than 10% the total
number of shares which may be issued under the Plan to Section 16 Persons, (ii)
materially increase the benefits accruing under the Plan to Section 16 Persons,
(iii) materially modify the requirements as to eligibility for participation in
the Plan by Section 16 Persons, (iv) make any changes in the class of employees
eligible to receive incentive stock options under the Plan, or (v) increase the
number of shares with respect to which incentive stock options may be granted
under the Plan. Approval of the Plan by the stockholders of the Company pursuant
to Section 12 shall also be deemed to constitute approval of any amendments to
Section 6(f) that are designed to take advantage of changes in income tax or
securities laws or regulations adopted for the purpose of reducing or
eliminating restrictions on transferability of options. No alteration,
amendment, revocation or termination of the Plan shall, without the written
consent of the holder of a stock option, restricted stock, restricted stock
units, performance units or bonus stock theretofore awarded under the Plan,
adversely affect the rights of such holder with respect thereto.
(b) It is the Company's intent that the Plan comply in all respects with
Rule 16b-3 of the 1934 Act, and any regulations promulgated thereunder. If any
provision of the Plan is later found not to be in compliance with the Rule, the
provision shall be deemed null and void. All grants and exercises of stock
options under the Plan shall be executed in accordance with the requirements of
Section 16 of the 1934 Act, as amended and any regulations promulgated
thereunder. To the extent that any of the provisions contained herein do not
conform with Rule 16b-3 of the 1934 Act or any amendments thereto or any
successor regulation, then the Committee may make such modifications so as to
conform the Plan and any stock options granted thereunder or the Rule's
requirements.
12. EFFECTIVE DATE AND DURATION OF PLAN.
The effective date and date of adoption of the Plan shall be the date of
approval of the Plan by the Stockholders. No stock option may be granted, and no
restricted stock, restricted stock units, bonus stock or performance units
payable in Common Stock may be awarded under the Plan subsequent to December 13,
2005.
13. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have as
directors, the members of the Committee administering the Plan shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any rights granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding that
such member is liable for negligence or misconduct in the performance of such
member's duties; provided that within 60 days after institution of any such
action, suit or proceeding, the member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
A-10
<PAGE>
INTELECT COMMUNICATIONS, INC.
PROXY SOLICITED BY DIRECTORS FOR ANNUAL MEETING
June 18, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having received the notice of annual meeting, proxy
statement, and annual report for the year ended December 31, 1998, hereby
appoints Herman M. Frietsch and Edwin J. Ducayet, Jr., and each of them, with
full power of substitution, are hereby authorized as attorneys and proxies of
the undersigned to represent and to vote all shares of the undersigned in
Intelect Communications, Inc. at the annual meeting of stockholders of Intelect
Communications, Inc. to be held on June 18, 1999 and at any adjournments
thereof.
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
INTELECT COMMUNICATIONS, INC.
JUNE 18, 1999
[Please Detach and Mail in the Envelope Provided]
[X] Please mark your
votes as in this
example.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR ELECTION TO WITHHOLD PLEASE SIGN, DATE AND RETURN THE
TERM EXPIRING 2001 AUTHORITY PROXY CARD PROMPTLY USING THE
(except as marked to (to vote for nominee ENCLOSED ENVELOPE
the contrary below) listed to right)
1. Election [ ] [ ]
of Director
FOR AGAINST ABSTAIN
NOMINEE: 2. Amendment of the Company's [ ] [ ] [ ]
Anton von Liechtenstein Stock Incentive Plan
(the "Plan") to increase
the number of shares reserved
for issuance under the Plan
from 5,000,000 to 6,000,000.
FOR AGAINST ABSTAIN
3. Approval of the Non-Employee [ ] [ ] [ ]
Directors' Stock Plan.
FOR AGAINST ABSTAIN
4. Approval of appointment of [ ] [ ] [ ]
Grant Thornton, LLP as
independent auditors for the
year ending December 31, 1999.
FOR AGAINST ABSTAIN
5. Approval of the issuance of [ ] [ ] [ ]
the Common Stock issuable
upon conversion of the Company's
Series E Convertible Preferred
Stock, $0.01 par value per share
and the shares issuable upon
exercise of related securities.
</TABLE>
In their discretion, the proxies are
authorized to vote upon matters not
known to the Board of Directors as
of the date of the accompanying
proxy statement, matters incident to
the conduct of the meeting and to
vote for any nominee of the Board of
whose nomination results from the
inability of any of the above named
nominees to serve.
UNLESS OTHERWISE SPECIFIED IN THE
SQUARES PROVIDED, THE PROXIES SHALL
VOTE FOR PROPOSALS 1, 2, 3, 4, and 5
ABOVE.
Signature ____________ Signature if held jointly _____________ Date: ____ 1999
NOTE: Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
