<PAGE> 1
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 Rule 14a-11(c) or Rule 14a-12
U.S. ENERGY SYSTEMS, INC.
----------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(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)(1) 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> 2
U.S. ENERGY SYSTEMS, INC.
515 NORTH FLAGLER DRIVE, SUITE 702
WEST PALM BEACH, FLORIDA 33401
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 26, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Annual Meeting") of U.S. Energy Systems, Inc., a Delaware corporation (the
"Company"), will be held on August 26, 1998 at 10 a.m. at Rockwell's Restaurant,
515 North Flagler Drive, 20th Floor, West Palm Beach, Florida, for the following
purposes:
1) To elect two Class I Directors to hold office for a term of three
years or until their successors are duly elected and qualified;
2) To consider and vote on a proposal to adopt an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of the common stock of the Company, par value $.01 per share (the "Common
Stock"), from 35,000,000 shares to 50,000,000 and to increase the number of
shares of preferred stock of the Company, par value $.01 per share (the
"Preferred Stock") from 5,000,000 to 10,000,000;
3) To consider and vote on a proposal to approve the issuance of an
option to purchase up to 888,888 shares of the Company's Series A Convertible
Preferred Stock (the "Series A Preferred Stock") which, if exercised, could
result in the holder of the Series A Preferred Stock holding 20% or more of the
voting power of the Company prior to the issuance of the Series A Preferred
Stock and, if converted, holding 20% or more of the Common Stock of the Company,
either of which may result in a change in control of the Company;
4) To consider and vote on a proposal to approve the Company's 1998
Executive Incentive Compensation Plan, as set forth in Appendix A hereto; and
5) To transact such other business as may properly come before the
stockholders at the Annual Meeting and any adjournments or postponements
thereof.
The Board of Directors has fixed the close of business on July 24, 1998
as the record date for the determination of stockholders entitled to notice of
and to vote at the Annual Meeting and at any adjournment or postponement
thereof.
By Order of the Board of Directors
Seymour J. Beder
Chief Financial Officer and Secretary
West Palm Beach, Florida
July 20, 1998
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. STOCKHOLDERS WHO EXECUTE A PROXY CARD MAY
NEVERTHELESS ATTEND THE ANNUAL MEETING, REVOKE THEIR PROXY AND VOTE THEIR SHARES
IN PERSON. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A
BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST
OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 3
U.S. ENERGY SYSTEMS, INC.
515 NORTH FLAGLER DRIVE, SUITE 702
WEST PALM BEACH, FLORIDA 33401
PROXY STATEMENT
The enclosed proxy is solicited by the Board of Directors of U.S.
Energy Systems, Inc., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held on August 26, 1998 at 10 a.m. (the
"Annual Meeting"), or at any adjournment or postponement thereof, for the
purposes set forth herein. The Annual Meeting will be held at Rockwell's
Restaurant, 515 North Flagler Drive, 20th Floor, West Palm Beach, Florida 33401.
The approximate date of mailing this proxy statement and accompanying proxy card
to all stockholders entitled to vote at the Annual Meeting is July 27, 1998.
INFORMATION CONCERNING SOLICITATION OF PROXIES
The entire cost of solicitation of proxies, including expenses in
connection with preparing and mailing this Proxy Statement, the proxy and any
additional information furnished to the stockholders, will be borne by the
Company. Copies of solicitation materials will be furnished to banks, brokerage
houses, nominees, fiduciaries and custodians holding in their names shares of
Common Stock beneficially owned by others to forward to such beneficial owners.
The Company will reimburse persons representing beneficial owners of Common
Stock for their costs in forwarding solicitation materials to such beneficial
owners.
Original solicitation of proxies by mail may be supplemented by
telephone, telegram and personal solicitation by directors, officers or other
regular employees or agents of the Company. No additional compensation will be
paid to directors, officers or other regular employees or agents for such
services. The Company may also use a proxy solicitor. The persons named as
proxies were selected by the Board of Directors of the Company and are directors
of the Company.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
July 24, 1998 (the "Record Date") will be entitled to notice of and to vote at
the Annual Meeting. At the close of business on the Record Date, the Company had
outstanding 5,160,609 shares of Common Stock. As of the Record Date, the Company
also had outstanding 250,000 shares of Series A Preferred Stock.
Each holder of record of Common Stock as of the close of business on
the Record Date will be entitled to one vote for each share held on all matters
to be voted upon at the Annual Meeting. When the enclosed proxy has been
properly executed and returned, the shares it represents will be voted at the
Annual Meeting as specified. All votes will be tabulated by the inspector of
elections appointed for the meeting, who will separately tabulate affirmative
and negative votes, abstentions and broker non-votes.
Executed proxies with no instructions indicated thereon that have not
been revoked will be voted:
(i) FOR the election of two directors, as set forth below under
"PROPOSAL ONE - ELECTION OF DIRECTORS";
<PAGE> 4
(ii) FOR the proposal to adopt an amendment to the Company's
Certificate of Incorporation to increase the authorized shares
of Common Stock and Preferred Stock, as set forth below under
"PROPOSAL TWO - AMENDMENT TO CERTIFICATE OF INCORPORATION";
(iii) FOR the proposal to approve the issuance of an option to
purchase up to 888,888 shares of the Company's Series A
Preferred Stock, as set forth below under "PROPOSAL THREE -
ISSUANCE OF OPTION TO PURCHASE SERIES A PREFERRED STOCK";
(iv) FOR the proposal to approve the Company's 1998 Executive
Incentive Compensation Plan, as set forth below under
"PROPOSAL FOUR - APPROVAL OF 1998 EXECUTIVE INCENTIVE
COMPENSATION PLAN"; and
(v) to transact such other business as may properly come before
the Annual Meeting, including any adjournments or
postponements thereof.
The holder of shares of Series A Preferred Stock has the right to vote
on any matter that comes before the stockholders of the Company. Each share of
Series A Preferred Stock currently has four votes, subject to adjustment upon
the happening of certain specified events. However, pursuant to the rules of
governance of the National Association of Security Dealers as they pertain to
the Nasdaq SmallCap Market, on which the shares of Common Stock of the Company
are listed, the 250,000 shares of Series A Preferred Stock outstanding as of the
Record Date and beneficially owned by Energy Systems Investors, LLC, will not be
entitled to vote on Proposal Three set forth herein relating to the issuance of
an option to purchase up to 888,888 additional shares of Series A Preferred
Stock.
QUORUM AND REQUIRED VOTE
As set forth in the bylaws of the Company, the attendance, in person or
by proxy, of the holders of a majority of the outstanding shares of Common Stock
entitled to vote at the Annual Meeting is necessary to constitute a quorum for
the transaction of business at the Annual Meeting. If less than a majority of
the outstanding shares of Common Stock are represented at the Annual Meeting,
the Board of Directors may adjourn the Annual Meeting from time to time without
further notice until a quorum is obtained.
In accordance with the General Corporation Law of the State of Delaware
and the bylaws of the Company, in order to be elected, each director must
receive the affirmative vote of a plurality of the votes cast by the shares of
Common Stock represented at the Annual Meeting. The adoption of the amendment to
the Company's Certificate of Incorporation to increase the number of authorized
shares of Common Stock and Preferred Stock requires the affirmative vote of not
less than a majority of the votes entitled to be cast by all shares of the
Common Stock issued and outstanding on the Record Date. The affirmative vote of
a majority of the shares present or represented by proxy at the Annual Meeting,
and entitled to vote on the matter, will be sufficient to approve Proposal Three
relating to the issuance of the option to purchase up to 888,888 shares of
Series A Preferred Stock, and to approve Proposal Four relating to the adoption
of the 1998 Executive Incentive Compensation Plan.
Abstentions will be counted towards the tabulation of votes cast on
proposals presented to the stockholders and will have the same effect as
negative votes. Broker non-votes are counted towards a quorum but are not
counted for any purpose in determining whether a matter has been approved. The
stockholders shall not have any dissenters' rights of appraisal in connection
with the proposals contemplated herein.
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OTHER MATTERS
The Board of Directors knows of no matters that are to be presented for
consideration at the Annual Meeting other than those described in this Proxy
Statement, but if other matters are properly presented, it is the intention of
the persons designated as proxies in the enclosed form of proxy to vote as
proxies with respect to such matters in accordance with their best judgment.
REVOCABILITY OF PROXIES
Any stockholder giving a proxy pursuant to this solicitation has the
power to revoke it any time before it is voted. It may be revoked by filing with
the Secretary of the Company at the Company's principal executive office, 515
North Flagler Drive, Suite 702, West Palm Beach, Florida 33401, a written notice
of revocation or a duly executed proxy bearing a later date. The proxy may also
be revoked by attending the Annual Meeting and voting in person. Attendance at
the Annual Meeting will not, by itself, revoke a proxy.
THIS PROXY STATEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OF THE COMPANY. THE SECURITIES REFERRED TO IN THIS PROXY
STATEMENT HAVE NOT BEEN REGISTERED FOR SALE BY THE COMPANY UNDER THE ACT, OR ANY
STATE SECURITIES LAWS AND MAY NOT BE SO OFFERED OR SOLD ABSENT SUCH REGISTRATION
UNDER THE ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF.
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DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
<S> <C> <C>
Theodore Rosen 73 Chairman of the Board of Directors
Richard H. Nelson 58 Chief Executive Officer, President and Director
Howard A. Nevins 42 Executive Vice President and Director
Seymour J. Beder 70 Secretary, Treasurer, Controller and Chief Financial Officer
Terrence Page 51 Vice President - Western Resources
Henry Schneider 33 Vice President - Development
Evan Evans 72 Director
Allen J. Rothman 41 Director
Todd Goodwin* 66 Director
Lawrence I. Schneider 62 Director
</TABLE>
- ------------------
* Mr. Goodwin's term as director expires at the 1998 Annual Meeting of
Stockholders, and he has advised the Company that he does not wish to seek
re-election due to personal reasons.
THEODORE ROSEN. Mr. Rosen has been a Director of the Company and
Chairman of the Board of Directors since November 1993. Since June 1993, Mr.
Rosen has been Managing Director of Burnham Securities. He was Senior Vice
President of Oppenheimer & Co. from January 1991 to June 1993, and was Vice
President of Smith Barney & Co. from 1989 to 1991. Mr. Rosen also currently
serves as a director of Waterhouse Investors Cash Management Co., an investment
management company engaged in management of money market mutual funds. Mr. Rosen
received a BA degree from St. Lawrence University and did graduate work at both
Albany Law School and Columbia University School of Business.
RICHARD H. NELSON. Mr. Nelson has been President, Chief Executive
Officer and Director of the Company since November 1993. Mr. Nelson has been
engaged in the power plant industry for more than twenty years and has been
involved with over 200 power projects throughout the world, 125 of which were
cogeneration projects. In 1973, Mr. Nelson formed Sartex Corp., which was merged
into the Company, which was at that time called Cogenic Energy Systems, Inc.
("Cogenic"), in 1981. Mr. Nelson served as president of Cogenic until 1989. From
January 1989 until January 1991, Mr. Nelson was president of Utility Systems
Corp., a subsidiary of Cogenic. In January 1991, Mr. Nelson formed Utility
Systems Florida, Inc. ("USF") where he served as president until November 1993,
when USF and Cogenic merged, with Cogenic being the surviving corporation and
changing its name to U.S. Envirosystems, Inc. U.S. Envirosystems changed its
name to U.S. Energy Systems, Inc. in November 1996. Mr. Nelson was Special
Assistant to the Director of the Peace Corps from 1961 to 1962; thereafter he
served as Military Aide to the Vice President of the United States from 1962 to
1963 and Assistant to the President of the United States from 1963 to 1967. From
1967 to 1969, Mr. Nelson was Vice President of American International Bank, and
from 1969 to 1973 he was Vice President of Studebaker-Worthington Corp. Mr.
Nelson received a BA degree from Princeton University.
HOWARD A. NEVINS. Mr. Nevins has been Executive Vice President and
Director of the Company since August 1997. Mr. Nevins has wide ranging
experience in the fields of mineral exploration, chemical operations and
environmental compliance. In 1985, he founded Trey Explorations, Inc., a land
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exploration and development drilling company which presently operates 80 oil and
gas wells in the Illinois Basin. In 1990, he co-founded Midwest Custom
Chemicals, Inc., a manufacturer and international distributor of specialty
chemicals used for oil and water demulsification, specializing in used oil
recycling. In 1994, he co-founded both Quality Environmental Laboratories, Inc.
and America Enviro-Services, Inc., the latter of which was acquired by the
Company in August 1997. Mr. Nevins remains on the boards of Midwest Custom
Chemicals and Quality Environmental Laboratories. Mr. Nevins is a Certified
Professional Geologist, past President of the Indiana-Kentucky Geological
Society, past Chairman of the Society of Petroleum Engineers (Illinois Basin)
and is currently on the boards of both the Illinois Oil & Gas Association and
the Independent Oil Producers. He is also on the Advisory Council of the Indiana
Department of Natural Resources. Mr. Nevins received a BS degree in Geology from
Western Michigan University in 1978.
TERRENCE PAGE. Mr. Page has been Vice President - Western Resources of
the Company since March 1997. Previously, Mr. Page served with the Nevada Public
Service Commission. From 1982 to 1989 he was Regulatory Operations Supervisor
and from 1989 until he resigned to join the Company, he served as Director of
Regulatory Operations. In this position, he had final responsibility for
developing all staff positions brought before the Commission and coordinated
with federal, state and local governments on matters of regulatory policy. He
has served on the Nevada Department of Information Services Advisory Committee,
the Ohio State University's National Regulatory Research Institute Advisory
Committee, the Las Vegas Regional Transportation Advisory Committee and the
Washoe Regional Water Planning Commission. Mr. Page received a BS degree in
Business from the University of the State of New York and received a MS degree
in Management from the American University.
HENRY SCHNEIDER. Mr. Schneider, a member of Energy Systems Investors,
LLC, was appointed Vice President for Development in March 1998. From 1986 to
1988, Mr. Schneider was an associate at Drexel Burnham Lambert specializing in
taxable institutional fixed income products and portfolio strategies. From 1989
to 1994, Mr. Schneider was an associate with S & S Investments and Wood Gundy,
specializing in mergers, acquisitions and corporate restructuring. From 1994 to
1996, Mr. Schneider was a principal of Global Capital Resources, Inc., a private
merchant bank. Since 1996, Mr. Schneider has been a private investor. He has
been involved in arranging acquisitions and funding for the telecommunications,
energy, apparel, airline, financial and garage industries. Mr. Schneider
received a Economics degree from Tufts University and a Master of Business
Administration from Boston University. Mr. Schneider is the son of Lawrence I.
Schneider and is a member and manager of Energy Systems Investors, LLC.
SEYMOUR J. BEDER. Mr. Beder has been Secretary, Treasurer, Controller
and Chief Financial Officer of the Company since November 1993. From 1970
through 1980 he was Chief Financial Officer for Lynnwear Corporation, a textile
company, and from 1980 to September 1993, Mr. Beder was president of Executive
Timeshare, Inc., a provider of executive consulting talent. Mr. Beder is a
Certified Public Accountant, and a member of the New York State Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants. Mr. Beder received a BA degree from City College of New York.
EVAN EVANS. Mr. Evans has been a Director of the Company since August
1995. Since 1983 he has been chairman of the board of directors of Holvan
Properties, Inc. ("Holvan"), a real estate developer, and was managing director
of Easco Marine, Ltd. from 1983 to 1988. Also, from 1985 to 1986 Mr. Evans was
general manager of Belgian Refining Corporation ("BRC"), pursuant to a contract
between BRC and Holvan, and from 1992 to 1996, Mr. Evans was a director of BRC.
From 1981 to 1983 he was vice president of Getty Trading and Transportation
Company and president of its subsidiary,
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Getty Trading International, Inc. From 1970 to 1981 Mr. Evans was vice president
and member of the board of directors of United Refining Corp. since 1997. Mr.
Evans has been a director of United Refining Corp. since 1997. Mr. Evans
received a BS degree in Mathematics from St. Lawrence University and a BS degree
in Civil Engineering from M.I.T.
ALLEN J. ROTHMAN. Mr. Rothman was appointed to the Board of Directors
of the Company in January 1997. Mr. Rothman is a partner with the law firm of
Robinson, Brog, Leinwand, Greene, Genovese & Gluck P.C. in New York with whom he
has been associated since January 1996. Mr. Rothman specializes in corporate,
finance and real estate law. Prior to joining Robinson Brog, he was associated
with several New York law firms. Mr. Rothman received a BA degree from Columbia
University and a JD degree from Harvard University.
TODD GOODWIN. Mr. Goodwin was appointed to the Board of Directors of
the Company in January 1997. From 1984 until the present, Mr. Goodwin has been a
general partner of Gibbons, Goodwin, van Amerongen, an investment banking firm
in New York. From 1978 until 1984, he was a Managing Director of Merrill Lynch,
specializing in corporate finance and advising major client corporations on
acquisitions, divestitures and financings. Mr. Goodwin was a general partner of
White Weld & Co. from 1969 until that firm was acquired by Merrill Lynch in
1978. Mr. Goodwin also currently serves as a director of Johns Manville
Corporation, The Rival Company, Schult Homes Corporation and Wells Aluminum
Corp. He is a trustee of Southampton Hospital and the Madison Square Boys and
Girls Club. Mr. Goodwin received an AB degree in Economics from Harvard College.
Mr. Goodwin's term as director of the Company expires at the 1998 Annual Meeting
of Stockholders, and he has advised the Company that he does not intend to seek
re-election due to personal reasons.
LAWRENCE I. SCHNEIDER. Mr. Schneider, manager of Energy Systems
Investors, LLC, was elected to the Board of Directors in March 1998 and serves
as Chairman of its Executive Committee. Mr. Schneider has been associated with
numerous corporations through the years, including Newpark Resources, Inc., a
company involved with oil field environmental remediation, where he was Chairman
of the Executive Committee. Mr. Schneider was also a partner in the New York
Stock Exchange firm Sassower, Jacobs and Schneider. He received a BS degree from
New York University. Mr. Schneider is the father of Henry Schneider and is a
member and manager of Energy Systems Investors, LLC.
MEETINGS OF THE BOARD OF DIRECTORS AND INFORMATION REGARDING COMMITTEES
The Board has three standing committees, an Audit Committee, a
Compensation Committee and an Executive Committee. The Board does not have a
Nominating Committee. The Audit Committee is comprised of Messrs. Evans, Goodwin
and Rothman. The duties of the Audit Committee include recommending the
engagement of independent auditors, reviewing and considering actions of
management in matters relating to audit functions, reviewing with independent
auditors the scope and results of its audit engagement, reviewing reports from
various regulatory authorities, reviewing the system of internal controls and
procedures of the Company and reviewing the effectiveness of procedures intended
to prevent violations of law and regulations. The Audit Committee held one
meeting during the fiscal year ended January 31, 1998.
The Compensation Committee is comprised of Messrs. Evans, Goodwin and
Rothman. The duties of the Compensation Committee include recommending to the
Board remuneration to be paid to executive officers of the Company,
administering and monitoring compensation and recommending the establishment of
incentive and bonus programs for executives of the Company, including
determining
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the number of options to be awarded pursuant to the Company's stock option
plans. The Compensation Committee held four meetings during the fiscal year
ended January 31, 1998.
The Executive Committee is comprised of Messrs. Schneider (Chairman),
Rothman, Nelson and Rosen. The Executive Committee oversees all activities of
the Company between meetings of the Board of Directors and may exercise the
power and authority of the full Board of Directors to the extent permitted by
Delaware law and the Company's bylaws. Executive Committee members receive no
additional compensation for their participation. The Executive Committee was
established in March 1998, and therefore, did not hold any meetings during the
fiscal year ended January 31, 1998.
The Board held eight meetings during the fiscal year ended January 31,
1998. All directors attended at least 75% of the meetings of the Board and
Committees on which they served during this year.
EXECUTIVE COMPENSATION
The following table shows the total compensation paid by the Company
during the fiscal years ended January 31, 1998, 1997 and 1996 to Mr. Nelson, the
Company's President and Chief Executive Officer, and during the fiscal year
ended January 31, 1998 to Mr. Nevins, the Company's Executive Vice President.
There were no other executives of the Company who received total compensation in
excess of $100,000 during any of such years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------- -----------------------------------
NAME AND YEAR ENDED SECURITIES
PRINCIPAL POSITION JANUARY 31 SALARY BONUS UNDERLYING OPTIONS
- --------------------------- ------------ ------------ ------------ -----------------------------------
<S> <C> <C> <C> <C>
RICHARD H. NELSON, 1998 $150,000 -- 50,000
President and Chief 1997 $150,000 -- 100,000
Executive Officer 1996 $150,000 -- --
HOWARD NEVINS, Executive 1998 $ 49,457(1) -- 100,000
Vice President
</TABLE>
- ------------------
(1) Mr. Nevins' employment contract with the Company commenced as of August
23, 1997, and provides for an annual salary of $100,000.
The following table sets forth certain information with respect to all
options to purchase shares of Common Stock of the Company granted to the named
executive officers during the fiscal year ended January 31, 1998.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARs EMPLOYEES IN BASE PRICE
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- ----------------------- -------------------- ---------------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Richard H. Nelson 50,000 13% $2.03 January 12, 2008
Howard Nevins 100,000 27% $3.625 August 18, 2007
</TABLE>
TERMS OF OPTIONS
Mr. Nelson's stock options were granted under the Company's 1997 Stock
Option Plan (the "1997 Plan"), and Mr. Nevins' stock options were granted under
the Company's 1996 Stock Option Plan (the "1996 Plan"). All currently
outstanding options granted under the 1997 Plan and the 1996 Plan are
non-statutory (or non-incentive), were granted for a term of 10 years (unless
the term is expressly shortened by the Board of Directors), vest in 50%
increments over a two-year period and have an exercise price equal to the "fair
market value" of the Common Stock on the date of grant. Mr. Nelson's stock
options vest 50% immediately and 50% in six months from grant. Mr. Nevins'
options vest 100% in twelve months from grant. The term "fair market value" is
defined as the last reported sale price for the Common Stock on the Nasdaq
SmallCap Market on the date immediately prior to the date of grant.
The following table shows stock option exercises during the fiscal year
ended January 31, 1998 by the named executive officers. In addition, this table
describes the number of unexercised options and the value of unexercised
in-the-money options at January 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND JANUARY 31, 1998 OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SARs AT MONEY OPTIONS/SARs AT
JANUARY 31, 1998(#) JANUARY 31, 1998 ($)
SHARES ACQUIRED ------------------------------- -------------------------
NAME ON EXERCISE (#) VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------- --------------- ----------------- ------------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard H. Nelson 0 0 125,000/25,000 0/0
Howard A. Nevins 0 0 50,000/50,000 0/0
</TABLE>
COMPENSATION OF DIRECTORS
Outside directors are compensated at an annual rate of $10,000 plus
travel expenses, and must attend at least four meetings annually. Employee
directors are not compensated for attendance at meetings of the Board, although
certain travel expenses relating to attending meetings are reimbursed. No
additional compensation is given to committee members or participants in special
projects.
EMPLOYMENT AGREEMENTS
Mr. Nelson entered into an amended employment agreement with the
Company on March 31, 1998 to serve as its President and Chief Executive Officer
until March 31, 2001, which term automatically extends for additional one-year
periods beginning on the second anniversary of the agreement and on each
anniversary thereafter. Mr. Nelson's agreement provides for an annual salary of
$165,000, commencing on April 15, 1998, plus normal benefits. If Mr. Nelson is
terminated without
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cause during the term of the employment agreement, as defined in the agreement,
or if Mr. Nelson resigns from the Company because his salary or benefits are
decreased or he is demoted within two years after a change in control of the
Company, as defined in the employment agreement, he is entitled to severance pay
equal to approximately three times his base salary. Under the terms of Mr.
Nelson's employment agreement, he may not disclose any confidential information
pertaining to the Company nor compete with the Company during the term of his
employment with the Company and for an additional two years.
Mr. Rosen entered into an amended employment agreement with the Company
on March 31, 1998, to serve as its Chairman of the Board of Directors until
March 31, 2001, which term automatically extends for additional one-year periods
beginning on the second anniversary of the agreement and on each anniversary
thereafter. Mr. Rosen's agreement provides for an annual salary of $87,500,
commencing on May 15, 1998, plus normal benefits. If Mr. Rosen is terminated
without cause during the term of the employment, as defined in the agreement, or
if Mr. Rosen resigns from the Company because his salary or benefits are
decreased or he is demoted within two years after a change in control of the
Company, as defined in the employment agreement, he is entitled to severance pay
equal to approximately three times his base salary. Under the terms of Mr.
Rosen's employment agreement, he may not disclose any confidential information
pertaining to the Company nor compete with the Company during the term of his
employment with the Company and for an additional two years thereafter.
Mr. Nevins entered into an employment agreement with the Company on
August 4,1997, to serve as the Executive Vice President for a term of three
years ending August 4, 2000. Mr. Nevins' contract provides for an annual salary
of $100,000 plus normal benefits, and an initial grant of options to purchase
100,000 shares of the Company's Common Stock. Provision is also made for
incentive compensation in addition to the base salary and options. Under the
terms of Mr. Nevins' employment agreement, Mr. Nevins agrees that he will not
disclose any confidential information pertaining to the Company nor compete with
the Company during the term of his employment with the Company and for an
additional two years thereafter, but no earlier than August 4, 2002.
Mr. Page's contract with the Company to serve as Vice President was
amended effective March 1, 1998. His annual compensation is $47,400 for which he
will devote a minimum of 20 hours per week. Under the terms of the agreement,
Mr. Page agrees that he will not disclose any confidential information
pertaining to the Company without the prior express written consent of the
Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lawrence I. Schneider is a manager and member of Energy Systems
Investors, LLC (the "Investor"), the entity which will, if approved by the
stockholders, be granted an option to purchase up to 888,888 shares of the
Company's Series A Preferred Stock, as described under Proposal Three of this
Proxy Statement. Mr. Schneider is a member of the Board of Directors of the
Company and chairman of its Executive Committee. Appointment to these positions
was a condition of the Investor's initial purchase of 250,000 shares of the
Company's Series A Preferred Stock (the "Initial Financing"). Mr. Schneider did
not vote with the Board of Directors on the approval of Proposal Three to be
presented to the stockholders of the Company in connection with this Proxy
Statement, and the Investor will not vote its shares of Series A Preferred Stock
with the stockholders of the Company on such proposal. Mr. Schneider will,
however, be allowed to solicit proxies as a member of the Board of Directors of
the Company and will be present at the Annual Meeting. Henry Schneider, the Vice
President of the Company, is also a manager and member of Energy Systems
Investors, LLC. His appointment to the position as Vice President was made
following, but not as a condition to, the Initial Financing.
9
<PAGE> 12
Howard Nevins, Executive Vice President and Director of the Company,
was the former President and Director of American Enviro-Services, Inc., an
Indiana corporation which the Company acquired pursuant to a merger in August
1997 (the "AES Merger"). As part of the AES Merger, Mr. Nevins received 240,000
shares of the Common Stock of the Company and options to purchase 100,000 shares
of the Company's Common Stock at a price per share of $3.625. Mr. Nevins was
also appointed to the Company's Board of Directors in connection with the AES
Merger.
The law firm of Robinson, Brog, Leinwand, Green, Genovese & Gluck P.C.,
of which Allen J. Rothman, a director of the Company, is a partner, provides
certain legal services to the Company.
All transactions between the Company and its officers, directors,
principal stockholders or other affiliates have been on terms no less favorable
than those that are generally available from unaffiliated third parties. Any
such future transactions will be on terms no less favorable to the Company than
could be obtained from an unaffiliated third party on an arm's-length basis and
will be approved by a majority of the Company's independent and disinterested
directors.
10
<PAGE> 13
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of Common Stock
owned as of July 17, 1998 (i) by each director and nominee, (ii) by each
executive officer of the Company, (iii) by those persons known to the Company to
beneficially own 5% or more of the outstanding shares of Common Stock of the
Company, and (iv) by all directors and officers of the Company as a group. With
respect to any person who beneficially owns 5% or more of the outstanding shares
of Common Stock, the address of such person is also set forth.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- --------------------------------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Theodore Rosen................................................. 232,214 (2) 4.33%
Richard H. Nelson.............................................. 236,000 (3) 4.44%
Howard A. Nevins............................................... 241,000 (4) 4.67%
Seymour J. Beder............................................... 63,500 (5) 1.22%
Terrence Page.................................................. 15,000 (6) *
Evan Evans..................................................... 47,500 (7) *
Allen J. Rothman............................................... 45,000 (8) *
Todd Goodwin................................................... 175,000 (9) 3.30%
Lawrence I. Schneider.......................................... 1,000,000 (10) 16.23%
Henry Schneider................................................ 1,000,000 (10) 16.23%
Energy Systems Investors, LLC.................................. 1,000,000 (10) 16.23%
450 Park Avenue
Suite 1000
New York, New York 10022
Cambridge Investments Limited.................................. 360,000 (11) 6.98%
600 Montgomery Street
27th Floor
San Francisco, CA 94111
All officers and directors as a group (10 persons)............. 2,0155,214 29.40%
</TABLE>
- ----------------
* Indicates less than 1% of number of shares of Common Stock outstanding.
(1) The tabular information gives effect to the exercise of warrants or
options exercisable within 60 days of the date of this table owned in
each case by the person or group whose percentage ownership is set forth
opposite the respective percentage and is based on the assumption that no
other person or group exercises its option. The address of each of the
officers and directors is 515 North Flagler Drive, Suite 702, West Palm
Beach, Florida 33401.
(2) Includes 11,357 shares issuable upon exercise of warrants at an exercise
price of $4.00 per share, 60,250 shares issuable upon exercise of
presently exercisable options at an exercise price of $8.00 per share,
100,000 shares issuable upon exercise of
11
<PAGE> 14
presently exercisable options at an exercise price of $3.875 per share
and 25,000 shares issuable upon exercise of presently exercisable
options at an exercise price of $2.031 per share.
(3) Includes 100,000 shares issuable upon exercise of presently exercisable
options at an exercise price of $3.875 per share, 25,000 shares issuable
upon exercise of presently exercisable options at an exercise price of
$2.031 per share, and 25,000 shares issuable upon exercise of options
exercisable on July 12, 1998 at an exercise price of $2.031 per share.
(4) Excludes 100,000 shares issuable upon exercise of options exercisable on
August 18, 1998 at an exercise price of $3.625 per share.
(5) Includes 6,250 shares issuable upon exercise of presently exercisable
options at an exercise price of $10.00 per share, 6,250 shares issuable
upon exercise of presently exercisable options at an exercise price of
$4.00 per share, 40,000 shares issuable upon exercise of presently
exercisable options at an exercise price of $3.875 per share, and 7,500
shares issuable upon exercise of presently exercisable options at an
exercise price of $2.031 per share.
(6) Includes 15,000 shares issuable upon exercise of presently exercisable
options at an exercise price of $4.375 per share, but excludes 15,000
shares issuable upon exercise of options exercisable on April 2, 1999.
(7) Includes 1,250 shares issuable upon exercise of presently exercisable
options at an exercise price of $4.00 per share, and 40,000 shares
issuable upon exercise of presently exercisable options at an exercise
price of $3.875 per share, and 5,000 shares issuable upon exercise of
presently exercisable options at an exercise price of $2.031 per share.
(8) Includes 40,000 shares issuable upon exercise of presently exercisable
options at an exercise price of $3.875 per share, and 5,000 shares
issuable upon exercise of presently exercisable options at an exercise
price of $2.031 per share.
(9) Includes 40,000 shares issuable upon exercise of presently exercisable
options at an exercise price of $4.00, 5,000 shares issuable upon
exercise of presently exercisable options at an exercise price of $2.031
per share, and 100,000 shares issuable upon exercise of warrants at an
exercise price of $4.00 per share
(10) Represents 250,000 shares of Series A Preferred Stock, currently
convertible into 1,000,000 shares of Common Stock, which is owned by
Energy Systems Investors, LLC. Lawrence I. Schneider and Henry Schneider
are members and managers of Energy Systems Investors, LLC; Rita Schneider
is a member of Energy Systems Investors, LLC. Henry Schneider is the son
of Lawrence and Rita Schneider.
(11) Based on a Schedule 13-D sent to the Company on December 26, 1996.
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<PAGE> 15
PROPOSAL ONE
ELECTION OF DIRECTORS
The Board currently consists of seven directors, with one director
whose term expires this year not standing for re-election. The directors are
divided into three classes (Classes I, II and III), whose three-year terms of
office expire in annual succession. At this Annual Meeting two Class I directors
will be elected to serve until the Annual Meeting of Stockholders in 2001, or
until their successors have been duly elected and qualified.
The Board nominates the following two persons to serve as Class I
directors:
Howard A. Nevins
Lawrence I. Schneider
Messrs. Nevins and Schneider, who were appointed members of the Board
in August 1997 and March 1998, respectively, by action of the Board, are
standing for election by the stockholders for the first time. Todd Goodwin,
whose term as Class I director expires this year, has chosen not to seek
re-election due to personal reasons.
If, at the time of election, any of the nominees should be unavailable
for election, a circumstance which is not expected by the Company, it is
intended that the proxies will be voted for such substitute nominee as may be
selected by the Company. Proxies not marked to the contrary will be voted for
the election of the persons listed above.
Biographical information relating to these nominees for director
positions appears above starting on page 4 of this Proxy Statement under the
heading "DIRECTORS AND EXECUTIVE OFFICERS".
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF ALL OF THE
NOMINEES FOR ELECTION AS DIRECTORS.
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<PAGE> 16
PROPOSAL TWO
AMENDMENT TO CERTIFICATE OF INCORPORATION
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Amended and Restated Certificate of Incorporation (i)
to increase the authorized number of shares of Common Stock from 35,000,000
shares to 50,000,000 shares, and (ii) to increase the authorized number of
shares of Preferred Stock from 5,000,000 shares to 10,000,000 shares (the
"Amendment").
The additional Common Stock to be authorized by the Amendment would
have rights identical to the currently outstanding Common Stock of the Company.
The additional Preferred Stock authorized under the Amendment may be issued by
the Board of Directors from time to time in one or more series, with rights,
preferences, privileges and restrictions designated by the Board without any
further vote or action by the stockholders. The issuance of such Preferred Stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation. The terms of any series of Preferred Stock to be issued will be
largely dependent on market conditions and other factors existing at the time of
issuance and sale. If the Amendment is adopted, it will become effective upon
filing of a Certificate of Amendment of the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Amendment") with the Secretary
of State of the State of Delaware.
As of July 17, 1998, there were 5,160,609 shares of Common Stock
outstanding and 250,000 shares of Preferred Stock outstanding. In addition, the
Board has reserved 1,381,600 shares of Common Stock for issuance upon exercise
of options granted under the Company's stock option plans, 3,807,750 shares of
Common Stock for issuance upon exercise of currently outstanding warrants, and
1,000,000 shares of Common Stock for issuance upon conversion of the presently
outstanding shares of Series A Preferred Stock.
There are currently a sufficient number of authorized shares of
Preferred Stock and Common Stock under the Amended and Restated Certificate of
Incorporation to complete the issuance contemplated by the Proposal Three of
this Proxy Statement. Although at present the Board of Directors has no plans to
issue the additional shares of Common Stock or the additional shares of
Preferred Stock that would be authorized under the Amendment, it desires to have
such shares available to provide additional flexibility to use its capital stock
for business and financial purposes in the future. The additional shares may be
used, without further stockholder approval in some circumstances, for various
purposes including, without limitation, raising capital, establishing strategic
relationships with other companies and expanding the Company's business through
the acquisition of other businesses, or providing equity incentives to
employees, officers or directors.
The affirmative vote of the holders of a majority of the shares of the
Common Stock will be required to approve this Amendment to the Company's Amended
and Restated Certificate of Incorporation. As a result, abstentions and broker
non-votes will have the same effect as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL
TO ADOPT THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
14
<PAGE> 17
PROPOSAL THREE
ISSUANCE OF OPTION TO PURCHASE SERIES A PREFERRED STOCK
BACKGROUND - THE INITIAL FINANCING
On March 23, 1998, the Company sold 250,000 shares of its Series A
Convertible Preferred Stock (the "Series A Preferred Stock") to Energy Systems
Investors, LLC (the "Investor"), a Delaware limited liability company controlled
by Lawrence I. Schneider and Henry Schneider, for $2.25 million or $9.00 per
share (the "Initial Financing"). The sale was made in reliance on Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act") which offers an
exemption from the registration requirements under the Securities Act under
certain circumstances. Both the Initial Financing has been, and the financing
contemplated hereby will be placed directly by the Company, and no placement
agent has or will be retained.
Prior to meeting with the Company, Mr. Schneider had been an
acquaintance of Mr. Rosen, the Chairman of the Board of the Company, for over 20
years. Mr. Rosen introduced Mr. Schneider to the Company in February 1998. At
such time, the Company was predicting a cash flow shortage in the immediate
future and desired to engage in some manner of financing, either public or
private.
In November 1997, the Company contemplated but rejected a proposal to
issue between $2.5 million and $10.0 million in either convertible preferred
stock or a convertible note in a private placement to certain qualified
investors. The proposal was brought to the Company by Pacific Continental
Securities Corp., a California corporation ("Pacific Continental"), which would
have received fees in the amount of 6% of the total proceeds of the offering in
cash and 8% of the total proceeds of the offering in warrants to purchase shares
of the Company's Common Stock. The convertible securities would have been
convertible into shares of the Company's Common Stock any time after three
months from the closing date of the contemplated transaction, and would have had
a conversion price equal to the lesser of (i) the lowest sale price for the
Company's Common Stock for the 25 trading days prior to conversion or (ii) 105%
of the average closing price of the Common Stock for the five trading days
ending on the closing date of the contemplated transaction. The investors would
have received the right to have all of the shares of Common Stock underlying the
preferred securities which they held registered for resale under the Securities
Act within three months of closing.
The Board of Directors of the Company rejected the Pacific Continental
proposal after a full discussion of the benefits and potential negative
ramifications of such a transaction. Of particular concern to the Board of
Directors was the lack of any minimum conversion price, the relatively short
period of time before the investors would hold registered and freely-tradable
stock, the Company's lack of dealings with or knowledge of the investors, and
the seemingly high cost of consummating the transaction. At such time, the Board
of Directors decided that this proposal would not be in the best interests of
the Company or its stockholders.
In December 1997, the Company discussed with the managing underwriter
of its 1996 public offering of Common Stock and warrants, Gaines Berland, Inc.
("Gaines Berland"), the possibility of undertaking a public offering of the
securities of the Company. It was determined that while such a financing might
be possible, it would be difficult due to the low market price of the Company's
Common Stock, particularly in light of the fact that the Company did not then
have any pending acquisitions or proposed definitive use of proceeds which could
justify an $8.0 million to $15.0 million offering.
15
<PAGE> 18
In February 1998, at Mr. Rosen's suggestion, Mr. Schneider met with
Richard Nelson, the President and CEO of the Company, to discuss the possibility
of structuring a private placement of the Company's securities. Mr. Schneider
initially mentioned that he would be interested in investing between $2.0
million and $4.0 million in the Company in exchange for a convertible stock or
debt instrument. After further discussions with Mr. Schneider, the Company
entered into a non-binding Letter of Intent dated March 3, 1998 (the "Letter of
Intent") with Mr. Schneider, setting forth the general terms of the Initial
Financing. The Letter of Intent was subject to the review of The Nasdaq Stock
Market ("Nasdaq") with respect to the transaction's compliance with Nasdaq's
rules and regulations protecting the rights of stockholders and the satisfactory
completion of the due diligence investigation of the Company by Mr. Schneider.
In determining whether to enter into the Initial Financing, the Board
of Directors compared the terms of the transaction to the Pacific Continental
private placement, other private financing options that had been suggested to
the Company, and the possibility of undertaking a public financing. The terms of
the Initial Financing addressed the Board's concerns about the lack of a minimum
conversion price (which was set, subject to adjustment, at a price approximately
120% of the then current market price of the Company's Common Stock), and a
longer lock-up period for the Investor (at least one year). Additionally, the
Board considered the fact that Mr. Schneider would be investing his own money
and serving on the Board of Directors of the Company, thus creating a
substantial vested interest in the viability and success of the Company. The
Board also considered the relative speed and efficiency in which the Initial
Financing could be consummated. The Company would not have to pay any brokers
fees or commissions in connection with the Initial Financing, and could close
within 30 days of signing the Letter of Intent.
In addition to the negotiated terms and conditions of the 250,000
shares of Series A Preferred Stock issued to the Investor (See "Terms of the
Series A Preferred Stock"), the Company granted the Investor the following
rights:
1) An option to purchase an additional 220,000 shares of Series A
Preferred Stock on the same terms and conditions as the Initial Financing at any
time prior to one year from the date of the Annual Meeting, subject to the
approval of the stockholders of the Company (the "Secondary Financing Option").
2) Certain pre-emptive rights to purchase in any public or private
offering of the Company's securities prior to March 22, 2000 (exclusive of
issuances of Common Stock or options to purchase Common Stock to officers,
directors, employees and consultants of the Company, or stock issued in
connection with an acquisition or merger by the Company) a percentage of such
issuance, on the same terms offered to other investors, equal to the Investor's
then-current percentage of equity ownership in the Company.
3) A grant (the "Event Grant") of Common Stock if any non-operational,
extraordinary and non-recurring event (an "Event") occurs within 24 months of
the date of the closing of the Initial Financing (the "Closing Date") and which
arises from a situation preceding the Closing Date, which diminishes the
stockholder equity in the Company as of January 31, 1998, in an amount greater
than $500,000. The amount of any Event Grant will be equal to the decrease in
stockholder equity multiplied by the Investor's then-current equity percentage
ownership in the Company, divided by the lesser of (a) the average market price
of the Company's Common Stock on the five trading days prior to the Event or (b)
150% of the Conversion Price. The Event Grant may, alternatively, be paid to the
Investor in cash or some combination of cash and Common Stock at the option of
the Company. This Event Grant is in addition to the conversion price adjustments
and anti-dilutive measures granted to holders of the Series A Preferred Stock
generally.
Should an Event occur that would trigger the Company's obligation under
this provision, the Company would be obligated, at its option, to give the
Investor either cash or additional shares of Common Stock. If additional shares
of Common Stock are issued, it would have no effect on stockholders' equity, but
would result in some dilution to stockholders. Should the Company elect to pay
cash, stockholders' equity would be reduced. If additional shares of Common
Stock are issued, the amount of possible dilution will be dependent on three
variables: (1) the amount of the effect of an Event on stockholders' equity, (2)
the Investor's then-current percentage ownership in the Company and (3) the
market price of the Company's Common Stock at the time the Event takes place.
The greater (1) and (2), and the lower (3), the greater the dilution of
stockholders.
16
<PAGE> 19
4) The appointment of Mr. Schneider to the Board of Directors of the
Company and to the position of chairman of the Board's Executive Committee. The
Company also agreed to nominate Mr. Schneider to the slate of Directors to be
presented to the stockholders of the Company hereby.
5) Certain registration rights with respect to the shares of Common
Stock of the Company underlying the Investor's Series A Preferred Stock, as
follows:
a) INCIDENTAL (PIGGYBACK) REGISTRATION RIGHTS. If the Company
at any time after the Closing Date proposes to file a registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), for the sale of equity securities for cash, upon the proper
request of the Investor, the Company must include in such filing the
number of shares of Common Stock into which the Series A Preferred
Stock is convertible for which registration is so requested.
b) DEMAND REGISTRATION RIGHTS. At any time after six months
from the Closing Date and prior to the fifteenth anniversary of the
Closing Date, the Investor has one right to request that the Company
effect the registration under the Securities Act of all or any portion
of the Common Stock underlying the shares of the Investor's Series A
Preferred Stock. In such event, the Company will use reasonable efforts
to cause the restricted shares to be registered under the Securities
Act, unless the Board of Directors of the Company determines in good
faith that such registration would reasonably be likely to (i)
interfere with or affect the negotiation or completion of any
transaction that is being contemplated by the Company, or (ii) involve
initial or continuing disclosure obligations that would not be in the
best interest of the Company's stockholders.
Under the original terms of the Company's agreement with the Investor,
the Company granted the Investor piggyback registration rights effective at any
time after the first anniversary date of the Closing Date and demand
registration rights effective at any time after the second anniversary of the
Closing Date. At a July 6, 1998 meeting of the Board of Directors, the Board
voted to amend the term of the Investor's piggyback and demand registration
rights as described above.
INCREASE OF PROPOSED SECONDARY FINANCING OPTION
During the week of March 9, 1998, in connection with the Investor's due
diligence investigation of the Company, Messrs. Schneider and Nelson traveled to
the Company's facilities in Reno, Nevada and Evansville, Indiana, to meet with
several of the Company's operational personnel, business partners and clients.
Upon return from the trip, Mr. Schneider suggested that, based upon his
observations of the potential growth capabilities of the Company from an
internal perspective and the possibility of finding suitable acquisitions for
the Company, the Company's requirements for financing would probably exceed the
additional $2.0 million which could be raised pursuant to the Secondary
Financing Option as set forth in the Letter of Intent. Mr. Schneider requested
that the Company consider increasing the amount of the Secondary Financing
Option from $2.0 million to $8.0 million on the same terms as agreed to in the
Initial Financing. Mr. Schneider stated that he believed the increased option
amount was necessary for the Company's growth and profitability, as well as for
the protection of his initial investment of $2.25 million.
On April 7, 1998, after the consummation of the Initial Financing, the
Board of the Directors met to discuss and vote on Mr. Schneider's request to
increase the size of the Secondary Financing Option from $2.0 million to $8.0
million. A full discussion was held by the Board of Directors, which took into
account the relative merits of increasing the size of the Secondary Financing
Option versus seeking additional financing from other sources, including the
ability of the Company to find alternative sources of financing, whether public
or private, in a short period of time, on terms no less advantageous to the
stockholders of the Company than those provided by the Secondary Financing
Option, and in consideration of the current market price of the Company's Common
Stock. The Board of Directors also considered the fact that Mr. Schneider had
already invested $2.25 million in the Company and that he, as opposed to a new
outside investor, had a substantial vested interest in the financial success of
the
17
<PAGE> 20
Company, was believed by the Company to be knowledgeable about the Company's
business, and was believed by the Company to have had the ability to help the
Company expand its current operations and acquire additional money-producing
operations. The Board also considered Mr. Schneider's reputation for working
with and increasing the value of small companies, similar in size and business
as the Company.
After a full discussion, the Board of Directors authorized an increase
in the size of the Secondary Financing Option from a maximum of 220,000 shares
of Series A Preferred Stock to a maximum of 888,888 shares of Series A Preferred
Stock, at an aggregate purchase price of approximately $8.0 million, on the same
terms and conditions as the Initial Financing (the "Amended Secondary Financing
Option"). Additionally, the Board of Directors also passed a resolution amending
the Certificate of Designation to increase the number of shares of Series A
Preferred Stock from 600,000 shares to 1,200,000 shares, which would be required
to consummate the Amended Secondary Financing Option.
STOCKHOLDER APPROVAL
The issuance by the Company of the Series A Preferred Stock pursuant to
the Amended Secondary Financing Option is subject to stockholder approval
pursuant to the applicable rules of Nasdaq. Rule 4310 (c)(25)(H) of the Nasdaq
rules of corporate governance (the "Rule") requires companies that are listed on
the Nasdaq SmallCap Market to obtain stockholder approval prior to issuing
common stock (or shares convertible into common stock) in a private financing at
a price less than the market value of the common stock, where the amount of
common stock to be issued (or issuable upon conversion) is or will be greater
than 20% of the common stock or voting power of the Company outstanding prior to
the issuance.
The Rule also requires stockholder approval when an issuance of the
securities of a company will result in a change in control of the issuer. The
Securities Act defines the term "control" to mean the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through ownership of voting securities, by contract or
otherwise. The issuance of the 888,888 shares of Series A Preferred Stock in
connection with the exercise of the Amended Secondary Financing Option could
result in the Investor beneficially holding approximately 47% of the voting
power of the Company.
At the time of the Initial Financing, the $2.25 conversion price of the
Series A Preferred Stock was approximately 12% above the market price of the
Company's Common Stock. Immediately prior to the consummation of the Initial
Financing, the 250,000 shares of Series A Preferred Stock were convertible into
approximately 19.4% of the Common Stock and voting power of the Company. Fully
diluted, such shares of Series A Preferred Stock currently held by the Investor
are convertible into approximately 16.23% of the Company's Common Stock. The
Company was not required to obtain stockholder approval for the Initial
Financing.
As of July 17, 1998, the $2.25 conversion price of the Series A
Preferred Stock was approximately 20% above the market price of the Company's
Common Stock.
While the conversion price of the Series A Preferred Stock may or may
not be below the market value of the Common Stock on any exercise or conversion
date of the Amended Secondary Financing Option or the underlying shares of
Series A Preferred Stock, the maximum number of shares of Common Stock issuable
upon conversion of the Series A Preferred Stock, together with the maximum
number of shares of Common Stock issuable upon conversion of the issuance of
Series A Preferred Stock to the Investor in the Initial Financing, will be
greater than 20% of the shares of Common Stock outstanding
18
<PAGE> 21
immediately prior to both financings. Additionally, because the Investor will
control over 20% of the voting power and the Company's Common Stock if the
Amended Secondary Financing Option is exercised, approval of the Company's
stockholders is a condition to the issuance of the Amended Secondary Financing
Option. The laws of the State of Delaware do not require stockholder approval to
consummate the issuance of the Proposed Financing Option contemplated hereby.
TERMS OF THE SERIES A PREFERRED STOCK
The rights, preferences and privileges of the Series A Preferred Stock
are described below.
DIVIDENDS. The holders of the Series A Preferred Stock are entitled to
receive out of funds of the Company legally available for payment of cash
dividends, payable quarterly in arrears, at the rate of $0.81 per share per
annum, payable in cash, Common Stock or some combination thereof at the holder's
option. No dividends will be declared or paid or set apart for payment on any
Common Stock during any calendar quarter unless full dividends on the Series A
Preferred Stock for all quarterly dividend periods ending prior to or during
such calendar quarter have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment.
VOTING RIGHTS. Each share of Series A Preferred Stock is entitled to a
number of votes in any vote brought before the holders of the Common Stock of
the Company equal to the per-share purchase price of the Series A Preferred
Stock ($9.00) divided by the conversion price (as set forth below) determined as
of the record date of such vote of stockholders. Currently, each share of Series
A Preferred Stock is entitled to four votes per share.
CONVERSION. Each holder of a share of Series A Preferred Stock has the
right at any time to convert such share of Series A Preferred Stock into that
number of fully paid and non-assessable shares of Common Stock equal to the
per-share purchase price of the Series A Preferred Stock ($9.00) divided by the
conversion price of such share of Series A Preferred Stock, as set forth below.
Currently, each share of Series A Preferred Stock is convertible into four
shares of the Common Stock of the Company.
CONVERSION PRICE, ADJUSTMENTS. The conversion price of the Series A
Preferred Stock (the "Conversion Price") is currently $2.25. The Conversion
Price is subject to adjustment upon the happening of certain events, including
stock splits, subdivisions or combinations of the Company's Common Stock. The
Conversion Price also will be subject to adjustment in the event that the
Company issues Common Stock, or Common Stock equivalents convertible into Common
Stock, for consideration per share which is less than the then-applicable
Conversion Price (a "Dilutive Issuance").
If a Dilutive Issuance occurs in connection with an issuance of Common
Stock (or Common Stock equivalents convertible into Common Stock) in a public or
private offering of the Company's securities, the Conversion Price will be
reduced to the price per share of the shares issued in the Dilutive Issuance. In
such event, however, the Conversion Price will not be reduced below $1.00 unless
the Company consummates any offering of its Common Stock (or Common Stock
equivalents convertible into Common Stock) at a price, or conversion price, less
than an amount equal to the net book value per share of the Company, as
determined using the information provided in the Company's last quarterly or
annual report as filed with the Securities and Exchange Commission, pursuant to
the Securities Exchange Act of 1934, as amended.
19
<PAGE> 22
If there is a Dilutive Issuance in connection with an issuance of
Common Stock (or Common Stock equivalents convertible into Common Stock) in an
acquisition or merger, the Conversion Price will be reduced to the weighted
average of the issue price per share of the Common Stock outstanding or deemed
to be outstanding prior to the Dilutive Issuance and the per share price (or
equivalent conversion price) of the shares issued in the Dilutive Issuance. The
Conversion Price will not be adjusted for issuance of Common Stock upon the
exercise of options or the issuance of stock options to officers, directors,
employees or consultants of the Company.
REDEMPTION. At the option of the Company at any time and from time to
time after March 1, 2001, the Series A Preferred Stock may be redeemed in full
or in part for cash, plus accrued and unpaid dividends, at the following prices
per share:
$12.15 after March 1, 2001 through February 28, 2002;
$11.70 after March 1, 2002 through February 28, 2003;
$11.25 after March 1, 2003.
FORCED CONVERSION. The Company may force the conversion of the Series A
Preferred Stock into shares of Common Stock, at the Conversion Price then in
effect, at any time after March 1, 2006.
LIQUIDATION PREFERENCE. In the event of any liquidation or winding up
of the Company, the holders of the Series A Preferred Stock will be entitled to
receive, prior and in preference to the holders of Common Stock, $9.00 per share
of Series A Preferred Stock plus accrued and unpaid dividends. Thereafter, the
remaining assets will be distributed ratably to the holders of the Common Stock.
RESTRICTIVE COVENANTS. As long as any of the shares of Series A
Preferred Stock sold in the Financings are outstanding, the Company may not,
without the approval of holders representing a majority of the Series A
Preferred Stock outstanding, take certain actions, including, without
limitation: authorizing or issuing any class or series of equity security having
equal or superior rights as to payment upon liquidation, dissolution or winding
up; or redeeming or repurchasing outstanding securities of the Company, except
securities issuable upon the exercise of outstanding options and warrants or
issuable upon the exercise of options granted in the future.
SINKING FUND. The Series A Preferred Stock has no sinking fund.
RESTRICTED SECURITIES. The outstanding shares of Series A Preferred
Stock and the shares of Common Stock into which such Series A Preferred Stock is
convertible have not been registered under the Securities Act of 1934, as
amended (the "Securities Act") or any other applicable securities laws and are
deemed to be "restricted securities" under the Securities Act. The Common Stock
into which the outstanding Series A Preferred Stock is convertible may only be
sold, assigned, transferred or otherwise disposed of if subsequently registered
or an exemption from registration is available. The Investor has been granted
certain registration rights, as set forth more fully above.
COMPANY'S CAPITAL NEEDS; CONSEQUENCES OF NON-APPROVAL
Because of the restrictions of the Nasdaq Rule, the Company may not
raise funds through the sale of equity securities without stockholder approval
unless (i) the transaction results in an issuance or potential issuance of a
number of shares of Common Stock which is less than 20% of the total number of
shares of Common Stock currently outstanding, (ii) securities are sold at
current market price, or (iii) the securities are sold in a public offering. The
exercise of the Amended Secondary Financing Option, combined with the proceeds
of the Initial Financing, could raise up to approximately $10.25 million,
20
<PAGE> 23
compared to a maximum of approximately $2.25 million which could be raised
without stockholder approval. Based on current market conditions, management
believes that a sale of the Company's securities in the public markets at the
current market price of the Common Stock would most likely be unsuccessful. A
public offering would also involve substantial delay and significant expense.
The Company continuously evaluates the possibility of strategic
acquisitions. It is management's belief that any such acquisitions would require
cash, which, more than likely, would not be available but for the issuance and
exercise of the Amended Secondary Financing Option. Management believes that the
issuance of the Amended Secondary Financing Option can materially assist the
Company in achieving its growth plans quicker and more efficiently than would
otherwise be possible. Therefore, management believes that the Company's best
option is to complete the Amended Secondary Financing Option on the terms
outlined in the proposal set forth herein. If the Amended Secondary Financing
Option is not approved, the Company may experience difficulties or delays in
implementing its current plans for expansion and internal growth.
USE OF PROCEEDS
The Company plans to use the proceeds which may be received if or when
the Amended Secondary Financing Option is exercised for possible future
acquisitions and internal expansion, as well as for general working capital. The
Investor has indicated to the Company that it currently intends to exercise its
option to purchase all or a portion of the Amended Secondary Financing Option,
if approved hereby, as needed by the Company.
PRO FORMA BALANCE SHEET UPON ISSUANCE AND
EXERCISE OF THE AMENDED SECONDARY FINANCING OPTION
The following is a brief summary of the pro forma effects of the
issuance and exercise of the Amended Secondary Financing Option on the Company's
consolidated balance sheet as at April 30, 1998.
<TABLE>
<CAPTION>
PRO FORMA EFFECT OF AMENDED SECONDARY FINANCING OPTION AS AT APRIL 30, 1998
(in thousands, except for per share data) ACTUAL 4/30/98 ADJUSTMENT (1) PRO FORMA AS ADJUSTED (1)
---------------- ---------------- ---------------------------
<S> <C> <C> <C>
ASSETS
Total Current Assets 3,159 8,000 11,159
All Other Assets 11,646 11,646
Total Assets 14,805 22,805
------ ------
LIABILITIES
Total Current Liabilities 1,486 1,486
Total Long-Term Debt 1,307 1,307
Total Liabilities 2,793 2,793
Minority Interests 504 504
Stockholders' Equity 11,508 8,000 19,508
Total Liability and Equity 14,805 22,805
====== ======
Net (Loss) $ (270) $ (270)
(Loss) Per Share of Common Stock $ (0.05) $ (0.05)
- --------------------
</TABLE>
(1) Adjusted to reflect the exercise of an option to purchase 888,888 shares of
the Series A Preferred Stock of the Company at $9.00 per share.
21
<PAGE> 24
BOARD RECOMMENDATION
Although the issuance of shares of Series A Preferred Stock pursuant to
the Amended Secondary Financing Option may have a dilutive effect on the
Company's current stockholders, provided the Conversion Price of the Series A
Preferred Stock is below the then current market value of the Common Stock on
the date of conversion, the Board of Directors believes that stockholder
approval of the issuance of the Amended Secondary Financing Option is in the
best interest of the Company because it will provide the Company with an
efficient means to raise capital for use in acquisitions and internal expansion
on terms which it believes are fair to the stockholders of the Company.
Accordingly, the Board of Directors recommends the approval of the issuance of
the Amended Secondary Financing Option.
The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and entitled to vote at the meeting will be
required to approve the issuance of the Amended Secondary Financing Option. The
Investor will not be allowed to vote its shares of Series A Preferred Stock for
or against this Proposal Three.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
IN FAVOR OF THE ISSUANCE OF AN OPTION TO PURCHASE
SERIES A PREFERRED STOCK
22
<PAGE> 25
PROPOSAL FOUR
APPROVAL OF 1998 EXECUTIVE INCENTIVE COMPENSATION PLAN
BACKGROUND AND PURPOSE.
On May 28, 1998, the Board of Directors adopted the 1998 Executive
Incentive Compensation Plan (the "Plan") and recommended that it be submitted to
the Company's stockholders for their approval at the Annual Meeting. The terms
of the Plan provide for grants of stock options, stock appreciation rights
("SARs"), restricted stock, deferred stock, other stock related awards and
performance or annual incentive awards that may be settled in cash, stock or
other property (collectively, "Awards"). The Plan is intended to supersede the
Company's 1997 Stock Option Plan and the 1996 Stock Option Plan (the
"Preexisting Plans"). No Awards have been made under the Plan as of the date of
this Proxy Statement, and no Awards will be granted under the Plan unless the
Plan is approved by the Company's stockholders at the Annual Meeting.
Stockholder approval of the Plan is required (i) for purposes of compliance
with certain exclusions from the limitations of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), which are further described
below, (ii) in order for the Plan to be eligible under the "plan lender"
exemption from the margin requirements of Regulation G promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (iii) by
the rules of the Nasdaq SmallCap Market.
Although certain types of Awards authorized under the Plan are similar to
those under the Preexisting Plans, the Board determined to adopt an entirely new
plan in order to respond to the regulations under Section 162(m) of the Code, to
broaden the types of performance goals that may be set and the types of Awards
that may be granted by the Committee (as defined below under "ADMINISTRATION")
and otherwise to add flexibility to annual incentive awards and other
performance-based awards intended to qualify for corporate tax deductions under
Section 162(m), to increase the number of shares of Common Stock that may be
subject to Awards, and to otherwise adopt provisions intended to enable the
Committee to better promote the goals of the Company's compensation policies and
programs, as discussed above. See "Executive Compensation."
The following is a summary of certain principal features of the Plan. This
summary is qualified in its entirety by reference to the complete text of the
Plan, which is attached to this Proxy Statement as Exhibit A. Stockholders are
urged to read the actual text of the Plan in its entirety.
SHARES AVAILABLE FOR AWARDS; ANNUAL PER PERSON LIMITATIONS
Under the Plan, the total number of shares of Common Stock that may be
subject to the granting of Awards under the Plan at any time during the term of
the Plan shall be equal to 1,500,000 shares, plus the number of shares with
respect to which Awards previously granted under the Preexisting Plans that
terminate without being exercised, and the number of shares that are surrendered
in payment of any Awards or any tax withholding requirements.
The Plan limits the number of shares which may be issued pursuant to
incentive stock options to 1,500,000 shares. In addition, the Plan imposes
individual limitations on the amount of certain Awards in part to comply with
Code Section 162(m). Under these limitations, during any fiscal year the number
of options, SARs, restricted shares of Common Stock, deferred shares of Common
Stock, shares as a bonus or in lieu of other Company obligations, and other
stock based Awards granted to any one participant may not exceed 250,000 for
each type of such Award, subject to adjustment in certain circumstances. The
maximum amount that may be paid out as an annual incentive Award or other cash
Award in any fiscal year to any one participant is $2,000,000, and the maximum
amount that may be earned as a performance Award or other cash Award in respect
of a performance period by any one participant is $5,000,000.
23
<PAGE> 26
The Committee is authorized to adjust the limitations described in the
preceding paragraph and is authorized to adjust outstanding Awards (including
adjustments to exercise prices of options and other affected terms of Awards) in
the event that a dividend or other distribution (whether in cash, shares of
Common Stock or other property), recapitalization, forward or reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, share
exchange or other similar corporate transaction or event affects the Common
Stock so that an adjustment is appropriate in order to prevent dilution or
enlargement of the rights of participants. The Committee is also authorized to
adjust performance conditions and other terms of Awards in response to these
kinds of events or in response to changes in applicable laws, regulations or
accounting principles.
ELIGIBILITY
The persons eligible to receive Awards under the Plan are the officers,
directors, employees and independent contractors of the Company and its
subsidiaries. No independent contractor will be eligible to receive any Awards
other than stock options. An employee on leave of absence may be considered as
still in the employ of the Company or a subsidiary for purposes of eligibility
for participation in the Plan. As of July 17, 1998, approximately 30 persons
were eligible to participate in the Plan.
ADMINISTRATION
The Plan is to be administered by a committee designated by the Board of
Directors consisting of not less than two directors (the "Committee"), each
member of which must be a "non-employee director" as defined under Rule 16b 3
under the Exchange Act and an "outside director" for purposes of Section 162(m)
of the Code. However, except as otherwise required to comply with Rule 16b-3 of
the Exchange Act, or Section 162(m) of the Code, the Board may exercise any
power or authority granted to the Committee. The Compensation Committee of the
Board has been appointed as the Committee for the Plan. Subject to the terms of
the Plan, the Committee or the Board is authorized to select eligible persons to
receive Awards, determine the type and number of Awards to be granted and the
number of shares of Common Stock to which Awards will relate, specify times at
which Awards will be exercisable or settleable (including performance conditions
that may be required as a condition thereof), set other terms and conditions of
Awards, prescribe forms of Award agreements, interpret and specify rules and
regulations relating to the Plan, and make all other determinations that may be
necessary or advisable for the administration of the Plan.
STOCK OPTIONS AND SARS
The Committee or the Board is authorized to grant stock options, including
both incentive stock options ("ISOs"), which can result in potentially favorable
tax treatment to the participant, and non qualified stock options, and SARs
entitling the participant to receive the amount by which the fair market value
of a share of Common Stock on the date of exercise (or defined "change in
control price" following a change in control) exceeds the grant price of the
SAR. The exercise price per share subject to an option and the grant price of an
SAR are determined by the Committee, but in the case of an ISO must not be less
than the fair market value of a share of Common Stock on the date of grant. For
purposes of the Plan, the term "fair market value" means the fair market value
of Common Stock, Awards or other property as determined by the Committee or the
Board or under procedures established by the Committee or the Board. Unless
otherwise determined by the Committee or the Board, the fair market value of
Common Stock as of any given date shall be the closing sales price per share of
Common Stock as reported on the principal stock exchange or market on which
Common Stock is traded on the date as of which such value is being determined
or, if there is no sale on that date, then on the last previous day on which a
sale was reported. The maximum term of each option or SAR, the times at which
each option or SAR will be exercisable, and provisions requiring forfeiture of
unexercised options or SARs at or following termination of employment generally
are fixed by the Committee or the Board, except that no option or SAR may have a
term exceeding ten years. Options may be exercised by payment of the exercise
price in cash, shares that have been held for at least six months, outstanding
Awards or other property having a fair market value equal to the exercise price,
as the Committee or the Board may determine from time to time. Methods of
exercise and settlement and other terms of the SARs are determined by the
Committee or the Board. SARs granted under the Plan may include "limited SARs"
exercisable for a stated period of time following a change in control of the
Company, as discussed below.
24
<PAGE> 27
RESTRICTED AND DEFERRED STOCK
The Committee or the Board is authorized to grant restricted stock and
deferred stock. Restricted stock is a grant of shares of Common Stock which may
not be sold or disposed of, and which may be forfeited in the event of certain
terminations of employment, prior to the end of a restricted period specified by
the Committee or the Board. A participant granted restricted stock generally has
all of the rights of a stockholder of the Company, unless otherwise determined
by the Committee or the Board. An Award of deferred stock confers upon a
participant the right to receive shares of Common Stock at the end of a
specified deferral period, subject to possible forfeiture of the Award in the
event of certain terminations of employment prior to the end of a specified
restricted period. Prior to settlement, an Award of deferred stock carries no
voting or dividend rights or other rights associated with share ownership,
although dividend equivalents may be granted, as discussed below.
DIVIDEND EQUIVALENTS
The Committee or the Board is authorized to grant dividend equivalents
conferring on participants the right to receive, currently or on a deferred
basis, cash, shares of Common Stock, other Awards or other property equal in
value to dividends paid on a specific number of shares of Common Stock or other
periodic payments. Dividend equivalents may be granted alone or in connection
with another Award, may be paid currently or on a deferred basis and, if
deferred, may be deemed to have been reinvested in additional shares of Common
Stock, Awards or otherwise as specified by the Committee or the Board.
BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS
The Committee or the Board is authorized to grant shares of Common Stock as
a bonus, free of restrictions, or to grant shares of Common Stock or other
Awards in lieu of Company obligations to pay cash under the Plan or other plans
or compensatory arrangements, subject to such terms as the Committee or the
Board may specify.
OTHER STOCK BASED AWARDS
The Committee or the Board is authorized to grant Awards that are
denominated or payable in, valued by reference to, or otherwise based on or
related to shares of Common Stock. Such Awards might include convertible or
exchangeable debt securities, other rights convertible or exchangeable into
shares of Common Stock, purchase rights for shares of Common Stock, Awards with
value and payment contingent upon performance of the Company or any other
factors designated by the Committee or the Board, and Awards valued by reference
to the book value of shares of Common Stock or the value of securities of or the
performance of specified subsidiaries or business units. The Committee or the
Board determines the terms and conditions of such Awards.
PERFORMANCE AWARDS, INCLUDING ANNUAL INCENTIVE AWARDS
The right of a participant to exercise or receive a grant or settlement of
an Award, and the timing thereof, may be subject to such performance conditions
(including subjective individual goals) as may be specified by the Committee or
the Board. In addition, the Plan authorizes specific annual incentive Awards,
which represent a conditional right to receive cash, shares of Common Stock or
other Awards upon achievement of certain preestablished performance goals and
subjective individual goals during a specified fiscal year. Performance Awards
and annual incentive Awards granted to persons whom the Committee expects will,
for the year in which a deduction arises, be "covered employees" (as defined
below) will, if and to the extent intended by the Committee, be subject to
provisions that should qualify such Awards as "performance based compensation"
not subject to the limitation on tax deductibility by the Company under Code
Section 162(m). For purposes of Section 162(m), the term "covered employee"
means the Company's chief executive officer and each other person whose
compensation is required to be disclosed in the Company's filings with the SEC
by reason of that person being among the four highest compensated officers of
the Company as of the end of a taxable year. If and to the extent required under
Section 162(m) of the Code, any power or authority relating to a performance
Award or annual incentive Award intended to qualify under Section 162(m) of the
Code is to be exercised by the Committee and not the Board.
25
<PAGE> 28
Subject to the requirements of the Plan, the Committee or the Board will
determine performance Award and annual incentive Award terms, including the
required levels of performance with respect to specified business criteria, the
corresponding amounts payable upon achievement of such levels of performance,
termination and forfeiture provisions and the form of settlement. In granting
annual incentive or performance Awards, the Committee or the Board may establish
unfunded award "pools," the amounts of which will be based upon the achievement
of a performance goal or goals based on one or more of certain business criteria
described in the Plan (including, for example, total stockholder return, net
income, pretax earnings, EBITDA, earnings per share, and return on investment).
During the first 90 days of a fiscal year or performance period, the Committee
or the Board will determine who will potentially receive annual incentive or
performance Awards for that fiscal year or performance period, either out of the
pool or otherwise.
After the end of each fiscal year or performance period, the Committee or
the Board will determine (i) the amount of any pools and the maximum amount of
potential annual incentive or performance Awards payable to each participant in
the pools and (ii) the amount of any other potential annual incentive or
performance Awards payable to participants in the Plan. The Committee or the
Board may, in its discretion, determine that the amount payable as an annual
incentive or performance Award will be reduced from the amount of any potential
Award.
OTHER TERMS OF AWARDS
Awards may be settled in the form of cash, shares of Common Stock, other
Awards or other property, in the discretion of the Committee or the Board. The
Committee or the Board may require or permit participants to defer the
settlement of all or part of an Award in accordance with such terms and
conditions as the Committee or the Board may establish, including payment or
crediting of interest or dividend equivalents on deferred amounts, and the
crediting of earnings, gains and losses based on deemed investment of deferred
amounts in specified investment vehicles. The Committee or the Board is
authorized to place cash, shares of Common Stock or other property in trusts or
make other arrangements to provide for payment of the Company's obligations
under the Plan. The Committee or the Board may condition any payment relating to
an Award on the withholding of taxes and may provide that a portion of any
shares of Common Stock or other property to be distributed will be withheld (or
previously acquired shares of Common Stock or other property be surrendered by
the participant) to satisfy withholding and other tax obligations. Awards
granted under the Plan generally may not be pledged or otherwise encumbered and
are not transferable except by will or by the laws of descent and distribution,
or to a designated beneficiary upon the participant's death, except that the
Committee or the Board may, in its discretion, permit transfers for estate
planning or other purposes subject to any applicable restrictions under Rule
16b-3.
Awards under the Plan are generally granted without a requirement that the
participant pay consideration in the form of cash or property for the grant (as
distinguished from the exercise), except to the extent required by law. The
Committee or the Board may, however, grant Awards in exchange for other Awards
under the Plan, awards under other Company plans, or other rights to payment
from the Company, and may grant Awards in addition to and in tandem with such
other Awards, rights or other awards.
ACCELERATION OF VESTING; CHANGE IN CONTROL
The Committee or the Board may, in its discretion, accelerate the
exercisability, the lapsing of restrictions or the expiration of deferral or
vesting periods of any Award, and such accelerated exercisability, lapse,
expiration and if so provided in the Award agreement, vesting shall occur
automatically in the case of a "change in control" of the Company, as defined in
the Plan (including the cash settlement of SARs and "limited SARs" which may be
exercisable in the event of a change in control). In addition, the Committee or
the Board may provide in an Award agreement that the performance goals relating
to any performance based Award will be deemed to have been met upon the
occurrence of any "change in control." Upon the occurrence of a change in
control, if so provided in the Award agreement, stock options and limited SARs
(and other SARs which so provide) may be cashed out based on a defined "change
in control price," which will be the higher of (i) the cash and fair market
value of property that is the highest price per share paid (including
extraordinary dividends) in any reorganization, merger, consolidation,
liquidation, dissolution or sale of substantially all assets of the Company, or
(ii) the highest fair market value per share (generally based on market prices)
at any time during the 60 days before and 60 days after a change in control.
26
<PAGE> 29
For purposes of the Plan, the term "change in control" generally means (a)
approval by stockholders of any reorganization, merger or consolidation or other
transaction or series of transactions if persons who were stockholders
immediately prior to such reorganization, merger or consolidation or other
transaction do not, immediately thereafter, own more than 50% of the combined
voting power of the reorganized, merged or consolidated company's then
outstanding, voting securities, or a liquidation or dissolution of the Company
or the sale of all or substantially all of the assets of the Company (unless the
reorganization, merger, consolidation or other corporate transaction,
liquidation, dissolution or sale is subsequently abandoned), or (b) a change in
the composition of the Board such that the persons constituting the Board on the
date the Award is granted (the "Incumbent Board"), and subsequent directors
approved by the Incumbent Board (or approved by such subsequent directors),
cease to constitute at least a majority of the Board, or (c) the acquisition by
any person, entity or "group", within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act, of more than 50% of either the then
outstanding shares of the Company's Common Stock or the combined voting power of
the Company's then outstanding voting securities entitled to vote generally in
the election of directors (hereinafter referred to as the ownership of a
"Controlling Interest") excluding, for this purpose, any acquisitions by (1) the
Company or its Subsidiaries, (2) any person, entity or "group" that as of the
date on which the Award is granted owns beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Securities Exchange Act) of a Controlling
Interest or (3) any employee benefit plan of the Company or its Subsidiaries.
AMENDMENT AND TERMINATION
The Board of Directors may amend, alter, suspend, discontinue or terminate
the Plan or the Committee's authority to grant Awards without further
stockholder approval, except stockholder approval must be obtained for any
amendment or alteration if such approval is required by law or regulation or
under the rules of any stock exchange or quotation system on which shares of
Common Stock are then listed or quoted. Thus, stockholder approval may not
necessarily be required for every amendment to the Plan which might increase the
cost of the Plan or alter the eligibility of persons to receive Awards.
Stockholder approval will not be deemed to be required under laws or
regulations, such as those relating to ISOs, that condition favorable treatment
of participants on such approval, although the Board may, in its discretion,
seek stockholder approval in any circumstance in which it deems such approval
advisable. Unless earlier terminated by the Board, the Plan will terminate at
such time as no shares of Common Stock remain available for issuance under the
Plan and the Company has no further rights or obligations with respect to
outstanding Awards under the Plan.
SECURITIES ACT REGISTRATION
The Company intends to register the shares of Common Stock available for
Awards under the Plan pursuant to a Registration Statement on Form S-8 filed
with the SEC.
FEDERAL INCOME TAX CONSEQUENCES OF AWARDS OF OPTIONS
The following is a brief description of the federal income tax consequences
generally arising with respect to Awards of options under the Plan.
The grant of an option will create no tax consequences for the participant
or the Company. A participant will not have taxable income upon exercising an
ISO (except that the alternative minimum tax may apply). Upon exercising an
option other than an ISO, the participant must generally recognize ordinary
income equal to the difference between the exercise price and the fair market
value of the freely transferable and non forfeitable shares of Common Stock
acquired on the date of exercise.
Upon a disposition of shares of Common Stock acquired upon exercise of an
ISO before the end of the applicable ISO holding periods, the participant must
generally recognize ordinary income equal to the lesser of (i) the fair market
value of the shares of Common Stock at the date of exercise of the ISO minus the
exercise price, or (ii) the amount realized upon the disposition of the ISO
shares of Common Stock minus the exercise price. Otherwise, a participant's
disposition of shares of Common Stock acquired upon the exercise of an option
(including an ISO for which the ISO holding periods are met) generally will
result in short term or long term capital gain or
27
<PAGE> 30
loss measured by the difference between the sale price and the
participant's tax basis in such shares of Common Stock (the tax basis generally
being the exercise price plus any amount previously recognized as ordinary
income in connection with the exercise of the option). The Company generally
will be entitled to a tax deduction equal to the amount recognized as ordinary
income by the participant in connection with an option.
The Company generally is not entitled to a tax deduction relating to
amounts that represent a capital gain to a participant. Accordingly, the Company
will not be entitled to any tax deduction with respect to an ISO if the
participant holds the shares of Common Stock for the ISO holding periods prior
to disposition of the shares.
The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Code, which generally disallows a public company's tax deduction for
compensation to covered employees in excess of $1 million in any tax year
beginning on or after January 1, 1994. Compensation that qualifies as
"performance based compensation" is excluded from the $1 million deductibility
cap, and therefore remains fully deductible by the company that pays it. As
discussed above, the Company intends that options and certain other Awards
granted to employees whom the Committee expects to be covered employees at the
time a deduction arises in connection with such Awards, qualify as such
"performance based compensation," so that such Awards will not be subject to the
Section 162(m) deductibility cap of $1 million. Future changes in Section 162(m)
or the regulations thereunder may adversely affect the ability of the Company to
ensure that options or other Awards under the Plan will qualify as "performance
based compensation" that is fully deductible by the Company under Section
162(m).
The foregoing discussion, which is general in nature and is not intended to
be a complete description of the federal income tax consequences of the Plan, is
intended for the information of stockholders considering how to vote at the
Annual Meeting and not as tax guidance to participants in the Plan. This
discussion does not address the effects of other federal taxes or taxes imposed
under state, local or foreign tax laws. Participants in the Plan should consult
a tax advisor as to the tax consequences of participation.
NEW PLAN BENEFITS
No Awards have been granted under the Plan through the date of this Proxy
Statement. The table sets forth, as of July 17, 1998, the assumed amount and
dollar value of Awards that would have been received by the Named Officers and
by certain other groups of individuals during fiscal 1997 if the Plan had then
been in effect. The assumed amounts are based upon the awards actually granted
during fiscal 1997 under the Preexisting Plans, which are to be replaced with
the Plan. See "Executive Compensation."
<TABLE>
<CAPTION>
STOCK OPTIONS(1)
----------------------
NUMBER OF VALUE OF
OPTIONS OPTIONS
NAME AND POSITION GRANTED GRANTED
- --------------------------------------------------------- ---------- ---------
<S> <C> <C>
RICHARD H. NELSON, President, CEO and Director........... 50,000(2) *
HOWARD A. NEVINS, Executive Vice President and Director.. 100,000(3) *
All current executive officers as a group (4 persons) ... 215,000 *
All current directors who are not executive
officers (4 persons) ................................... 60,000 *
All employees, other than executive officers
(19 persons) ........................................... 197,000 *
</TABLE>
- -----------------------------
* Indicates exercise price of options is higher than market price of the
Company's Common Stock as of July 17, 1998.
(1) Represents options granted in fiscal 1997 under the Company's 1997 Plan and
1996 Plan. For purposes of this table, the value of each option was deemed
to be the amount, if any, by which the closing market price of a
28
<PAGE> 31
share of Common Stock on July 17, 1998 ($1.8125) exceeded the option's
exercise price. The value is determined without regard to whether the option
is currently exercisable or not. All options are nonqualified options with
exercise prices ranging from $2.031 to $4.375 per share (the market price on
the date of grant), generally become exercisable at the rate of 50% on each
of the first two anniversaries of the date of grant, and generally have a
term of 10 years.
(2) Mr. Nelson's options vested 50% immediately upon grant and 50% six months
later.
(3) Mr. Nevins' options vest 100% on the first anniversary of the date of grant.
The Company believes that Awards granted under the Plan will be granted
primarily to those persons who possess a capacity to contribute significantly to
the successful performance of the Company. Because persons to whom Awards may be
made are to be determined from time to time by the Committee in its discretion,
it is impossible at this time to indicate the precise number, name or positions
of persons who will hereafter receive Awards or the nature and terms of such
Awards.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL
OF THE PROPOSAL TO APPROVE THE 1998 EXECUTIVE
INCENTIVE COMPENSATION PLAN.
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CERTAIN ANTI-TAKEOVER EFFECTS OF PROPOSALS TWO, THREE AND FOUR
The potential issuance of additional shares of the Company's Common
Stock and Preferred Stock, pursuant to Proposal Two, the issuance of the option
to purchase 888,888 shares of Series A Preferred Stock to the Investor, pursuant
to Proposal Three, and the adoption of the Plan, pursuant to Proposal Four,
could operate to deter a potential takeover of the Company. For example, the
issuance of the shares authorized under the proposed Amendment to the Company's
Certificate of Incorporation or the voting control held by the holder of the
Series A Preferred Stock could operate to (i) preserve current management; (ii)
make more difficult or discourage a merger, tender offer or proxy contest
directed at the Company; (iii) delay the assumption of control by a holder of a
large block of the Company's shares and the removal of incumbent management; or
(iv) increase the degree of control of current management. Approval of Proposals
Two, Three or Four could be to the advantage of incumbent management in a
hostile takeover attempt and to the disadvantage of stockholders who might want
to participate in the takeover transaction. The Board of Directors, currently
has no plans, arrangements or understandings, written or oral, for the issuance
of any additional stock or the voting of the shares of Series A Preferred Stock,
and is not aware of any proposal or intention on the part of any person to
attempt a merger, tender offer or any other similar transaction with the
Company.
Other provisions of the Company's Certificate of Incorporation
currently in effect could have the effect of deterring takeovers. The Company's
Certificate of Incorporation (i) provides for a Board of Directors that is
divided into three classes of directors serving staggered three-year terms; (ii)
requires that written notice of the intent to make a nomination for the election
of directors at a meeting of stockholders be received by the Secretary of the
Company not later than specified periods prior to the meeting; and (iii) does
not provide for cumulative voting. Approval of Proposals Two, Three or Four
could, when taken together with the existing Certificate of Incorporation
provisions noted above, increase the aggregate anti-takeover effect of
provisions in the Company's Certificate of Incorporation. Management has no
present intention to propose in any future proxy solicitations any other
amendments to the Company's Certificate of Incorporation that would have an
anti-takeover effect.
MISCELLANEOUS
INDEPENDENT AUDITORS
The Audit Committee and the Board of Directors have selected the firm
of Richard A. Eisner & Co., LLC ("Eisner"), independent certified public
accountants, to examine the consolidated financial statements of the Company and
its subsidiaries for the fiscal year ended January 31, 1998. Representatives of
Eisner are expected to be available at the Annual Meeting by telephone, and will
have an opportunity to make a statement if they desire to do so and to respond
to appropriate questions from shareholders.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires that the Company's officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities,
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
stockholders are required by regulation to furnish to the Company copies of all
Section 16(a) forms they file. Based solely on its review of the copies of such
forms received by it, or written representations from certain reporting persons,
the Company believes that during the fiscal year ended January 31, 1998, all
officers, directors,
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and greater than ten percent beneficial owners complied with all applicable
Section 16(a) filing requirements.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual Report on Form 10-KSB for the year ended January
31, 1998 and quarterly report on Form 10-QSB for the period ended April 30, 1998
are incorporated herein by reference. Certain financial information from the
Form 10-KSB and management's discussion and analysis of this information has
been included in the Annual Report to Stockholders, a copy of which has been
mailed with this Proxy Statement.
All documents filed by the Company pursuant to sections 13(a), 13(c),
14 and 15(d) of the Securities Exchange Act of 1934, as amended, after the
mailing date of this proxy statement and prior to June 15, 1998, the date of the
Annual Meeting, will be deemed to be incorporated by reference herein and to be
a part hereof from the date of filing of such documents. Any statement contained
in this proxy statement or in a document incorporated or deemed to be
incorporated by reference herein will be deemed to be modified or superseded for
purposes of this Proxy Statement to the extent that a statement contained herein
or in any subsequently-filed document which also is or is deemed to be
incorporated by reference herein modifies or superseded such statement. Any such
statement so modified or superseded will not be deemed, as modified or
superseded, to constitute a part of this Proxy Statement.
OTHER MATTERS
The Board of Directors know of no other business to be presented at the
meeting, but if other matters do properly come before the meeting, it is
intended that the persons named in the Proxy will vote in respect thereof in
accordance with their best judgment.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the
Company's 1999 Annual Meeting of Stockholders must be received by the Company by
May 1, 1999 in order to be included in the proxy statement and proxy relating to
that Annual Meeting.
By Order of the Board of Directors
Seymour J. Beder
Chief Financial Officer and Secretary
West Palm Beach, Florida
July 20, 1998
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APPENDIX A
U.S. ENERGY SYSTEMS, INC.
1998 EXECUTIVE INCENTIVE COMPENSATION PLAN
1. PURPOSE. The purpose of this 1998 Executive Incentive Compensation
Plan (the "Plan") is to assist U.S. ENERGY SYSTEMS, INC., a Delaware corporation
(the "Company") and its subsidiaries in attracting, motivating, retaining and
rewarding high-quality executives and other employees, officers, Directors and
independent contractors by enabling such persons to acquire or increase a
proprietary interest in the Company in order to strengthen the mutuality of
interests between such persons and the Company's stockholders, and providing
such persons with annual and long term performance incentives to expend their
maximum efforts in the creation of stockholder value. The Plan is also intended
to qualify certain compensation awarded under the Plan for tax deductibility
under Section 162(m) of the Code (as hereafter defined) to the extent deemed
appropriate by the Committee (or any successor committee) of the Board of
Directors of the Company.
2. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof.
(a) "Annual Incentive Award" means a conditional right
granted to a Participant under Section 8(c) hereof to receive a cash payment,
Stock or other Award, unless otherwise determined by the Committee, after the
end of a specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another
award, Dividend Equivalent, Other Stock-Based Award, Performance Award or Annual
Incentive Award, together with any other right or interest, granted to a
Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts
which have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards or
other rights are transferred if and to the extent permitted under Section 10(b)
hereof. If, upon a Participant's death, there is no designated Beneficiary or
surviving designated Beneficiary, then the term Beneficiary means the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(d) "Beneficial Owner", "Beneficially Owning" and
"Beneficial Ownership" shall have the meanings ascribed to such terms in Rule
13d-3 under the Exchange Act and any successor to such Rule.
(e) "Board" means the Company's Board of Directors.
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(f) "Change in Control" means Change in Control as defined
with related terms in Section 9 of the Plan.
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including regulations thereunder and successor provisions and
regulations thereto.
(i) "Committee" means a committee designated by the Board to
administer the Plan; provided, however, that the Committee shall consist of at
least two directors, and each member of which shall be (i) a "non-employee
director" within the meaning of Rule 16b-3 under the Exchange Act, unless
administration of the Plan by "non-employee directors" is not then required in
order for exemptions under Rule 16b-3 to apply to transactions under the Plan,
and (ii) an "outside director" within the meaning of Section 162(m) of the Code,
unless administration of the Plan by "outside directors" is not then required in
order to qualify for tax deductibility under Section 162(m) of the Code.
(j) "Corporate Transaction" means a Corporate Transaction as
defined in Section 9(b)(i) of the Plan.
(k) "Covered Employee" means an Eligible Person who is a
Covered Employee as specified in Section 8(e) of the Plan.
(l) "Deferred Stock" means a right, granted to a Participant
under Section 6(e) hereof, to receive Stock, cash or a combination thereof at
the end of a specified deferral period.
(m) "Director" means a member of the Board.
(n) "Disability" means a permanent and total disability
(within the meaning of Section 22(e) of the Code), as determined by a medical
doctor satisfactory to the Committee.
(o) "Dividend Equivalent" means a right, granted to a
Participant under Section 6(g) hereof, to receive cash, Stock, other Awards or
other property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments.
(p) "Effective Date" means the effective date of the Plan,
which shall be June 1, 1998.
(q) "Eligible Person" means each Executive Officer of the
Company (as defined under the Exchange Act) and other officers, Directors and
employees of the Company or of any Subsidiary, and independent contractors with
the Company or any Subsidiary. The foregoing notwithstanding, only employees of
the Company or any Subsidiary shall be Eligible Persons for purposes of
receiving any Incentive Stock Options. An employee on leave of absence may be
considered as still in the employ of the Company or a Subsidiary for purposes of
eligibility for participation in the Plan.
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(r) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(s) "Executive Officer" means an executive officer of the
Company as defined under the Exchange Act.
(t) "Fair Market Value" means the fair market value of Stock,
Awards or other property as determined by the Committee or the Board, or under
procedures established by the Committee or the Board. Unless otherwise
determined by the Committee or the Board, the Fair Market Value of Stock as of
any given date shall be the closing sale price per share reported on a
consolidated basis for stock listed on the principal stock exchange or market on
which Stock is traded on the date as of which such value is being determined or,
if there is no sale on that date, then on the last previous day on which a sale
was reported.
(u) "Incentive Stock Option" or "ISO" means any Option
intended to be designated as an incentive stock option within the meaning of
Section 422 of the Code or any successor provision thereto.
(v) "Incumbent Board" means the Incumbent Board as defined in
Section 9(b)(ii) of the Plan.
(w) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.
(x) "Option" means a right granted to a Participant under
Section 6(b) hereof, to purchase Stock or other Awards at a specified price
during specified time periods.
(y) "Other Stock-Based Awards" means Awards granted to a
Participant under Section 6(h) hereof.
(z) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.
(aa) "Participant" means a person who has been granted an
Award under the Plan which remains outstanding, including a person who is no
longer an Eligible Person.
(bb) "Performance Award" means a right, granted to an Eligible
Person under Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee or the Board.
(cc) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, and shall include a "group" as defined in Section 13(d) thereof.
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(dd) "Preexisting Plans" means the Company's 1997 Stock Option
Plan and 1996 Stock Option Plan.
(ee) "Restricted Stock" means Stock granted to a Participant
under Section 6(d) hereof, that is subject to certain restrictions and to a risk
of forfeiture.
(ff) "Rule 16b-3" and "Rule 16a-1(c)(3)" means Rule 16b-3 and
Rule 16a-1(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act
(gg) "Stock" means the Company's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(hh) "Stock Appreciation Rights" or "SAR" means a right
granted to a Participant under Section 6(c) hereof.
(ii) "Subsidiary" means any corporation or other entity in
which the Company has a direct or indirect ownership interest of 50% or more of
the total combined voting power of the then outstanding securities or interests
of such corporation or other entity entitled to vote generally in the election
of directors or in which the Company has the right to receive 50% or more of the
distribution of profits or 50% or more of the assets on liquidation or
dissolution.
3. ADMINISTRATION.
(a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered
by the Committee; provided, however, that except as otherwise expressly provided
in this Plan or in order to comply with Code Section 162(m) or Rule 16b-3 under
the Exchange Act, the Board may exercise any power or authority granted to the
Committee under this Plan. The Committee or the Board shall have full and final
authority, in each case subject to and consistent with the provisions of the
Plan, to select Eligible Persons to become Participants, grant Awards, determine
the type, number and other terms and conditions of, and all other matters
relating to, Awards, prescribe Award agreements (which need not be identical for
each Participant) and rules and regulations for the administration of the Plan,
construe and interpret the Plan and Award agreements and correct defects, supply
omissions or reconcile inconsistencies therein, and to make all other decisions
and determinations as the Committee or the Board may deem necessary or advisable
for the administration of the Plan. In exercising any discretion granted to the
Committee or the Board under the Plan or pursuant to any Award, the Committee or
the Board shall not be required to follow past practices, act in a manner
consistent with past practices, or treat any Eligible Person in a manner
consistent with the treatment of other Eligible Persons.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. The Committee,
and not the Board, shall exercise sole and exclusive discretion on any matter
relating to a Participant then subject to Section 16 of the Exchange Act with
respect to the Company to the extent necessary in order that transactions by
such Participant shall be exempt under Rule 16b-3 under the Exchange Act. Any
action of the Committee or the Board shall be final, conclusive and binding on
all persons, including the Company, its subsidiaries, Participants,
Beneficiaries, transferees under
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Section 10(b) hereof or other persons claiming rights from or through a
Participant, and stockholders. The express grant of any specific power to the
Committee or the Board, and the taking of any action by the Committee or the
Board, shall not be construed as limiting any power or authority of the
Committee or the Board. The Committee or the Board may delegate to officers or
managers of the Company or any subsidiary, or committees thereof, the authority,
subject to such terms as the Committee or the Board shall determine, (i) to
perform administrative functions, (ii) with respect to Participants not subject
to Section 16 of the Exchange Act, to perform such other functions as the
Committee or the Board may determine, and (iii) with respect to Participants
subject to Section 16, to perform such other functions of the Committee or the
Board as the Committee or the Board may determine to the extent performance of
such functions will not result in the loss of an exemption under Rule 16b-3
otherwise available for transactions by such persons, in each case to the extent
permitted under applicable law and subject to the requirements set forth in
Section 8(d). The Committee or the Board may appoint agents to assist it in
administering the Plan.
(c) LIMITATION OF LIABILITY. The Committee and the Board, and
each member thereof, shall be entitled to, in good faith, rely or act upon any
report or other information furnished to him or her by any executive officer,
other officer or employee of the Company or a Subsidiary, the Company's
independent auditors, consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and the Board, and any
officer or employee of the Company or a subsidiary acting at the direction or on
behalf of the Committee or the Board, shall not be personally liable for any
action or determination taken or made in good faith with respect to the Plan,
and shall, to the extent permitted by law, be fully indemnified and protected by
the Company with respect to any such action or determination.
4. STOCK SUBJECT TO PLAN.
(a) LIMITATION ON OVERALL NUMBER OF SHARES SUBJECT TO AWARDS.
Subject to adjustment as provided in Section 10(c) hereof, the total number of
shares of Stock reserved and available for delivery in connection with Awards
under the Plan shall be the sum of (i) 1,500,000 plus (ii) the number of shares
with respect to Awards previously granted under the Plan that terminate without
being exercised, expire, are forfeited or canceled, and the number of shares of
Stock that are surrendered in payment of any Awards or any tax withholding with
regard thereto. Any shares of Stock delivered under the Plan may consist, in
whole or in part, of authorized and unissued shares or treasury shares. Subject
to adjustment as provided in Section 10(c) hereof, in no event shall the
aggregate number of shares of Stock which may be issued pursuant to ISOs exceed
1,500,000 shares.
(b) APPLICATION OF LIMITATIONS. The limitation contained in
Section 4(a) shall apply not only to Awards that are settleable by the delivery
of shares of Stock but also to Awards relating to shares of Stock but settleable
only in cash (such as cash-only SARs). The Committee or the Board may adopt
reasonable counting procedures to ensure appropriate counting, avoid double
counting (as, for example, in the case of tandem or substitute awards) and make
adjustments if the number of shares of Stock actually delivered differs from the
number of shares previously counted in connection with an Award.
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5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS.
(a) AWARDS UNDER THE PLAN. Awards may be granted under the
Plan only to Eligible Persons. In each fiscal year during any part of which the
Plan is in effect, an Eligible Person may not be granted Awards relating to more
than 250,000 shares of Stock, subject to adjustment as provided in Section
10(c), under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), 6(h), 8(b) and
8(c). In addition, the maximum amount that may be earned as an Annual Incentive
Award or other cash Award in any fiscal year by any one Participant shall be
$2,000,000, and the maximum amount that may be earned as a Performance Award or
other cash Award in respect of a performance period by any one Participant shall
be $5,000,000.
(b) AWARDS UNDER PREEXISTING PLANS. Upon approval of the Plan
by stockholders of the Company, as required under Section 10(k) hereof, no
further Awards shall be granted under the Preexisting Plans.
6. SPECIFIC TERMS OF AWARDS.
(a) GENERAL. Awards may be granted on the terms and
conditions set forth in this Section 6. In addition, the Committee or the Board
may impose on any Award or the exercise thereof, at the date of grant or
thereafter (subject to Section 10(e)), such additional terms and conditions, not
inconsistent with the provisions of the Plan, as the Committee or the Board
shall determine, including terms requiring forfeiture of Awards in the event of
termination of employment by the Participant and terms permitting a Participant
to make elections relating to his or her Award. The Committee or the Board shall
retain full power and discretion to accelerate, waive or modify, at any time,
any term or condition of an Award that is not mandatory under the Plan. Except
in cases in which the Committee or the Board is authorized to require other
forms of consideration under the Plan, or to the extent other forms of
consideration must be paid to satisfy the requirements of Florida law, no
consideration other than services may be required for the grant (but not the
exercise) of any Award.
(b) OPTIONS. The Committee and the Board each is authorized to
grant Options to Participants on the following terms and conditions:
(i) EXERCISE PRICE. The exercise price per share of
Stock purchasable under an Option shall be determined by the
Committee or the Board, provided that such exercise price
shall not, in the case of Incentive Stock Options, be less
than 100% of the Fair Market Value of the Stock on the date of
grant of the Option and shall not, in any event, be less than
the par value of a share of Stock on the date of grant of such
Option. If an employee owns or is deemed to own (by reason of
the attribution rules applicable under Section 424(d) of the
Code) more than 10% of the combined voting power of all
classes of stock of the Company or any Parent Corporation and
an Incentive Stock Option is granted to such employee, the
option price of such Incentive Stock Option (to the extent
required by the Code at the time of grant) shall be no less
than 110% of the Fair Market Value of the Stock on the date
such Incentive Stock Option is granted.
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(ii) TIME AND METHOD OF EXERCISE. The Committee or
the Board shall determine the time or times at which or the
circumstances under which an Option may be exercised in whole
or in part (including based on achievement of performance
goals and/or future service requirements), the time or times
at which Options shall cease to be or become exercisable
following termination of employment or upon other conditions,
the methods by which such exercise price may be paid or deemed
to be paid (including in the discretion of the Committee or
the Board a cashless exercise procedure), the form of such
payment, including, without limitation, cash, Stock, other
Awards or awards granted under other plans of the Company or
any subsidiary, or other property (including notes or other
contractual obligations of Participants to make payment on a
deferred basis), and the methods by or forms in which Stock
will be delivered or deemed to be delivered to Participants.
(iii) ISOS. The terms of any ISO granted under the
Plan shall comply in all respects with the provisions of
Section 422 of the Code. Anything in the Plan to the contrary
notwithstanding, no term of the Plan relating to ISOs
(including any SAR in tandem therewith) shall be interpreted,
amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify
either the Plan or any ISO under Section 422 of the Code,
unless the Participant has first requested the change that
will result in such disqualification. Thus, if and to the
extent required to comply with Section 422 of the Code,
Options granted as Incentive Stock Options shall be subject to
the following special terms and conditions:
(A) the Option shall not be exercisable more
than ten years after the date such Incentive Stock Option is
granted; provided, however, that if a Participant owns or is
deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10% of the combined voting power
of all classes of stock of the Company or any Parent
Corporation and the Incentive Stock Option is granted to such
Participant, the term of the Incentive Stock Option shall be
(to the extent required by the Code at the time of the grant)
for no more than five years from the date of grant; and
(B) The aggregate Fair Market Value
(determined as of the date the Incentive Stock Option is
granted) of the shares of stock with respect to which
Incentive Stock Options granted under the Plan and all other
option plans of the Company or its Parent Corporation during
any calendar year exercisable for the first time by the
Participant during any calendar year shall not (to the extent
required by the Code at the time of the grant) exceed
$100,000.
(c) STOCK APPRECIATION RIGHTS. The Committee and the Board
each is authorized to grant SAR's to Participants on the following terms and
conditions:
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(i) RIGHT TO PAYMENT. A SAR shall confer on the
Participant to whom it is granted a right to receive, upon
exercise thereof, the excess of (A) the Fair Market Value of
one share of stock on the date of exercise (or, in the case of
a "Limited SAR" that may be exercised only in the event of a
Change in Control, the Fair Market Value determined by
reference to the Change in Control Price, as defined under
Section 9(c) hereof), over (B) the grant price of the SAR as
determined by the Committee or the Board. The grant price of
an SAR shall not be less than the Fair Market Value of a share
of Stock on the date of grant except as provided under Section
7(a) hereof.
(ii) OTHER TERMS. The Committee or the Board shall
determine at the date of grant or thereafter, the time or
times at which and the circumstances under which a SAR may be
exercised in whole or in part (including based on achievement
of performance goals and/or future service requirements), the
time or times at which SARs shall cease to be or become
exercisable following termination of employment or upon other
conditions, the method of exercise, method of settlement, form
of consideration payable in settlement, method by or forms in
which Stock will be delivered or deemed to be delivered to
Participants, whether or not a SAR shall be in tandem or in
combination with any other Award, and any other terms and
conditions of any SAR. Limited SARs that may only be exercised
in connection with a Change in Control or other event as
specified by the Committee or the Board, may be granted on
such terms, not inconsistent with this Section 6(c), as the
Committee or the Board may determine. SARs and Limited SARs
may be either freestanding or in tandem with other Awards.
(d) RESTRICTED STOCK. The Committee and the Board each is
authorized to grant Restricted Stock to Participants on the following terms and
conditions:
(i) GRANT AND RESTRICTIONS. Restricted Stock shall be
subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee or
the Board may impose, which restrictions may lapse separately
or in combination at such times, under such circumstances
(including based on achievement of performance goals and/or
future service requirements), in such installments or
otherwise, as the Committee or the Board may determine at the
date of grant or thereafter. Except to the extent restricted
under the terms of the Plan and any Award agreement relating
to the Restricted Stock, a Participant granted Restricted
Stock shall have all of the rights of a stockholder, including
the right to vote the Restricted Stock and the right to
receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee or
the Board). During the restricted period applicable to the
Restricted Stock, subject to Section 10(b) below, the
Restricted Stock may not be sold, transferred, pledged,
hypothecated, margined or otherwise encumbered by the
Participant.
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(ii) FORFEITURE. Except as otherwise determined by
the Committee or the Board at the time of the Award, upon
termination of a Participant's employment during the
applicable restriction period, the Participant's Restricted
Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Company; provided that the
Committee or the Board may provide, by rule or regulation or
in any Award agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to
Restricted Stock shall be waived in whole or in part in the
event of terminations resulting from specified causes, and the
Committee or the Board may in other cases waive in whole or in
part the forfeiture of Restricted Stock.
(iii) CERTIFICATES FOR STOCK. Restricted Stock
granted under the Plan may be evidenced in such manner as the
Committee or the Board shall determine. If certificates
representing Restricted Stock are registered in the name of
the Participant, the Committee or the Board may require that
such certificates bear an appropriate legend referring to the
terms, conditions and restrictions applicable to such
Restricted Stock, that the Company retain physical possession
of the certificates, and that the Participant deliver a stock
power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) DIVIDENDS AND SPLITS. As a condition to the
grant of an Award of Restricted Stock, the Committee or the
Board may require that any cash dividends paid on a share of
Restricted Stock be automatically reinvested in additional
shares of Restricted Stock or applied to the purchase of
additional Awards under the Plan. Unless otherwise determined
by the Committee or the Board, Stock distributed in connection
with a Stock split or Stock dividend, and other property
distributed as a dividend, shall be subject to restrictions
and a risk of forfeiture to the same extent as the Restricted
Stock with respect to which such Stock or other property has
been distributed.
(e) DEFERRED STOCK. The Committee and the Board each is
authorized to grant Deferred Stock to Participants, which are rights to receive
Stock, cash, or a combination thereof at the end of a specified deferral period,
subject to the following terms and conditions:
(i) AWARD AND RESTRICTIONS. Satisfaction of an
Award of Deferred Stock shall occur upon expiration of the
deferral period specified for such Deferred Stock by the
Committee or the Board (or, if permitted by the Committee or
the Board, as elected by the Participant). In addition,
Deferred Stock shall be subject to such restrictions (which
may include a risk of forfeiture) as the Committee or the
Board may impose, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified
times (including based on achievement of performance goals
and/or future service requirements), separately or in
combination, in installments or otherwise, as the Committee or
the Board may determine. Deferred Stock may be satisfied by
delivery of Stock, cash equal to the Fair Market Value of the
specified number of shares of Stock covered by
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the Deferred Stock, or a combination thereof, as determined by
the Committee or the Board at the date of grant or thereafter.
Prior to satisfaction of an Award of Deferred Stock, an Award
of Deferred Stock carries no voting or dividend or other
rights associated with share ownership.
(ii) FORFEITURE. Except as otherwise determined by
the Committee or the Board, upon termination of a
Participant's employment during the applicable deferral period
thereof to which forfeiture conditions apply (as provided in
the Award agreement evidencing the Deferred Stock), the
Participant's Deferred Stock that is at that time subject to
deferral (other than a deferral at the election of the
Participant) shall be forfeited; provided that the Committee
or the Board may provide, by rule or regulation or in any
Award agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Deferred
Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the
Committee or the Board may in other cases waive in whole or in
part the forfeiture of Deferred Stock.
(iii) DIVIDEND EQUIVALENTS. Unless otherwise
determined by the Committee or the Board at date of grant,
Dividend Equivalents on the specified number of shares of
Stock covered by an Award of Deferred Stock shall be either
(A) paid with respect to such Deferred Stock at the dividend
payment date in cash or in shares of unrestricted Stock having
a Fair Market Value equal to the amount of such dividends, or
(B) deferred with respect to such Deferred Stock and the
amount or value thereof automatically deemed reinvested in
additional Deferred Stock, other Awards or other investment
vehicles, as the Committee or the Board shall determine or
permit the Participant to elect.
(f) BONUS STOCK AND AWARDS IN LIEU OF OBLIGATIONS. The
Committee and the Board each is authorized to grant Stock as a bonus, or to
grant Stock or other Awards in lieu of Company obligations to pay cash or
deliver other property under the Plan or under other plans or compensatory
arrangements, provided that, in the case of Participants subject to Section 16
of the Exchange Act, the amount of such grants remains within the discretion of
the Committee to the extent necessary to ensure that acquisitions of Stock or
other Awards are exempt from liability under Section 16(b) of the Exchange Act.
Stock or Awards granted hereunder shall be subject to such other terms as shall
be determined by the Committee or the Board.
(g) DIVIDEND EQUIVALENTS. The Committee and the Board each is
authorized to grant Dividend Equivalents to a Participant entitling the
Participant to receive cash, Stock, other Awards, or other property equal in
value to dividends paid with respect to a specified number of shares of Stock,
or other periodic payments. Dividend Equivalents may be awarded on a
free-standing basis or in connection with another Award. The Committee or the
Board may provide that Dividend Equivalents shall be paid or distributed when
accrued or shall be deemed to have been reinvested in additional Stock, Awards,
or other investment vehicles, and subject to such restrictions on
transferability and risks of forfeiture, as the Committee or the Board may
specify.
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(h) OTHER STOCK-BASED AWARDS. The Committee and the Board each
is authorized, subject to limitations under applicable law, to grant to
Participants such other Awards that may be denominated or payable in, valued in
whole or in part by reference to, or otherwise based on, or related to, Stock,
as deemed by the Committee or the Board to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee or the Board, and
Awards valued by reference to the book value of Stock or the value of securities
of or the performance of specified subsidiaries or business units. The Committee
or the Board shall determine the terms and conditions of such Awards. Stock
delivered pursuant to an Award in the nature of a purchase right granted under
this Section 6(h) shall be purchased for such consideration, paid for at such
times, by such methods, and in such forms, including, without limitation, cash,
Stock, other Awards or other property, as the Committee or the Board shall
determine. Cash awards, as an element of or supplement to any other Award under
the Plan, may also be granted pursuant to this Section 6(h).
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS.
Awards granted under the Plan may, in the discretion of the Committee or the
Board, be granted either alone or in addition to, in tandem with, or in
substitution or exchange for, any other Award or any award granted under another
plan of the Company, any subsidiary, or any business entity to be acquired by
the Company or a subsidiary, or any other right of a Participant to receive
payment from the Company or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is granted
in substitution or exchange for another Award or award, the Committee or the
Board shall require the surrender of such other Award or award in consideration
for the grant of the new Award. In addition, Awards may be granted in lieu of
cash compensation, including in lieu of cash amounts payable under other plans
of the Company or any subsidiary, in which the value of Stock subject to the
Award is equivalent in value to the cash compensation (for example, Deferred
Stock or Restricted Stock), or in which the exercise price, grant price or
purchase price of the Award in the nature of a right that may be exercised is
equal to the Fair Market Value of the underlying Stock minus the value of the
cash compensation surrendered (for example, Options granted with an exercise
price "discounted" by the amount of the cash compensation surrendered).
(b) TERM OF AWARDS. The term of each Award shall be for such
period as may be determined by the Committee or the Board; provided that in no
event shall the term of any Option or SAR exceed a period of ten years (or such
shorter term as may be required in respect of an ISO under Section 422 of the
Code).
(c) FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS.
Subject to the terms of the Plan and any applicable Award agreement, payments to
be made by the Company or a subsidiary upon the exercise of an Option or other
Award or settlement of an Award may be made in such forms as the Committee or
the Board shall determine, including, without limitation, cash, Stock that have
been held for at least 6 months, other Awards or other property, and may be made
in a single payment or transfer, in installments, or on a deferred basis. The
settlement of any Award may be
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accelerated, and cash paid in lieu of Stock in connection with such settlement,
in the discretion of the Committee or the Board or upon occurrence of one or
more specified events (in addition to a Change in Control). Installment or
deferred payments may be required by the Committee or the Board (subject to
Section 10(e) of the Plan) or permitted at the election of the Participant on
terms and conditions established by the Committee or the Board. Payments may
include, without limitation, provisions for the payment or crediting of a
reasonable interest rate on installment or deferred payments or the grant or
crediting of Dividend Equivalents or other amounts in respect of installment or
deferred payments denominated in Stock.
(d) EXEMPTIONS FROM SECTION 16(B) LIABILITY. It is the
intent of the Company that this Plan comply in all respects with applicable
provisions of Rule 16b-3 or Rule 16a-1(c)(3) to the extent necessary to ensure
that neither the grant of any Awards to nor other transaction by a Participant
who is subject to Section 16 of the Exchange Act is subject to liability under
Section 16(b) thereof (except for transactions acknowledged in writing to be
non-exempt by such Participant). Accordingly, if any provision of this Plan or
any Award agreement does not comply with the requirements of Rule 16b-3 or Rule
16a-1(c)(3) as then applicable to any such transaction, such provision will be
construed or deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such Participant shall
avoid liability under Section 16(b). In addition, the purchase price of any
Award conferring a right to purchase Stock shall be not less than any specified
percentage of the Fair Market Value of Stock at the date of grant of the Award
then required in order to comply with Rule 16b-3.
8. PERFORMANCE AND ANNUAL INCENTIVE AWARDS.
(a) PERFORMANCE CONDITIONS. The right of a Participant to
exercise or receive a grant or settlement of any Award, and the timing thereof,
may be subject to such performance conditions as may be specified by the
Committee or the Board. The Committee or the Board may use such business
criteria and other measures of performance as it may deem appropriate in
establishing any performance conditions, and may exercise its discretion to
reduce the amounts payable under any Award subject to performance conditions,
except as limited under Sections 8(b) and 8(c) hereof in the case of a
Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m). If and to the extent required under Code Section 162(m), any
power or authority relating to a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m), shall be exercised by the
Committee and not the Board.
(b) PERFORMANCE AWARDS GRANTED TO DESIGNATED COVERED
EMPLOYEES. If and to the extent that the Committee determines that a Performance
Award to be granted to an Eligible Person who is designated by the Committee as
likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise and/or
settlement of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this Section 8(b).
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(i) PERFORMANCE GOALS GENERALLY. The performance
goals for such Performance Awards shall consist of one or more
business criteria and a targeted level or levels of
performance with respect to each of such criteria, as
specified by the Committee consistent with this Section 8(b).
Performance goals shall be objective and shall otherwise meet
the requirements of Code Section 162(m) and regulations
thereunder including the requirement that the level or levels
of performance targeted by the Committee result in the
achievement of performance goals being "substantially
uncertain." The Committee may determine that such Performance
Awards shall be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of
the performance goals must be achieved as a condition to
grant, exercise and/or settlement of such Performance Awards.
Performance goals may differ for Performance Awards granted to
any one Participant or to different Participants.
(ii) BUSINESS CRITERIA. One or more of the
following business criteria for the Company, on a consolidated
basis, and/or specified subsidiaries or business units of the
Company (except with respect to the total stockholder return
and earnings per share criteria), shall be used exclusively by
the Committee in establishing performance goals for such
Performance Awards: (1) total stockholder return; (2) such
total stockholder return as compared to total return (on a
comparable basis) of a publicly available index such as, but
not limited to, the Standard & Poor's 500 Stock Index or the
S&P Specialty Retailer Index; (3) net income; (4) pretax
earnings; (5) earnings before interest expense, taxes,
depreciation and amortization; (6) pretax operating earnings
after interest expense and before bonuses, service fees, and
extraordinary or special items; (7) operating margin; (8)
earnings per share; (9) return on equity; (10) return on
capital; (11) return on investment; (12) operating earnings;
(13) working capital or inventory; and (14) ratio of debt to
stockholders' equity. One or more of the foregoing business
criteria shall also be exclusively used in establishing
performance goals for Annual Incentive Awards granted to a
Covered Employee under Section 8(c) hereof that are intended
to qualify as "performanced-based compensation under Code
Section 162(m).
(iii) PERFORMANCE PERIOD; TIMING FOR ESTABLISHING
PERFORMANCE GOALS. Achievement of performance goals in respect
of such Performance Awards shall be measured over a
performance period of up to ten years, as specified by the
Committee. Performance goals shall be established not later
than 90 days after the beginning of any performance period
applicable to such Performance Awards, or at such other date
as may be required or permitted for "performance-based
compensation" under Code Section 162(m).
(iv) PERFORMANCE AWARD POOL. The Committee may
establish a Performance Award pool, which shall be an unfunded
pool, for purposes of measuring Company performance in
connection with Performance Awards. The amount of such
Performance Award pool shall be based upon the achievement of
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a performance goal or goals based on one or more of the
business criteria set forth in Section 8(b)(ii) hereof during
the given performance period, as specified by the Committee in
accordance with Section 8(b)(iii) hereof. The Committee may
specify the amount of the Performance Award pool as a
percentage of any of such business criteria, a percentage
thereof in excess of a threshold amount, or as another amount
which need not bear a strictly mathematical relationship to
such business criteria.
(v) SETTLEMENT OF PERFORMANCE AWARDS; OTHER TERMS.
Settlement of such Performance Awards shall be in cash, Stock,
other Awards or other property, in the discretion of the
Committee. The Committee may, in its discretion, reduce the
amount of a settlement otherwise to be made in connection with
such Performance Awards. The Committee shall specify the
circumstances in which such Performance Awards shall be paid
or forfeited in the event of termination of employment by the
Participant prior to the end of a performance period or
settlement of Performance Awards.
(c) ANNUAL INCENTIVE AWARDS GRANTED TO DESIGNATED COVERED
EMPLOYEES. If and to the extent that the Committee determines that an Annual
Incentive Award to be granted to an Eligible Person who is designated by the
Committee as likely to be a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the grant,
exercise and/or settlement of such Annual Incentive Award shall be contingent
upon achievement of preestablished performance goals and other terms set forth
in this Section 8(c).
(i) ANNUAL INCENTIVE AWARD POOL. The Committee may
establish an Annual Incentive Award pool, which shall be an
unfunded pool, for purposes of measuring Company performance
in connection with Annual Incentive Awards. The amount of such
Annual Incentive Award pool shall be based upon the
achievement of a performance goal or goals based on one or
more of the business criteria set forth in Section 8(b)(ii)
hereof during the given performance period, as specified by
the Committee in accordance with Section 8(b)(iii) hereof. The
Committee may specify the amount of the Annual Incentive Award
pool as a percentage of any such business criteria, a
percentage thereof in excess of a threshold amount, or as
another amount which need not bear a strictly mathematical
relationship to such business criteria.
(ii) POTENTIAL ANNUAL INCENTIVE AWARDS. Not later
than the end of the 90th day of each fiscal year, or at such
other date as may be required or permitted in the case of
Awards intended to be "performance-based compensation" under
Code Section 162(m), the Committee shall determine the
Eligible Persons who will potentially receive Annual Incentive
Awards, and the amounts potentially payable thereunder, for
that fiscal year, either out of an Annual Incentive Award pool
established by such date under Section 8(c)(i) hereof or as
individual Annual Incentive Awards. In the case of individual
Annual Incentive Awards intended to qualify under Code Section
162(m), the amount potentially payable shall be based
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upon the achievement of a performance goal or goals based on
one or more of the business criteria set forth in Section
8(b)(ii) hereof in the given performance year, as specified by
the Committee; in other cases, such amount shall be based on
such criteria as shall be established by the Committee. In all
cases, the maximum Annual Incentive Award of any Participant
shall be subject to the limitation set forth in Section 5
hereof.
(iii) PAYOUT OF ANNUAL INCENTIVE AWARDS. After
the end of each fiscal year, the Committee shall determine the
amount, if any, of (A) the Annual Incentive Award pool, and
the maximum amount of potential Annual Incentive Award payable
to each Participant in the Annual Incentive Award pool, or (B)
the amount of potential Annual Incentive Award otherwise
payable to each Participant. The Committee may, in its
discretion, determine that the amount payable to any
Participant as an Annual Incentive Award shall be reduced from
the amount of his or her potential Annual Incentive Award,
including a determination to make no Award whatsoever. The
Committee shall specify the circumstances in which an Annual
Incentive Award shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end
of a fiscal year or settlement of such Annual Incentive Award.
(d) WRITTEN DETERMINATIONS. All determinations by the
Committee as to the establishment of performance goals, the amount of any
Performance Award pool or potential individual Performance Awards and as to the
achievement of performance goals relating to Performance Awards under Section
8(b), and the amount of any Annual Incentive Award pool or potential individual
Annual Incentive Awards and the amount of final Annual Incentive Awards under
Section 8(c), shall be made in writing in the case of any Award intended to
qualify under Code Section 162(m). The Committee may not delegate any
responsibility relating to such Performance Awards or Annual Incentive Awards if
and to the extent required to comply with Code Section 162(m).
(e) STATUS OF SECTION 8(B) AND SECTION 8(C) AWARDS UNDER
CODE SECTION 162(M). It is the intent of the Company that Performance Awards and
Annual Incentive Awards under Section 8(b) and 8(c) hereof granted to persons
who are designated by the Committee as likely to be Covered Employees within the
meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of Sections 8(b), (c), (d) and (e), including
the definitions of Covered Employee and other terms used therein, shall be
interpreted in a manner consistent with Code Section 162(m) and regulations
thereunder. The foregoing notwithstanding, because the Committee cannot
determine with certainty whether a given Participant will be a Covered Employee
with respect to a fiscal year that has not yet been completed, the term Covered
Employee as used herein shall mean only a person designated by the Committee, at
the time of grant of Performance Awards or an Annual Incentive Award, as likely
to be a Covered Employee with respect to that fiscal year. If any provision of
the Plan or any agreement relating to such Performance Awards or Annual
Incentive Awards does not comply or is inconsistent with the
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requirements of Code Section 162(m) or regulations thereunder, such provision
shall be construed or deemed amended to the extent necessary to conform to such
requirements.
9. CHANGE IN CONTROL.
(a) EFFECT OF "CHANGE IN CONTROL." If and to the extent
provided in the Award, in the event of a "Change in Control," as defined in
Section 9(b), the following provisions shall apply:
(i) Any Award carrying a right to exercise that was
not previously exercisable and vested shall become fully
exercisable and vested as of the time of the Change in
Control, subject only to applicable restrictions set forth in
Section 10(a) hereof;
(ii) Limited SARs (and other SARs if so provided
by their terms) shall become exercisable for amounts, in cash,
determined by reference to the Change in Control Price;
(iii) The restrictions, deferral of settlement,
and forfeiture conditions applicable to any other Award
granted under the Plan shall lapse and such Awards shall be
deemed fully vested as of the time of the Change in Control,
except to the extent of any waiver by the Participant and
subject to applicable restrictions set forth in Section 10(a)
hereof; and
(iv) With respect to any such outstanding Award
subject to achievement of performance goals and conditions
under the Plan, such performance goals and other conditions
will be deemed to be met if and to the extent so provided by
the Committee in the Award agreement relating to such Award.
(b) DEFINITION OF "CHANGE IN CONTROL. A "Change in Control"
shall be deemed to have occurred upon:
(i) Approval by the stockholders of the Company of a
reorganization, merger, consolidation or other form of corporate transaction or
series of transactions, in each case, with respect to which persons who were the
stockholders of the Company immediately prior to such reorganization, merger or
consolidation or other transaction do not, immediately thereafter, own more than
50% of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then outstanding
voting securities, or a liquidation or dissolution of the Company or the sale of
all or substantially all of the assets of the Company (unless such
reorganization, merger, consolidation or other corporate transaction,
liquidation, dissolution or sale (any such event being referred to as a
"Corporate Transaction") is subsequently abandoned);
(ii) Individuals who, as of the date on which the
Award is granted, constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a
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majority of the Board, provided that any person becoming a director subsequent
to the date on which the Award was granted whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the Directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Securities Exchange Act) shall be, for
purposes of this Agreement, considered as though such person were a member of
the Incumbent Board; or
(iii) The acquisition (other than from the Company)
by any person, entity or "group", within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act, of more than 50% of either the then
outstanding shares of the Company's Common Stock or the combined voting power of
the Company's then outstanding voting securities entitled to vote generally in
the election of directors (hereinafter referred to as the ownership of a
"Controlling Interest") excluding, for this purpose, any acquisitions by (1) the
Company or its Subsidiaries, (2) any person, entity or "group" that as of the
date on which the Award is granted owns beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Securities Exchange Act) of a Controlling
Interest or (3) any employee benefit plan of the Company or its Subsidiaries.
(c) DEFINITION OF "CHANGE IN CONTROL PRICE." The "Change in
Control Price" means an amount in cash equal to the higher of (i) the amount of
cash and fair market value of property that is the highest price per share paid
(including extraordinary dividends) in any Corporate Transaction triggering the
Change in Control under Section 9(b)(i) hereof or any liquidation of shares
following a sale of substantially all of the assets of the Company, or (ii) the
highest Fair Market Value per share at any time during the 60-day period
preceding and the 60-day period following the Change in Control.
10. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS. The Company
may, to the extent deemed necessary or advisable by the Committee or the Board,
postpone the issuance or delivery of Stock or payment of other benefits under
any Award until completion of such registration or qualification of such Stock
or other required action under any federal or state law, rule or regulation,
listing or other required action with respect to any stock exchange or automated
quotation system upon which the Stock or other Company securities are listed or
quoted, or compliance with any other obligation of the Company, as the Committee
or the Board, may consider appropriate, and may require any Participant to make
such representations, furnish such information and comply with or be subject to
such other conditions as it may consider appropriate in connection with the
issuance or delivery of Stock or payment of other benefits in compliance with
applicable laws, rules, and regulations, listing requirements, or other
obligations. The foregoing notwithstanding, in connection with a Change in
Control, the Company shall take or cause to be taken no action, and shall
undertake or permit to arise no legal or contractual obligation, that results or
would result in any postponement of the issuance or delivery of Stock or payment
of benefits under any Award or the imposition of any other
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conditions on such issuance, delivery or payment, to the extent that such
postponement or other condition would represent a greater burden on a
Participant than existed on the 90th day preceding the Change in Control.
(b) LIMITS ON TRANSFERABILITY; BENEFICIARIES. No Award or
other right or interest of a Participant under the Plan, including any Award or
right which constitutes a derivative security as generally defined in Rule
16a-1(c) under the Exchange Act, shall be pledged, hypothecated or otherwise
encumbered or subject to any lien, obligation or liability of such Participant
to any party (other than the Company or a Subsidiary), or assigned or
transferred by such Participant otherwise than by will or the laws of descent
and distribution or to a Beneficiary upon the death of a Participant, and such
Awards or rights that may be exercisable shall be exercised during the lifetime
of the Participant only by the Participant or his or her guardian or legal
representative, except that Awards and other rights (other than ISOs and SARs in
tandem therewith) may be transferred to one or more Beneficiaries or other
transferees during the lifetime of the Participant, and may be exercised by such
transferees in accordance with the terms of such Award, but only if and to the
extent such transfers and exercises are permitted by the Committee or the Board
pursuant to the express terms of an Award agreement (subject to any terms and
conditions which the Committee or the Board may impose thereon, and further
subject to any prohibitions or restrictions on such transfers pursuant to Rule
16b-3). A Beneficiary, transferee, or other person claiming any rights under the
Plan from or through any Participant shall be subject to all terms and
conditions of the Plan and any Award agreement applicable to such Participant,
except as otherwise determined by the Committee or the Board, and to any
additional terms and conditions deemed necessary or appropriate by the Committee
or the Board.
(c) ADJUSTMENTS. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange, liquidation,
dissolution or other similar corporate transaction or event affects the Stock
such that a substitution or adjustment is determined by the Committee or the
Board to be appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Committee or the Board shall, in
such manner as it may deem equitable, substitute or adjust any or all of (i) the
number and kind of shares of Stock which may be delivered in connection with
Awards granted thereafter, (ii) the number and kind of shares of Stock by which
annual per-person Award limitations are measured under Section 5 hereof, (iii)
the number and kind of shares of Stock subject to or deliverable in respect of
outstanding Awards and (iv) the exercise price, grant price or purchase price
relating to any Award and/or make provision for payment of cash or other
property in respect of any outstanding Award. In addition, the Committee (and
the Board if and only to the extent such authority is not required to be
exercised by the Committee to comply with Code Section 162(m)) is authorized to
make adjustments in the terms and conditions of, and the criteria included in,
Awards (including Performance Awards and performance goals, and Annual Incentive
Awards and any Annual Incentive Award pool or performance goals relating
thereto) in recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence, as well as acquisitions
and dispositions of businesses and assets) affecting the Company, any Subsidiary
or any business unit, or the financial statements of the Company or any
Subsidiary, or in response to changes in
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applicable laws, regulations, accounting principles, tax rates and regulations
or business conditions or in view of the Committee's assessment of the business
strategy of the Company, any Subsidiary or business unit thereof, performance of
comparable organizations, economic and business conditions, personal performance
of a Participant, and any other circumstances deemed relevant; provided that no
such adjustment shall be authorized or made if and to the extent that such
authority or the making of such adjustment would cause Options, SARs,
Performance Awards granted under Section 8(b) hereof or Annual Incentive Awards
granted under Section 8(c) hereof to Participants designated by the Committee as
Covered Employees and intended to qualify as "performance-based compensation"
under Code Section 162(m) and the regulations thereunder to otherwise fail to
qualify as "performance-based compensation" under Code Section 162(m) and
regulations thereunder.
(d) TAXES. The Company and any Subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Stock, or any payroll or other payment to
a Participant, amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee or the Board may deem advisable to enable the Company
and Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations,
either on a mandatory or elective basis in the discretion of the Committee.
(e) CHANGES TO THE PLAN AND AWARDS. The Board may amend,
alter, suspend, discontinue or terminate the Plan, or the Committee's authority
to grant Awards under the Plan, without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Company's stockholders not later than the annual
meeting next following such Board action if such stockholder approval is
required by any federal or state law or regulation (including, without
limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock
exchange or automated quotation system on which the Stock may then be listed or
quoted, and the Board may otherwise, in its discretion, determine to submit
other such changes to the Plan to stockholders for approval; provided that,
without the consent of an affected Participant, no such Board action may
materially and adversely affect the rights of such Participant under any
previously granted and outstanding Award. The Committee or the Board may waive
any conditions or rights under, or amend, alter, suspend, discontinue or
terminate any Award theretofore granted and any Award agreement relating
thereto, except as otherwise provided in the Plan; provided that, without the
consent of an affected Participant, no such Committee or the Board action may
materially and adversely affect the rights of such Participant under such Award.
Notwithstanding anything in the Plan to the contrary, if any right under this
Plan would cause a transaction to be ineligible for pooling of interest
accounting that would, but for the right hereunder, be eligible for such
accounting treatment, the Committee or the Board may modify or adjust the right
so that pooling of interest accounting shall be available, including the
substitution of Stock having a Fair Market Value equal to the cash otherwise
payable hereunder for the right which caused the transaction to be ineligible
for pooling of interest accounting.
A-19
<PAGE> 53
(f) LIMITATION ON RIGHTS CONFERRED UNDER PLAN. Neither the
Plan nor any action taken hereunder shall be construed as (i) giving any
Eligible Person or Participant the right to continue as an Eligible Person or
Participant or in the employ of the Company or a Subsidiary; (ii) interfering in
any way with the right of the Company or a Subsidiary to terminate any Eligible
Person's or Participant's employment at any time, (iii) giving an Eligible
Person or Participant any claim to be granted any Award under the Plan or to be
treated uniformly with other Participants and employees, or (iv) conferring on a
Participant any of the rights of a stockholder of the Company unless and until
the Participant is duly issued or transferred shares of Stock in accordance with
the terms of an Award.
(g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
obligation to deliver Stock pursuant to an Award, nothing contained in the Plan
or any Award shall give any such Participant any rights that are greater than
those of a general creditor of the Company; provided that the Committee may
authorize the creation of trusts and deposit therein cash, Stock, other Awards
or other property, or make other arrangements to meet the Company's obligations
under the Plan. Such trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant. The trustee of such trusts may be
authorized to dispose of trust assets and reinvest the proceeds in alternative
investments, subject to such terms and conditions as the Committee or the Board
may specify and in accordance with applicable law.
(h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the
Plan by the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board or a committee thereof to adopt such other incentive arrangements as it
may deem desirable including incentive arrangements and awards which do not
qualify under Code Section 162(m).
(i) PAYMENTS IN THE EVENT OF FORFEITURES; FRACTIONAL SHARES.
Unless otherwise determined by the Committee or the Board, in the event of a
forfeiture of an Award with respect to which a Participant paid cash or other
consideration, the Participant shall be repaid the amount of such cash or other
consideration. No fractional shares of Stock shall be issued or delivered
pursuant to the Plan or any Award. The Committee or the Board shall determine
whether cash, other Awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) GOVERNING LAW. The validity, construction and effect of
the Plan, any rules and regulations under the Plan, and any Award agreement
shall be determined in accordance with the laws of the State of Delaware without
giving effect to principles of conflicts of laws, and applicable federal law.
(k) PLAN EFFECTIVE DATE AND STOCKHOLDER APPROVAL;
TERMINATION OF PLAN. The Plan shall become effective on the Effective Date,
subject to subsequent approval within 12
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<PAGE> 54
months of its adoption by the Board by stockholders of the Company eligible to
vote in the election of directors, by a vote sufficient to meet the requirements
of Code Sections 162(m) and 422, Rule 16b-3 under the Exchange Act, applicable
NASDAQ requirements, and other laws, regulations, and obligations of the Company
applicable to the Plan. Awards may be granted subject to stockholder approval,
but may not be exercised or otherwise settled in the event stockholder approval
is not obtained. The Plan shall terminate at such time as no shares of Common
Stock remain available for issuance under the Plan and the Company has no
further rights or obligations with respect to outstanding Awards under the Plan.
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<PAGE> 55
ATTACHMENT A
U.S. ENERGY SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 26, 1998
The undersigned hereby appoints Richard H. Nelson and Seymour J. Beder,
and each of them, as attorneys and proxies of the undersigned, with full power
of substitution, to vote all of the shares of stock of U.S. Energy Systems, Inc.
which the undersigned may be entitled to vote at the Annual Meeting of
Stockholders of U.S. Energy Systems to be held at Rockwell's Restaurant, 515
North Flagler Drive, 20th Floor, West Palm Beach, Florida, on August 26, 1998,
at 10 a.m., (local time, and at any and all postponements, continuations and
adjournments thereof), with all powers that the undersigned would possess if
personally present, upon and in respect of the following matters and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE "FOR" EACH OF THE
PROPOSALS SET FORTH BELOW, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY
STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN
ACCORDANCE THEREWITH. MANAGEMENT RECOMMENDS A VOTE "FOR" ALL FOUR PROPOSALS.
PROPOSAL ONE: Election of Directors.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote
for all nominees listed below
A VOTE FOR ALL NOMINEES IS RECOMMENDED BY THE BOARD OF DIRECTORS. NOMINEES ARE:
Howard A. Nevins, Lawrence I. Schneider.
* To withhold authority to vote for any individual nominee, write that
nominee's name in the space provided below:
Exceptions:
- --------------------------------------------------------------------------------
PROPOSAL TWO: To adopt the amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 50,000,000 shares and the number of authorized shares of
Preferred Stock to 10,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 56
PROPOSAL THREE: To approve the issuance of an option to purchase up to 888,888
shares of the Company's Series A Convertible Series A Preferred Stock in a
private financing to the Investor described in the Proxy Statement and on the
terms and subject to the conditions described in the Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL FOUR: To approve the Company's 1998 Executive Incentive Compensation
Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on other side)
DATED
---------------------------- ----------------------------------
-----------------------------------
SIGNATURE(S)
Please sign exactly as your name appears
hereon. If the stock is registered in
the names of two or more persons, each
should sign. Executors, administrators,
trustees, guardians and
attorneys-in-fact should add their
titles. If signer is a corporation,
please give full corporate name and have
a duly authorized officer sign, stating
title. If signer is a partnership,
please sign in partnership name by
authorized person.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
