SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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
[ x ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
US WATS, Inc.
-------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Ward G. Schultz
-------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
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:
____________________________________________________________
[ ] 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>
US WATS, INC.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
_________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 30, 1996
_________________________
To our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of US
WATS, Inc. (the "Company") to be held on December 30, 1996 at 10:00 a.m. at
the Holiday Inn - City Line, 4100 Presidential Blvd., Philadelphia,
Pennsylvania 19131, for the following purposes:
1. To elect three directors to serve until the next annual meeting of
shareholders.
2. To approve the Amended and Restated Stock Option Plan (merger and
restatement of the Company's Employee Compensation Stock Option Plan
and its 1993 Executive Stock Option Plan) and the one-time grant of
non-qualified stock options outside of the Company's stock option
plans.
3. To transact such other business as may properly come before the
Annual Meeting.
Only shareholders of record at the close of business on November 15, 1996
will be entitled to notice of and to vote at the Annual Meeting.
If you do not expect to attend the Annual Meeting in person but wish to have
your shares voted, please promptly sign, date and mail the enclosed proxy in
the envelope provided in order that your shares may be represented at the
Annual Meeting.
By Order of the Board of Directors,
Stephen J. Parker
Secretary
Date: November 22, 1996
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US WATS, INC.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
__________________
PROXY STATEMENT
__________________
This proxy statement is furnished to shareholders of US WATS, Inc. (the
"Company") in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company for use at the Annual Meeting of
Shareholders to be held on December 30, 1996 at 10:00 a.m. at the Holiday Inn
- - City Line, 4100 Presidential Blvd., Philadelphia, Pennsylvania 19131.
The approximate date of mailing of this proxy statement and accompanying
proxy is November 22, 1996. If the enclosed form of proxy is duly executed
and returned, the shares represented will be voted in accordance with the
instructions marked on the proxy.
REVOCATION
Execution and delivery of the enclosed proxy will not affect the right of any
person to attend the Annual Meeting and vote in person. Any shareholder who
gives a proxy has the power to revoke it at any time before it is voted by
delivery of a written instrument of revocation or a duly executed proxy
bearing a later date to the Secretary of the Company or by a request in
person to the Secretary of the Company to return the executed proxy. The
presence of a shareholder at the Annual Meeting will not operate to revoke a
proxy, but the casting of a ballot by a shareholder who is present at the
Annual Meeting will revoke a proxy as to the matter on which the ballot is
cast.
COST OF SOLICITATION
The cost of soliciting proxies is being borne by the Company. In addition to
solicitation by mail, arrangements will be made with brokerage houses and
other custodians, nominees and fiduciaries to send proxies and proxy
statements to their principals, and the Company will reimburse them for their
expense in so doing. Officers, directors and employees of the Company may
solicit proxies in person or by telephone, but will not receive any
additional compensation therefor.
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<PAGE>
VOTING SECURITIES
The common stock is the only voting security of the Company outstanding, and
the holders thereof are entitled to one vote per share on each matter. Only
shareholders of record at the close of business on November 15, 1996 will be
entitled to notice of and to vote at the Annual Meeting. On November 8, 1996
there were 15,652,100 shares of common stock outstanding. The presence, in
person or by proxy, of the holders of a majority of the outstanding shares of
Common Stock will constitute a quorum at the Annual Meeting.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of November 8, 1996 information concerning
the shares of the Company's common stock beneficially owned by: (a) each
person or group known to the Company to be the beneficial owner of more than
5% of the outstanding shares of common stock; (b) each director; and (c) all
directors and officers as a group. Except as otherwise indicated, each
person named or included in a group has sole voting and investment power with
respect to his or its shares of common stock. The Company also has
outstanding a class of preferred stock known as the "9% Series of Preferred
Stock." To the Company's knowledge, no officer or director of the Company
owns any shares of such preferred stock.
Name and Address of Beneficial Amount and Nature
Owner or Identity of Group of Beneficial Ownership Percent of Class(1)
- ------------------------------ ----------------------- -------------------
Stephen Parker 2,930,000(2) 17.8%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Aaron R. Brown 2,580,000(3) 15.7%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Murray Goldberg 2,270,000 14.5%
26 Anthony Drive
Malvern, PA 19355
All Directors and Officers
as a group (5 persons) 6,445,000(4) 48.2%
(1) Based on 15,652,100 shares of common stock outstanding on November 8,
1996. Shares which are not outstanding but which a person has the right
to acquire within sixty (60) days of November 8, 1996, are considered as
shares outstanding for purposes of computing the percentage of common
stock owned by such person, but such shares are not deemed outstanding
for purposes of computing the percentage of common stock owned by any
other person.
(2) Includes 180,000 shares issuable to Mr. Parker upon exercise of options
granted under the Company's Executive Plan and 600,000 shares issuable
upon exercise of warrants issued in consideration of Mr. Parker's
limited personal guarantee of the Company's revolving credit facility
(See "Certain Relationships and Related Transactions").
(3) Includes 180,000 shares issuable to Mr. Brown upon exercise of options
granted under the Company's Executive Plan and 600,000 shares issuable
upon exercise of warrants issued in consideration of Mr. Brown's limited
3
<PAGE>
personal guarantee of the Company's revolving credit facility (See
"Certain Relationships and Related Transactions").
(4) Includes shares issuable to Messrs. Parker and Brown upon the exercise
of options and warrants described in notes 2 and 3 and 2,150,000 and
1,800,000 shares held directly by each of them, respectively, 130,000
shares issuable to Mr. Schultz, the Chief Financial Officer of the
Company, upon exercise of options granted under the Company's Executive
Plan and 55,000 shares held directly by Mr. Schultz, 600,000 shares
issuable to Mr. Scully, the President of the Company, upon the exercise
of options granted under the Company's Executive Plan and 150,000 shares
issuable to Olney Telecom, Inc., of which Mr. Scully is the sole owner,
outside of any benefit plan, and 2,270,000 shares held directly by Mr.
Goldberg.
ELECTION OF DIRECTORS
(Proposal No. 1)
Three Directors, constituting the entire membership of the Board of Directors
of the Company, are to be elected at the 1996 Annual Meeting to hold office
until the next Annual Meeting of Shareholders and until the election and
qualification of their successors. Messrs. Brown, Parker and Goldberg are
currently Directors of the Company. All have indicated their willingness to
serve if elected.
Unless authority is withheld with respect to any individual nominee or all of
the nominees, the shares represented by the proxies received as a result of
this solicitation will be voted in favor of the nominees listed below. In
the event any nominee declines or is unable to serve, proxies will be voted
for the election of the others so named, and may be voted for such substitute
nominees as the Board may recommend, or the Board may reduce the number of
Directors to eliminate the vacancy. The Board of Directors, however, does
not anticipate that any nominee will decline or be unable to serve.
Directors are elected by a plurality of the votes cast at the Annual Meeting
by the holders of shares entitled to vote. Abstentions and broker non-votes
will not be treated as votes cast.
The Company's Board of Directors met one time during 1995. The Company is
conducting a search for additional independent Directors to serve on the
Board of Directors. The Company believes its ability to attract qualified
Directors is dependent on its ability to obtain directors' and officers'
liability insurance, which it does not have at this time. Once additional
Directors are added to the Board, the Board intends to establish an audit
committee and a compensation committee. The Company does not have a
nominating committee of the Board of Directors. The Company's Stock Option
Committee is comprised of Aaron Brown and Stephen Parker.
The names of the nominees, and certain information about them, are set forth
below:
Name Age Position Director Since
- ---- --- -------- --------------
Aaron R. Brown (43) Chief Executive Officer,
Treasurer and Director(1) 1989
Stephen J. Parker (58) Chairman, Chief Operating Officer
and Secretary(2) 1989
Murray Goldberg (53) Vice President - Jamco, Inc.,
and Director (3) 1996
(1) Aaron R. Brown, a Certified Public Accountant, has been employed with
the Company since its inception in October 1989. Prior to his
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<PAGE>
employment with the Company, and in August 1989, Mr. Brown and Mr.
Parker founded Parker Brown, Inc. ("PBI"), a broker-dealer that became
licensed with the NASD in November 1990. PBI did not conduct any
business, and Mr. Brown sold all of his interest in PBI in September
1991. Mr. Brown and Mr. Parker also founded Parker Brown Partners
("PBP") in August 1989. PBP was organized to operate as a branch office
of Morgan Gladstone, a registered broker-dealer, and to provide
investment banking and consulting services to start-up and development
stage businesses. PBP operated as a branch office of Morgan Gladstone
until April 1990. Mr. Brown was Vice President of Finance for United
Environmental Services, an asbestos removal firm in Philadelphia in
1988. Mr. Brown was Chairman of the Board and President of the Company
until May 24, 1995. He has been Chief Executive Officer of the Company
since that date. Mr. Brown devotes all of his time to the management
and affairs of the Company.
(2) Stephen J. Parker holds a Ph.D. from Ohio University. He was employed
part-time by the Company from October 1989 until March 1990. He joined
the Company full-time in March 1990 as Vice President of Operations.
Prior to his employment with the Company, and in August 1989, Mr. Parker
and Mr. Brown founded Parker Brown, Inc. ("PBI"), a broker-dealer that
became licensed with the NASD in November 1990. PBI did not conduct any
business, and Mr. Parker sold all of his interest in PBI in September
1991. Mr. Parker and Mr. Brown also founded Parker Brown Partners
("PBP") in August 1989. PBP was organized to operate as a branch office
of Morgan Gladstone, a registered broker-dealer, and to provide
investment banking and consulting services to start-up and development
stage businesses. PBP operated as a branch office of Morgan Gladstone
until April 1990. Mr. Parker is a former stockbroker, and in addition
to his association with PBI and Morgan Gladstone in 1989-1990, he was
employed as a stockbroker with Princeton Financial, and with Profile
Investments, both in Philadelphia, during 1989. Mr. Parker was
Executive Vice President of the Company until May 24, 1995. He has
served as Chairman of the Board since that date and as Chief Operating
Officer since November 1996. Mr. Parker devotes all of his time to the
management and affairs of the Company.
(3) Murray Goldberg, a shareholder of the Company since 1989, and an
independent sales agent of the Company since 1993, is also currently
employed as a sales agent for MEG Associates, a partnership. Mr.
Goldberg also is the owner and a Vice-President of Jamco, Inc., a
discount shoe distributor in Florida and the owner and Director of Doxs,
Inc., an anaesthesia equipment developer and distributor. Prior to
January 1993, Mr. Goldberg worked as an anaesthesiologist at Paoli
Memorial Hospital. From June 1994 until May 1996, he was an owner of
Strathmore Bagel Franchise Company. Mr. Goldberg was elected a Director
of the Company in November, 1996.
Executive Officers
The Company's executive officers are appointed by the Board of Directors and,
except as described herein, hold office at the pleasure of the Board until
their successors are appointed and have qualified. In addition to Messrs.
Brown and Parker, both of whom serve as executive officers, the Company has
two additional executive officers, Mark Scully and Ward G. Schultz. Mr.
Scully, the President of the Company, age 39, has served as such since May
24, 1995. For the twelve years prior to joining the Company, Mr. Scully was
part owner of Call America, a long distance company in southern California.
From 1987, he served as General Partner and General Manager at Call America.
From 1985 to 1987, Mr. Scully served as Business Manager of TMC of Monterey
Bay, a telecommunications company, and he also worked with the Bell companies
as a member of the technical advisory committee. Mr. Scully currently serves
on the board of CompTel (Competitive Telecommunications Association). Mr.
Schultz, age 38, is a Certified Public Accountant and has served as Chief
Financial Officer of the Company since January 17, 1994. From 1989 to 1994
Mr. Schultz was employed by Global Environmental Corp., a manufacturer of
pollution control devices, as Vice President and Chief Financial Officer.
From 1983 to 1989 he was employed by Deloitte and Touche (formerly Touche
Ross & Co.), an international accounting firm.
5
<PAGE>
Certain Relationships and Related Transactions
On May 11, 1995, the Company entered into a Loan and Security Agreement with
Century Business Credit Corporation ("Century") for a revolving credit
facility of $2,000,000. The loan is for a period of two years, and is
automatically renewable for two successive years. On April 27, 1995, the
Company issued 500,000 shares of restricted common stock to each of Aaron R.
Brown and Stephen J. Parker in consideration for their limited personal
guarantee given to Century equal to 25% of the indebtedness incurred with
Century. In connection with this transaction each of these two officers also
terminated 420,000 Executive Stock Options. After review of the transaction
by a Special Committee appointed by the Board of Directors (consisting of
Kenneth J. Adelberg, a former director of the Company) the issuance of the
restricted stock and the cancellation of options was rescinded. In its
place, the Company agreed to issue each of Messrs. Brown and Parker 600,000
warrants to purchase common stock of the Company in consideration for the
limited personal guarantees given by each in connection with the credit
facility.
Each warrant issued in the transaction described in the above paragraph
entitles the holder to purchase one share of common stock of the Company at
price of $1.0625 per share until May 11, 2000. The warrants are non-
transferable by the officers and the stock issuable upon exercise of the
warrants is restricted stock under the federal securities laws.
During 1994, Aaron R. Brown established a Letter of Credit in the amount of
$150,000 in favor of a vendor of the Company, which is still in effect as of
this date.
During the quarter ended March 31, 1996, Messrs. Parker and Brown made
advances to the Company totalling $196,824 ($10,000 of which was reimbursed
to Mr. Brown in May 1996). Each of Messrs. Brown and Parker were issued a
note payable on demand at an interest rate of ten percent (10%).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE ELECTION OF ITS NOMINEES.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for the years ended December 31, 1993, 1994 and
1995, certain compensation paid or accrued by the Company for services by the
named officers.
6
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------------------
Name Other Restricted Common All
and Annual Stock Stock LTIP Other
Principal Salary Bonus Comp. Awards Underlying Payouts Comp.
Position Year ($) ($) ($) ($) Options (#) ($) ($) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aaron R. Brown, '95 160,000 -- -- -- 600,000(3) -- 1,932
Chief Executive '94 149,063 -- -- -- -- -- 1,070
Officer and '93 109,000 -- -- -- -- -- --
Treasurer
Stephen J. Parker, '95 160,000 -- -- -- 600,00(3) -- 4,332
Chief Operating '94 149,063 -- -- -- -- -- 3,098
Officer and '93 97,100 -- -- -- 600,000 -- --
Secretary
Mark Scully, '95 100,000 -- -- -- 850,000 -- --
President '94 N/A N/A N/A N/A 150,000(4) N/A N/A
'93 N/A N/A N/A N/A N/A N/A N/A
Ward G. Schultz '95 94,000 37,500(5) -- -- 100,000 -- --
Chief Financial '94 75,301 -- -- -- 200,000 -- --
Officer' '93 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(1) For 1993, 1994 and 1995 the aggregate amount of such Other Annual
Compensation for each named officer is not reportable under SEC rules
because such amount is the lesser of either $50,000 or 10% of the total
salary for such named officer.
(2) Includes amounts paid for life insurance of the named executive where
the Company is not the beneficiary of the policy.
(3) On May 11, 1995, the Company agreed to issue each of Messrs. Brown and
Parker warrants to purchase 600,000 shares of the Company's common stock
in consideration for their limited personal guarantees provided in
connection with the Company's revolving credit facility. The warrants
were issued after the rescission of a transaction consisting of a stock
grant and option cancellation described under "Report on Repricing of
Options."
(4) Represents options to purchase 150,000 shares of the Company's common
stock granted outside of any benefit plan to Olney Telecom, Inc. on
December 12, 1994, as compensation for its services as an independent
contractor. Mr. Scully, the sole owner of Olney Telecom, may be deemed
to be the beneficial owner of such options and underlying shares.
(5) Represents the fair market value on April 27, 1995 ($.75 per share) of
50,000 shares of the Company's common stock awarded to Mr. Schultz as
compensation for his services as an executive officer of the Company.
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<PAGE>
Option Grants In Last Fiscal Year
The following table summarizes the number of options or warrants granted to
named officers during the year ended December 31, 1995. The Company did not
grant any stock appreciation rights in 1995.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Number of Shares of Percent of Total
Common Stock Options and Warrants
Underlying Options and Granted in Fiscal Exercise Expiration
Name Warrants Granted Year(1) Price Date
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aaron R. Brown 600,000(2) 21.93% $1.0625 5/11/2000
- ----------------------------------------------------------------------------------------------------
Stephen J. Parker 600,000(2) 21.93% $1.0625 5/11/2000
- ----------------------------------------------------------------------------------------------------
Mark Scully 850,000(3) 31.07% $0.750 5/01/2000
- ----------------------------------------------------------------------------------------------------
Ward G. Schultz 100,000(4) 3.66% $1.00 4/27/2005
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon options to purchase a total of 1,535,500 shares granted to all
officers and employees of the Company in 1995 under the 1993 Executive
Stock Option Plan and 1992 Employee Compensation Stock Option Plan and
warrants to purchase a total of 1,200,000 shares granted to executive
officers of the Company in 1995. The Company also granted options to
purchase a total of 850,000 shares of the Company's common stock in 1995
to persons not officers or directors of the Company. Such options have
not been included in the number of total options for purposes of this
calculation.
(2) Represents warrants to purchase 600,000 shares of the Company's common
stock granted to Messrs. Brown and Parker in consideration of their
limited personal guarantees in connection with the Company's revolving
credit facility (See "Certain Relationships and Related Transactions").
(3) Represents options to purchase the Company's common stock awarded to Mr.
Scully under the 1993 Executive Stock Option Plan on May 1, 1995.
(4) Represents options to purchase the Company's common stock awarded to Mr.
Schultz under the 1993 Executive Stock Option Plan on April 27, 1995.
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End
Option Values
The following table summarizes the number and value of unexercised options
held by the named officers as of December 31, 1995. No named officer
exercised any options in 1995.
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Number of Number of Shares of Common
Shares Stock Value of Unexercised
Acquired on Value Underlying Unexercised Options In-The-Money Options
Exercise Realized or Warrants at Fiscal Year-End at Fiscal Year-End(1)
---------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME # # $ $
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aaron R. Brown -0- N/A 720,000(2) 480,000(3) none none
- ----------------------------------------------------------------------------------------------------------------
Stephen J. Parker -0- N/A 720,000(2) 480,000(3) none none
- ----------------------------------------------------------------------------------------------------------------
Mark Scully -0- N/A 400,000(4) 600,000(5) 31,250 75,000
- ----------------------------------------------------------------------------------------------------------------
Ward G. Schultz -0- N/A 80,000(6) 220,000(7) None None
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon a market price of the Company's common stock on December 29,
1995 of $.875 per share (last trading day in December 1995).
(2) Includes options to purchase 120,000 shares of common stock issued on
9/1/93 under the Company's 1993 Executive Stock Option Plan (the
"Executive Plan") at an exercise price of $1.375 per share and warrants
to purchase 600,000 shares of the Company's Common Stock issued on May
11, 1995 at $1.0625 per share (See "Certain Relationships and Related
Transactions").
(3) Includes options to purchase 300,000 shares of the Company's common
stock issued on September 1, 1993 that will vest upon the attainment of
certain performance goals and will be exercisable at a price equal to
110% of the greater of (i) the fair market value of the Company's common
stock on September 1, 1993 or (ii) the fair market value of the
Company's common stock on the date the option vests and options to
purchase 180,000 shares of common stock issued on September 1, 1993
under the Company's Executive Plan at a price of $1.375 per share.
Using an assumed exercise price of $1.375 per share of the performance-
based options (110% of the fair market value of the Company's common
stock on the date of grant, September 1, 1993) none of the options were
"in- the-money" on December 31, 1995.
(4) Includes options to purchase 150,000 shares of common stock granted to
Olney Telecom, Inc., a company of which Mr. Scully is the sole owner,
outside of any formal benefit plan as compensation for its services on
December 19, 1994 at an exercise price of $1.00 per share and options to
purchase 250,000 shares of common stock granted to Mr. Scully under the
Executive Plan on May 1, 1995 at an exercise price of $.75 per share.
(5) Represents options to purchase shares of common stock granted under the
Executive Plan on May 1, 1995 with an exercise price of $.75 per shares.
(6) Includes options to purchase 50,000 shares of common stock granted under
the 1992 Employee Compensation Stock Option Plan on August 5, 1994 at an
exercise price of $1.53 per share, and options to purchase 30,000 shares
of common stock granted under the Executive Plan on August 5, 1994 at an
exercise price of $1.53 per share.
(7) Includes options to purchase 120,000 shares of common stock granted
under the Executive Plan on August 5, 1994 at an exercise price of $1.53
per share and options to purchase 100,000 shares of common stock granted
under the Executive Plan on April 27, 1995 at an exercise price of $1.00
per share.
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Compensation of Directors
Directors who also serve as salaried employees of the Company do not receive
any fees or salaries in addition to their compensation as employees. No
compensation was paid to non-employee directors during 1995 for their
services as directors.
Employment Agreements
Each of Mr. Brown and Mr. Parker have a seven year employment agreement
terminating December 31, 2000, which is automatically renewable for an
additional five years unless either party provides written notice of non-
renewal no later than thirty (30) days prior to the expiration of the initial
term. The contract provides for an annual base salary of not less than
$165,000 subject to annual cost of living increases as measured by the growth
in the Consumer Price Index--Urban Consumer, All Items, U.S. Cities' Average.
Upon the death of the employee, the Company is obligated to pay his
beneficiary his annual salary in effect at the time of his death for the
remainder of the term of the agreement.
Mr. Brown's Employment Agreement provides that Mr. Brown may not be
terminated by the Company except in the case where Mr. Brown: (i) has
materially failed to perform or observe any of the terms and provisions of
his Employment Agreement (after reasonable notice has been given and Mr.
Brown has had an opportunity to cure such failure); (ii) has engaged in gross
misconduct relating to the Company; (iii) has been convicted of a felony;
(iv) has misappropriated funds, or (v) has undertaken deliberate and
premeditated acts against the interests of the Company.
Mr. Parker's Employment Agreement provides that Mr. Parker may not be
terminated by the Company except for the conviction of a felony.
Any costs of legal counsel engaged by Messrs. Brown or Parker relating to the
Company's failure to comply with the terms of the Employment Agreement will
be paid by the Company.
Report on Repricing of Options
On May 11, 1995, the Company entered into a Loan and Security Agreement with
Century Business Credit Corporation ("Century") for a revolving credit
facility of $2,000,000. The loan is for a period of two years and is
automatically renewable for two successive years. On April 27, 1995 the
Company issued 500,000 shares of restricted common stock to each of Aaron R.
Brown and Stephen J. Parker in consideration for their limited personal
guarantee given to Century equal to 25% of the indebtedness incurred with
Century. In connection with this transaction, each of Messrs. Brown and
Parker terminated 420,000 stock options issued under the Company's 1993
Executive Stock Option Plan. After review of the transaction by a Special
Committee consisting of Kenneth J. Adelberg, a former director of the
Company, the issuance of the restricted stock and cancellation of stock
options was rescinded. In its place, Messrs. Brown and Parker were each
issued 600,000 warrants to purchase the common stock of the Company in
consideration for their limited personal guarantees. Each warrant issued in
the transaction entitles the holder to purchase one share of common stock of
the Company at a price of $1.0625 per share until May 11, 2000. The warrants
are non-transferable by the officers and the stock issuable upon exercise of
the warrants is restricted stock under the federal securities laws.
The warrants were issued in the place of (i) the issuance of 500,000 shares
of the Company's restricted common stock on April 27, 1995 (fair market value
of $0.75 per share on April 27, 1995) and (ii) the cancellation by each of
Messrs. Brown and Parker of options to purchase 420,000 shares of common
stock granted under the Company's 1993 Executive Stock Option Plan as
follows: (a) options to purchase 120,000 shares granted September 1, 1993 at
an exercise price of $1.375 per share and expiring September 1, 1998; (b)
options to purchase 30,000 shares granted September 1, 1993, vesting upon the
10
<PAGE>
attainment of quarterly sales volume of $9 million and quarterly net income
after taxes of $270,000 and expiring September 1, 1998; (c) options to
purchase 30,000 shares granted on September 1, 1993, vesting upon the
attainment of quarterly sales volume of $12.5 million and quarterly net
income after taxes of $500,000; (d) options to purchase 90,000 shares granted
on September 1, 1993, vesting upon the attainment of quarterly sales volume
of $25 million and quarterly net income after taxes of $1.25 million and
expiring September 1, 1998; (e) options to purchase 75,000 shares granted on
September 1, 1993, vesting upon the attainment of quarterly sales volume of
$40 million and quarterly net income after taxes of $2 million and expiring
September 1, 1998; and (f) options to purchase 75,000 shares granted on
September 1, 1993, vesting upon the attainment of quarterly sales volume of
$60 million and quarterly net income after taxes of $3 million and expiring
September 1, 1998.
The rescission of the transaction involving the issuance of restricted common
stock and the cancellation of options was undertaken after the receipt of a
fairness opinion (the "Fairness Opinion") from Howard, Lawson & Co. dated
June 20, 1995 concerning the issuance of the warrants to Messrs. Brown and
Parker. The Fairness Opinion was prepared at the request of a Special
Committee appointed by the Board of Directors, which consisted of Kenneth J.
Adelberg, a former director of the Company. The Fairness Opinion provided
that the issuance of the 600,000 warrants to Messrs. Brown and Parker was
fair to the shareholders of the Company (other than Messrs. Brown and Parker)
from a financial point of view.
Submitted by the Board of Directors
Aaron R. Brown, Stephen J. Parker and Murray Goldberg
APPROVAL OF THE AMENDED AND RESTATED STOCK OPTION PLAN
(MERGER AND RESTATEMENT OF 1993 EXECUTIVE STOCK OPTION PLAN
AND 1992 EMPLOYEE COMPENSATION STOCK OPTION PLAN)
(PROPOSAL NO. 2)
On August 13, 1996, the Board of Directors adopted, subject to the approval
of the shareholders, the Company's Stock Option Plan (the "Amended and
Restated Plan"), which merged and restated the Company's two existing stock
option plans: the 1993 Executive Stock Option Plan (the "Executive Plan")
and the 1992 Employee Compensation Stock Option Plan (the "Employee Plan").
The purpose of the Amended and Restated Plan is (i) to amend certain
provisions of the Employee Plan and the Executive Plan in the Amended and
Restated Plan (a) to comply with the California Corporations Code, as
described below, so that the Company may issue options under the Amended and
Restated Plan to its current and future employees who are residents of
California and (b) to comply with Rule 16b-3 under the Securities Exchange
Act of 1934 (the "Exchange Act"), (ii) to standardize and make uniform the
two existing plans of the Company, (iii) to combine them into one plan for
ease of administration. Options which were granted under the Executive and
Employee Plans prior to August 13, 1996, and which are outstanding on that
date, remain unchanged subject to the terms of those plans as in effect prior
to August 13, 1996.
Options granted under the Amended and Restated Plan are designated either as
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Code or "non-qualified stock options" ("NQSOs") within the meaning of that
section. Options granted under the Executive Plan were intended to be "ISOs"
and Options granted under the Employee Plan were intended to be "NQSOs".
Based upon the closing price for the Company's common stock on November 8,
1996 ($1.22) the aggregate market value of the 470,500 shares reserved under
the Amended and Restated Plan (3,500,000 original shares reserved, reduced
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<PAGE>
for the Executive Plan by 30,000 shares issued upon exercise of options and
2,540,000 shares reserved for issuance upon the exercise of options granted,
reduced for the Employee Plan by 62,100 shares issued upon exercise of
options and 207,400 shares reserved for issuance upon the exercise of options
granted and reduced for the Amended and Restated Plan by 175,000 ISOs and
15,000 NQSOs reserved for issuance upon exercise of options granted after
August 13, 1996) is $574,010.
To date, the Company has awarded 3,029,500 options under the Executive,
Employee and Amended and Restated Plans, 2,937,400 of which are still subject
to option and 92,100 of which have been exercised for shares of common stock.
The full text of the Amended and Restated Plan is set forth as Exhibit A to
this proxy statement, and the following summary is qualified in its entirety
by reference to Exhibit A.
SUMMARY OF AMENDED AND RESTATED PLAN
Number of Shares
ISOs
Options to purchase a maximum of 3,000,000 shares of common stock
of the Company, reduced by the number of shares of common stock issued
under options granted under the Executive Plan prior to August 13, 1996,
and under the Amended and Restated Plan after August 13, 1996, may be
granted as ISOs under the Amended and Restated Plan. As of November 8,
1996, 175,000 ISOs were granted and subject to option under the Amended
and Restated Plan. As of November 8, 1996, a total of 2,540,000 options
were granted and subject to option under the Executive Plan and a total
of 30,000 options had been exercised under such plan. Options that are
granted but expire or otherwise terminate are available for reissuance
under the plan. Under the Executive Plan, options to purchase a maximum
of 3,000,000 shares were authorized.
NQSOs
Options to purchase a maximum of 500,000 shares of common stock of
the Company, reduced by the number of shares of common stock issued
under options granted under the Employee Plan prior to August 13, 1996,
and under the Amended and Restated Plan after August 13, 1996, may be
granted as NQSOs under the Amended and Restated Plan. As of
November 8, 1996, 15,000 NQSOs were granted and subject to option under
the Amended and Restated Plan. As of November 8, 1996, a total of
207,400 options were granted and subject to option under the Employee
Plan and a total of 62,100 options had been exercised under such plan.
Options that are granted but expire or otherwise terminate are available
for reissuance under the plan. Under the Employee Plan, options to
purchase a maximum of 500,000 shares were authorized.
Administration
The Amended and Restated Plan may be administered by a committee
(the "Committee") which consists of two or more non-employee directors
(within the meaning of Rule 16b-3(b)(3) under the Exchange Act) who are
appointed by the Company's Board of Directors (the "Board") or,
alternatively, by the full Board. The Amended and Restated Plan
initially will be administered by the full Board and the term
"Committee" as used hereinafter, shall refer to the full Board. As
under the Employee and Executive Plans, the Committee will consist of
directors who are involved with the management of the Company. Such
Committee members are eligible to receive option grants while serving on
the Committee.
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<PAGE>
Under the Amended and Restated Plan, the Committee is responsible
for the operation of the Amended and Restated Plan, and it selects the
officers, executives, managerial employees and consultants of the
Company to be granted options. The interpretation and construction of
any provision of the Amended and Restated Plan by the Committee is
final. No member of the Board or Committee shall be liable for any
action or determination made by him in good faith. Under the Employee
Plan, the committee administering the Plan made recommendations to the
Board with respect to the participation in the Plans by officers,
executives, managerial employees and consultants of the Company. The
Executive Plan provided that the Board might appoint a Stock Option
Committee to administer the Plan.
Eligibility
Officers, executives and managerial employees of the Company or a
subsidiary ("Key Employees") and consultants of the Company or a
subsidiary who are not officers or employees of the Company
("Consultants") are eligible to receive options under the Amended and
Restated Plan. Key Employees are eligible to receive either ISOs or
NQSOs under the Amended and Restated Plan; however, Consultants may only
receive NQSOs. Under the Amended and Restated Plan, grants of ISOs and
NQSOs must be separate, and not in tandem. Employees and consultants of
the Company (including directors and officers) were eligible to receive
options under the Employee Plan. The Executive Plan allowed for grants
of options to corporate officers, executives and managerial employees of
the principal operations, sales and administrative departments of the
Company and its subsidiaries.
Option Price
ISOs
As in the Executive Plan, the option exercise price of an ISO is
determined and fixed by the Committee in its discretion at the time of
grant, but may not be less 100% (110% in the case of an ISO granted to a
more than 10% shareholder (as described below)) of the fair market value
of the optioned shares of common stock on the date the option is
granted.
NQSOs
As in the Employee Plan, the option exercise price of an NQSO is
determined and fixed by the Committee in its discretion at the time of
grant. In the case of NQSOs granted to an optionee who is a resident of
the State of California, however, the option exercise price may not be
less than 85% (110% in the case of an NQSO granted to a more than 10%
shareholder (as described below)) of the fair market value of the
optioned shares of common stock on the date the NQSO is granted. The
provision regarding California residents was not present in the Employee
Plan.
In the case of any ISO granted under the Amended and Restated Plan and in the
case of an NQSO which is granted to an optionee who is a resident of the
State of California, if the optionee owns more than 10% of the total combined
voting power of all classes of stock of the Company or of a subsidiary or
parent at the time the option is granted to such optionee, the option
exercise price for such option shall be not less than 110% of the fair market
value of the optioned shares of common stock on the date such option is
granted. In addition, such option shall not be exercisable after the
expiration of five years from the date it is granted. As mentioned above,
the California resident provisions were not present in the Employee or
Executive Plans.
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<PAGE>
Annual Limit for ISOs
The aggregate fair market value of the common stock with respect to
which ISOs become exercisable for the first time by an optionee under
all plans during any calendar year may not exceed $100,000. To the
extent the fair market value of such options exceeds $100,000, such
options will be treated as NQSOs. This provision was also present in
the Executive Plan.
Option Period
ISOs
Subject to earlier termination, the term of each ISO is not more
than 10 years (or 5 years in the case of a more than 10% shareholder)
from the date of grant. The Executive Plan contained the same term
provisions, with the differences in early termination provisions
outlined below.
NQSOs
Subject to earlier termination, the term of each NQSO is not more
than 10 years from the date of grant (or 5 years in the case of an NQSO
granted to a California resident who is also a more than 10%
shareholder). The Employee Plan provided for a 5 year exercise period.
Exercise Upon Termination of Employment or Service
If an optionee's employment by or service with the Company and
subsidiaries terminates for any reason other than death, disability or
"Cause" (as defined in the Amended and Restated Plan) prior to the
expiration date of his or her option, such option may be exercised, to
the extent the option was exercisable on the date of termination (or to
a greater extent if authorized by the Committee) at any time prior to
the earlier of the expiration date specified in such option, or an
accelerated expiration date determined by the Committee, in its
discretion, and set forth in the option agreement, except that such
accelerated expiration date shall not be earlier than 30 days or later
than 90 days after the date of such termination of employment or
service. If an optionee becomes disabled during his or her employment
by or service with the Company and the subsidiaries and, before his or
her option expires, the optionee's employment by or service with the
Company is terminated because of the disability, then such option may be
exercised to the extent the option was exercisable on the date of such
termination (or to any greater extent permitted by the Committee) by the
optionee at any time before the earlier of the expiration date of the
option or one year after the date of termination. If an optionee's
employment by or service with the Company and subsidiaries terminates
for Cause prior to the expiration date of his or her option, such option
shall terminate immediately.
Under the Employee Plan, options terminated immediately upon
termination of employment or service for a reason other than death. The
Executive Plan provided for exercise of unexpired options for a period
of 3 months after termination only in the case of "Authorized
Retirement" (which included disability).
Exercise After Death of Optionee
If an optionee's employment terminates by reason of the optionee's
death before the expiration date fixed for his or her option, or if an
optionee whose employment is terminated for any reason dies following
his or her termination of employment but before the earlier of the
expiration date fixed for his or her option or the expiration of the
period determined under the provisions described above regarding
termination of employment, the option may be exercised to the extent to
14
<PAGE>
which it was exercisable on the date of death (or to any greater extent
permitted by the Committee) by the optionee's estate, personal
representative or beneficiary who acquired the right to exercise such
option by bequest or inheritance or by reason of the death of the
optionee, at any time before the earlier of the expiration date
specified in such option or one year after the date of death. The
Executive Plan provided for exercise of unexpired options after death
for up to six months. The Employee Plan provided for exercise after
death of outstanding options to the extent exercisable by the optionee
on the date of death at any time before the earlier of the expiration
date specified in such option or 90 days after the date of death.
Adjustment
The number of shares of common stock that may be issued under the
Amended and Restated Plan, and the number of shares of common stock issuable
upon the exercise of outstanding options under the Amended and Restated Plan
(as well as the option exercise price per share under such outstanding
options), shall be adjusted to reflect any stock dividend, stock split, share
combination, or similar change in the capitalization of the Company. The
Executive and Employee Plans contained provisions substantially similar to
the provision in the Amended and Restated Plan.
In the event of a "Corporate Transaction" (as described in Section
424(a) of the Code, and including, for example, a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation
of the Company) each option outstanding under the Amended and Restated Plan
will be assumed by the surviving or successor company. The Committee also
has the discretion to accelerate the date such options become exercisable,
and to change the terms of any outstanding options to reflect any such
Corporate Transaction (subject to certain limitations under the Code).
The Executive Plan provided the option agreement could contain such
provisions as the Board approved as equitable concerning the effect upon such
option and upon the per share or per unit option price, of proposals to merge
or consolidate the Company or to sell all or substantially all of its assets,
or to liquidate or dissolve the Company. The Employee Plan provided that, if
the Company was the surviving corporation in any merger or consolidation, any
outstanding options were to pertain, apply, and relate to the securities to
which a holder of the number of shares of common stock subject to the option
would have been entitled after the merger or consolidation. Upon dissolution
or liquidation of the Company, or upon a merger or consolidation in which the
Company was not the surviving corporation, each option outstanding under the
Plan was to be terminated; provided, however, that each such option was to
remain exercisable, to the extent such option was otherwise exercisable under
the terms of the Employee Plan, until such termination.
Exercise Of Options
Subject to certain exceptions set forth below, options granted under the
Amended and Restated Plan are exercisable in such installments and on such
dates as the Committee may specify. In the case of options granted to
optionees resident in the State of California, such options are exercisable
at the rate of at least 20% per year over five years from the date of grant.
In the case of new options granted in replacement for options (whether
granted under the Amended and Restated Plan or otherwise) held by an
optionee, the new options may be made exercisable, if so determined by the
Committee, in its discretion, at the earliest date the replaced options were
exercisable. The Committee may accelerate the exercise date of any
outstanding options granted to an optionee in its discretion, if it deems
such acceleration to be desirable. However, with respect to an optionee who
is a California resident, acceleration is permitted only if the optionee is
an officer, director or consultant.
Any shares of common stock, the right to the purchase of which has
accrued under an option, may be purchased at any time up to the expiration or
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<PAGE>
termination of the option. Exercisable options may be exercised, in whole or
in part, from time to time by giving written notice of exercise to the
Company at its principal office, specifying the number of shares of common
stock to be purchased and accompanied by payment in full of the aggregate
option exercise price for such shares. Only full shares are issued under the
Amended and Restated Plan, and any fractional shares otherwise issuable are
forfeited.
The option price of an option is payable in cash or its equivalent or in
the common stock of the Company.
The Executive and Employee Plans contained provisions concerning
exercise substantially similar to those in the Amended and Restated Plan,
except no provisions regarding options granted to residents of California
were contained therein, and they provided for payment in cash only.
As in the Executive and Employee Plans, an optionee has no rights as a
shareholder with respect to any shares of common stock covered by his or her
option until the issuance of a stock certificate to him or her for such
shares.
Holding Period Requirements
In the case of an option which is an ISO, the option agreement shall
provide that shares of common stock acquired by the Key Employee upon
exercise of the ISO may not be disposed of (1) within two years after the ISO
is granted or (2) within one year after the shares of common stock are
transferred to the Key Employee. This holding period requirement shall not
apply in the case of an ISO exercised in accordance with the Amended and
Restated Plan after the Key Employee's death. The Executive Plan contained a
provision regarding holding period requirements substantially similar to the
provision in the Amended and Restated Plan.
* * * *
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<PAGE>
- -------------------------------------------------------------------------------
NEW PLAN BENEFITS
- -------------------------------------------------------------------------------
Amended and Restated Stock Option Plan
- -------------------------------------------------------------------------------
No. Shares
Name and Underlying Exercise Market Expiration
Position Options Grant Date Price Value(1) Date
===============================================================================
Aaron R. Brown 300,000(2) 9/1/93 $1.375 (24) 9/1/98
Director, Chief 30,000(3) 9/1/93 (8) (9) 9/1/98
Executive 30,000(4) 9/1/93 (8) (9) 9/1/98
Officer and 90,000(5) 9/1/93 (8) (9) 9/1/98
Treasurer 75,000(6) 9/1/93 (8) (9) 9/1/98
75,000(7) 9/1/93 (8) (9) 9/1/98
-------
600,000
=======
- -------------------------------------------------------------------------------
Stephen J. 300,000(2) 9/1/93 $1.375 (24) 9/1/98
Parker 30,000(3) 9/1/93 (8) (9) 9/1/98
Chairman, Chief 30,000(4) 9/1/93 (8) (9) 9/1/98
Operating 90,000(5) 9/1/93 (8) (9) 9/1/98
Officer and 75,000(6) 9/1/93 (8) (9) 9/1/98
Secretary 75,000(7) 9/1/93 (8) (9) 9/1/98
-------
600,000
=======
- -------------------------------------------------------------------------------
Mark Scully 850,000(10) 5/1/95 $0.750 $399,500 5/2/2005
President
- -------------------------------------------------------------------------------
Ward G. Schultz 50,000(11) 8/5/94 $1.530 (24) 8/6/99
Chief Financial 150,000(12) 8/5/94 $1.530 8/6/2005
Officer 100,000(13) 8/5/94 $1.000 8/6/2005
-------
300,000
=======
- -------------------------------------------------------------------------------
All Executive 2,350,000 (20) (20) (20) (20)
Officers as a
group(23)
- -------------------------------------------------------------------------------
All Employees 40,000(14) 9/12/95 $1.88 (24) 9/13/2000
as a Group, 10,000(15) 9/12/95 1.875 (24) 9/13/2000
excluding 31,900(16) 8/5/94 1.530 (24) 8/6/99
Executive 50,000(17) 6/26/96 1.3125 (24) 6/26/06
Officers 33,500(18) 8/30/93 1.250 (24) 8/31/98
25,000(19) 9/3/96 1.250 (24) 9/03/06
165,000(20) 8/19/96 1.34375 (24) 8/19/01
82,500(21) 1/23/95 1.00 $18,150 1/24/2000
150,000(22) 1/23/95 1.00 $33,000 1/24/2000
------- -------
587,900 $51,150
======= =======
- -------------------------------------------------------------------------------
(1) The market value shown in this column was computed by multiplying the
number of shares times the difference between the market price of the
Company's common stock at November 8, 1996 ($1.22) and the exercise
price.
(2) Represents options originally issued under the Executive Plan. 40% of
such options are currently exercisable, 20% of such options become
exercisable on September 1, 1996 and an additional 20% become
exercisable on each of the fourth and fifth anniversaries of the grant
date.
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<PAGE>
(3) Represents options originally issued under the Executive Plan. The
options granted will vest upon the attainment of quarterly sales volume
of $9,000,000 and quarterly net income after taxes of $270,000.
(4) Represents options originally issued under the Executive Plan. The
options granted will vest upon the attainment of quarterly sales volume
of $12,500,000 and quarterly net income after taxes of $500,000.
(5) Represents options originally issued under the Executive Plan. The
options granted will vest upon the attainment of quarterly sales volume
of $25,000,000 and quarterly net income after taxes of $1,250,000.
(6) Represents options originally issued under the Executive Plan. The
options granted will vest upon the attainment of quarterly sales volume
of $40,000,000 and quarterly net income after taxes of $2,000,000.
(7) Represents options originally issued under the Executive Plan. The
options granted will vest upon the attainment of quarterly sales volume
of $60,000,000 and quarterly net income after taxes of $3,000,000.
(8) Since Messrs. Brown and Parker own over 10% of the voting securities of
the Company, the option exercise price will be equal to 110% of the
greater of (i) the fair market value of the Company's common stock on
September 1, 1993, the date the options were granted, or (ii) the fair
market value of the Company's common stock on the date on which such
options vest.
(9) The market value of the options is not ascertainable until vesting
occurs. At vesting, the exercise price of the options will be set in
accordance with footnote (8), above. Assuming the exercise price was
$1.375 (110% of fair market value of a share on the grant date) no
market value has been attributed to such stock options since the assumed
exercise price is higher than the closing price of the Company's common
stock on November 8, 1996 ($1.22).
(10) Represents options originally issued under the Executive Plan. 750,000
of such options are currently exercisable and an additional 200,000
options become exercisable on May 1, 1997.
(11) Represents options originally issued under the Employee Plan, all of
which are currently exercisable.
(12) Represents options originally issued under the Executive Plan. 40% of
such options are currently exercisable and an additional 20% become
exercisable on each of the third, fourth and fifth anniversaries of the
grant date.
(13) Represents options originally issued under the Executive Plan. 20% of
such options are currently exercisable and an additional 20% become
exercisable on each of the second, third, fourth and fifth anniversaries
of the grant date.
(14) Consists of options granted to one employee under the Executive Plan.
(15) Consists of options granted to one employee under the Employee Plan.
(16) Consists of options granted to 15 employees under the Employee Plan.
(17) Consists of options granted to one employee under the Executive Plan.
18
<PAGE>
(18) Consists of options granted to 15 employees under the Employee Plan.
(19) Consists of 25,000 ISOs granted to Mr. Crawley under the Amended and
Restated Plan, which represents 14.3% of all ISOs issued after August
13, 1996 under the Amended and Restated Plan (.92% of all ISOs issued to
date under all of the Plans).
(20) Consists of (i) 15,000 non-qualified stock options granted to Mr.
McAnulty under the Amended and Restated Plan, which represents 7.9% of
all options issued after August 13, 1996 under the Amended and Restated
Plan (3.7% of all NQSOs issued to date under all of the Plans) and (ii)
150,000 ISOs granted to Mr. Story, which represents 78.9% of all ISOs
issued after August 13, 1996 under the Amended and Restated Plan (5.5%
of all ISOs issued under all of the Plans).
(21) Consists of options granted to 32 employees under the Employee Plan.
One such employee, Mr. Dement, received a grant of 50,000 options, which
represents 24.1% of the total options currently outstanding under the
Employee Plan.
(22) Consists of options granted to two employees under the Executive Plan.
(23) The terms of such options have been set forth above in this table under
each executive officer's individual name.
(24) No market value has been attributed to such stock options since the
prices at which the options may be exercised are higher than the closing
price of the Company's common stock on November 8, 1996 ($1.22).
In addition, on August 15, 1995, the Board of Directors made a one-time
grant of non-qualified stock options outside of the Company's stock option
plans to one employee of the Company, Michael Scheele, subject to the
approval of the shareholders. Mr. Scheele was granted options to purchase
150,000 shares of Common Stock with an exercise price of $1.50 per share.
The options are exercisable immediately and expire on August 14, 1997. Mr.
Scheele was granted the options as an incentive for his continued employment
with the Company. The options granted to Mr. Scheele are designated NQSOs
and have the tax consequences for NQSOs described below. A vote "FOR" the
Amended and Restated Plan will approve both the Amended and Restated Plan and
the one-time stock option grant to Mr. Scheele described in this paragraph.
FEDERAL INCOME TAX CONSEQUENCES
ISOs
"Incentive stock options" ("ISOs") may be awarded under the Amended and
Restated Plan. The maximum number of ISOs that may be awarded is 3,000,000
reduced by 175,000 ISOs already granted and subject to option under the
Amended and Restated Plan and the number of shares issued under options
granted pursuant to the Executive Plan prior to August 13, 1996. As of
November 8, 1996, a total of 2,540,000 options were granted and subject to
option under the Executive Plan and a total of 30,000 options had been
exercised under such plan. Options that are granted but expire or otherwise
terminate are available for reissuance under the plan.
Based on the advice of counsel, the Company believes that the normal
operation of the Amended and Restated Plan with respect to such ISO shares
should generally have, under the Code and the regulations and rulings
thereunder, all in effect on November 8, 1996, the principal federal income
tax consequences described below.
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<PAGE>
(i) The optionee will not recognize taxable income upon the grant of
an ISO.
(ii) Unless he is subject to the alternative minimum tax, the optionee
will not recognize taxable income, and the Company will not be
entitled to a deduction, upon the exercise by the optionee of an
ISO, provided the optionee was an employee of the Company for not
less than the entire period from the date of grant of the ISO
until three months before the date of exercise, increased to
twelve months if employment ceased due to total and permanent
disability and inapplicable in the event of the optionee's death.
The option must in all events be exercised before its stated term
expires. If the employment requirements are not met, the tax
consequences relating to NQSOs as discussed below will apply.
(iii) If the optionee disposes of the shares acquired under an ISO
after at least two years following the date of grant of the ISO
and at least one year following the date of transfer of the
shares to the optionee following exercise of the ISO, the
optionee will recognize a long-term capital gain (or loss) equal
to the difference between the amount realized upon the
disposition and the exercise price.
(iv) Except for certain transactions such as gifts and related party
transactions, if the optionee disposes of the shares within two
years after the date of grant of the ISO or within one year after
the transfer of the shares to the optionee, but all other
requirements of Section 422 of the Code are met, the optionee
will generally recognize ordinary income upon disposition of the
shares in an amount equal to the lesser of (a) the fair market
value of the shares on the date of transfer to the optionee minus
the exercise price or (b) the amount realized on disposition
minus the exercise price. Any additional gain will be treated as
short or long- term capital gain, depending on how long the
optionee held the shares. In the case of disqualifying
dispositions resulting from, for example, a gift or related party
transaction, the determination of the ordinary income realized by
the optionee will be equal to the fair market value of the shares
as of the date of transfer to the optionee minus the exercise
price.
(v) Where all requirements of Section 422 of the Code, including the
holding and employment requirements specified in paragraph (ii)
and (iii) above, are met, the Company is not entitled to any
federal income tax deduction with respect to the ISO. In those
cases where any of such requirements are not met, the Company
generally will be allowed a Federal income tax deduction to the
extent of the ordinary income includable in the optionee's gross
income in accordance with the provisions of Section 83 (and
Section 162(m), to the extent applicable) of the Code and the
regulations thereunder.
(vi) The Company will not recognize any gain or loss upon the issuance
of ISOs under the Amended and Restated Plan.
(vii) To the extent that an option granted under the Amended and
Restated Plan is treated as a nonqualified stock option because
the $100,000 limit described in "Annual Limit for ISOs" has been
exceeded, or for any other reason, the Federal income tax
consequences would be the same as those described below for NQSOs
with respect to the Amended and Restated Plan.
NQSOs
"Non-qualified stock options" ("NQSOs") may be awarded under the Amended and
Restated Plan. The maximum number of NQSOs which may be awarded is 500,000
reduced by 15,000 NQSOs already granted and subject to option under the
Amended and Restated Plan and the number of shares issued under options
granted pursuant to the Employee Plan prior to August 13, 1996. As of
November 8, 1996, a total of 207,400 options were granted and subject to
20
<PAGE>
option under the Employee Plan and a total of 62,100 options had been
exercised under such plan. Options that are granted but expire or otherwise
terminate are available for reissuance under the plan.
Based on the advice of counsel, the Company believes that the normal
operation of the Amended and Restated Plan with respect to such NQSO shares
should generally have, under the Code and the regulations and rulings
thereunder, all as in effect on November 8, 1996, the principal federal
income tax consequences described below.
(i) The optionee will not recognize taxable income and the Company
will not be entitled to a deduction upon the grant of an NQSO.
(ii) Generally, the optionee will recognize ordinary income at the
exercise of the NQSO, in an amount equal to the excess of the
fair market value of the shares at the time of such exercise over
the exercise price.
(iii) The Company will be entitled to a deduction to the extent of the
ordinary income recognized by the optionee in accordance with the
rules of Section 83 (and Section 162(m) to the extent applicable)
of the Code and the regulations thereunder.
(iv) Gain or loss recognized by the optionee upon a subsequent
disposition of such shares will be treated as short or long-term
capital gain, or loss, depending on how long the optionee held
the shares.
OTHER CONSIDERATIONS
The Amended and Restated Plan is not qualified under Section 401(a) of the
Code and, based upon current law and published interpretations, the Company
believes the Amended and Restated Plan is not subject to the provisions of
the Employee Retirement Income Security Act of 1974.
The comments set forth in the above paragraphs are only a summary of certain
of the federal income tax consequences relating to the Amended and Restated
Plan, as the Code was in effect at November 8, 1996. No consideration has
been given to the effects of state, local and other laws (tax or other) on
the Amended and Restated Plan or the optionee or grantee.
The present members of the Board of Directors and the Company's officers may
benefit from the approval of the Amended and Restated Plan to the extent that
they receive options under the Amended and Restated Plan. The Board of
Directors believes that the advantages of having qualified individuals serve
on the Board and as officers of the Company justify the benefit that may be
derived by these individuals.
APPROVAL BY SHAREHOLDERS
The Board of Directors believes that the proposal to approve the Amended and
Restated Stock Option Plan is in the best interest of the Company and its
shareholders and unanimously recommends a vote FOR approval of the Amended
and Restated Plan.
Approval of the Amended and Restated Plan requires the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock entitled
to vote thereon at the Annual Meeting. Abstentions or broker non-votes would
have the effect of a vote against the proposal.
21
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
AMENDED AND RESTATED STOCK OPTION PLAN
22
<PAGE>
RELATIONSHIP WITH INDEPENDENT PUBLIC AUDITORS
On January 12, 1996, the Company replaced Baratz & Associates, P.A. as the
principal accountant for the Company and its subsidiaries. The former
principal accountant's reports on the Company's financial statements for
either of the past two years have not contained an adverse opinion or a
disclaimer of opinion, nor have its opinions been qualified or modified as to
uncertainty, audit scope or accounting principles. The Company's decision to
replace its principal accountant was approved by the board of directors.
During the Company's two most recent fiscal years (January 1, 1993 to
December 31, 1993 and January 1, 1994 to December 31, 1994) and the
subsequent interim period preceding the Company's replacement of its
principal accountant, there were no disagreements with the former accountant
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of the former accountant, would have caused it
to make reference to the subject matter of the disagreement in connection
with its report. Rudolph, Palitz LLP was the Company's independent
accountant with respect to the consolidated financial statements of the
Company during the fiscal year ended December 31, 1995. A representative of
Rudolph Palitz is expected to be present at the Annual Meeting and will have
the opportunity to make a statement if he desires to do so. The
representative is also expected to be available to respond to appropriate
questions of shareholders.
OTHER MATTERS
The Board of Directors knows of no matters to be presented for action at the
Annual Meeting other than those set forth in the attached notice and
customary procedural matters. However, if other matters should properly come
before the Annual Meeting or any adjournments thereof, the proxies solicited
hereby will be voted on such matters, to the extent permitted by applicable
law, in accordance with the judgment of the persons voting such proxies.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers, and persons who own more than ten percent of
the Company's Common Stock ("10% Shareholders") to file reports of ownership
and reports of changes in ownership of the Company's Common Stock with the
Securities and Exchange Commission ("SEC"). Officers, directors and 10%
Shareholders are required by SEC regulation to furnish the Company with
copies of all forms they file under Section 16(a). Based solely on its
review of the copies of such forms received by it with respect of its fiscal
year ended December 31, 1995, the Company believes that all Section 16(a)
filing requirements applicable to its officers, directors and 10%
Shareholders were complied with except for one form filed late for one
transaction involving the sale of shares of common stock by Mr. Goldberg.
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Shareholders wishing to submit proposals for inclusion in the Board of
Director's proxy statement for the next Annual Meeting of Shareholders must
submit their proposals to be received by the Company no later than February
3, 1997.
23
<PAGE>
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 accompanies this Proxy Statement. THE COMPANY HAS ALSO FILED ITS
ANNUAL REPORT ON FORM 10-K WITH THE SECURITIES AND EXCHANGE COMMISSION.
SHAREHOLDERS WISHING TO RECEIVE A COPY OF DOCUMENTS INCORPORATED BY REFERENCE
IN THE COMPANY'S 1995 FORM 10-K, EXCEPT FOR THE EXHIBITS TO SUCH DOCUMENTS,
MAY RECEIVE THEM WITHOUT CHARGE BY WRITING TO AARON R. BROWN, CHIEF EXECUTIVE
OFFICER, US WATS, INC., 111 PRESIDENTIAL AVENUE, SUITE 114, BALA CYNWYD, PA
19004.
By Order of the Board of Directors,
Stephen J. Parker
Secretary
24
<PAGE>
US WATS, INC.
111 Presidential Boulevard, Suite 114
Bala Cynwyd, Pennsylvania 19004
PROXY -- Annual Meeting of Shareholders -- December 30, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Aaron R. Brown and Stephen J. Parker as
proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the Common Stock of
US WATS, INC. held of record by the undersigned on the close of business on
November 15, 1996 at the Annual Meeting of Shareholders to be held on
December 30, 1996 or at any adjournment thereof.
1. ELECTION OF DIRECTORS FOR all nominees listed WITHHOLD AUTHORITY
below (except as marked to vote for all nominees
to the contrary below) [ ] listed below [ ]
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
Aaron R. Brown
Stephen J. Parker
Murray J. Goldberg
2. PROPOSAL TO APPROVE THE AMENDED AND RESTATED STOCK OPTION PLAN AND ONE-
TIME GRANT OF NON-QUALIFIED STOCK OPTIONS OUTSIDE OF THE COMPANY'S STOCK
OPTION PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED, TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED IN FAVOR OF PROPOSAL NO. 1 AND 2, AND IN ACCORDANCE WITH THE
PROXIES' BEST JUDGMENT UPON OTHER MATTERS PROPERLY COMING BEFORE THE MEETING
AND ANY ADJOURNMENTS THEREOF.
When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
______________________________________________
Name(s) (Please Print)
______________________________________________
Signature
______________________________________________
Signature, if held jointly
______________________________________________
Date
Exhibit A
US WATS, INC.
STOCK OPTION PLAN
(As Amended and Restated Effective August 13, 1996)
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1 - Purpose....................................................... 1
SECTION 2 - Definitions................................................... 1
SECTION 3 - Administration................................................ 3
SECTION 4 - Eligibility................................................... 4
SECTION 5 - Stock......................................................... 5
SECTION 6 - Granting of Options........................................... 5
SECTION 7 - Annual Limit for ISOs......................................... 6
SECTION 8 - Terms and Conditions of Options............................... 6
SECTION 9 - Capital Adjustments........................................... 12
SECTION 10 - Financial Information........................................ 12
SECTION 11 - Amendment or Discontinuance of the Plan...................... 13
SECTION 12 - Termination of Plan.......................................... 13
SECTION 13 - Effective Date............................................... 14
SECTION 14 - Miscellaneous................................................ 14
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US WATS, INC.
STOCK OPTION PLAN
(As Amended and Restated Effective August 13, 1996)
SECTION 1
Purpose
-------
This US WATS, INC. STOCK OPTION PLAN ("Plan") is intended to provide a
means whereby US WATS, INC. ("Company") and any Subsidiary (as defined in
Section 2 hereof) of the Company may, through the grant of incentive stock
options and nonqualified stock options to Key Employees and Consultants (both
as defined in Section 2 hereof), attract and retain such Key Employees and
Consultants and motivate such individuals to exercise their best efforts on
behalf of the Company and of any Subsidiary.
The Plan, as amended and restated effective August 13, 1996, constitutes
a merger and amendment and restatement of the Prior Plans (as defined in
Section 2 hereof). Such merger and amendment and restatement shall not, in
and of itself, affect Prior Options (as defined in Section 2 hereof) which
are outstanding as of August 12, 1996.
SECTION 2
Definitions
-----------
For all purposes of the Plan, unless the context requires otherwise, the
following words and phrases shall have the meanings set forth below. In all
cases, the singular shall include the plural, and vice versa, and the
masculine shall include the feminine.
(a) "Board" means the Company's Board of Directors.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the administrator of the Plan, as described in
Section 3 hereof.
(d) "Common Share" means a share of the Company's $.001 par value
common stock.
(e) "Consultant" means any consultant of the Company or a Subsidiary
who is not an officer or employee thereof.
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(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(g) "Fair Market Value" means the value of a Common Share, which shall
be arrived at by a reasonable, good faith determination of the Committee and
shall be:
(1) The mean between the highest and lowest quoted selling price,
if there is a market for the Common Shares on a registered securities
exchange or on an over the counter market, on the date specified;
(2) The weighted average of the means between the highest and
lowest sales on the nearest date before and the nearest date after the
specified date, if there are no such sales on the specified date but there
are such sales on dates within a reasonable period both before and after the
specified date;
(3) The mean between the bid and asked prices, as reported by the
National Quotation Bureau on the specified date, if actual sales are not
available during a reasonable period beginning before and ending after the
specified date; or
(4) If Subparagraphs (1) through (3) above are not applicable,
such other method of determining fair market value as shall be authorized by
the Code, or the rules or regulations thereunder, and adopted by the
Committee.
Where the Fair Market Value of Common Shares is determined under
Subparagraph (2) above, the average of the means between the highest and
lowest sales on the nearest date before and the nearest date after the
specified date shall be weighted inversely by the respective numbers of
trading days between the dates of reported sales and the specified date
(i.e., the valuation date), in accordance with Treas. Reg. Section
20.2031-2(b)(1), or any successor thereto.
(h) "ISO" means an Option which qualifies as an incentive stock option
within the meaning of section 422 of the Code.
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(i) "Key Employee" means any executive or managerial employee of the
Company or a Subsidiary.
(j) "NQSO" means an Option which is a nonqualified stock option (i.e.,
an Option which does not qualify as an incentive stock option within the
meaning of section 422 of the Code).
(k) "Option" means any stock option granted to a Key Employee or
Consultant under Section 6 hereof.
(l) "Optionee" means any Key Employee or Consultant who has been
granted an Option.
(m) "Prior Option" shall mean an incentive stock option or a
nonqualified stock option granted under a Prior Plan.
(n) "Prior Plan" shall mean the Company's Employee Compensation Stock
Option Plan, adopted November 6, 1992, or the Company's 1993 Executive Stock
Option Plan, adopted August 30, 1993, in both cases, as in effect prior to
August 13, 1996.
(o) "Subsidiary" means any corporation (whether or not in existence at
the time the Plan is restated) which, at the time an Option is granted, is a
subsidiary of the Company under the definition of "subsidiary corporation"
contained in section 424(f) of the Code, or any successor thereto.
SECTION 3
Administration
--------------
The Plan shall be administered:
(a) By a committee, which shall consist of not fewer than two non-
employee directors (within the meaning of Rule 16b-3(b)(3) under the Exchange
Act, or any successor thereto) of the Company who shall be appointed by, and
shall serve at the pleasure of, the Board; or
(b) In the event a committee has not been established in accordance
with subsection (a) or cannot be constituted to vote on the grant of an
Option, by the entire Board.
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The administrator of the Plan shall hereinafter be referred to as the
"Committee." Each member of the Committee, while serving as such, shall be
deemed to be acting in his or her capacity as a director of the Company.
The Committee shall have full and final authority in its absolute
discretion, subject to the terms of the Plan, to select the Key Employees and
Consultants to be granted Options under the Plan, to grant Options on behalf
of the Company, and to set the date of grant and the other terms of such
Options; provided, however, that Consultants shall not be eligible to receive
ISOs under the Plan.
The Committee may correct any defect, supply any omission and reconcile
any inconsistency in the Plan and in any Option granted hereunder in the
manner and to the extent it shall deem desirable. The Committee also shall
have the authority to establish such rules and regulations, not inconsistent
with the provisions of the Plan, for the proper administration of the Plan,
and to amend, modify or rescind any such rules and regulations, and to make
such determinations and interpretations under, or in connection with, the
Plan, as it deems necessary or advisable. All such rules, regulations,
determinations and interpretations shall be binding and conclusive upon the
Company, its shareholders and all officers, employees, and consultants and
former officers, employees, and consultants, and upon their respective legal
representatives, beneficiaries, successors and assigns and upon all other
persons claiming under or through any of them.
No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Option
granted hereunder.
SECTION 4
Eligibility
-----------
Key Employees and Consultants shall be eligible to receive Options under
the Plan. Key Employees shall be eligible to receive ISOs and/or NQSOs.
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<PAGE>
Consultants shall be eligible to receive only NQSOs. More than one Option
may be granted to an Optionee under the Plan.
SECTION 5
Stock
-----
The number of Common Shares that may be subject to ISOs under the Plan
shall be 3,000,000, reduced by the number of Common Shares issued pursuant to
Prior Options granted under the Company's 1993 Executive Stock Option Plan;
the number of Common Shares that may be subject to NQSOs under the Plan shall
be 500,000, reduced by the number of Common Shares issued pursuant to Prior
Options granted under the Company's Employee Compensation Stock Option Plan.
However, both limits in the preceding sentence shall be subject to adjustment
as hereinafter provided. Common Shares issuable under the Plan may be
authorized but unissued shares or reacquired shares, as the Company may
determine from time to time.
Any Common Shares subject to an Option or a Prior Option which expires
or otherwise terminates for any reason whatever (including, without
limitation, the Key Employee or Consultant's surrender thereof) without
having been exercised shall continue to be available for the granting of
Options under the Plan.
SECTION 6
Granting of Options
-------------------
From time to time until the expiration or earlier suspension or
discontinuance of the Plan, the Committee may, on behalf of the Company,
grant to Key Employees and Consultants under the Plan such Options as it
determines are warranted, subject to the limitations of the Plan; provided,
however, that grants of ISOs and NQSOs shall be separate and not in tandem.
The granting of an Option under the Plan shall not be deemed either to
entitle the Optionee to, or to disqualify the Optionee from, any other
Options under the Plan. In making any determination as to whether a Key
Employee or Consultant shall be granted an Option, the type of Option to be
granted, and the number of Common Shares to be covered by the Option, the
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Committee shall take into account the duties of the Key Employee or
Consultant, his or her present and potential contributions to the success of
the Company or a Subsidiary, the tax implications to the Company and the Key
Employee or Consultant of any Options granted, and such other factors as the
Committee shall deem relevant in accomplishing the purposes of the Plan.
Moreover, the Committee may provide in the Option Agreement that the Option
may be exercised only if certain conditions, as determined by the Committee,
are fulfilled.
SECTION 7
Annual Limit for ISOs
---------------------
(a) Annual Limit. The aggregate Fair Market Value (determined as of the
date the ISO is granted) of the Common Shares with respect to which ISOs
become exercisable for the first time by a Key Employee during any calendar
year (under this Plan and any other incentive stock option plan of the
Company or any parent corporation (within the meaning of section 424(e) of
the Code ("Parent")) or Subsidiary) shall not exceed $100,000.
(b) Options Over Annual Limit. If an Option intended as an ISO is
granted to a Key Employee and such Option may not be treated in whole or in
part as an ISO pursuant to the limitation in Paragraph (a) above, such Option
shall be treated as an ISO to the extent it may be so treated under such
limitation and as an NQSO as to the remainder, but shall continue to be
subject to the provisions of the Plan that apply to ISOs. For purposes of
determining whether an ISO would cause such limitation to be exceeded, the
Key Employee's incentive stock options shall be taken into account in the
order granted.
(c) NQSOs. The annual limit set forth above for ISOs shall not apply to
NQSOs.
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<PAGE>
SECTION 8
Terms and Conditions of Options
-------------------------------
The Options granted pursuant to the Plan shall include expressly or by
reference the following terms and conditions, as well as such other
provisions not inconsistent with the provisions of this Plan as the Committee
shall deem desirable, and for ISOs granted under this Plan, the provisions of
section 422(b) of the Code:
(a) Number of Common Shares. The Option shall state the number of
Common Shares to which it pertains.
(b) Price.
(1) ISOs. The Option exercise price of an ISO shall be determined
and fixed by the Committee in its discretion at the time of grant, but shall
not be less than 100% (110% in the case of an ISO granted to a more than 10%
shareholder as provided in Paragraph (i) below) of the Fair Market Value of
the optioned Common Shares on the date the Option is granted.
(2) NQSOs. The Option exercise price of an NQSO shall be
determined and fixed by the Committee in its discretion at the time of grant;
provided that in the case of NQSOs granted to an Optionee who is a resident
of the State of California, the Option exercise price shall not be less than
85% (110% in the case of an NQSO granted to a more than 10% shareholder as
provided in Paragraph (i) below) of the Fair Market Value of the optioned
Common Shares on the date the NQSO is granted.
(c) Term.
(1) ISOs. Subject to earlier termination as provided in
Paragraphs (e), (f), and (g) below, the term of each ISO shall be not more
than 10 years (5 years in the case of a more than 10% shareholder as provided
in Paragraph (i) below) from the date of grant.
(2) NQSOs. Subject to earlier termination as provided in
Paragraphs (e), (f) and (g) below, the term of each NQSO shall be not more
than 10 years (five years in the case of an NQSO granted to a California
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resident who is also a more than 10% shareholder as provided in Paragraph (i)
below) from the date of grant.
(d) Exercisability and Purchase.
(1) Exercisability. Options granted under this Plan shall be
exercisable in such installments and on such dates as the Committee may
specify, provided that:
(A) In the case of Options granted to Optionees who are
residents of the State of California, such Options shall be exercisable at
the rate of at least 20% per year over five years from the date of grant;
(B) In the case of new Options granted in replacement for
options (whether granted under the Plan or otherwise) held by an Optionee,
the new Options may be made exercisable, if so determined by the Committee,
in its discretion, at the earliest date the replaced options were
exercisable; and
(C) The Committee may accelerate the exercise date of any
outstanding Options granted to an Optionee in its discretion, if it deems
such acceleration to be desirable. However, with respect to an Optionee who
is a California resident, acceleration is permitted only if the Optionee is
an officer, director or consultant.
(2) Purchase. Any Common Shares, the right to the purchase of
which has accrued, under an Option may be purchased at any time up to the
expiration or termination of the Option. Exercisable Options may be
exercised, in whole or in part, from time to time by giving written notice of
exercise to the Company at its principal office, specifying the number of
Common Shares to be purchased and accompanied by payment in full of the
aggregate Option exercise price for such shares. Only full shares shall be
issued under the Plan, and any fractional share which might otherwise be
issuable upon the exercise of an Option granted hereunder shall be forfeited.
The Option price shall be payable --
(A) In cash or its equivalent;
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(B) In the case of an ISO, if the Committee, in its
discretion, causes the Option Agreement so to provide and in the case of an
NQSO if the Committee, in its discretion, so determines at or prior to the
time of exercise, in Common Shares previously acquired by the Optionee,
provided that if such shares were acquired through the exercise of an
incentive stock option and are used to pay the Option exercise price of an
ISO, such shares have been held by the Optionee for a period of not less than
the holding period described in section 422(a)(1) of the Code on the date of
exercise, or if such Common Shares were acquired through exercise of a
nonqualified stock option and are used to pay the Option exercise price of an
NQSO, such shares have been held by the Optionee for a period of more than 12
months on the date of exercise; or
(C) In the discretion of the Committee, in any combination of
(A) and (B) above.
In the event such Option exercise price is paid, in whole or in
part, with Common Shares, the portion of the Option exercise price so paid
shall equal the Fair Market Value on the date of exercise of the Option of
the Common Shares surrendered in payment of such Option exercise price.
(e) Exercise Upon Termination of Employment or Service.
(1) General. If an Optionee's employment by or service with the
Company and Subsidiaries terminates for any reason other than death,
disability, or Cause (as described in Subparagraph (2) below) prior to the
expiration date fixed for his or her Option, such Option may be exercised, to
the extent of the number of Common Shares with respect to which the Optionee
could have exercised it on the date of such termination, or to any greater
extent permitted by the Committee, by the Optionee at any time prior to the
earlier of:
(A) The expiration date specified in such Option; or
(B) An accelerated termination date determined by the
Committee, in its discretion, and set forth in the Option Agreement;
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<PAGE>
except that such accelerated termination date shall not be earlier than 30
days or later than 90 days after the date of the Optionee's termination of
employment or service.
If an Optionee's employment by or service with the Company and
Subsidiaries terminates by reason of Cause prior to the expiration date fixed
for his or her Option, such Option shall terminate immediately.
(2) Cause. For purposes of this Paragraph (e), "Cause" shall
include any act of fraud or intentional misrepresentation, or embezzlement,
misappropriation, or conversion of assets or opportunities of the Company.
(f) Exercise upon Disability of Optionee. If an Optionee shall become
disabled (within the meaning of section 22(e)(3) of the Code) during his or
her employment by or service with the Company and Subsidiaries and, prior to
the expiration date fixed for his or her Option, his or her employment or
service is terminated as a consequence of such disability, such Option may be
exercised, to the extent of the number of shares with respect to which the
Optionee could have exercised it on the date of such termination, or to any
greater extent permitted by the Committee, by the Optionee at any time prior
to the earlier of:
(A) The expiration date specified in such Option; or
(B) One year after the date of such termination of employment
or service.
In the event of the Optionee's legal disability, such Option may be so
exercised by the Optionee's legal representative.
(g) Exercise after Death of Optionee. If an Optionee's employment
terminates by reason of the Optionee's death prior to the expiration date
fixed for his or her Option, or if an Optionee whose employment is terminated
for any reason shall die following his or her termination of employment but
prior to the earlier of:
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<PAGE>
(A) The expiration date fixed for his or her Option; or
(B) The expiration of the period determined under Paragraph
(e) or (f) above, such Option may be exercised to the extent of the number
of Common Shares with respect to which the Optionee could have exercised it
on the date of his or her death, or to any greater extent permitted by the
Committee, by the Optionee's estate, personal representative or beneficiary
who acquired the right to exercise such Option by bequest or inheritance or
by reason of the death of the Optionee, at any time prior to the earlier of:
(i) The expiration date specified in such Option; or
(ii) One year after the date of death.
(h) Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to any Common Shares covered by his or her Option
until the issuance of a stock certificate to him or her for such shares.
(i) Ten Percent Shareholder. In the case of any ISO granted under the
Plan and in the case of an NQSO which is granted to an Optionee who is a
resident of the State of California, if the Optionee owns more than 10% of
the total combined voting power of all classes of stock of the Company or of
a Subsidiary or Parent at the time the Option is granted to such Optionee,
the Option exercise price for such Option shall be not less than 110% of the
Fair Market Value of the optioned Common Shares on the date such Option is
granted. In addition, such Option shall not be exercisable after the
expiration of five years from the date it is granted.
(j) Option Agreements. Options granted under the Plan shall be
evidenced by written documents ("Option Agreements") in such form as the
Committee shall, from time to time, approve. Option Agreements shall contain
such provisions, not inconsistent with the provisions of the Plan, for NQSOs
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<PAGE>
granted pursuant to the Plan, and such conditions, not inconsistent with
section 422(b) of the Code or the provisions of the Plan, for ISOs granted
pursuant to the Plan, as the Committee shall deem advisable. An Option
Agree ment shall specify whether the Option is an ISO or NQSO; provided,
however, if the Option is not designated in the Option Agreement as an ISO or
NQSO, the Option shall constitute an ISO to the extent it complies with the
terms of section 422 of the Code, and otherwise, it shall constitute an NQSO.
Each Optionee shall enter into, and be bound by, the terms of an Option
Agreement.
(k) Holding Period Requirement. In the case of an Option which is an
ISO, the Option Agreement shall provide that Common Shares acquired by the
Key Employee upon exercise of the ISO may not be disposed of (1) within two
years after the ISO is granted or (2) within one year after the Common Shares
are transferred to the Key Employee. This holding period requirement shall
not apply in the case of an ISO exercised in accordance with Paragraph (g)
after the Key Employee's death.
SECTION 9
Capital Adjustments
-------------------
The number of Common Shares which may be issued under the Plan, the
maximum number of Common Shares with respect to which Options may be granted
to any Key Employee under the Plan, both as stated in Section 5 hereof, and
the number of Common Shares issuable upon the exercise of outstanding Options
under the Plan (as well as the Option exercise price per share under such
outstanding Options) shall, subject to the provisions of section 424(a) of
the Code, be adjusted to reflect any stock dividend, stock split, share
combination, or similar change in the capitalization of the Company.
In the event of a corporate transaction (as that term is described in
section 424(a) of the Code and the Treasury Regulations issued thereunder as,
for example, a merger, consolidation, acquisition of property or stock,
separation, reorganization, or liquidation), each outstanding Option shall be
assumed by the surviving or successor corporation. As provided in Section
8(d)(1)(C) hereof, the Committee, in its discretion, may accelerate, in whole
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<PAGE>
or in part, the date on which any outstanding Option becomes exercisable.
The Committee also may, in its discretion, change the terms of any
outstanding Option to reflect any such corporate transaction, provided that,
in the case of ISOs, such change is excluded from the definition of a
"modification" under section 424(h) of the Code.
SECTION 10
Financial Information
---------------------
With respect to Optionees (including Optionees who have already
exercised their Options or Prior Options) who are residents of the State of
California, the Company will comply with Section 240.140.46 of Title 10,
California Administrative Code, which requires the Company to deliver
financial statements at least annually to such Optionees.
SECTION 11
Amendment or Discontinuance of the Plan
---------------------------------------
(a) In General. The Board from time to time may suspend or discontinue
the Plan or amend it in any respect whatsoever, except that, without the
approval of the shareholders (given in the manner set forth in Paragraph (b)
below): (1) the class of persons eligible to receive Options shall not be
changed; (2) the maximum number of Common Shares with respect to which
Options may be granted under the Plan shall not be increased except as
permitted under Section 9 hereof; and (3) the duration of the Plan under
Section 12 hereof with respect to any Options granted hereunder shall not be
extended.
(b) Manner of Shareholder Approval. The approval of the Company's
shareholders must occur by a majority of all outstanding shares of voting
stock entitled to vote thereon.
Notwithstanding the foregoing, no such suspension, discontinuance or
amendment shall terminate or affect the continued existence of rights created
under Options granted and outstanding or materially impair the rights of any
holder of an outstanding Option without the consent of such holder.
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SECTION 12
Termination of Plan
-------------------
Unless earlier terminated as provided in the Plan, the Plan and all
authority granted hereunder shall terminate absolutely at 12:00 midnight on
August 28, 2003, which date is within 10 years after the date the 1993
Executive Stock Option Plan was adopted by the Board, and no Options
hereunder shall be granted thereafter. Notwithstanding the foregoing, no
NQSO other than an Option which is treated as an NQSO under Section 7(b)
hereof may be granted after November 5, 2002, the date that is 10 years after
the date the Employee Compensation Stock Option Plan was adopted. Nothing
contained in this Section 12, however, shall terminate or affect the
continued existence of rights created under Options issued hereunder and
outstanding on August 28, 2003 (November 5, 2002, in the case of NQSOs) which
by their terms extend beyond such date.
SECTION 13
Effective Date
---------------
This Plan merger and amendment and restatement shall become effective on
August 13, 1996 (the date the amendment and restatement was adopted by the
Board); provided that the Plan merger and amendment and restatement shall be
approved by the Company's shareholders (in accordance with Section 12(b))
within 12 months of such date. In the event such shareholder approval is not
obtained, the merger and amendment and restatement of the Plan and all
Options granted hereunder shall be null and void; no additional Options shall
be granted hereunder; and, if any shares of Common Stock were issued pursuant
to such an Option such Option shall be rescinded. Any shares issued pursuant
to such an Option shall not be counted in determining whether such approval
is obtained. In no event may any Option be exercised prior to shareholder
approval of the Plan. Nothing in this Section 13 shall limit an Optionee's
right to exercise any Prior Option in accordance with its terms. In
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addition, in the event shareholder approval is not obtained as required by
this Section 13, the Prior Plans shall continue as separate Plans as though
this merger and amendment and restatement had never been attempted.
SECTION 14
Miscellaneous
-------------
(a) Governing Law. The Plan and the Option Agreements entered into,
and the Options granted hereunder, shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the operation of, and
the rights of Optionees under, the Plan, the Option Agreements, and the
Options shall be governed by applicable federal law and otherwise by the laws
of the state of New York.
(b) Rights. Neither the adoption or amendment and restatement of the
Plan nor any action of the Board or the Committee shall be deemed to give any
individual any right to be granted an Option, or any other right hereunder,
unless and until the Committee shall have granted such individual an Option,
and then his or her rights shall be only such as are provided by the Plan and
the Option Agreement.
Any Option under the Plan shall not entitle the holder thereof to any
rights as a shareholder of the Company prior to the exercise of such Option
and the issuance of the Common Shares pursuant thereto. Further,
notwithstanding any provisions of the Plan or any Option Agreement with an
Optionee, the Company and Subsidiaries shall have the right, in their
discretion, to retire a Key Employee at any time pursuant to their retirement
rules or otherwise to terminate a Key Employee's employment or a Consultant's
service at any time for any reason whatsoever.
(c) No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon an Optionee to exercise such Option.
(d) Non-Transferability. No Option shall be assignable or transferable
by an Optionee otherwise than by will or by the laws of descent and
distribution, and during the lifetime of the Optionee, any Option shall be
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exercisable only by the Optionee or by his or her guardian or legal
representative. If an Optionee is married at the time of exercise of an
Option and if the Optionee so requests at the time of exercise, the
certificate or certificates issued shall be registered in the name of the
Optionee and the Optionee's spouse, jointly, with right of survivorship.
(e) Withholding and Use of Common Shares to Satisfy Tax Obligations.
The obligation of the Company to deliver Common Shares or to pay cash to a
Key Employee pursuant to any Option under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Subject to
the withholding requirements of applicable federal tax laws, the Committee,
in its discretion (and subject to such withholding rules ("Withholding
Rules") as shall be adopted by the Committee), may permit the Key Employee to
satisfy the minimum required federal withholding tax, in whole or in part, by
electing to have the Company withhold (or by returning to the Company) Common
Shares, which shares shall be valued, for this purpose, at their Fair Market
Value on the date of exercise of the Option (or if later, the date on which
the Key Employee recognizes ordinary income with respect to such Option) (the
"Determination Date").
An election to use Common Shares to satisfy federal tax withholding
requirements must be made in compliance with and subject to the Withholding
Rules. The Company may not withhold Common Shares in excess of the number
necessary to satisfy the minimum federal income tax withholding requirements.
In the event Common Shares acquired under the exercise of an ISO are used to
satisfy such withholding requirement, such Common Shares must have been held
by the Key Employee for a period of not less than the holding period
described in section 422(a)(1) of the Code on the Determination Date, or if
such Common Shares were acquired through the exercise of an NQSO or of an
option under a similar plan, such option must have been granted to the Key
Employee at least six months prior to the Determination Date.
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(f) Listing and Registration of Common Shares. Each Option shall be
subject to the requirement that, if at any time the Committee shall
determine, in its discretion, that the listing, registration or qualification
of the Common Shares covered thereby upon any securities exchange or under
any state or federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such Option or the purchase or vesting of
Common Shares thereunder, or that action by the Company or by the Optionee
should be taken in order to obtain an exemption from any such requirement, no
such Option may be exercised, in whole or in part, unless and until such
listing, registration, qualification, consent, approval, or action shall have
been effected, obtained, or taken under conditions acceptable to the
Committee. Without limiting the generality of the foregoing, each Optionee or
his or her legal representative or beneficiary may also be required to give
satisfactory assurance that Common Shares purchased upon exercise of an
Option are being purchased for investment and not with a view to
distribution, and certificates representing such Common Shares may be
legended accordingly.
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