sec document
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 (Amendment No. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
FALCONSTOR SOFTWARE, INC.
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(Name of Registrant as Specified in Charter)
Kenneth A. Schlesinger, Esq.
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(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement no.:
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(4) Date Filed:
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FALCONSTOR SOFTWARE, INC.
125 Baylis Rd. Suite 140
Melville, NY 11747
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 15, 2003
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To Our Stockholders:
We invite you to attend our annual stockholders' meeting on
Thursday, May 15, 2003 at the Huntington Hilton, Route 110 at 598 Broadhollow
Road, Melville, New York 11747 at 9:00 a.m. At the meeting, you will hear an
update on our operations, have a chance to meet some of our directors and
executives, and will act on the following matters:
1) To elect two directors to three-year terms;
2) To approve an amendment to our 2000 Stock Option Plan to increase
the number of shares of Common Stock reserved for issuance
thereunder by 2,000,000 from 10,662,296 to 12,662,296;
3) To ratify the appointment of KPMG LLP as our independent
accountants for fiscal 2003; and
4) Any other matters that properly come before the meeting.
This booklet includes a formal notice of the meeting and the proxy
statement. The proxy statement tells you more about the agenda and procedures
for the meeting. It also describes how our Board of Directors operates and gives
personal information about our director nominees.
Only stockholders of record at the close of business on March 27,
2003 will be entitled to vote at the annual meeting. Even if you only own a few
shares, we want your shares to be represented at the annual meeting. I urge you
to complete, sign, date, and return your proxy card promptly in the enclosed
envelope.
We have also provided you with the exact place and time of the
meeting if you wish to attend in person.
Sincerely yours,
ReiJane Huai
Chief Executive Officer
Dated: Melville, New York
April 10, 2003
FALCONSTOR SOFTWARE, INC.
125 Baylis Rd. Suite 140
Melville, New York 11747
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2003 PROXY STATEMENT
GENERAL INFORMATION
This proxy statement contains information related to the annual
meeting of stockholders of FalconStor Software, Inc. to be held on Thursday, May
15, 2003, beginning at 9:00 a.m., at the Huntington Hilton, Route 110 at 598
Broadhollow Road, Melville, New York 11747, and at any postponements or
adjournments thereof.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the Company's annual meeting, stockholders will hear an update on
the Company's operations, have a chance to meet some of its directors and
executives and will act on the following matters:
1) To elect two directors to three-year terms;
2) To approve an amendment to our 2000 Stock Option Plan (the "2000
Plan") to increase the number of shares of Common Stock reserved
for issuance thereunder by 2,000,000 from 10,662,296 to
12,662,296;
3) To ratify the appointment of KPMG LLP as our independent
accountants for fiscal 2003; and
4) Any other matters that properly come before the meeting.
WHO MAY VOTE
Stockholders of FalconStor Software, Inc., as recorded in our stock
register on March 27, 2003 (the "Record Date"), may vote at the meeting. As of
this date, we had 45,594,646 shares of common stock eligible to vote. We have
only one class of voting shares. All shares in this class have equal voting
rights of one vote per share.
HOW TO VOTE
You may vote in person at the meeting or by proxy. We recommend that
you vote by proxy even if you plan to attend the meeting. You can always change
your vote at the meeting.
HOW PROXIES WORK
Our Board of Directors is asking for your proxy. Giving us your
proxy means you authorize us to vote your shares at the meeting in the manner
you direct. You may vote for or against the proposals or abstain from voting.
Proxies submitted will be voted by the individuals named on the
proxy card in the manner you indicate. If you give us your proxy but do not
specify how you want your shares voted, they will be voted in accordance with
the Board of Directors recommendations, i.e., in favor of our director nominees,
in favor of an increase in the Common Stock reserved for issuance under the 2000
Plan, and in favor of the ratification of the appointment of KPMG LLP as our
independent accountants.
You may receive more than one proxy or voting card depending on how
you hold your shares. If you hold shares through someone else, such as a
stockbroker, you may get materials from them asking how you want to vote. The
latest proxy card we receive from you will determine how we will vote your
shares.
REVOKING A PROXY
There are three ways to revoke your proxy. First, you may submit a
new proxy with a later date up until the existing proxy is voted. Second, you
may vote in person at the meeting. Last, you may notify our Chief Financial
Officer in writing at 125 Baylis Road, Suite 140, Melville, New York 11747.
QUORUM
In order to carry on the business of the meeting, we must have a
quorum. This means at least a majority of the outstanding shares eligible to
vote must be represented at the meeting, either by proxy or in person. Shares
that we own are not voted and do not count for this purpose.
VOTES NEEDED
The director nominees receiving a majority of the votes cast during
the meeting will be elected to fill the seats of our directors. For the other
proposals to be approved, we require the favorable vote of a majority of the
votes cast. Only votes for or against a proposal count. Votes which are withheld
from voting on a proposal will be excluded entirely and will have no effect in
determining the quorum or the majority of votes cast. Abstentions and broker
non-votes count for quorum purposes only and not for voting purposes. Broker
non-votes occur when a broker returns a proxy but does not have the authority to
vote on a particular proposal. Brokers that do not receive instructions are
entitled to vote on the election of directors, the 2000 Plan and the
ratification of the auditors.
ATTENDING IN PERSON
Only stockholders, their proxy holders, and our invited guests may
attend the meeting. If you wish to attend the meeting in person but you hold
your shares through someone else, such as a stockbroker, you must bring proof of
your ownership and an identification with a photo at the meeting. For example,
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you could bring an account statement showing that you owned FalconStor Software,
Inc. shares as of March 27, 2003 as acceptable proof of ownership.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of
the Common Stock of FalconStor Software Inc. outstanding at March 27, 2003, by
(i) each person known by the Company to be the beneficial owner of more than
five percent of its Common Stock, (ii) each director and nominee for director,
(iii) each of the executive officers named in the summary compensation table,
and (iv) all directors, nominees for director and executive officers of the
Company as a group.
Shares Beneficially Percentage
Name and Address of Beneficial Owner (1) Owned of Class (2)
----------------------------------------- ----- ------------
ReiJane Huai (3) 10,824,260 23.7%
c/o FalconStor Software, Inc.
125 Baylis Road
Melville, NY 11747
Barry Rubenstein (4) 6,793,053 14.9%
68 Wheatley Road
Brookville, NY 11545
Irwin Lieber (5) 4,602,689 10.1%
80 Cuttermill Road Suite 311
Great Neck, NY 11021
Kern Capital Management, LLC (6) 3,315,600 7.3%
114 West 47th St., Suite 1926
New York, NY 10036
Eli Oxenhorn (7) 3,240,009 7.1%
56 The Intervale
Roslyn Estates, NY 11576
Barry Fingerhut (8) 3,000,164 6.6%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Seth Lieber (9) 3,014,474 6.6%
200 East 72 Street, PH N
New York, NY 10021
Jonathan Lieber (10) 2,927,852 6.4%
271 Hamilton Road
Chappaqua, NY 10514
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Marilyn Rubenstein (11) 2,475,424 5.4%
c/o Barry Rubenstein
68 Wheatley Road
Brookville, NY 11545
Lawrence S. Dolin (12) 59,850 *
Steven R. Fischer (13) 24,350 *
Steven H. Owings (14) 77,880 *
Patrick B. Carney (15) 3,300 *
Jacob Ferng (16) 313,493 *
Wayne Lam (17) 344,314 *
All Directors, Nominees for Director
and Executive Officers as a Group (18)
(7 persons) 11,647,447 25.5%
*Less than one percent
(1) A person is deemed to be the beneficial owner of voting securities
that can be acquired by such person within 60 days after the date
hereof upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any
other person) and that are currently exercisable (i.e., that are
exercisable within 60 days from the date hereof) have been
exercised. Unless otherwise noted, we believe that all persons named
in the table have sole voting and investment power with respect to
all shares beneficially owned by them.
(2) Based upon shares of Common Stock outstanding at the Record Date of
45,594,646.
(3) Based upon information contained in a Form 4 and a report on
Schedule 13D filed by Mr. Huai and certain other information.
Consists of (i) 10,774,260 shares of Common Stock held by Mr. Huai
and (ii) 50,000 shares of Common Stock held by The 2002 ReiJane Huai
Revocable Trust, of which Mr. Huai is a trustee. Mr. Huai disclaims
beneficial ownership of the securities held by The 2002 ReiJane Huai
Revocable Trust, except to the extent of his equity interest
therein.
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(4) Based upon information contained in a Form 4 and a report on
Schedule 13D, as amended (the "Wheatley 13D") filed jointly by Barry
Rubenstein, Brookwood Partners, L.P. ("Brookwood"), Seneca Ventures
("Seneca"), Wheatley Associates III, L.P. ("Wheatley Associates"),
Wheatley Foreign Partners, L.P. ("Wheatley Foreign"), Wheatley
Foreign Partners III, L.P. ("Wheatley Foreign III"), Wheatley
Partners, L.P. ("Wheatley"), Wheatley Partners II, L.P. ("Wheatley
II"), Wheatley Partners III, L.P. ("Wheatley III"), Woodland
Partners, Woodland Venture Fund ("Woodland Fund"), and certain other
entities with the Securities and Exchange Commission ("SEC"), as
well as certain other information. Consists of (i) 1,650,903 shares
of Common Stock held by Mr. Rubenstein, (ii) 395,217 shares of
common stock held by Brookwood, (iii) 642,453 shares of common stock
held by Seneca, (iv) 299,809 shares of common stock held by Wheatley
Associates, (v) 41,008 shares of common stock held by Wheatley
Foreign, (vi) 293,012 shares of common stock held by Wheatley
Foreign III, (vii) 484,051 shares of common stock held by Wheatley,
(viii) 180,089 shares of common stock held by Wheatley II, (ix)
1,370,015 shares of common stock held by Wheatley III, (x) 692,983
shares of common stock held by Woodland Partners and (xi) 743,513
shares of common stock held by Woodland Fund. Does not include 1,258
shares of common stock held by Mr. Rubenstein's spouse, Marilyn
Rubenstein. Mr. Rubenstein disclaims beneficial ownership of the
securities held by Wheatley, Wheatley Foreign, Wheatley II, Wheatley
III, Wheatley Foreign III, Wheatley Associates, Seneca, Woodland
Fund, Woodland Partners and Brookwood, except to the extent of his
respective equity interest therein.
(5) Based upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 1,934,705 shares of Common Stock
held by Irwin Lieber, (ii) 484,051 shares of Common Stock held by
Wheatley, (iii) 41,008 shares of Common Stock held by Wheatley
Foreign, (iv) 180,089 shares of Common Stock held by Wheatley II,
(v) 1,370,015 shares of Common Stock held by Wheatley III, (vi)
293,012 shares of Common Stock held by Wheatley Foreign III, and
(vii) 299,809 shares of Common Stock held by Wheatley Associates.
Mr. Lieber disclaims beneficial ownership of the securities held by
Wheatley, Wheatley Foreign, Wheatley II, Wheatley III, Wheatley
Foreign III and Wheatley Associates, except to the extent of his
respective equity interests therein.
(6) Based on information contained in a report on Schedule 13G filed by
Kern Capital Management, LLC ("KCM"), Robert E. Kern and David C.
Kern on February 14, 2003, consists of 3,315,600 shares held by KCM.
Robert Kern and David Kern are controlling members of KCM and
disclaim beneficial ownership of the securities held by KCM.
(7) Based on information contained in a report on Schedule 13G, as
amended, filed jointly on February 14, 2003 by Eli Oxenhorn and the
Eli Oxenhorn Family Limited Partnership (the "EOFLP"). Consists of
(i) 2,898,932 shares of Common Stock held by Mr. Oxenhorn (including
3,500 shares held by the Eli Oxenhorn SEP IRA account and 8,000
shares held by the Eli Oxenhorn Rollover IRA Account) and (ii)
341,077 shares of Common Stock held by the EOFLP. Mr. Oxenhorn
disclaims beneficial ownership of the securities held by the EOFLP,
except to the extent of his respective equity interests therein.
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(8) Based upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 332,180 shares of Common Stock
held by Barry Fingerhut, (ii) 484,051 shares of Common Stock held by
Wheatley, (iii) 41,008 shares of Common Stock held by Wheatley
Foreign, (iv) 180,089 shares of Common Stock held by Wheatley II,
(v) 1,370,015 shares of Common Stock held by Wheatley III, (vi)
293,012 shares of Common Stock held by Wheatley Foreign III, and
(vii) 299,809 shares of Common Stock held by Wheatley Associates.
Mr. Fingerhut disclaims beneficial ownership of the securities held
by Wheatley, Wheatley Foreign, Wheatley II, Wheatley III, Wheatley
Foreign III and Wheatley Associates, except to the extent of his
respective equity interests therein.
(9) Based upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 86,622 shares of Common Stock
held by Seth Lieber, (ii) 484,051 shares of Common Stock held by
Wheatley, (iii) 41,008 shares of Common Stock held by Wheatley
Foreign, (iv) 180,089 shares of Common Stock held by Wheatley II,
(v) 1,370,015 shares of Common Stock held by Wheatley III, (vi)
293,012 shares of Common Stock held by Wheatley Foreign III, (vii)
299,809 shares of Common Stock held by Wheatley Associates and
(viii) 259,868 shares of Common Stock held by Applegreen. Mr. Lieber
disclaims beneficial ownership of the securities held by Wheatley,
Wheatley Foreign, Wheatley II, Wheatley III, Wheatley Foreign III,
Wheatley Associates and Applegreen, except to the extent of his
respective equity interests therein.
(10) Based upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 484,051 shares of Common Stock
held by Wheatley, (ii) 41,008 shares of Common Stock held by
Wheatley Foreign, (iii) 180,089 shares of Common Stock held by
Wheatley II, (iv) 1,370,015 shares of Common Stock held by Wheatley
III, (v) 293,012 shares of Common Stock held by Wheatley Foreign
III, (vi) 299,809 shares of Common Stock held by Wheatley Associates
and (vii) 259,868 shares of Common Stock held by Applegreen
Partners. Mr. Lieber disclaims beneficial ownership of the
securities held by Wheatley, Wheatley Foreign, Wheatley II, Wheatley
III, Wheatley Foreign III, Wheatley Associates and Applegreen,
except to the extent of his respective equity interests therein.
(11) Based upon information contained in the Wheatley 13D and certain
other information. Consists of (i) 1,258 shares of Common Stock held
by Marilyn Rubenstein, (ii) 642,453 shares of Common Stock held by
Seneca, (iii) 743,513 shares of Common Stock held by Woodland Fund,
(iv) 692,983 shares of Common Stock held by Woodland Partners and
(v) 395,217 shares of Common Stock held by Brookwood. Mrs.
Rubenstein disclaims beneficial ownership of the securities held by
Seneca, Woodland Fund, Woodland Partners and Brookwood, except to
the extent of her respective equity interests therein. Does not
include 1,650,903 shares of Common Stock held by Mrs. Rubenstein's
spouse, Barry Rubenstein.
(12) Based on information contained in a Form 5 filed by Mr. Dolin and
certain other information. Consists of (i) 40,000 shares held by
Northern Union Club and (ii) 19,850 shares of Common Stock issuable
upon exercise of options that are currently exercisable or will be
exercisable within 60 days of March 27, 2003. Mr. Dolin is a general
partner of Mordo Partners, which is a general partner of Northern
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Union Club. Mr. Dolin disclaims beneficial ownership of the
securities held by Northern Union Club, except to the extent of his
equity interest therein.
(13) Based on information contained in a Form 5 filed by Mr. Fischer and
certain other information. Consists of (i) 4,500 shares held by Mr.
Fischer and (ii) 19,850 shares of Common Stock issuable upon
exercise of options that are currently exercisable or will be
exercisable within 60 days of March 27, 2003. Excludes 1,000 shares
of Common Stock held by Mr. Fischer as a custodian for his daughter.
Mr. Fischer disclaims beneficial ownership of the securities held as
a custodian for his daughter, except to the extent of his equity
interest therein.
(14) Based on information contained in a Form 5 filed by Mr. Owings and
certain other information. Consists of (i) 58,030 shares held by Mr.
Owings and (ii) 19,850 shares of Common Stock issuable upon exercise
of options that are currently exercisable or will be exercisable
within 60 days of March 27, 2003.
(15) Based on Company information. Consists of 3,300 shares of Common
Stock issuable upon exercise of options that are currently
exercisable or will be exercisable within 60 days of March 27, 2003.
(16) Based on information contained in a Form 4 filed by Mr. Ferng and
certain other information. Consists of (i) 95,285 shares held by Mr.
Ferng and (ii) 218,208 shares of Common Stock issuable upon exercise
of options that are currently exercisable or will be exercisable
within 60 days of March 27, 2003.
(17) Based on information contained in a Form 4 filed by Mr. Lam and
certain other information. Consists of (i) 48,003 shares held by Mr.
Lam and (ii) 296,311 shares of Common Stock issuable upon exercise
of options that are currently exercisable or will be exercisable
within 60 days of March 27, 2003.
(18) Consists of (i) 11,070,078 shares held by all directors, nominees
for director and executive officers as a group and (ii) 577,369
shares of Common Stock issuable upon exercise of options that are
currently exercisable or will be exercisable within 60 days of March
27, 2003
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PROPOSAL NO. 1
ELECTION OF DIRECTOR
The Company's bylaws authorize the Board of Directors to fix the
number of directors and provide that the directors shall be divided into three
classes, with the classes of directors serving for staggered, three-year terms.
From October, 2001 until March, 2003, the number of directors was fixed at four.
In March, 2003, the Company's directors voted to increase the number of members
of the Board of Directors to five, with the newly created directorship to be
filled at the Company's next annual meeting. Steven H. Owings and Patrick B.
Carney are the Board of Directors nominees for director. Mr. Owings is currently
a director of the Company. All directors are chosen for a full three-year term
to succeed those whose terms expire. It is therefore proposed that Mr. Owings
and Mr. Carney be elected to serve until the Annual Meeting of Stockholders to
be held in 2006 and until each of their successors is elected and shall have
qualified.
Unless authority is specifically withheld, proxies will be voted for
the election of each of the nominees below to serve as a director of the Company
for a term which will expire at the Company's 2006 Annual Meeting of
Stockholders and until a successor is elected and qualified.
Director
Name Position Age Since
---- -------- --- -----
Steven H. Owings Director Nominee 49 2001
Patrick B. Carney Director Nominee 38 --
STEVEN H. OWINGS served as the chief executive officer of ScanSource, Inc., a
value-added distributor of POS and bar code products, from 1992 to early 2000.
He has served as chairman of the board of directors of ScanSource, Inc., since
its inception in December 1992. From 1991 to 1992, Mr. Owings served as chairman
of the board of directors, chief executive officer and the sole shareholder of
Argent Technologies, Inc., a personal computer manufacturer. From 1983 to 1991
he held various positions with Gates/FA Distributing, Inc., and its predecessors
("Gates"), a computer distribution company, including serving as president,
chief executive officer and chairman of the board of directors. From December
1987 to September 1994, Mr. Owings served as a director of Gates. From July 1996
to April 1997, he served as a director of Globelle Corporation, an international
distributor of personal computer products. He holds a B.A. from Clemson
University. Mr. Owings has been a director of the Company since August 2001.
PATRICK B. CARNEY has served as the Chief Information Officer for the North
Shore - Long Island Jewish Health System ("North Shore-LIJ") since August, 2000.
North Shore-LIJ is one of the largest not-for-profit health systems in the U.S.
with 6,500 affiliated physicians, 30,000 employees and over $3 billion in annual
revenues. Mr. Carney is responsible for strategic IS planning and managing the
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IS and Telecommunications operations throughout the Health System. From 1995 to
July, 2000, Mr. Carney was the Vice President & Chief Information Officer
for Staten Island University Hospital, a multi-site healthcare system serving
the New York City communities of Staten Island and Brooklyn. Mr. Carney's career
also includes IT management experience in other industries as he was also the
Director of Information Systems for ABB Power Generation Inc., a subsidiary of
the Zurich-based Asea Brown Boveri, and also held positions at KPMG Peat
Marwick, Wang Laboratories, and IBM Corporation. Mr. Carney received a BS degree
from Manhattan College.
The names of the directors, whose terms expire at the 2004 and 2005
Annual Meetings of Stockholders of the Company, who are currently serving their
terms, are set forth below:
Director
Name Position Age Since
---- -------- --- -----
ReiJane Huai Chairman 44 2000
Lawrence S. Dolin Director 59 2001
Steven R. Fischer Director 58 2001
REIJANE HUAI has served as President and Chief Executive Officer of the Company
and its predecessor since December 2000 and has served as Chairman of the Board
of the Company since August 2001. Mr. Huai also served as a director of the
Company's predecessor from July 2000 to August 2001. Mr. Huai came to the
Company with a career in software development and management. As executive vice
president and general manager, Asia, for Computer Associates International,
Inc., he was responsible for sales, marketing and the development of strategic
joint ventures in the region. Mr. Huai joined Computer Associates in 1996 with
its acquisition of Cheyenne Software, Inc., where he was president and chief
executive officer. Mr. Huai joined Cheyenne Software, Inc., in 1985 as manager
of research and development of ARCserve, the industry's first storage management
solution for the client/server environment. Mr. Huai received a master's degree
in computer science from the State University of New York at Stony Brook in
1985. Mr. Huai's term as a director of the Company expires in 2004.
LAWRENCE S. DOLIN has held several positions with Noteworthy Medical Systems,
Inc. ("Noteworthy"), a provider of computerized patient record software, since
July 1998. He is currently serving as Noteworthy's chairman, president and chief
executive officer. Since January 1996, Mr. Dolin has been a general partner of
Mordo Partners, an investment management partnership. Since 1981, Mr. Dolin has
served as a director of Morgan's Foods, Inc., which owns, through wholly-owned
subsidiaries, KFC restaurants, Taco Bell restaurants and Pizza Hut restaurants.
Mr. Dolin holds a B.A. from Case Western Reserve University and a J.D. from Case
Western Reserve University. Mr. Dolin's term as a director of the Company
expires in 2004. Mr. Dolin has been a director of the Company since August 2001.
STEVEN R. FISCHER has held multiple positions with Transamerica Business Capital
Corporation ("Transamerica"), which specializes in secured lending for mergers,
acquisitions and restructurings, since 1992. He is currently serving as
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Transamerica's President. From 1981 to 1992, he served as vice president and
regional manager of Citibank, N.A. Since 1995, he has served as a director of
ScanSource, Inc., a value-added distributor of POS and bar code products. He
holds a B.S. in Economics and Accounting from Queens College and an M.B.A. from
Baruch College. Mr. Fischer's term as a director of the Company expires in 2005.
Mr. Fischer has been a director of the Company since August 2001.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES.
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MEETINGS AND COMMITTEES
The Board of Directors met on ten occasions and took action by
unanimous written consent on six occasions during the fiscal year ended December
31, 2002. There are three committees of the Board of Directors: the Compensation
Committee, the Stock Option Committee and the Audit Committee. All Directors
attended at least 75% of the Board of Directors Meetings.
The members of the Compensation Committee are ReiJane Huai, Lawrence
S. Dolin and Steven R. Fischer. The Compensation Committee was part of a joint
Compensation Committee/Stock Option Committee during the fiscal year ended
December 31, 2002, which met on one occasion and took action by unanimous
written consent on two occasions during the fiscal year ended December 31, 2002.
The Compensation Committee reviews compensation arrangements and personnel
matters.
The members of the Stock Option Committee are Lawrence S. Dolin,
Steven R. Fischer, and Steven H. Owings. The Stock Option Committee was part of
a joint Compensation Committee/Stock Option Committee during the fiscal year
ended December 31, 2002, which met on one occasion and took action by unanimous
written consent on two occasions during the fiscal year ended December 31, 2002.
The Stock Option Committee is responsible for the administration and grant of
awards under the Company's 2000 Stock Option Plan.
The members of the Audit Committee are Lawrence S. Dolin, Steven H.
Owings and Steven R. Fischer. Each of the members of the Audit Committee is
"independent" as that term is defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards. The Audit Committee met on
four occasions during the fiscal year ended December 31, 2002. The primary
purpose of the Audit Committee is to assist the Board of Directors in fulfilling
its responsibility to oversee the Company's financial reporting activities. The
Audit Committee annually recommends to the Company's stockholders independent
public accountants to serve as auditors of the Company's books, records and
accounts, reviews the scope of the audits performed by such auditors and the
audit reports prepared by them, approves non-audit services, reviews and
monitors the Company's internal accounting procedures and monitors compliance
with the Company's Business Ethics and Conduct Policy and Conflicts of Interest
Policy. A report from the Audit Committee is also included in this Proxy
Statement, see Audit Committee Report. The Board of Directors has adopted a
written charter for the Audit Committee. A copy of the written charter was
included as Annex E to the Company's Proxy Statement for its special meeting of
stockholders held on August 22, 2001.
Directors who are also employees receive no compensation for serving
on the Company's Board of Directors. Non-employee directors are reimbursed for
all travel and other expenses incurred in connection with attending Board and
Committee meetings.
Pursuant to the 1994 Outside Directors Stock Option Plan (the "1994
Plan"), as amended, each non-employee director of the Company is entitled upon
becoming a non-employee director to receive an initial grant of options to
acquire 50,000 shares of Common Stock and an annual grant of options to acquire
10,000 shares of Common Stock on the date of each Annual Meeting of Stockholders
of the Company. These stock options will be granted with per share exercise
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prices equal to the fair market value of the Common Stock on the date of grant.
A director who received an initial grant of options to acquire 50,000 shares of
Common Stock within six months prior to an Annual Meeting is not entitled to
receive an annual grant of options to acquire 10,000 shares of Common Stock on
the date of the Annual Meeting.
In May 2002, each of Messrs. Dolin, Fischer and Owings received
options to purchase 45,000 shares of Common Stock at an exercise price of $5.25
per share. This included options to purchase 35,000 shares granted to each
outside Director following the approval of the amendments to the 1994 Plan on
May 17, 2002 to bring their initial grants up to 50,000, and options to purchase
10,000 shares granted to each outside Director as an annual grant under the 1994
Plan, as amended.
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
The following table contains the names, positions and ages of the
executive officers of the Company who are not directors.
Name Position Age
---- -------- ---
Jacob Ferng, CPA Chief Financial Officer, Treasurer, Corporate 41
Secretary and Vice President
Wayne Lam Vice President, Marketing 39
JACOB FERNG has served as chief financial officer and vice president of the
Company and its predecessor entity since August 2000. Mr. Ferng has more than 10
years of experience handling corporate finance, worldwide software production
and product distribution for publicly held companies, various private
corporations and a public accounting firm. Mr. Ferng was vice president of
finance and production worldwide for Computer Associates from 1996 to April
2000. Mr. Ferng joined Computer Associates in 1996 with its acquisition of
Cheyenne Software, where he served as corporate controller and vice president of
finance and operations. From 1988 to 1990, he was an accountant for General
Aerospace and for Bell Associates, CPAs. He has a master's degree in
Accounting/Taxation from Long Island University, C.W. Post. He is a certified
public accountant in the state of New York.
WAYNE LAM has served as vice president of marketing of the Company and its
predecessor entity since April 2000. Mr. Lam has more than 15 years of software
development and corporate management experience. As vice president at Computer
Associates, he held various roles in product marketing, business development and
product development. Mr. Lam joined Computer Associates in 1996 with its
acquisition of Cheyenne Software, where he held various positions including
general manager of Cheyenne Software Netware Division, director of business
development, and head of Cheyenne Communications, a business development unit
focusing on communication software. From 1989 to 1993 he was co-founder and
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chief executive officer of Applied Programming Technologies, where he managed
all aspects of its operations and development projects. From 1987 to 1989 he was
vice president of engineering at Advanced Graphic Applications, where he managed
the development of PC-based document management systems and optical storage
device drivers. Mr. Lam has a B.E. in Electrical Engineering from Cooper Union,
where he was involved with a privately funded research project studying the
feasibility of building paperless offices using optical storage devices. The
success of the project led to the formation of Advanced Graphic Applications.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth, for the
fiscal years indicated, all compensation awarded to, paid to or earned by the
Company's chief executive officer and the Company's other executive officers
(collectively, the "Named Executive Officers"). The executive compensation
provided below reflects the executive compensation information of the Company
from the inception of FalconStor, Inc., on February 10, 2000 through December
31, 2002.
Summary Compensation Table
Name and Principal Long Term
Position Annual Compensation Compensation
---------------------------------- ------------------------------------------------------ ---------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Year ($) ($) ($)(2) Options (#) ($)(3)
----------- -------------- ----------------- ------------------ ---------------- ------------
ReiJane Huai 2002 $150,000 -- $ 24,000 -- --
Chairman and Chief 2001 $170,833 -- $ 8,000 -- $239,924
Executive Officer 2000 -- -- -- -- --
Jacob Ferng 2002 $100,000 -- -- 175,000 --
Chief Financial Officer 2001 $ 95,833 $ 20,000 (1) -- -- --
and Vice President 2000 $ 20,833 -- -- 288,743 --
Wayne Lam 2002 $100,000 -- -- 225,000 --
Vice President-Marketing 2001 $ 96,667 $ 10,000 (1) -- -- --
2000 $ 41,154 -- -- 288,743 --
(1) Bonuses of $20,000 and $10,000 for Mr. Ferng and Mr. Lam, respectively were
paid in 2002 for services rendered in 2001.
(2) Mr. Huai was given automobile allowances of $24,000 and $8,000 in 2002 and
2001, respectively.
(3) Mr. Huai was reimbursed $239,924 in June 2001 for the payment of
Hart-Scott-Rodino filing fees as well as all taxes that were due as a
result of this reimbursement. The filing fees were incurred in connection
with FalconStor's merger with Network Peripherals Inc.
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Option Grants During 2002 Fiscal Year
The following table provides information related to options to
purchase Common Stock granted to the Company's Named Executive Officers. The
Company currently does not have any plans providing for the grant of stock
appreciation rights.
Potential Realizable Value at
Assumed Rates of Stock Price
Appreciation for Option
Individual Grants Term(2)
----------------------------------------------------------------------------------------------------------------------------
% of Total
Number of Options Exercise
Securities Granted to or Base
Underlying Employees in Price
Nanme Option(#) Fiscal Year ($/Sh)(1) Expiration Date 5% 10%
----------------------------------------------------------------------------------------------------------------------------
Jacob Ferng 75,000(3) 2% $5.07 May 7, 2012 $239,137.18 $606,020.57
100,000(4) 3% $4.04 November 11, 2012 $254,073.43 $643,871.95
Wayne Lam 75,000(3) 2% $5.07 May 7, 2012 $239,137.18 $606,020.57
150,000(4) 5% $4.04 November 11, 2012 $381,110.14 $965,807.93
(1) The option exercise price must be paid in cash. The exercise price is equal
to or greater than the fair market value of the Common Stock on the date of
grant.
(2) The potential realizable value portion of the foregoing table illustrates
values that might be realized upon exercise of the options immediately prior to
the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options. These
numbers do not take into account provisions of certain options providing for
termination of the option following termination of employment,
non-transferability or differences in vesting periods. Regardless of the
theoretical value of an option, its ultimate value will depend upon the market
value of the Common Stock at a future date, and that value will depend on a
variety of factors, including the overall condition of the stock market and the
Company's results of operations and financial condition. There can be no
assurance that the values reflected in this table will be achieved.
(3) These options become exercisable with respect to 33% of the shares indicated
on May 7 in each of 2003 and 2004 and 34% in 2005.
(4) These options become exercisable with respect to 33% of the shares indicated
on November 11 in each of 2003 and 2004 and 34% in 2005.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the
number of options exercised during 2002 and unexercised stock options held by
the Named Executive Officers as of December 31, 2002.
Shares Number of Securities Value of Unexercised In-
Acquired Underlying Unexercised the-Money Options at
on Value Options at 2002 Fiscal 2002 Fiscal Year-End
Exercise Realized Year-End (#) ($)(2)
Name (#) ($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
---- ---- ------ ------------------------- -------------------------
ReiJane Huai -- -- 0/0 0/0
Jacob Ferng 95,285 $727,377 95,285/273,173 $336,709/$346,914
Wayne Lam -- -- 190,569/323,174 $673,414/$346,917
-------------------
(1) Represents the fair value of the underlying securities on the date of
exercise, less the exercise price of such options. To date, Mr. Ferng has
not sold the shares acquired upon exercise of the options.
(2) On December 31, 2002, the last reported sales price of the Common Stock as
reported on The Nasdaq National Market was $3.88.
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Equity Compensation Plan Information
The Company currently does not have any equity compensation plans not approved
by security holders.
Number of Number of Securities
Securities to be Weighted - Remaining Available for
Issue upon Average exercise Future Issuance Under
Exercise of Price of Equity Compensation
Outstanding Outstanding Plans (Excluding
Options, Warrants Options, Warrants Securities Reflected in
and Rights and Rights Column (a))
Plan Category (a) (b) (c)
------------- --- --- ---
Equity compensation
plans approved by
security holders........... 9,080,383 $ 3.66 1,724,266
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with ReiJane
Huai dated as of September 2001, providing for the employment of Mr. Huai as
Chairman, President and Chief Executive Officer. The employment agreement
provides that Mr. Huai shall devote substantially all of his professional time
to the business of the Company. The employment agreement provides a base salary
in the amount of $150,000, subject to an increase of $15,000 per annum, provided
that the Company's earnings were higher than the previous year, as certified by
either the Company's Chief Financial Offer or its independent auditors and such
other increases as determined by the Board of Directors. The agreement contains
non-competition, confidentiality and non-solicitation provisions that apply for
twenty-four months after cessation of employment.
SEVERANCE AGREEMENTS
The Company has entered into Change of Control Contracts with each
of ReiJane Huai, Wayne Lam and Jacob Ferng dated as of December 2001 that
provide for severance pay and incidental benefits if there is a change in
control of the Company (as defined in the Change of Control Contracts). The
payment is a lump sum payment equal to 4.0 times one year's annual compensation.
The agreements also provide such individuals with the right to replace all stock
options whether vested or not with fully vested stock options, or alternatively
the right to receive a cash payment for surrendering the options equal to the
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difference between the full exercise price of each option surrendered and the
greater of the price per share paid by the acquirer in the change of control
transaction or the market price of the Company's Common Stock on the date of the
change of control. Finally, the agreements provide that if any excise taxes are
imposed on Messrs. Huai, Lam and Ferng by Section 4999 of the Internal Revenue
Code of 1986, as amended, the Company will make them whole.
REPORT ON REPRICING OF OPTIONS. None of the stock options granted
under any of the Company's plans was repriced in the fiscal year ended 2002.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION. Messrs.
ReiJane Huai, Lawrence S. Dolin and Steven R. Fischer served as members of the
Compensation Committee of the Board of Directors during the fiscal year ended
December 31, 2002. For information relating to transactions involving the
Company and such individuals, please see "Certain Relationships and Related
Transactions."
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AUDIT COMMITTEE REPORT
The Board of Directors appoints an Audit Committee each year to
review the Company's financial matters. The members of the Audit Committee are
Lawrence S. Dolin, Steven H. Owings and Steven R. Fischer. Each member of the
Company's Audit Committee meets the independence requirements set by the
Securities Exchange Commission (the "SEC") and the Nasdaq National Market. The
Audit Committee operates under a written charter adopted by the Board of
Directors.
The primary purpose of the Audit Committee is to assist the Board of
Directors in fulfilling its responsibility to oversee the Company's financial
reporting activities. The Audit Committee meets with the Company's independent
accountants and reviews the scope of their audit, report and recommendations.
The Audit Committee also recommends to the Company's stockholders the selection
of the Company's independent accountants. The Audit Committee met four times
during fiscal 2002. The Audit Committee members reviewed and discussed the
audited financial statements for the fiscal year ending December 31, 2002 with
management. The Audit Committee also discussed all the matters required to be
discussed by Statement of Auditing Standard No. 61 with the Company's
independent auditors, KPMG LLP. The Audit Committee received the written
disclosures and the letter from KPMG LLP as required by Independence Standards
Board Standard No. 1 and has discussed the independence of KPMG LLP with
representatives of such firm.
Based on their review and the discussions described above, the Audit
Committee recommended to the Board of Directors that the Company's audited
financial statements be included in the Company's Annual Report on Form 10-K to
be filed with the SEC.
Audit Committee
---------------
Lawrence S. Dolin
Steven H. Owings
Steven R. Fischer
2002 COMPENSATION COMMITTEE/STOCK OPTION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION:
GENERAL
During the fiscal year ended December 31, 2002, the Compensation
Committee/Stock Option Committee determined the cash and other incentive
compensation, if any, to be paid to the Company's executive officers and key
employees and was responsible for the administration and award of stock options
under the Company's 2000 Plan. During the fiscal year ended December 31, 2002,
Messrs. Huai, Dolin and Fischer served as members of the Compensation
Committee/Stock Option Committee. Messrs. Dolin and Fischer are non-employee
directors of the Company, as defined under Rule 16b-3 of the Securities Exchange
Act of 1934, as amended. Mr. Huai served as Chairman of the Compensation
Committee/Stock Option Committee. The Compensation Committee/Stock Option
Committee met one time and took action unanimous written consent on two
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occasions during the fiscal year ended December 31, 2002. As set forth above,
the Company has split this Committee effective March, 2003.
COMPENSATION PHILOSOPHY
The Compensation Committee/Stock Option Committee's executive
compensation philosophy is to base management's pay, in part, on achievement of
the Company's annual and long-term performance goals, to provide competitive
levels of compensation, to recognize individual initiative, achievement and
length of service to the Company, and to assist the Company in attracting and
retaining qualified management. The Compensation Committee/Stock Option
Committee also believes that the potential for equity ownership by management is
beneficial in aligning management's and stockholders' interests in the
enhancement of stockholder value. The Company has not established a policy with
regard to Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), since the Company has not paid and does not currently anticipate paying
compensation in excess of $1 million per annum to any employee. The Company
believes, however, that any compensation received by executive officers pursuant
to the exercise of options granted under the 2000 Plan qualifies as
"performance-based" compensation.
SALARIES
Base salaries for the Company's executive officers are determined
initially by evaluating the responsibilities of the position held and the
experience of the individual, and by reference to the competitive marketplace
for management talent, including a comparison of base salaries for comparable
positions at other comparable companies. Base salary compensation of executive
officers is reviewed annually by the Compensation Committee/Stock Option
Committee, and recommendations of the Compensation Committee/Stock Option
Committee in that regard are acted upon by the Board of Directors. Annual salary
adjustments are determined by evaluating the competitive marketplace; the
performance of the Company, which includes operating results of the Company and
cash management; quality of products; the performance of the executive; and the
length of the executive's service to the Company and any increased
responsibilities assumed by the executive. The Company places itself between the
low and medium levels in determining salaries compared to the other comparable
storage software companies.
INCENTIVE COMPENSATION
The Company from time to time will consider the payment of
discretionary bonuses to its executive officers. Bonuses would be determined
based, first, upon the level of achievement by the Company of its strategic and
operating goals and, second, upon the level of personal achievement by
participants. The achievement of goals by the Company includes, among other
things, the performance of the Company as measured by the operating results of
the Company and quality of products. The achievement of personal goals includes
the actual performance of the department of the Company for which the executive
officer has responsibility as compared to the planned performance thereof, other
individual contributions, the ability to manage and motivate employees and the
achievement of assigned projects. Bonuses are determined annually after the
close of each fiscal year. Despite achievement of personal goals, bonuses might
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not be given based upon the performance of the Company as a whole.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Huai's salary in 2002 was $150,000. Mr. Huai's salary is based
upon the factors described in the "Salaries" paragraph above and his base salary
is now set forth in his employment contract.
STOCK OPTION AND OTHER PLANS
The Company awarded options to the Named Executive Officers in 2002
as set forth in the table, above. It is the philosophy of the Compensation
Committee/Stock Option Committee that stock options should be awarded to
employees of the Company to promote long-term interests between such employees
and the Company's stockholders through an equity interest in the Company and to
assist in the retention of such employees. The Compensation Committee/Stock
Option Committee also considered the amount and terms of options previously
granted to Named Executive Officers. The Compensation Committee/Stock Option
Committee believes the potential for equity ownership by management is
beneficial in aligning management's and stockholders' interest in the
enhancement of stockholder value.
Compensation Committee/Stock Option Committee:
----------------------------------------------
ReiJane Huai, Chairman
Lawrence S. Dolin
Steven R. Fischer
SARBANES-OXLEY ACT COMPLIANCE
The Sarbanes-Oxley Act of 2002 (the "Act") sets forth various new
requirements for public companies and directs the SEC to adopt additional rules
and regulations.
Currently, the Company believes it is in compliance with all
applicable laws, rules and regulations arising from the Act. A number of the SEC
rules and regulations are not yet effective as regards the Company. The Company
intends to comply with all rules and regulations adopted by the SEC pursuant to
the Act no later than the time they become applicable to the Company.
-21-
COMMON STOCK PERFORMANCE: The following graph compares, for each of the periods
indicated, the percentage change in the Company's cumulative total stockholder
return on the Company's Common Stock with the cumulative total return of a) an
index consisting of Computer Software and Services companies, a peer group
index, and b) the Russell 3000 Index, a broad equity market index. The stock
price information for the Company at fiscal year ends prior to fiscal year ended
December 31, 2001, reflects the stock price of Network Peripherals, Inc.
[GRAPH]
Fiscal year ending
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
FalconStor Software, Inc. 100.00 62.07 651.72 88.80 124.97 53.52
Computer Software and Services 100.00 149.24 256.12 153.88 136.33 92.85
Russell 3000 Index 100.00 123.82 147.79 135.19 118.11 91.17
There can be no assurance that the Common Stock's performance will
continue with the same or similar trends depicted in the graph above.
-22-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 2, 2001, the Company invested approximately $2,300,000 in
a private placement of Network-1 Security Solutions, Inc. ("NSSI"), a publicly
traded corporation that develops and markets intrusion prevention software
products. For its investment, the Company received 1,084,935 shares of preferred
stock, which if converted into common stock would represent an approximate 16.5%
ownership of NSSI. Primarily due to the decline in the market value of NSSI's
common stock underlying the convertible preferred stock to a value which is
significantly below the Company's cost, the Company has concluded that the
decline in the fair value of its investment in NSSI's preferred stock is other
than temporary. Accordingly, in 2002 the Company recorded an impairment charge
of $2.3 million to write-off its investment in NSSI. At the same time as the
investment, the Company paid a $0.5 million non-refundable prepaid royalty to
NSSI, which is recoupable against future product sales of NSSI's products. Due
to the lack of market acceptance of the NSSI product, the Company determined
that the prepaid royalty is not recoverable and the Company recorded an
impairment charge of $0.5 million to write-off this prepaid royalty. The
following 5% stockholders or entities affiliated with 5% stockholders of the
Company also invested the following approximate amounts in the private placement
of NSSI: Applegreen Partners - $75,000; Brookwood Partners - $250,000; Barry
Fingerhut - $350,000; Irwin Lieber - $350,000; Jonathan Lieber - $25,000; Seth
Lieber - $25,000; Barry Rubenstein - $100,000; Seneca Ventures - $350,000;
Wheatley Partners, L.P. - $184,000; Wheatley Partners II, L.P. - $200,000;
Wheatley Foreign Partners, L.P. - $16,000; Woodland Partners - $200,000;
Woodland Venture Fund - $450,000.
Barry Rubenstein, a 5% stockholder, may be deemed to be the
beneficial owner of the securities acquired by Seneca Ventures, Woodland Venture
Fund, Woodland Partners, Brookwood Partners, Wheatley Foreign Partners, L.P.,
Wheatley Partners, L.P., and Wheatley Partners II, L.P. Barry Fingerhut and
Irwin Lieber, each of whom are 5% stockholders, may be deemed to be a beneficial
owner of the securities acquired by Wheatley Foreign Partners, L.P., Wheatley
Partners, L.P., and Wheatley Partners II, L.P. Seth Lieber and Jonathan Lieber,
each of whom are 5% stockholders, may be deemed to be the beneficial owners of
the securities acquired by Wheatley Foreign Partners, L.P., Wheatley Partners,
L.P., Wheatley Partners II, L.P. and Applegreen Partners. Marilyn Rubenstein, a
5% stockholder, may be deemed to be a beneficial owner of the securities
acquired by Seneca Ventures, Brookwood Partners, Woodland Partners and Woodland
Venture Fund.
-23-
PROPOSAL NO. 2
APPROVAL OF AMENDMENT TO THE 2000 STOCK OPTION PLAN
The Board of Directors proposes that the amendment to the 2000 Plan
(the "2000 Plan Amendment") be approved, whereby the number of shares issuable
upon the exercise of options under the 2000 Plan would be increased from
10,662,296 to 12,662,296.
As of the Record Date, options to purchase 1,494,682 shares were
available for grant under the 2000 Plan and options to purchase 8,098,216 shares
were issued and outstanding, with a weighted average exercise price of
approximately $3.00 per share. All such issued options vest over a three-year
period.
The 2000 Plan is intended to assist the Company in securing and
retaining employees, officers, consultants and advisors (the "Optionees") by
allowing them to participate in the ownership and growth of the Company through
the grant of incentive and nonqualified stock options. The granting of such
options serves as partial consideration for and gives the Optionees an
additional inducement to remain in the service of the Company and its
subsidiaries and provides them with an increased incentive to work towards the
Company's success. Shares of Common Stock may be issued under the 2000 Plan upon
the exercise of incentive stock options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options.
The Board of Directors believes it is in the Company's and its
stockholders' best interests to approve the 2000 Plan Amendment because it would
allow the Company to continue to grant options under the 2000 Plan which
facilitates the benefits of the additional incentive inherent in the ownership
of Common Stock by the Optionees and helps the Company retain the services of
these Optionees.
The proposed Amendment to the 2000 Plan is attached as Exhibit A to
this Proxy Statement.
SUMMARY OF THE 2000 PLAN, AS AMENDED
The following summary of the 2000 Plan, assuming stockholder
approval of the above amendment, is qualified in its entirety by the specific
language of the 2000 Plan.
General. The 2000 Plan provides for the grant of incentive and
nonqualified stock options to employees, officers, consultants and advisors of
the Company.
Shares Subject to Plan. A maximum of 12,662,296 of the authorized
but unissued or treasury shares of the common stock of the Company may be issued
upon the exercise of options granted under the 2000 Plan. Upon any stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments will be made to the shares subject to the 2000 Plan and
to outstanding options. To the extent that any outstanding option under the 2000
Plan expires or terminates prior to exercise in full or if shares issued upon
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the exercise of an option are repurchased by the Company, the shares of Common
Stock for which such option is not exercised or the repurchased shares are
returned to the 2000 Plan and again become available for grant. No optionee may
be granted, in total, options to purchase more than 15% of the shares authorized
under the plan.
Administration. The 2000 Plan will be administered by a Stock Option
Committee, consisting of two or more members of the Board of Directors appointed
by the Board of Directors. The Stock Option Committee will approve option grants
to employees, officers, consultants and advisors of the Company, subject to the
provisions of the 2000 Plan. The Stock Option Committee will also make any other
determinations necessary or advisable for the administration of the 2000 Plan.
The determinations by the Stock Option Committee will be final and conclusive.
Eligibility. Employees, officers, consultants and advisors of the
Company are eligible to participate in the 2000 Plan.
Terms and Conditions of Options. Each option granted under the 2000
Plan is evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the 2000 Plan. The
purchase price of each share of Common Stock purchasable under an incentive
option shall be determined by the Stock Option Committee at the time of grant,
but shall not be less than 100% of the fair value of such share of Common Stock
on the date the option is granted; provided, however, that with respect to an
optionee who, at the time such incentive option is granted, owns (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or of any Subsidiary, the
purchase price per share of Common Stock shall be at least 110% of the fair
market value per share of Common Stock on the date of grant. The purchase price
of each share of Common Stock purchasable under a nonqualified option shall not
be less than 80% of the fair market value of such share of Common Stock on the
date the option is granted. Generally, the fair market value of the Common Stock
will be the closing price per share on the date of grant as reported on The
Nasdaq National Market. The exercise price may be paid in cash, by check, or in
cash equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale of some or all of the shares of Common
Stock being acquired upon the exercise of the option, or by any combination of
these. Not withstanding the foregoing, an optionee may not take any actions
which are prohibited by the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated by the Securities and Exchange Commission or any other
agency thereunder.
Options granted under the 2000 Plan become exercisable at such time
or times and subject to such terms and conditions as shall be determined by the
Stock Option Committee at the time of grant. The term of each option shall be
determined by the Stock Option Committee (but shall not be more than 10 years
after the date of grant), subject to earlier termination in the event the
optionee's service with the Company ceases.
In general, during the lifetime of the optionee, the option may be
exercised only by the optionee and may not be transferred or assigned, except by
will or the laws of descent and distribution. However, the 2000 Plan provides
-25-
that, with the consent of the Stock Option Committee, an optionee may transfer a
nonqualified option to (i) a trust for the exclusive benefit of the optionee or
(ii) a member of the optionee's immediate family (or a trust for his or her
benefit).
Termination or Amendment. Unless earlier terminated by the Board,
the 2000 Plan will terminate on May 1, 2010. The 2000 Plan provides that it may
be terminated or amended by the Board at any time, subject to stockholder
approval only if such amendment would increase the total number of shares of
Common Stock reserved for issuance thereunder.
SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. Incentive stock options granted under the
2000 Option Plan are intended to be "incentive stock options" as defined by
Section 422 of the Code. Under present law, the grantee of an incentive stock
option will not realize taxable income upon the grant or the exercise of the
incentive stock option and the Company will not receive an income tax deduction
at either such time. If the grantee does not sell the shares acquired upon
exercise of an incentive stock option within either (i) two years after the
grant of the incentive stock option or (ii) one year after the date of exercise
of the incentive stock option, the gain upon a subsequent sale of the shares
will be taxed as long-term capital gain. If the grantee, within either of the
above periods, disposes of the shares acquired upon exercise of the incentive
stock option, the grantee will recognize as ordinary income an amount equal to
the lesser of (i) the gain realized by the grantee upon such disposition or (ii)
the difference between the exercise price and the fair market value of the
shares on the date of exercise. In such event, the Company would be entitled to
a corresponding income tax deduction equal to the amount recognized as ordinary
income by the grantee. The gain in excess of such amount recognized by the
grantee as ordinary income would be taxed as a long-term capital gain or
short-term capital gain (subject to the holding period requirements for
long-term or short-term capital gain treatment).
Unless the shares subject to an incentive stock option are subject
to a risk of forfeiture at the time the option is exercised, the exercise of the
incentive stock option will result in the excess of the stock's fair market
value on the date of exercise over the exercise price being included in the
optionee's alternative minimum taxable income (AMTI). If the shares are subject
to a risk of forfeiture and are nontransferable, the excess described above will
be included in AMTI when the risk of forfeiture lapses or the shares become
transferable, whichever occurs sooner. Liability for the alternative minimum tax
is complex and depends upon an individual's overall tax situation. Before
exercising an incentive stock option, a grantee should discuss the possible
application of the alternative minimum tax with his tax advisor in order to
determine the tax's impact.
Non-Qualified Stock Options. Upon exercise of a non-qualified stock
option granted under the 2000 Plan, the grantee will recognize ordinary income
in an amount equal to the excess of the fair market value of the shares received
over the exercise price of such shares. That amount increases the grantee's
basis in the stock acquired pursuant to the exercise of the non-qualified
option. Upon a subsequent sale of the stock, the grantee will incur short-term
or long-term gain or loss depending upon his holding period for the shares and
upon the shares' subsequent appreciation or depreciation in the value. The
-26-
Company will be allowed a federal income tax deduction for the amount recognized
as ordinary income by the grantee upon the grantee's exercise of the option.
Summary of Tax Consequences. This outline is no more than a summary
of the federal income tax provisions relating to the grant and exercise of
options and stock appreciation rights under the 2000 Plan and the sale of shares
acquired under the 2000 Plan. Individual circumstances may vary these results.
The federal income tax laws and regulations are constantly being amended, and
each participant should rely upon his own tax counsel for advice concerning the
federal income tax provisions applicable to the 2000 Plan.
The Board believes it is in the Company's best interests to approve
the 2000 Plan Amendment, which would allow the Company to continue to grant
options under the 2000 Plan to secure for the Company the benefits of the
additional incentive inherent in the ownership of shares of the Company's Common
Stock by employees, officers, consultants and advisors and to help the Company
secure and retain the services of employees, officers, consultants and advisors.
AMENDED PLAN BENEFITS
The following table sets forth the stock options outstanding under
the 2000 Plan as of the Record Date.
Stock Options Outstanding
ReiJane Huai -0-
Jacob Ferng 368,458
Wayne Lam 513,743
All Executive Officers as a Group 882,201
Non-Executive Directors and Director Nominees as a Group 10,000
Non-Executive Officer Employees as a Group 7,206,015
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE 2000 STOCK OPTION
PLAN AMENDMENT.
-27-
PROPOSAL NO. 3
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of KPMG LLP has been selected as the independent
public accountants for the Company for the fiscal year ending December 31, 2003.
Although the selection of accountants does not require ratification, the Audit
Committee of the Board of Directors has directed that the appointment of KPMG
LLP be submitted to stockholders for ratification due to the significance of
their appointment by the Company. If stockholders do not ratify the appointment
of KPMG LLP, the Audit Committee will consider the appointment of other
certified public accountants. A representative of that firm, which served as the
Company's independent public accountants for the fiscal year ended December 31,
2002, is expected to be present at the Meeting and, if he so desires, will have
the opportunity to make a statement, and in any event will be available to
respond to appropriate questions.
AUDIT FEES: The aggregate fees billed for professional services
rendered by KPMG LLP for the audit of the Company's annual financial statements
for the fiscal year ended December 31, 2002 and the reviews of the financial
statements included in the Company's Form 10-Qs for such fiscal year were
approximately $188,700.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: No
fees were billed for professional services rendered by KPMG LLP for financial
information systems design and implementation services for the fiscal year ended
December 31, 2002.
ALL OTHER FEES: The aggregate fees billed for non-audit related
services rendered by KPMG LLP to the Company, for the fiscal year ended December
31, 2002 were approximately $71,550. These fees consisted primarily of reviews
of SEC filings and tax services.
The Audit Committee has considered whether the provision by KPMG LLP
of the services covered by the fees other than the audit fees is compatible with
maintaining KPMG LLP's independence and believes that it is compatible.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE - On August 30, 2001, the Company dismissed
PricewaterhouseCoopers LLP ("PWC") as its independent accountants. The reports
of PWC on the Company's balance sheets as of December 31, 2000 and 1999 and
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000 did not contain an
adverse opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit scope or accounting principles. The Company 's Board of
Directors approved the dismissal of PWC on August 30, 2001. During the fiscal
years ended December 31, 2000 and 1999 and during the subsequent interim period
through August 30, 2001, there were no disagreements with PWC on any matter of
accounting principles or practices, financial statement disclosure or auditing
-28-
scope or procedures which disagreements if not resolved to the satisfaction of
PWC would have caused them to make reference thereto in their report on the
financial statements for such years. During the fiscal years ended December 31,
2000, 1999 and 1998 and during the subsequent interim period through August 30,
2001, there were no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K).
The Company requested that PWC furnish it a letter addressed to the
SEC stating whether PWC agreed with the statements made by the Company herein
and, if not, stating the respects in which it did not agree. PWC's letter, dated
September 5, 2001 was filed as Exhibit 16.1 to a Form 8-K filed by the Company.
Simultaneously with the dismissal of its former auditors, the
Company engaged KPMG LLP, the independent auditors of FalconStor, Inc., as its
independent public auditors, replacing its former auditor, PWC. The Audit
Committee of the Board of Directors of the Company approved the appointment of
KPMG LLP as its independent accountants and auditors on August 30, 2001. During
the two most recent fiscal years and subsequent interim periods, the Company had
not consulted with KPMG LLP regarding (i) either the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on its financial statements, or (ii) any
matter that was either the subject of disagreement on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures or a reportable event (as defined in Item 304(a)(1)(v) of Regulation
S-K).
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE SELECTION OF THE INDEPENDENT
PUBLIC ACCOUNTANTS.
SOLICITATION STATEMENT
The Company will bear all expenses in connection with the
solicitation of proxies. In addition to the use of the mail, solicitations may
be made by the Company's regular employees, by telephone, telegraph or personal
contact, without additional compensation. The Company will, upon their request,
reimburse brokerage houses and persons holding shares of Common Stock in the
names of the Company's nominees for their reasonable expenses in sending
solicited material to their principals.
STOCKHOLDER PROPOSALS
-29-
In order to be considered for inclusion in the proxy materials to be
distributed in connection with the next annual meeting of stockholders of the
Company, stockholder proposals for such meeting must be submitted to the Company
no later than December 11, 2003.
On May 21, 1998 the SEC adopted an amendment to Rule 14a-4, as
promulgated under the Securities and Exchange Act of 1934, as amended. The
amendment to Rule 14a-4(c)(1) governs the Company's use of its discretionary
proxy voting authority with respect to a stockholder proposal, which is not
addressed in the Company's proxy statement. The amendment provides that if the
Company does not receive notice of the proposal at least 45 days prior to the
first anniversary of the date of mailing of the prior year's proxy statement,
then the Company will be permitted to use its discretionary voting authority
when the proposal is raised at the annual meeting, without any discussion of the
matter in the proxy statement.
With respect to the Company's 2004 Annual Meeting of Stockholders,
if the Company is not provided notice of a stockholder proposal, which has not
been timely submitted, for inclusion in the Company's proxy statement by
February 25, 2004 the Company will be permitted to use its discretionary voting
authority as outlined above.
OTHER MATTERS
So far as now known, there is no business other than that described
above to be presented for action by the stockholders at the Meeting, but it is
intended that the proxies will be voted upon any other matters and proposals
that may legally come before the Meeting or any adjournment thereof, in
accordance with the discretion of the persons named therein.
ANNUAL REPORT
The Company has sent, or is concurrently sending, to all of its
stockholders of record as of March 27, 2003 a copy of its Annual Report for the
fiscal year ended December 31, 2002. Such report contains the Company's audited
consolidated financial statements for the fiscal year ended December 31, 2002.
By Order of the Company,
ReiJane Huai, Chairman and Chief Executive Officer
Dated: Melville, New York
April 10, 2003
-30-
THE COMPANY WILL FURNISH A FREE COPY OF ITS ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 (WITHOUT EXHIBITS) TO ALL OF
ITS STOCKHOLDERS OF RECORD AS OF MARCH 27, 2003 WHO WILL MAKE A WRITTEN REQUEST
TO MR. JACOB FERNG, CHIEF FINANCIAL OFFICER, FALCONSTOR SOFTWARE, INC., 125
BAYLIS ROAD SUITE 140 MELVILLE, NEW YORK 11747.
31
EXHIBIT A
Amendment to 2000 Stock Option Plan
If approved by Stockholders, paragraph 4 of the FalconStor Software,
Inc., 2000 Stock Option Plan shall read in its entirety as follows:
4. Stock Reserved for the Plan. Subject to adjustment as provided in Section 7
hereof, a total of 10,662,296 shares of the Company's Common Stock, $.001 par
value per share (the "Stock"), shall be subject to the Plan. The shares of Stock
subject to the Plan shall consist of unissued shares or previously issued shares
held by any Subsidiary or Affiliate of the Company, and such amount of shares of
Stock shall be and is hereby reserved for such purpose. Any of such shares of
Stock that may remain unsold and that are not subject to outstanding Options at
the termination of the Plan shall cease to be reserved for the purposes of the
Plan, but until termination of the Plan the Company shall at all times reserve a
sufficient number of shares of Stock to meet the requirements of the Plan.
Should any Option expire or be canceled prior to its exercise in full or should
the number of shares of Stock to be delivered upon the exercise in full of an
Option be reduced for any reason, the shares of Stock theretofore subject to
such Option may be subject to future Options under the Plan.
A-1
PROXY
FALCONSTOR SOFTWARE, INC.
Proxy for Annual Meeting of Stockholders
Solicited by the Board of Directors
The undersigned hereby appoints ReiJane Huai and Jacob Ferng, and
each of them, with full power of substitution to represent the undersigned and
to vote all of the shares of common stock of FalconStor Software, Inc.
("FalconStor") which the undersigned is entitled to vote at the Annual Meeting
of Stockholders of FalconStor to be held at the Huntington Hilton, Route 110 at
598 Broadhollow Road, Melville, New York 11747, on Thursday, May 15, 2003, at
9:00 a.m., local time, and at any adjournment thereof, (1) as hereinafter
specified upon the proposals listed below and (2) in their discretion, upon such
other matters as may properly come before the meeting.
IMPORTANT: PLEASE DATE, SIGN AND MAIL PROMPTLY THIS PROXY IN THE
ENCLOSED RETURN ENVELOPE TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE
MEETING. If you attend the meeting, you may vote in person should you wish to do
so even though you have already sent in your Proxy.
1. To elect the following directors: (01) Patrick B. Carney and (02) Steven H.
Owings, to serve as directors until the 2006 Annual Meeting of Stockholders
of the Company and until successors have been duly elected and qualified.
____________ FOR ALL NOMINEES __________ WITHHELD FROM ALL NOMINEES
____________________________________________________________________
FOR ALL NOMINEES EXCEPT AS NOTED ABOVE
2. To approve an amendment to our 2000 Stock Option Plan.
FOR ___________ AGAINST ___________ ABSTAIN ___________
3. To ratify the appointment of KPMG LLP as the independent public accountants
of the Company for the fiscal year ending December 31, 2003.
FOR ___________ AGAINST ___________ ABSTAIN ___________
4. With discretionary authority, upon such other matters as may properly come
before the meeting. At this time, the persons making this solicitation know
of no other matters to be presented at the meeting.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT _____
MARK HERE IF YOU PLAN TO ATTEND THE MEETING ____
Please sign your name exactly as it appears on the stock certificate
representing your shares. If signing for estates, trusts or corporations, title
or capacity should be stated. If shares are held jointly, both should sign.
Signature: __________________ Date______________
Signature: __________________ Date______________