SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED
BY RULE 14A-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
TERAFORCE TECHNOLOGY CORPORATION
-----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------
TERAFORCE TECHNOLOGY CORPORATION
To the Stockholders of TeraForce Technology Corporation:
The Company's Annual Meeting of Stockholders for 2001 has been called for
12:00 noon on Friday, June 15, 2001, at the Omni Richardson Hotel, 701 East
Campbell Road, Richardson, Texas 75081.
You are requested to participate by proxy or in person by voting on the
matters presented for action at the meeting as described in the attached Notice
of Annual Meeting and Proxy Statement. The Company's business strategy and
progress will be reviewed at the meeting. Directors and officers will be
participating and available to respond to stockholder inquiries.
The Company's Annual Report for the year ended December 31, 2000, is
enclosed as filed on Form 10-K with the Securities and Exchange Commission. The
report includes an overview of the Company's business; descriptions of its
products, technologies, and services; an outline of risk factors; and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such presentations are intended to cover changes in the Company's
business strategy and operations that are expected to underlie the Company's
prospects for growth and value.
We cordially invite you to attend the meeting. Your support is important and
we encourage you to vote "yes" on the agenda items. Whether or not you plan to
attend the meeting, please sign, date, and return the enclosed proxy promptly in
the envelope provided. If you attend the meeting, you may, at your discretion,
withdraw the proxy and vote in person.
Thank you for your time and consideration to respond to our request.
Sincerely,
/s/ Herman M. Frietsch
Herman M. Frietsch
Chairman and Chief Executive Officer
On Behalf of the Board of Directors
and Management of the Company
Enclosures
April 30, 2001
TERAFORCE TECHNOLOGY CORPORATION
NOTICE OF THE
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 15, 2001
To the Stockholders of TeraForce Technology Corporation.
We hereby give you notice that the 2001 Annual Meeting of Stockholders (the
"Meeting") of TeraForce Technology Corporation (the "Company") will be held on
Friday, June 15, 2001, at 12:00 p.m. (Central Daylight Time) at the Omni
Richardson Hotel, 701 East Campbell Road, Richardson, Texas 75081 for the
purpose of considering and voting upon the following matters:
1. To elect one (1) director of the Company;
2. To consider and vote upon a proposal to increase the number of shares
reserved for issuance under the Company's Amended and Restated Stock
Incentive Plan;
3. To consider and vote upon a proposal to approve and ratify a stock
option plan for the Company's wholly-owned subsidiary Aegean Networks,
Incorporated;
4. To consider and vote upon a proposal to approve and ratify a stock
option plan for the Company's wholly-owned subsidiary Centauri NetSystems
Corporation;
5. To consider and act upon a proposal to ratify the appointment of Grant
Thornton LLP as independent certified public accountants of the Company
for 2001; and
6. To transact such other business as may properly come before the Meeting
or any adjournment thereof.
Your Board of Directors recommends that you vote "FOR" the nominee to the
Board and the other proposals set before you. We have fixed the close of
business on April 23, 2001 as the record date for the Meeting, and only holders
of common stock of record at such time will be entitled to vote at the Meeting
or any adjournment thereof.
Whether or not you plan to attend the Meeting, please promptly complete,
date, sign and return the enclosed proxy in the accompanying envelope. No
postage need be affixed if the proxy is mailed in the United States. If you
attend the Meeting, you may vote in person even if you have returned a proxy. By
promptly returning your proxy, you will greatly assist us in preparing for the
Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
[/S/ ROBERT P. CAPPS]
Robert P. Capps
Secretary
Richardson, Texas
April 30, 2001
IMPORTANT: PLEASE MARK, DATE, SIGN AND RETURN YOUR PROXY PROMPTLY, WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING. NO POSTAGE IS REQUIRED IF YOU USE THE
ENCLOSED ENVELOPE ADDRESSED TO THE COMPANY.
TERAFORCE TECHNOLOGY CORPORATION
1240 EAST CAMPBELL ROAD
RICHARDSON, TEXAS 75081
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 15, 2001
This Proxy Statement accompanies the Notice (the "Notice") of the Annual
Meeting of Stockholders of TeraForce Technology Corporation (the "Company") and
is furnished in connection with the solicitation by the Board of Directors of
the Company of proxies to be voted at the Annual Meeting of Stockholders of the
Company (the "Meeting") and at any and all adjournments of such Meeting. The
Meeting is to be held on June 15, 2001, at the Omni Richardson Hotel, 701 East
Campbell Road, Richardson, Texas 75081.
The Company's Annual Report for the year ended December 31, 2000 is being
mailed to stockholders with the mailing of the Notice of Meeting and Proxy
Statement. The Notice of Meeting, this Proxy Statement, the Annual Report, and
the enclosed proxy are being first mailed to stockholders on or about April 30,
2001.
At the Meeting, holders of the Company's common stock will vote upon the
proposals set forth in this Proxy Statement. We have presented the following
questions and answers section to provide you answers to commonly asked
questions.
QUESTIONS AND ANSWERS ABOUT THE MEETING
Q: WHEN AND WHERE IS THE MEETING?
A: The Annual Meeting will take place on Friday, June 15, 2001, at
12:00 p.m. (Central Daylight Time) at the Omni Richardson Hotel located at 701
East Campbell Road, Richardson, Texas 75081.
Q: WHAT WILL BE VOTED ON AT THE MEETING?
A: There will be a vote upon the following matters: (1) the election of
management's nominee to the Board of Directors; (2) an amendment to the
Company's Amended and Restated Stock Incentive Plan to increase the number of
shares reserved for issuance under the plan; (3) the approval and ratification
of the Aegean Networks, Incorporated 2001 Stock Option Plan; (4) the approval
and ratification of the Centauri NetSystems Corporation 2001 Stock Option Plan;
and (5) the ratification of the appointment of Grant Thornton LLP as the
independent certified public accountants of the Company.
Q: WHO CAN VOTE AT THE MEETING?
A: Only stockholders of record as of the close of business on April 23, 2001
(the "Record Date") will be entitled to vote at the Meeting and any adjournment
or postponement thereof. As of the Record Date, there were 85,698,376 shares of
the Company's common stock issued and outstanding which are entitled to vote.
Each such share is entitled to one vote.
Q: HOW DO I VOTE?
A: If you hold your shares as a stockholder of record, you can vote by proxy
or in person at the Meeting. To vote by proxy you should mark, date, sign and
mail the enclosed proxy card in the enclosed prepaid envelope. The proxies
identified on the back of the proxy card will vote the shares of which you are a
stockholder of record in accordance with your instructions. Giving a proxy will
not
affect your right to vote in person--by voting in person you automatically
revoke your proxy. You also may revoke your proxy at any time before the voting
by giving the Secretary of the Company written notice of your revocation or by
submitting a later-dated proxy. If you execute, date and return your proxy, but
do not mark your voting preference, the shares represented by proxy will be
voted as recommended by the Board of Directors. Thus, if no directions are
given, the proxy will be voted FOR the proposals.
If you are a "street name" stockholder, as for example, when your shares are
in the name of your broker or nominee, you will receive instructions from your
bank, broker, or other nominee describing the procedure for how to vote your
shares. The enclosed form of proxy confers discretionary authority upon the
persons named therein with respect to amendments or variations to matters
identified in the Notice of Meeting and with respect to other matters which are
appropriately brought before the Meeting. Except as disclosed herein, at the
date hereof, the management of the Company knows of no such amendments,
variations or other matters.
Q: HOW MANY VOTES CAN I CAST?
A: Each stockholder of record as of the Record Date is entitled to one vote
at the Meeting for each share of common stock held.
Q: WHAT CONSTITUTES QUORUM AND HOW DOES IT AFFECT VOTING ON THE PROPOSALS?
A: Voting can take place at the Meeting only if stockholders owning a
majority of the voting power of the common stock (that is a majority of the
total number of votes entitled to be cast) outstanding as of the Record Date are
present in person or by proxy. If you submit a valid proxy card or attend the
Meeting, your shares will be counted to determine whether there is a quorum.
Both abstentions and broker non-votes are counted as present for purposes of
establishing the quorum necessary for the Meeting to proceed.
Q: WHAT IS A BROKER NON-VOTE?
A: A broker non-vote results from a situation in which a broker or bank
holding your shares in "street" or "nominee" name indicates to us on a proxy
that you have not voted and it lacks discretionary authority to vote your
shares.
Q: HOW CAN I VOTE?
A: In completing the proxy, shares may be voted as "FOR" or "WITHHOLD
AUTHORITY" with respect to the election of the director and "FOR", "AGAINST" or
"ABSTAIN" with respect to the other proposals. Shares voted accordingly are
treated as being present at the Meeting for purposes of establishing a quorum
and are also treated as shares entitled to vote ("Voted Shares").
Q: HOW ARE ABSTENTIONS AND BROKER NON-VOTES TREATED?
A: Under Delaware law, we believe that abstentions should be counted for
purposes of determining both (1) the presence of a quorum for the transaction of
business and (2) the total number of Voted Shares with respect to a proposal
(other than the election of directors). In the absence of a clearly defined
precedent from the Delaware courts, we intend to treat abstentions in this
manner. Therefore, proxy proposals marked as "ABSTAIN" will have the same effect
as a vote against a proposal.
Likewise, under Delaware law we believe that broker non-votes should be
counted for purposes of constituting a quorum; however, they should not be
counted for purposes of determining the number of Voted Shares with respect to
the proposals.
2
Q: HOW MANY VOTES ARE NEEDED TO APPROVE THE PROPOSALS?
A: The director shall be elected by a plurality of votes on that particular
matter. In order to ratify and approve the other proposals, a majority of the
Voted Shares is required.
Q: WHAT IS THE EFFECT OF VOTING IN FAVOR OF THE PROPOSALS?
A: Each properly executed proxy received at or before the Meeting on
June 15, 2001, or any adjournments thereof, will be voted at the Meeting as
specified in the properly executed proxy. A proxy may be revoked at any time
prior to its exercise by delivering written notice of its revocation to the
Secretary of the Company, by a later dated proxy or by attending the Meeting and
voting in person.
A vote "FOR" the various proposals would have the effect of: (1) electing
Robert E. Garrison II to the Board of Directors for a term expiring at the 2004
annual meeting; (2) increasing the number of shares available for issuance under
the Company's Amended and Restated Stock Incentive Plan from 8 million to
9.5 million; (3) approving and ratifying a stock plan for the Company's
wholly-owned subsidiary Aegean Networks, Incorporated; (4) approving and
ratifying a stock plan for the Company's wholly-owned subsidiary Centauri
NetSystems Corporation; and (5) ratifying the appointment of Grant Thornton LLP
as the Company's independent certified public accountants.
Q: WILL ANY OTHER MATTERS BE VOTED ON AT THE MEETING?
A: Any other business that properly comes before the Meeting or any
adjournment or postponement of the Meeting may also be voted on. However, we are
currently not aware of any other business.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY OR VOTING INSTRUCTION
CARD?
A: It means your shares are registered differently or are held in more than
one account. Please provide voting instructions for each proxy card that you
receive in the space provided on each proxy card.
Q: HOW CAN I VOTE SHARES HELD IN MY BROKER'S NAME?
A: As previously indicated, if your broker holds your shares in its name (or
in what is commonly called "street name"), you will receive instructions from
your broker describing how to vote your shares. You should follow the directions
provided by your broker regarding how to instruct your broker to vote your
shares.
Q: CAN I VOTE SHARES AT THE MEETING THAT ARE HELD BY A BROKER AS NOMINEE?
A: If you would like to attend the Meeting and your shares are held by a
broker, bank or other nominee, in order to vote your shares at the Meeting, you
must obtain from each nominee a proxy issued in your name. Also, please bring to
the Meeting a recent brokerage statement or letter from the nominee confirming
the beneficial ownership of the shares of common stock. You must also bring a
form of personal identification.
Q: HOW DOES THE BOARD RECOMMEND THAT I VOTE ON THE PROPOSALS?
A: The Board of Directors of the Company unanimously recommends that the
stockholders vote FOR the proposals to be submitted at the upcoming Annual
Meeting.
3
Q: WHO IS SOLICITING MY PROXY?
A: We, the Board of Directors of the Company, are sending you this proxy
statement. We have elected to retain the services of Regan & Associates, Inc.
for the purpose of soliciting proxies to be voted at the Meeting at an estimated
cost of $12,000, plus out-of-pocket expenses. In addition, certain directors,
officers and employees of the Company also may solicit proxies on our behalf by
mail, phone, and fax or in person.
Q: WHO IS PAYING FOR THIS SOLICITATION?
A: The Company will pay for the solicitation of proxies. We will also
reimburse banks, brokers, custodians, nominees and fiduciaries for their
reasonable charges and expenses in forwarding our proxy materials to the
beneficial owners of our common stock.
Q: WHO WILL COUNT THE VOTE?
A: American Stock Transfer and Trust Company, New York, who serves as the
Company's transfer agent, will count the vote. The inspector of the election
will be appointed by the Company.
Q: WHO CAN HELP ANSWER ANY QUESTIONS I HAVE?
A: If you have any questions about the proposals, please contact Regan &
Associates at (212) 587-3005 or Robert P. Capps, Corporate Secretary, at
(469) 330-4960.
PLEASE READ THE ENTIRE PROXY STATEMENT BEFORE DECIDING HOW TO VOTE. THE
ENCLOSED FORM OF PROXY CONFERS DISCRETIONARY AUTHORITY UPON THE PERSONS NAMED
THEREIN WITH RESPECT TO AMENDMENTS OR VARIATIONS TO MATTERS IDENTIFIED IN THE
NOTICE AND WITH RESPECT TO OTHER MATTERS WHICH ARE APPROPRIATELY BROUGHT BEFORE
THE MEETING. EXCEPT AS DISCLOSED HEREIN, AT THE DATE HEREOF, THE MANAGEMENT OF
THE COMPANY KNOWS OF NO SUCH AMENDMENTS, VARIATIONS OR OTHER MATTERS.
The Proxy Statement and the accompanying proxy were first mailed to
stockholders on or about April 30, 2001. Only holders of the Company's common
stock of record at the close of business on April 23, 2001, will be entitled to
receive notice of and to vote at the Meeting.
4
PROPOSAL 1: ELECTION OF DIRECTOR
Our Board of Directors currently has five director seats, one of which is
currently vacant. Pursuant to an agreement with The Coastal Corporation Second
Pension Trust ("Coastal"), so long as Coastal owns at least ten percent (10%) of
the common stock we have agreed to appoint a person nominated by Coastal upon
prior notice to fill the vacancy, to serve until December 17, 2001. Our Board of
Directors is grouped into three classes. In accordance with our Restated By-Laws
and Amended and Restated Certificate of Incorporation, the directors are elected
for staggered three-year terms. One of three classes is elected each year to
succeed the directors whose terms are expiring. At this Meeting, the term of one
of the director seats, that of Robert E. Garrison II, expires. The director
nominated for election at this Meeting would hold office for a three-year term
expiring in 2004. Other directors are not up for election this year and will
continue in office for the remainder of their terms.
The Company, and its predecessor, Intelect Communications Systems Limited, a
company organized under the laws of Bermuda ("Intelect (Bermuda)") in
December 1997 engaged in a restructuring transaction, the principal effect of
which was to make the Company, a Delaware corporation, the publicly traded
surviving corporation. As a result of this transaction, there is some continuity
in the Board of Directors of the Company and Intelect (Bermuda). Accordingly,
for the periods prior to December 1997, references herein to service to the
"Company" refer to service with Intelect (Bermuda).
NOMINEES FOR ELECTION
DIRECTOR NOMINATED THIS YEAR FOR TERM TO EXPIRE IN 2004.
ROBERT E. GARRISON II, 59, is President and Chief Executive Officer of
Pinnacle Global Group, Inc. a publicly traded financial services company, since
January 1999. Mr. Garrison previously served as Executive Vice President of
Investment Banking with Harris, Webb & Garrison, Inc. a regional investment
banking and brokerage firm, from February 1994 to January 1999, and Chairman and
Chief Executive Officer of Pinnacle Management & Trust Company, a state
chartered independent trust company, from June 1994 to January 1999, at which
time Harris Webb & Garrison, Inc. and Pinnacle Management & Trust Company became
part of Pinnacle Global Group, Inc. From October 1992 to February 1994,
Mr. Garrison served as Chief Executive Officer of Health Care Capital
Group, Inc., a regional investment bank focusing on the health care industry.
From 1991 until October 1992, Mr. Garrison served as Chairman and Chief
Executive Officer of Med Center Bank & Trust Company, an independent bank
located in Houston, Texas. Mr. Garrison serves on the Board of Directors of
Pinnacle Global Group, Inc. Mr. Garrison has been a director of the Company
since July 1997 and serves as Chairman of the Audit Committee and as a member of
the Stock Option Committee.
The Board of Directors recommends a vote FOR this nominee, and unless
otherwise instructed or unless authority to vote is withheld, the enclosed proxy
will be voted FOR the election of this nominee. Proxies may not be voted for a
greater number of persons than the nominee named. Although the Board of
Directors of the Company does not contemplate that the nominee will be unable to
serve, if such a situation exists prior to the Meeting, the persons named in the
enclosed proxy will vote for the election of such other persons as may be
nominated by the Board of Directors.
OTHER DIRECTORS
DIRECTOR UP FOR ELECTION IN 2002.
ANTON VON LIECHTENSTEIN, 60, is a private investor and has been so for the
past five years. Mr. von Liechtenstein has been a director of the Company since
1980 and was its first Managing Director. He is Chairman of the Stock Option
Committee and serves as a member of the Audit Committee.
5
DIRECTORS UP FOR ELECTION IN 2003.
HERMAN M. FRIETSCH, 61, has served as a director since 1988, Chairman of the
Board of the Company since 1989, and its Chief Executive Officer since
February 1997. He was Executive Chairman from October 1995 to February 1997.
Mr. Frietsch also serves as Chairman of the Compensation Committee.
DAVID H. YEDWAB, 54, is Executive Vice President of the Eastern Management
Group, a management-consulting firm, since 1987. Mr. Yedwab has been a director
of the Company since July 2000 and serves as a member of both the Audit
Committee and the Compensation Committee. Mr. Yedwab was appointed by the Board
of Directors in July 2000 to fill a vacancy on the Board.
For information relating to common stock owned by each of the directors see
"Security Ownership of Certain Beneficial Owners and Management."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 23, 2001
unless otherwise noted, with respect to the beneficial ownership of the
Company's common stock by (i) each person known by the Company to own
beneficially more than 5% of the outstanding common stock; (ii) each director
and nominee for director; (iii) each executive officer named in the Summary
Compensation Table under the heading "Executive Compensation" below; and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, the information included below is based upon the Company's
stock transfer records as maintained by the Company's stock transfer agent.
The number of shares of common stock beneficially owned by each director or
executive officer is determined under the rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares, which the individual has the right to
acquire within 60 days after April 23, 2001 through the exercise of any stock
option or other right. Unless otherwise indicated, each person has sole
investment and voting power (or shares such power with his or her spouse) with
respect to the shares set forth in the following table. The inclusion herein of
any shares deemed beneficially owned does not constitute admission of beneficial
ownership of those shares.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------ -------------------- ----------------
Herman M. Frietsch......................................... 1,297,659(1) 1.50%
Robert P. Capps............................................ 78,332(2) *
R. Eugene Helms............................................ 186,665(3) *
Willard F. Barnett......................................... 104,998(4) *
John C. Radford............................................ 76,666(5) *
Robert E. Garrison II...................................... 447,413(6) *
Anton von Liechtenstein.................................... 613,382(7) *
David H. Yedwab............................................ 150,000(2) *
The Coastal Corporation Second Pension Trust(8)............ 15,219,243(9) 16.50%
SJMB, L.P.(10)............................................. 9,757,381(11) 10.22%
All Directors and Executive Officers as a group (8
persons)................................................. 2,955,115(12) 3.33%
------------------------
(1) Includes 656,664 shares issuable upon exercise of options, which are
currently exercisable or become exercisable by June 22, 2001. Includes
138,995 shares, which assume the conversion at a price of $1.00 per dollar
of outstanding principal, and interest of a loan made by Mr. Frietsch to the
Company in December of 1997. Includes 6,000 shares owned beneficially by
Mr. Frietsch's spouse as to which he disclaims beneficial ownership.
6
(2) Represents shares issuable upon exercise of options, which are currently
exercisable or become exercisable by June 22, 2001.
(3) Includes 161,665 shares issuable upon exercise of options, which are
currently exercisable or become exercisable by June 22, 2001.
(4) Represents shares issuable upon exercise of options, which are currently
exercisable or become exercisable by June 22, 2001. Does not include shares
of common stock which may be issued to Mr. Barnett in connection with his
separation from the Company.
(5) Represents shares issuable upon exercise of options, which are currently
exercisable or become exercisable by June 22, 2001. The exercise period for
these options terminates on September 28, 2001.
(6) Includes 375,000 shares issuable upon exercise of options, which are
currently exercisable or become exercisable by June 22, 2001.
(7) Includes 325,000 shares issuable upon exercise of options, which are
currently exercisable or become exercisable by June 22, 2001.
(8) The principal address of The Coastal Corporation Second Pension Trust is
Nine Greenway Plaza, Houston, Texas 77046.
(9) Based solely on information supplied to the Company as of December 13, 2000,
by Coastal. Includes 6,517,308 shares issuable upon exercise of currently
exercisable warrants.
(10) The general partner of SJMB, L.P. is SJMB, L.L.C. The directors of SJMB,
L.L.C. are Charles E. Underbrink and John L. Thompson. The principal address
of SJMB, L.P. is 777 Post Oak Boulevard, Suite 950, Houston, Texas 77056.
(11) Represents 9,757,381 shares issuable upon exercise of currently exercisable
warrants, including 950,076 issuable shares which SJMB, L.P. has previously
disclaimed beneficial ownership in a Schedule 13D filed with the Securities
and Exchange Commission on January 11, 2001. Does not include 2,142,619
shares upon currently exercisable warrants beneficially owned by St. James
Capital Partners, L.P.
(12) Includes 1,928,325 shares issuable upon exercise of options which are
currently exercisable or become exercisable by June 22, 2001. Includes
138,995 shares issuable upon conversion of convertible debt.
* Represents less than 1%
7
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers is set forth below.
The executive officers of the Company are elected by the Board of Directors.
NAME AGE OFFICE AND EMPLOYMENT DURING LAST FIVE YEARS
---- -------- --------------------------------------------
Herman M. Frietsch............. 61 Chairman of the Board since 1989, Chief Executive Officer
since February 1997, Director since 1988, Executive Chairman
from October 1995 to February 1997.
Robert P. Capps................ 47 Executive Vice President, Chief Financial Officer, Treasurer
and Secretary of the Company since August 1999; Executive
Vice President and Chief Financial Officer of Dynamex, Inc.
from 1996 until 1999; Executive Vice President and Chief
Financial Officer of Hadson Corporation from 1986 until
1996.
R. Eugene Helms................ 50 Executive Vice President, and Corporate Development Officer
of the Company, Vice President and Chief Technology Officer
since June 1996; President and Chief Executive Officer of
DNA Enterprises, Inc. (a subsidiary of the Company) from
April 1996 to September 1999; President and Owner of
TeleSolutions Inc., a consulting firm, from January 1990 to
1996; Vice President, Engineering of Mizar, Inc., a DSP
products manufacturer, from March 1994 to October 1995.
Willard F. Barnett............. 52 Resigned from all positions held with the Company and its
subsidiaries effective April 27, 2001; previously served as
Vice President of the Company since April 2000; President of
Intelect Network Technologies Company (a subsidiary of the
Company) since March 1999; Vice President Sales and
Marketing of Intelect Network Technologies Company since
1995.
John C. Radford................ 43 Resigned from all positions held with the Company and its
subsidiaries effective February 9, 2001; previously served
as Vice President of the Company since April 2000, President
of DNA Enterprises, Inc. since September 1999, and Senior
Vice President of DNA Enterprises, Inc. since 1993.
BOARD AND COMMITTEE MEETINGS
The business of the Company is managed under the direction of the Board of
Directors, which is comprised of three classes, which are elected for staggered
three-year terms. Directors serve for the remainder of their respective terms or
until their successors are elected. The Board meets regularly to review Company
related activities, transactions, developments, and to act on matters requiring
Board approval. It also holds special meetings and acts by written consent as
may be necessary. The Board of Directors of the Company held 13 meetings during
2000. Each incumbent director attended at least 75% of the aggregate of the
total number of meetings of the Board of Directors during the period for which
he was a director and the total number of meetings held by all committees of the
Board of Directors on which the director served during the period he served.
The Company's Board of Directors has three standing committees: the Audit
Committee, the Compensation Committee, and the Stock Option Committee.
The Audit Committee approves the scope of the annual audit and makes
recommendations to the Board of Directors concerning the selection of the
Company's independent auditors. The Audit
8
Committee also advises the Board of Directors concerning the Company's internal
accounting controls, factors that may affect the quality and integrity of the
Company's financial reports, compliance by the Company's management and
employees with Company policies, and other matters. In doing so, it is the
responsibility of the Audit Committee to maintain free and open means of
communication between the directors, the independent auditors, the internal
auditors and the financial management of the Company. The independent auditors
for the Company are ultimately accountable to the Board of Directors and the
Audit Committee, who have the ultimate authority and responsibility to select,
evaluate, and where appropriate, replace the independent auditors. The members
of the Audit Committee are Messrs. Garrison, Liechtenstein and Yedwab. The Audit
Committee met two times during 2000. See "Audit Committee Report" below.
The Compensation Committee determines policy and reviews activity concerning
the compensation of the Company's executive management and the Company's
employees generally. The members of the Compensation Committee are
Messrs. Frietsch and Yedwab. The Compensation Committee met four times during
2000. See "Compensation Committee Report on Executive Compensation" below.
The Stock Option Committee determines policies and procedures for
implementing and administering the Company's stock option plans. The members of
the committee are Messrs. Garrison and Liechtenstein. Meetings of the Stock
Option Committee generally are adjunct to meetings of the Board. The Stock
Option Committee met four times during 2000.
The Company does not have a nominating committee or a committee serving a
similar function. Nominations are made by and through the full Board of
Directors.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Currently, employee directors receive no cash compensation for their
services as directors, however, each non-employee, outside director is entitled
to receive a cash fee of $1,000 per month for service as a director, and members
of the Audit, Compensation, and the Stock Option Committees each are entitled to
receive a cash fee of up to $1,000 per month for service on each committee. At
the election of each director at the beginning of each year, all fees are
payable, in cash or in common stock pursuant to the Directors' Stock Plan.
Directors can elect to defer receipt of the stock issued in payment of such fees
to a future fiscal year. With respect to fiscal year 2000, all members of the
Board elected to receive their fee in cash. Directors also may receive grants of
stock options in the discretion of the Board.
For a discussion of certain transactions between the Company and certain
directors and their affiliates, see "Certain Transactions."
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes annual and long-term compensation for each of
the last three fiscal years to Herman M. Frietsch, Chief Executive Officer of
the Company, and the other four most highly compensated executive officers of
the Company who were serving at the end of the last completed fiscal year and
who received more than $100,000 in salary and bonus during the last fiscal year
ended December 31, 2000 (the Chief Executive Officer and such other executive
officers are hereinafter referred to as the "Named Executive Officers").
9
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION SECURITIES
FISCAL ---------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)(1)
---------------------------- -------- ---------- --------- ---------------- ------------- -------------------
Herman M. Frietsch............... 2000 275,255 -- -- 200,000 8,161
Chairman and Chief Executive 1999 275,000 -- -- 850,000(2) 7,550
Officer of the Company 1998 250,000 -- -- 660,000(3) 3,742
Robert P. Capps.................. 2000 150,278 10,000 -- 165,000 2,624
Executive Vice President, Chief 1999 63,210 20,000 -- 270,000 687
Financial Officer, Treasurer
and Secretary of the Company
R. Eugene Helms.................. 2000 210,000 -- -- 165,000 14,029
Executive Vice President and 1999 210,000 93,642(4) -- 410,000(5) 12,440
Corporate Development Officer 1998 210,000 50,000(4) -- 350,000 4,000
of the Company
Willard F. Barnett............... 2000 220,690 52,111 -- 50,000 10,973
Former President of Intelect 1999 186,983 2,328 -- 190,000(6) 8,671
Network Technologies Company (a
subsidiary of the Company)
John C. Radford.................. 2000 190,000 -- -- 50,000 13,538
Former President of DNA 1999 164,923 40,000 -- 150,000 11,554
Enterprises, Inc. (a subsidiary
of the Company)
------------------------------
(1) Consists of matching contributions to 401(k) defined contribution plan and
insurance premiums for life, health and dental insurance.
(2) Includes 500,000 shares underlying options granted in replacement of, and
upon surrender of, an equal number of options previously granted, due to
option exchange and repricing transactions in January and October of 1999.
(3) These options were surrendered and replaced in repricing transactions in
1998 and 1999.
(4) Bonus amounts attributable and accrued for such years but paid in 2000.
(5) Includes 325,000 shares underlying options granted in replacement of, and
upon surrender of, an equal number of options previously granted, due to
option exchange and repricing transactions in October of 1999.
(6) 50,000 of these options were surrendered and replaced in a repricing
transaction in 1998.
(7) Includes options, which were surrendered and replaced in a repricing
transaction in 1998.
The following table sets forth stock options granted in 2000 to each of the
Named Executive Officers. The table also sets forth the hypothetical gains that
would exist for the options at the end of their ten-year terms at assumed
compound annual rates of stock price appreciation of 5% and 10%. The actual
future value of the options will depend on the market value of the Company's
common stock as the options are vested and exercisable.
10
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/ APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS(1)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME AND PRINCIPAL POSITIONS GRANTED (#) IN 2000 ($/SHARE) DATE 5% ($) 10% ($)
---------------------------- ----------- ---------- --------- ---------- --------- ---------
Herman M. Frietsch.................... 100,000(2) 4.07% 1.063 11/03/10 173,151 275,715
100,000(3) 4.07% 1.063 11/03/10 173,151 275,715
Robert P. Capps....................... 65,000(4) 2.64% 3.156 04/24/10 334,151 532,000
100,000(2) 4.07% 1.063 11/03/10 173,151 275,715
R. Eugene Helms....................... 65,000(4) 2.64% 3.156 04/24/10 334,151 532,000
100,000(2) 4.07% 1.063 11/03/10 173,151 275,715
Willard F. Barnett.................... 50,000(4) 2.03% 3.156 04/24/10 257,040 409,293
John C. Radford....................... 50,000(5) 2.03% 3.156 09/28/01 257,040 409,293
------------------------
(1) The amount shown on this table represents hypothetical gains that could be
achieved for the respective options, if exercised at the end of the option
term. These gains are based on assumed rates of stock price appreciation of
5% and 10% compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the common stock, the
option holders' continued employment through the option period, and the date
on which the options are exercised. These amounts are not intended to
forecast possible future appreciation, if any, of the Company's stock price.
(2) Options granted November 3, 2000. Options have a three-year vesting
schedule, vesting at the rate of one-third per year, until fully vested on
the third anniversary of the grant, except for such earlier vesting
permitted under the terms of the Amended and Restated Stock Incentive Plan.
(3) Options granted November 3, 2000. Options fully vested upon grant.
(4) Options granted April 24, 2000. Options have a three-year vesting schedule,
vesting at the rate of one-third per year, until fully vested on the third
anniversary of the grant, except for such earlier vesting permitted under
the terms of the Amended and Restated Stock Incentive Plan.
(5) Options granted April 24, 2000.
The following table sets forth the number of shares acquired on exercise of
stock options and the aggregate gains realized on exercise in 2000 by the Named
Executive Officers. The table also sets forth the number of shares covered by
exercisable and unexercisable options held by such executives on December 31,
2000 and the aggregate gains that would have been realized had these options
been exercised on December 31, 2000, even though these options were not
exercised, and the unexercisable options could not have been exercised, on
December 31, 2000.
11
AGGREGATED OPTION/ EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
COMMON STOCK VALUE YEAR-END (#) AT FISCAL YEAR-END(1)($)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
Herman M. Frietsch............ -- -- 606,664 583,336 -- --
Robert P. Capps............... -- -- 56,665 378,335 -- --
R. Eugene Helms............... -- -- 61,665 513,335 -- --
Willard F. Barnett............ -- -- 88,335 226,665 -- --
John C. Radford............... -- -- 76,665 193,335 -- --
------------------------
(1) Market value of shares covered by in-the-money options on December 31, 2000,
less the option exercise price. Options are in-the-money if the market value
of the shares covered thereby is greater than the option exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company consists
of the Committee's Chairman Mr. Frietsch and its other member Mr. Yedwab.
Mr. Frietsch serves as the Chairman of the Board and Chief Executive Officer of
the Company and Mr. Yedwab is an independent director.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE
The Compensation Committee oversees compensation policies and practices of
the Company. The current members of the Compensation Committee are Herman M.
Frietsch and David H. Yedwab. Compensation actions regarding Committee members
are referenced to the Board for determination and Committee members do not
participate in Board actions on compensation relating to themselves.
OVERVIEW AND PHILOSOPHY
The Compensation Committee in considering executive compensation follows the
general guideline of pay-for-performance while taking into account the need to
provide overall compensation arrangements intended to attract, motivate and
retain qualified and effective executives. Individual performance standards,
expectations and accomplishments are reviewed and considered in order to relate
the compensation of executives to the Company's strategy, objective and
progress.
Various elements of compensation fulfill different roles in the attraction,
motivation and retention of qualified officers and employees. For Named
Executive Officers, the primary focus is on variable and contingent forms of
compensation. Accordingly, executive officer compensation is mainly comprised of
base salary, cash incentive bonuses and long-term incentive compensation in the
form of stock options. Executive officers also participate in the Company's
benefit plans for employees including medical and 401K.
BASE SALARY
Base salary levels in fiscal 2000 for the Company's executive officers,
including the Chief Executive Officer, were intended and believed to be
comparable and competitive relative to companies in the telecommunications
industry and other companies in similar or analogous circumstances. In
12
determining base salaries, the Compensation Committee also took into account
individual experience and performance and specific issues particular to the
Company.
COMPENSATION OF CEO
Compensation arrangements for the Chief Executive Officer are determined by
the Company's Board of Directors taking into consideration executive
compensation in comparable circumstances and competitive conditions. It is the
policy of the Board of Directors to continue such process of review and
determination concerning compensation arrangements relative to the Company's
Chief Executive Officer.
ANNUAL CASH BONUS PROGRAM
The Company maintains annual incentive compensation arrangements for its
executive officers. Robert P. Capps received a $10,000 bonus for 2000.
Mr. Barnett received a bonus of $52,111 in fiscal year 2000 based on commissions
from sales of certain products. No other executive officer received bonus
payments during fiscal year 2000.
STOCK OPTIONS
To further link the interests of management with those of the Company's
stockholders, stock options are granted periodically to qualified employees,
managers, officers and directors under the Company's stock incentive plans.
Stock options are consistently granted at option prices approximating market
price at the time of grant. To encourage continued service, the options normally
vest over three years in three equal annual installments or upon the fulfillment
by the employee of certain performance-based criteria, and expire after ten
years. If the performance criteria are not achieved, the options normally vest
one month prior to an expiration date, which may be ten years after the date of
the grant. In prior years, rather than granting new options under the plan, the
Company occasionally has offered to reprice previous options provided vesting
restrictions and any related performance criteria are also reset. Stock options
granted to executive officers are considered to be appropriate in terms of the
market value of the shares covered by the options relative to performance, other
forms of compensation and taking into consideration the possible future value of
the options.
BENEFITS
The Company provides medical benefits to its executive officers pursuant to
the Company's medical plans.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m).
Section 162(m) of the Internal Revenue Code of 1986, as amended, enacted in
1993, generally disallows a tax deduction to public companies for compensation
over $1 million paid to the corporation's chief executive officer and four other
most highly compensated executive officers. Qualifying performance compensation
will not be subject to the deduction limit if certain requirements are met. The
Company intends to structure the performance-based portion of the compensation
of its executive officers in a manner that complies with the statute to mitigate
any disallowance of deductions.
This report of the Compensation Committee on executive compensation is
submitted by the current members of the Committee as noted below:
COMPENSATION COMMITTEE
Herman M. Frietsch, Chairman
David H. Yedwab
April 30, 2001
13
AUDIT COMMITTEE REPORT
The following is the report of the Audit Committee of the Company with
respect to the Company's audited financial statements for the fiscal year ended
December 31, 2000.
The Audit Committee acts pursuant to a written charter that was originally
adopted by the Board of Directors of the Company in June 2000. The Audit
Committee has reviewed the audited financial statements of the Company for the
fiscal year ended December 31, 2000 with management and it has discussed with
Grant Thornton LLP the Company's independent certified public accountants, the
matters required to be discussed by Statement on Auditing Standards No. 61
(Communications with Audit Committees) relating to the conduct of the audit. The
Audit Committee has also received written disclosures and a letter from Grant
Thornton LLP regarding its independence from the Company as required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees) and has discussed with Grant Thornton LLP the independence of that
firm.
The Audit Committee acts pursuant to the Audit Committee Charter, a copy of
which is attached as Exhibit A to this Proxy Statement. Each of the members of
the Audit Committee qualifies as an "independent" director under the current
listing standards of the National Association of Securities Dealers.
Based upon the above materials and discussions, the Audit Committee has
recommended to the Board of Directors of the Company that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
AUDIT COMMITTEE
Robert E. Garrison II, Chairman
Anton von Liechtenstein
David H. Yedwab
April 30, 2001
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers (as defined in Rule 16a-1(f)), directors, and persons who own more than
ten percent of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it and written representations
from persons required to file such reports ("Reporting Persons"), the Company
believes that all filing requirements applicable to such Reporting Persons were
timely complied with during the fiscal year ended December 31, 2000.
EMPLOYEE AGREEMENTS
Herman M. Frietsch
The Company has had a contractual employment relationship with Mr. Frietsch
since 1995. This arrangement was most recently revised, incorporated in, and
reformatted by an Employment Agreement effective as of January 1, 2001.
Mr. Frietsch has agreed to continue to serve as Chairman and Chief Executive
Officer of the Company. His employment agreement provides for a term, which
shall end on December 31st following the third anniversary of the date on which
the Board of Directors notifies Mr. Frietsch that it has determined to
discontinue the automatic daily extension of his agreement. Mr. Frietsch
receives a base salary of $290,000 per year, subject to increase by the Board,
and may receive a discretionary bonus subject to determination by the Board of
Directors. Mr. Frietsch is also entitled to receive options to purchase common
stock of the Company pursuant to the
14
Company's Amended and Restated Stock Incentive Plan. In the event of a
termination of Mr. Frietsch's employment (other than if Mr. Frietsch is
terminated for "cause" of if he terminates "without good reason"), all unvested
stock options issued and outstanding shall vest upon such termination.
In the event of a termination by the Company for "cause" (as defined in the
agreement to include certain criminal acts, gross and willful misconduct, or
committing a material breach in the agreement by Mr. Frietsch) or by
Mr. Frietsch "without good reason," then the Company's obligation to pay
compensation and benefits shall terminate as of that date, other than for salary
and benefits already accrued. In the event of termination of the agreement by
the Company "without cause," by Mr. Frietsch for "good reason" (e.g., a material
breach of the employment agreement by the Company, a material change in the
nature or scope of his authority and duties, his salary is reduced, or required
compensation payments are not made), or if Mr. Frietsch is terminated upon or
following within twelve months of a "change in control," then the Company shall
pay Mr. Frietsch as severance pay, in accordance with the general payroll
practices of the Company or in a lump sum payment (at Mr. Frietsch's option) the
greater of (i) $1,000,000 or (ii) the sum of three years of his base salary as
of the date of termination. In the event of termination for "disability" or his
death, then Mr. Frietsch, or his estate as the case may be, is entitled to
receive payments equal to three years of his base salary at the time of
termination either in accordance with the general payroll practices of the
Company or in a lump sum payment. Mr. Frietsch is entitled to gross-up payments
to compensate for any excise taxes imposed.
R. Eugene Helms
Dr. Helms is party to an Employment Agreement with the Company dated
January 1, 2001, which provides for his continued employment as Executive Vice
President and Corporate Development Officer. Pursuant to the arrangement,
Dr. Helms is to receive a base salary of $225,000 per year. Dr. Helms continues
to be eligible for bonuses and stock options at the Company's discretion. The
term of the arrangement extends through January 1, 2004 and is automatically
renewed for subsequent one-year terms, unless either party provides notice of
termination in accordance with the provisions of the agreement. There are
provisions similar to the agreement with Mr. Frietsch in which the Company may
terminate Dr. Helms for "disability," "cause," "without cause," and for death or
disability, while Dr. Helms may terminate the agreement for "good reason" and
"without good reason." In the event of Dr. Helms' "disability," then the
Company's has no obligation to pay further benefits under the Agreement. In the
event of termination for "cause" by the Company or "without good reason" by
Dr. Helms, then the Company's obligation to pay compensation and benefits shall
also terminate, other than for salary and benefits already accrued. If the
Company terminates Dr. Helms "without cause" or he terminates the arrangement
for "good reason," then the Company shall pay severance pay in accordance with
its general payroll practices or in a lump sum payment, an amount equivalent to
Dr. Helms' base salary for the greater of (i) two years following the date of
termination or (ii) the remainder of the term of the agreement. Finally, in the
event Dr. Helms is terminated due to a "change in control," then he is to
receive as severance pay and liquidated damages, in accordance with the
Company's general payroll practices or in a lump-sum payment, an amount equal to
$100 less than three times his "annualized includable compensation for the base
period" (as defined in Section 280G of the Code). Further, in accordance with
the terms of the Amended and Restated Stock Incentive Plan, Dr. Helms' options
vest in the event of a "charge in control" (as defined in the Plan). Dr. Helms
is entitled to gross-up payments to compensate for any excise tax imposed. In
the event of Dr. Helms' death prior to the expiration of the agreement, his
employment and obligations shall automatically terminate and his compensation
shall terminate as of the end of the month of his death; provided, however, that
for the balance of the term of the agreement his family will be entitled to
receive their Company benefits, and his beneficiary or beneficiaries may receive
benefits payable under a life insurance policy benefits provided by the Company
and other amounts reimbursable to Dr. Helms by the Company.
15
Robert P. Capps
Mr. Capps has entered into an arrangement with the Company dated January 1,
2001. His arrangement contains substantially similar provisions as that of the
arrangement entered into with Dr. Helms except that Mr. Capps is to serve as
Executive Vice President and Chief Financial Officer and is to receive a base
salary of $205,000 per year.
Willard F. Barnett
Effective September 15, 2000, in consideration for Mr. Barnett's continued
employment with the Company's wholly owned subsidiary Intelect Network
Technologies Company ("INT"), the Company agreed to pay Mr. Barnett, in cash or
the Company's common stock, $300,000 upon Mr. Barnett's termination, which
occured effective April 27, 2001. The Company granted to Mr. Barnett a security
interest in the INT inventory or accounts receivable in the event of
non-payment. In connection with the agreement, the Company extended the
post-termination exercise period of Mr. Barnett's stock options for twelve
months following his termination date. Mr. Barnett was also entitled to a bonus
of $200,000 and immediate vesting of all of his outstanding options if the
Company were able to successfully close the sale or merger of INT.
John C. Radford
The Company agreed to extend the post-termination exercise period of options
granted to Mr. Radford until September 28, 2001.
CERTAIN TRANSACTIONS
In April 2000 the Company redeemed all of its outstanding Series A Preferred
Stock, all of which was held by The Coastal Corporation Second Pension Trust
("Coastal") for an aggregate redemption amount of approximately $8,450,000. In
April 2000 Coastal delivered the preferred stock certificates to the Company and
received the redemption proceeds.
In April 2000 SJMB, L.P. converted $1,500,000 due under its note payable
from the Company into 767,573 shares of the Company's common stock, pursuant to
the terms of the loan agreement. Accordingly, this amount has been reflected as
a non-current liability as of March 31, 2000.
On August 31, 2000, the Company loaned $100,000 to John Radford as a bridge
loan for the purchase of a home. Mr. Radford repaid the principal amount of the
loan in full on September 15, 2000.
Effective November 30, 2000, the Company closed the settlement of its
litigation with St. James Capital Partners, L.P., SJMB, L.P., St. James Capital
Corp., SJMB, L.L.C., John L. Thompson, Charles E. Underbrink and certain
affiliated persons and entities (collectively "St. James"). Under the terms of a
Settlement Agreement and Mutual Release (the "Settlement Agreement") the Company
and St. James released one another from all obligations and liabilities related
to financing previously entered into by the parties and the Company also
released its claims against St. James for short-swing profit disgorgement. St.
James delivered all the stock in the material subsidiaries that it held and the
original warrants issued to it. In return, the Company delivered to SJMB certain
redeemable replacement warrants in recognition of the anti-dilution provisions
of the warrants formerly held by SJMB. Replacement warrants for 3,437,381 shares
were exercisable immediately, at an exercise price of $0.75 per share and expire
June 30, 2002. Replacement warrants for an additional 12,584,009 shares will
have an exercise price of $0.75 per share and expire September 30, 2002 half of
which are currently exercisable and the remainder of which will be exercisable
beginning on October 15, 2001. The resale of the shares of common stock issuable
upon exercise of the warrants are covered by a currently effective registration
statement. All of the warrants will be redeemable by the Company at a price of
$6.75 per share.
16
Effective January 1, 2001, the company entered into new employment
agreements with each of the Messrs. Frietsch, Helms, and Capps. The Company also
entered into a retention agreement with Mr. Barnett on September 15, 2000. See
"Employee Agreements".
COMPARATIVE STOCK PERFORMANCE
The following graph compares the cumulative total stockholder return over
the past five years on the Company's common stock (Nasdaq Stock Market trading
symbol ICOM) through December 31, 2000 with the cumulative total return
(including reinvested dividends) of the Nasdaq Telecommunications Industry
Segment Total Return Index ("Nasdaq-Telecom") and the Nasdaq Stock Market Total
Return Index for United States stocks ("Nasdaq-US"). This graph assumes the
investment of $100 at the market close on December 31, 1995. Amounts have been
rounded to the nearest dollar. The stock price performance on the following
graph is not necessarily indicative of future stock price performance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ICOM NASDAQ TELECOM NASDAQ-US
1995 100 100 100
1996 81 103 124
1997 92 151 152
1998 27 249 215
1999 25 455 396
2000 7 190 240
------------------------
(1) Compound Annual Growth Rate for the five years ending December 31, 2000.
17
PROPOSAL 2: INCREASE THE NUMBER OF ADDITIONAL SHARES
AVAILABLE FOR ISSUANCE UNDER THE COMPANY'S AMENDED AND
RESTATED STOCK INCENTIVE PLAN
Our Amended and Restated Stock Incentive Plan (the "Plan") is a principal
component of our compensation program for the purpose of tying individual
compensation directly to stockholder value, specifically the market price of our
common stock. The purposes of the Plan have been and continue to be to attract,
retain, motivate and incentivize directors, executives, and key employees, to
provide them with a strong incentive to advance the interests of the Company,
and to otherwise align the interests of management more closely with that of the
Company and its stockholders. We may grant options that are intended to qualify
as incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonstatutory options not
intended to qualify as incentive options, award restricted stock, restricted
stock units, performance units and bonus stock.
In 1995, the Board of Directors of Intelect (Bermuda) adopted the Plan and
it was approved by its stockholders in December 1995. The Plan was adopted by
the Company in connection with the reorganization in December 1997 and all
previously outstanding options to acquire common stock of Intelect (Bermuda)
became options to acquire common stock of the Company. No stock option may be
granted, and no restricted stock, restricted stock units, bonus stock or
performance units payable in shares of common stock may be awarded under the
Plan after December 13, 2005.
The aggregate number of shares of common stock, which may be issued under
the Plan, before the amendment, is set at 8,000,000 shares, which quantity was
approved at the 2000 Annual Meeting of Stockholders of the Company. In order to
continue and to enhance the effectiveness of the Plan, the Board of Directors
adopted on April 30, 2000, in accordance with the recommendation of its Stock
Option Committee (the "Committee"), subject to stockholder approval, an
amendment to the Plan which would increase the number of shares of common stock
available for issuance under the Plan from 8,000,000 to 9,500,000 shares.
The Board believes this amendment is necessary in order to make shares
available for future awards under the Plan, to allow the Company added
flexibility to compensate consultants of the Company, and to allow the grant of
additional shares to attract, motivate, and retain employees and directors of
the Company and its subsidiaries. With respect to the number of shares presently
authorized under the Plan, it is anticipated that, at the current rate of usage,
all of the shares presently available for awards under the Plan will be
exhausted prior to the 2002 Annual Meeting of Stockholders. Further, since the
prior share authorization, the Company has continued to expand, increasing the
number of employees, and its capitalization has increased significantly. As the
Company expands, the need to attract, motivate, and retain additional key
employees increases correspondingly. In view of the limited number of shares
remaining for grants under the Plan and the continuing need to attract and
retain individuals of the highest caliber to positions on the Board, management
and employment, the Board of Directors and the Committee have concluded that the
maximum number of shares of common stock that may be issued under the Plan
should be increased from the current maximum of 8,000,000 to 9,500,000 shares.
BOARD RECOMMENDATION
The Board of Directors unanimously recommends a vote FOR the proposal to
amend the Plan. Unless otherwise instructed, the enclosed proxy will be voted
FOR such proposal.
The following is a summary of the material provisions of the Plan. The
summary is subject to the terms of the Plan. The Company has attached as
Exhibit B to the Proxy Statement the full text of the amendment to the Plan. The
Company will provide, upon request, a copy of the full text of the Plan, as
amended, to each person to whom a copy of this proxy statement is delivered.
Requests should be
18
directed to Mr. Robert P. Capps, Secretary, TeraForce Technology Corporation,
1240 East Campbell Road, Richardson, Texas 75081.
ADMINISTRATION AND ELIGIBILITY
The Plan is administered by the Board of Directors and by the Committee.
Subject to the provisions of the Plan, the Committee has authority to construe
the respective option agreements, award restricted stock, restricted stock
units, performance units and bonus stock, to prescribe, amend, and rescind rules
and regulations relating to the Plan, and to make all other determinations in
the judgment of the Committee necessary or desirable for the administration and
purposes of the Plan.
Options may be granted to persons who are, at the time of grant, employees,
officers or directors of, or consultants or advisors to, the Company; provided
that incentive stock options may be granted only to persons who are eligible to
receive such options under Section 422 of the Code. The granting of options to
directors and officers shall be determined either (a) by the full Board of
Directors, or (b) by a committee consisting solely of two or more directors.
NUMBER OF SHARES
Subject to adjustment as provided in the Plan, the proposed amendment would
increase the aggregate number of shares of common stock authorized for issuance
under the Plan by 1,500,000, to 9,500,000. Of the 9,500,000 shares, no more than
1,000,000 shares will be available for the grant of restricted stock or
restricted stock units. As of April 10, 2001, options to purchase a total of
5,580,137 shares of common stock were outstanding under the Plan. The maximum
number of shares of common stock with respect to all grants or awards, which may
be granted to any participant under the Plan, is 400,000 per calendar year
(subject to adjustment as provided in the Plan). The types of awards, which the
Committee has authority to grant, consist of (1) stock options, (2) restricted
stock, (3) restricted stock units, (4) performance units, and (5) bonus stock.
These awards can be granted to consultants, officers, directors and key
employees of the Company. Each of these is described herein.
EXERCISE PRICE AND TERMS OF STOCK OPTIONS
The Committee has the authority to grant incentive stock options and
non-qualified stock options, to officers and key employees of the Company, and
non-qualified stock options to employees, officers, directors and consultants.
The Committee (or, in the alternative, the full Board of Directors), with
respect to stock options, selects the exercise price per share of stock,
provided the exercise price cannot be less than (a) 110% of fair market value
per share for incentive stock options granted to a holder of more than 10% of
the Company's capital stock, (b) 100% of fair market value for incentive stock
options generally, and (c) 75% of fair market value for non-qualified options.
The option price may be paid in cash or common stock owned by the optionee as
provided in the Plan. The Committee shall also determine the expiration of the
option period, provided that no stock options shall be exercisable later than
10 years after the date on which the option is granted, provided, however, in
the case of incentive stock options granted to a holder of more than 10% of the
Company's capital stock, such date shall not be later than five years after the
date on which the option is granted. In all cases, options shall be subject to
earlier termination as provided in the Plan.
All options are nontransferable other than by will or the laws of descent
and distribution. The Committee has the authority under the Plan to set the
times within which the options vest. Unless the stock option agreement with
respect to any options otherwise provides, the options become exercisable on a
cumulative basis of 33 1/3% of the total number of shares covered thereby on
each of the first, second, and third anniversary dates of the grant of the
option. Holders of incentive stock options may generally exercise such options
up to three months after voluntary termination of employment (which termination
has been made with the consent of the Company as determined by the Committee in
its
19
sole discretion), unless termination results from death or disability in which
case such options may be exercised at any time prior to the expiration date of
such stock option or within one year after the date of termination of
employment, whichever period is shorter. Holders of non-qualified options may
exercise such options at any time prior to the expiration date of such
non-qualified stock option or within one year after the date of voluntary
termination of employment (which termination has been made with the consent of
the Company as determined by the Committee in its sole discretion), whichever
period is shorter.
Notwithstanding the foregoing, if the employment terminates for any reason
other than voluntary termination with the consent of the Company, retirement
under a retirement plan of the Company, or death, all outstanding stock options
shall automatically terminate.
The Committee determines when options granted under the Plan become
exercisable. The Committee may accelerate the date on which any option granted
may be exercised, provided that no such extension shall be permitted if it would
cause the Plan to fail to comply with Section 422 of the Code or with
Rule 16b-3 promulgated under the Securities Exchange Act of 1934.
The Committee has authority, with the consent of the affected optionee, to
cancel or amend any outstanding options under the Plan and to grant in
substitution new options covering the same or a different number of shares of
common stock and having an exercise price per share which may be lower or higher
than the exercise price per share of the outstanding options.
RESTRICTED STOCK OR RESTRICTED STOCK UNITS
Restricted common stock or restricted stock units awarded by the Committee
will be subject to such restrictions as the Committee may impose thereon and
will be subject to forfeiture if certain events (which may, in the discretion of
the Committee, include termination of employment or directorship and/or
performance-based events) specified by the Committee occur prior to the lapse of
the restrictions. The agreement between the Company and the grantee will set
forth the number of shares of restricted stock or restricted stock units awarded
to the grantee, the restrictions imposed thereon, the duration of such
restrictions, the events the occurrence of which would cause a forfeiture and
such other terms and conditions as the Committee in its discretion deems
appropriate. Unless otherwise provided in the agreement, shares of restricted
stock or restricted stock units will vest at the rate of 33 1/3% on each of the
first three anniversaries of the date of grant of the award.
Following a restricted stock award and prior to the lapse or termination of
the applicable restrictions, stock certificates for the shares of restricted
stock will be held in escrow. Upon the lapse or termination of the restrictions,
the stock certificates will be delivered to the grantee. From the date a
restricted stock award is effective, however, the grantee will be a stockholder
with respect to the shares of restricted stock and will have all the rights of a
stockholder with respect to such shares, including the right to vote the shares
and to receive all dividends and other distributions paid with respect to the
shares, subject only to the restrictions imposed by the Committee.
Restricted stock or restricted stock units may be issued for no
consideration or for such consideration as shall be determined at the time of
the award by the Committee.
PERFORMANCE UNITS
The Committee may award performance units (expressed in dollars or shares)
to be earned by an awardee based on the level of performance of the Company, a
subsidiary or subsidiaries, a branch, department or other unit thereof or the
awardee individually over a specified period of not less than one year
("Performance Period"). For each Performance Period the Committee will establish
a Performance Target, and a Minimum Target which may be the same or less than
the Performance Target. Targets may be expressed in terms of earnings per share,
return on assets, return on equity,
20
asset growth, ratio of capital to assets or such other level or levels of
performance by the Company, a subsidiary or subsidiaries, a branch, department
or other unit thereof or the awardee individually as the Committee may
establish.
An awardee shall earn the performance unit in full by meeting the
Performance Target for the Performance Period. If the Minimum Target has not
been attained at the end of the Performance Period, no part of the performance
unit shall have been earned by the awardee. If the Minimum Target is attained
but the Performance Target is not attained, the portion of the performance unit
earned by the awardee shall be determined on the basis of a formula established
by the Committee.
Payment in respect of earned performance units, whether expressed in dollars
or shares, may be made in cash, in common stock, or partly in cash and partly in
common stock as determined by the Committee at the time of payment. For this
purpose, performance units expressed in dollars will be converted to shares, and
performance units expressed in shares will be converted to dollars, based on the
fair market value of the common stock as of the date the amount payable is
determined by the Committee.
Except as otherwise provided below under "Additional Rights in Certain
Events," if the employment of an awardee terminates prior to the close of a
Performance Period for any reason other than voluntary termination with the
consent of the Company or a subsidiary, retirement under any retirement plan of
the Company or a subsidiary, or death, the performance units of the awardee will
be deemed not to have been earned, and no portion of such performance units may
be paid. If prior to the close of the Performance Period the employment of an
awardee is voluntarily terminated with the consent of the Company or a
subsidiary or the awardee retires under any retirement plan of the Company or a
subsidiary or the awardee dies during employment, the Committee may in its
discretion determine to pay all or any part of the performance unit based upon
the extent to which the Committee determines the Performance Target or Minimum
Target has been achieved as of the date of termination of employment, retirement
or death, the period of time remaining until the close of the Performance Period
and/or such other factors as the Committee may deem relevant.
Performance unit awards may have such other terms and conditions as the
Committee in its discretion deems appropriate.
BONUS STOCK
The Committee will have the authority in its discretion to award bonus
shares of common stock to eligible individuals in recognition of the
contribution of the awardee to the performance of the Company, a subsidiary or
subsidiaries, or a branch, department or other unit, in recognition of the
awardee's individual performance or on the basis of such other factors as the
Committee may deem relevant. Any bonus stock awarded would not be subject to any
restrictions or possibilities of forfeiture.
ADDITIONAL RIGHTS IN CERTAIN EVENTS
The Plan provides for certain additional rights upon the occurrence of one
or more events described in Section 9 of the Plan ("Section 9 Events"). Such an
event is deemed to have occurred when (1) the Company acquires actual knowledge
that any person (other than the Company, a subsidiary or any employee benefit
plan sponsored by the Company or a person approved under certain circumstances
by the Board of Directors) has acquired beneficial ownership, directly or
indirectly, of securities of the Company representing 20% or more of the voting
power of the Company, (2) a tender offer is made to acquire securities of the
Company representing 20% or more of the voting power of the Company, (3) a
person other than the Company solicits proxies relating to the election or
removal of 50% or more of any class of the Board of Directors, or (4) the
stockholders of the Company approve a merger, consolidation, share exchange,
division or sale or other disposition of assets of the Company as a result of
which the stockholders of the Company immediately prior to the transaction
21
will not own a majority of the voting power of the surviving or resulting
company or any company which acquires the stock of the Company or more than 20%
of its consolidated assets.
Unless the agreement between the Company and the awardee otherwise provides,
if any Section 9 Event occurs (1) all outstanding stock options will become
immediately and fully exercisable, (2) all stock options held by an awardee
whose employment with the Company or a subsidiary terminates within one year of
any Section 9 Event for any reason (other than voluntary termination with the
consent of the Company or a subsidiary, retirement under any retirement plan of
the Company or subsidiary, or death) will be exercisable for a period of three
months from the date of such termination of employment, but in no event after
the expiration date of the stock option, (3) all restrictions applicable to
restricted stock awarded under the Plan will lapse, and (4) all performance
units for which the Performance Period has not yet expired will be deemed to
have been fully earned as of the date of the Section 9 Event, regardless of the
attainment or non-attainment of the Performance Target or any Minimum Target.
AMENDMENT AND TERMINATION
The Board of Directors may at any time modify or amend the Plan in any
respect, provided that no such alteration or amendment of the Plan shall,
without stockholder approval (i) increase by more than 10% the total number of
shares which may be issued under the Plan to persons subject to Section 16 under
the Securities Exchange Act of 1934 ("Section 16 Persons"), (ii) materially
increase the benefits accruing under the Plan to Section 16 Persons,
(iii) materially modify the requirements as to eligibility for participation in
the Plan by Section 16 Persons, (iv) make any changes in the class of employees
eligible to receive incentive stock options under the Plan, or (v) increase the
number of shares with respect to which incentive stock options may be granted
under the Plan. Termination or any amendment of the Plan shall not, without the
consent of an optionee, adversely affect his or her rights under an option
previously granted.
If an awardee engages in a business which is in competition with the Company
or any of its subsidiaries, the Company may immediately terminate all
outstanding stock options held by the awardee, declare forfeited all restricted
stock held by the awardee as to which the restrictions have not yet lapsed and
terminate all outstanding performance unit awards held by the awardee for which
the applicable Performance Period has not been completed. The preceding sentence
shall not apply if the exercise period of the stock option upon termination of
employment or a directorship has been extended, the lapse of the restrictions
applicable to the restricted stock has been accelerated or the performance unit
has been deemed to have been earned as a result of the occurrence of a
Section 9 Event.
The Plan shall terminate with respect to incentive stock options upon the
earlier of December 13, 2005, or the date on which all shares available for
issuance under the Plan shall have been issued pursuant to the exercise or
cancellation of options granted thereunder. The Plan shall terminate with
respect to non-qualified options on December 13, 2005.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to awards granted under the
Plan and with respect to the sale of shares of common stock acquired under the
Plan.
INCENTIVE STOCK OPTIONS. In general, a participant will not recognize
taxable income upon the grant or exercise of an incentive stock option. Instead,
a participant will recognize taxable income with respect to an incentive stock
option only upon the sale of common stock acquired through the exercise of the
option ("ISO Shares"). The exercise of an incentive stock option may, however,
subject the participant to the alternative minimum tax.
22
Generally, the tax consequences of selling ISO Shares will vary with the
length of time that the participant has owned the ISO Shares at the time it is
sold. If the participant sells ISO Shares after having owned it for at least two
years from the date the option was granted (the "Grant Date") and one year from
the date the option was exercised (the "Exercise Date"), then the participant
will recognize long-term capital gain in an amount equal to the excess of the
sale price of the ISO Shares over the exercise price.
The Company will not be entitled to a tax deduction with respect to the
grant or exercise of an ISO or the disposition of such shares if the participant
sells the ISO Shares after having owned it for at least two years from the Grant
Date and one year from the Exercise Date.
If the participant sells ISO Shares for more than the exercise price prior
to having owned it for at least two years from the Grant Date and one year from
the Exercise Date (a "Disqualifying Disposition"), the participant will
recognize compensation income in an amount equal to the difference between the
fair market value (or, if less, the sales price) of the stock on the date of
exercise and exercise price. Any subsequent increase in the price of the stock
is treated as capital gain to the employee. This capital gain will be a
long-term capital gain if the participant has held the ISO Shares for more than
one year prior to the date of sale. The Company will be entitled to a tax
deduction in the amount of the ordinary compensation income realized by the
participant.
If a participant sells ISO Shares for less than the exercise price, then the
participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Shares. This capital loss will be a
long-term capital loss if the participant has held the ISO Shares for more than
one year prior to the date of sale.
NON-QUALIFIED STOCK OPTIONS. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a non-qualified
stock option. The Company will not be entitled to a tax deduction by reason of
such grant. Unlike the case of an incentive stock option, however, a participant
who exercises a non-qualified stock option generally will recognize ordinary
compensation income in an amount equal to the excess of the fair market value of
the common stock acquired through the exercise of the option ("NSO Shares") on
the Exercise Date over the exercise price. Upon such exercise of a non-qualified
stock option, the Company may claim a tax deduction in the amount of the
ordinary compensation income recognized by the participant. Any deduction will
be subject to the limitations of Section 162(m) of the Code, which provides for
certain limitations on the deductibility of non-performance based compensation.
The Company will have a withholding obligation with respect to ordinary
compensation income recognized by participants.
With respect to any NSO Shares, a participant will have a basis equal to the
exercise price plus any income recognized upon the exercise of the option (the
"Tax Basis"). Upon selling NSO Shares, a participant generally will recognize
capital gain or loss in an amount equal to the excess of the sale price of the
NSO Shares over the participant's Tax Basis in the NSO Shares. This capital gain
or loss will be a long-term gain or loss if the participant has held the NSO
Shares for more than one year prior to the date of the sale.
RESTRICTED STOCK. A participant granted shares of restricted stock will not
recognize any taxable income for Federal income tax purposes until the first
time such participant's rights in the shares are transferable or are not subject
to a substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an election under Section 83(b) of the Code to be taxed
on receipt of the shares. In either case, the amount of such income will be
equal to the excess of the fair market value of the stock at the time the income
is recognized over the amount (if any) paid for the stock. The Company or one of
its subsidiaries generally will be entitled to a deduction for compensation paid
in the same amount treated as compensation income to the grantee.
23
PERFORMANCE UNITS. A participant granted performance units recognizes
income in the amount of the award of those units when they vest and are no
longer subject to substantial risk of forfeiture and such person is entitled to
receive the value of the award. Any cash or common stock received pursuant to
the award will be treated as compensation income received by the awardee
generally in the year in which the awardee receives such cash or shares of
common stock. In each case, the amount of compensation income will equal the
amount of cash and the fair market value of the common stock on the date
compensation income is recognized. The Company or one of its subsidiaries
generally will be entitled to a deduction for compensation paid in the same
amount treated as compensation income to the awardee.
BONUS STOCK. Any common stock received pursuant to an award of shares of
bonus stock will generally be treated as compensation income received by the
awardee in the year in which the awardee receives such shares. In such case, the
amount of compensation income will equal the fair market value of the common
stock on the date compensation income is recognized. The Company or one of its
subsidiaries generally will be entitled to a corresponding deduction in the same
amount for compensation paid.
OTHER TAX MATTERS. The exercise of a stock option by an awardee, the lapse
of restrictions on restricted stock, or the deemed earn out of performance units
following the occurrence of a Section 9 Event, in certain circumstances, may
result in (i) a 20% Federal excise tax (in addition to Federal income tax) to
the awardee on certain payments of common stock or cash resulting from such
exercise or deemed earn out of performance units or, in the case of shares of
restricted stock, on all or a portion of the fair market value of the common
stock on the date the restrictions lapse, and (ii) the loss of a compensation
deduction which would otherwise be allowable to the Company or one of its
subsidiaries as explained above.
AMENDED AND RESTATED PLAN: NEW PLAN BENEFITS
Grants and awards under the Plan, which may be made to Company executive
officers, directors and other employees, are not presently determinable. If the
stockholders approve the Plan, such grants and awards will be made at the
discretion of the Committee or the Board of Directors in accordance with the
compensation policies of the Compensation Committee, which are discussed in the
"Compensation Committee Report on Executive Compensation" above.
PROPOSAL 3: APPROVE AND RATIFY THE AEGEAN NETWORKS, INCORPORATED
2001 STOCK OPTION PLAN
Aegean Networks, Incorporated ("Aegean") is a Delaware corporation that is a
wholly-owned subsidiary of the Company. The Aegean Networks, Incorporated 2001
Stock Option Plan (the "Aegean Plan") is a principal component of Aegean's
compensation program for the purpose of fostering and promoting the long-term
financial success of Aegean, its subsidiaries, and of the Company and its
subsidiaries (collectively, the "Aegean Related Entities"). Under the Company's
strategy, the Aegean business model anticipates entrepreneurial activities and
equity participations for strategic partners. The start-up nature of the Aegean
operations would benefit from providing equity participations to attract,
compensate and retain key contributors to the formation, direction and
technical, commercial and financial success of the enterprise. Aegean's
employees, consultants, and outside directors as well as those of the other
Aegean Related Entities are eligible to receive grants under the Aegean Plan. In
order to accomplish its purpose, the Aegean Plan seeks to encourage long-term
commitment, motivate performance, encourage and provide ownership opportunities,
attract and retain outstanding individuals by providing incentive compensation
opportunities, and enable participation in the long-term growth and financial
success of the Aegean Related Entities. Under the Aegean Plan, Aegean may grant
options that are intended to qualify as incentive stock options within the
meaning of Section 422 of the
24
Internal Revenue Code, nonstatutory options not intended to qualify as incentive
options, and/or may award restricted stock.
The Board of Directors of the Company and Aegean adopted and ratified the
Aegean Plan effective as of January 1, 2001. The Aegean Plan has already been
approved by the sole shareholder of Aegean and is being submitted to
stockholders of the Company for approval and ratification. No stock option may
be granted, and no award of restricted stock, may be made under the Aegean Plan
after August 22, 2010.
The Company's Board believes the Aegean Plan is necessary in order to
attract and retain expert personnel for key executive management and employee
positions, and to attract individuals as directors. The Company's Board also
believes that it is necessary to make shares of Aegean available for future
awards to allow both Aegean and the Company flexibility to compensate and add
incentive to employees, consultants, and directors. These grants can be used to
attract, motivate, and retain employees and directors of the Aegean Related
Entities. As Aegean expands, the needs to further attract, motivate, and retain
additional key employees will increase correspondingly. Therefore, the Aegean
Plan may be amended in the future to allow grants of additional awards as they
are needed.
BOARD RECOMMENDATION
The Company' Board of Directors unanimously recommends a vote FOR the
proposal to approve and ratify the Aegean Plan. In order to vote FOR this
proposal, you must complete, sign, date and return the proxy indicating your
affirmative vote for the Aegean Plan.
The following is a summary of the material provisions of the Aegean Plan.
The summary is subject to the terms of the Aegean Plan. The Company has attached
as Exhibit C to the Proxy Statement the form of the Aegean Plan. The Company
will provide, upon request, a copy of the full text of the Aegean Plan to each
person to whom a copy of this Proxy Statement is delivered. Requests should be
directed to Mr. Robert P. Capps, Secretary, TeraForce Technology Corporation,
1240 East Campbell Road, Richardson, Texas 75081.
ADMINISTRATION AND ELIGIBILITY
The Aegean Plan shall be administered by the Board of Directors of Aegean
(the "Aegean Board") or such committee as is designated by the Aegean Board (the
"Aegean Plan Committee"). The Aegean Plan Committee shall consist of not fewer
than two persons, including but not limited to the independent outside directors
of Aegean's ultimate parent, the Company.
Subject to the provisions of the Aegean Plan, the Aegean Plan Committee has
the authority to construe award agreements granting stock options or restricted
stock. It shall also have authority to prescribe, amend and rescind rules and
regulations relating to the Aegean Plan and to make all other interpretations
and determinations in its judgment necessary or desirable for the administration
and purposes of the Aegean Plan. The Aegean Plan Committee shall also establish
performance goals for grants of awards and certify the extent of their
achievement. Any interpretation, determination, or other action made or taken by
the Aegean Plan Committee shall be final, binding, and conclusive on all
interested parties.
The Aegean Plan Committee shall determine and designate the eligible persons
to whom any incentive stock option, nonqualified stock option, or restricted
stock award will be granted (collectively referred to as "Aegean Awards" and
individually as an "Aegean Incentive"). Each related award agreement shall set
forth, where applicable, the award period, the date of grant, and such other
terms, provisions, limitations, and performance requirements of the Aegean
Award. The Aegean Plan Committee will determine whether an Aegean Award includes
one type of Aegean Incentive or more types granted in combination.
25
Aegean Awards may be granted to any employee (including an employee who is
also a director or an officer), outside director, or consultant of the Aegean
Related Entities whose judgment, initiative, and efforts contributed or may be
expected to contribute to the successful performance of Aegean. Only employees
of the Aegean Related Entities are eligible to receive incentive stock options.
Except as required by the Aegean Plan, Aegean Awards granted at different times
need not contain similar provisions. Finally, the Aegean Plan Committee's
determination (including, without limitation, determinations as to which
participants are to receive Aegean Awards and the terms and provisions of such
Aegean Awards) need not be uniform and may be made selectively among
participants who receive, or are eligible to receive, Aegean Awards.
The Aegean Plan Committee, in its sole discretion, may determine that an
Aegean Incentive will be immediately vested in whole or in part, or that all or
any portion may not be vested until a date, or dates, subsequent to its date of
grant, or until the occurrence of one or more specified events. If the Aegean
Plan Committee imposes conditions upon vesting, then, subsequent to the date of
grant, the Aegean Plan Committee may, in its sole discretion, accelerate the
date on which all or any portion of the Incentive may be vested.
The Aegean Plan Committee may grant Aegean Awards prior to the time of
stockholder approval of the Aegean Plan; however, any such Aegean Award granted
prior to such approval of this proposal shall be made subject to such
stockholder approval.
NUMBER OF SHARES
Subject to adjustment as provided in the Aegean Plan, before amendment, the
maximum number of shares of Aegean's common stock that may be delivered pursuant
to Aegean Awards granted under the Aegean Plan is 20,000,000 shares. The types
of Aegean Awards that the Aegean Committee has authority to grant consist of
both incentive and nonstatutory stock options and of restricted stock. Aegean
will at all times reserve and keep available the number of shares of common
stock that shall be sufficient to satisfy the requirements of the Aegean Plan.
As provided by the Aegean Plan, certain shares may be reused to the extent
that (a) a stock option shall expire or terminate for any reason without having
been exercised in full or (b) shares of restricted stock are forfeited for any
reason; provided, however, that if any dividends are paid with respect to shares
of restricted stock and such dividends were paid to the Aegean Plan participant
prior to the forfeiture of the restricted stock, such shares shall not be reused
for grants or awards.
In no event shall the number of shares of common stock subject to incentive
stock options exceed, in the aggregate, 2,000,000 shares of Aegean common stock
plus shares subject to incentive stock options which are forfeited or
terminated, or expire unexercised. No Participant may receive during any of
Aegean's fiscal year Aegean Awards covering an aggregate of more than 2,500,000
shares of Aegean common stock.
EXERCISE PRICE AND TERMS OF STOCK OPTIONS
The grant of an Aegean Award of stock options shall be authorized by the
Aegean Plan Committee and shall be evidenced by an award agreement setting forth
(a) the Aegean Incentive or Aegean Incentives being granted, (b) the total
number of shares of Aegean common stock subject to the Aegean Incentive(s),
(c) the option price, (d) the award period, (e) the date of grant, and
(f) other terms, provisions, limitations, and performance objectives.
26
The option price for any share of Aegean common stock purchasable under a
nonqualified stock option may be less than, equal to, or greater than the fair
market value of the share on the date of grant. The option price for any share
of Aegean common stock purchasable under an incentive stock option must be at
least equal to the fair market value of the share on the date of grant. If an
incentive stock option is granted to an employee who owns or is deemed to own
(by reason of the attribution rules of Section 424(d) of the Code) more than ten
percent (10%) of the combined voting power of all classes of stock of Aegean or
any of the Aegean Related Entities, then the option price shall be at least 110%
of the fair market value of the common stock on the date of grant.
The Aegean Plan Committee may not grant incentive stock options under the
Aegean Plan to any employee which would permit the aggregate fair market value
(determined on the date of grant) of the Aegean common stock with respect to
which incentive stock options (under this and any other plan of Aegean and its
subsidiaries) are exercisable for the first time by such employee during any
calendar year to exceed $100,000. To the extent any stock option granted under
the Aegean Plan which is designated as an incentive stock option exceeds this
limit or otherwise fails to qualify as an incentive stock option, then such
stock option (or any such portion thereof) shall be deemed a nonqualified stock
option. In such case, the Aegean Plan Committee shall designate which stock will
be treated as incentive stock option stock by causing the issuance of a separate
stock certificate and identifying such stock as incentive stock option stock on
Aegean's stock transfer records.
The Aegean Plan Committee may, in its sole discretion, determine that a
stock option will be immediately exercisable, in whole or in part, or that all
or any portion may not be exercised until a future date or until the occurrence
of one or more specified events. If a stock option is exercisable prior to the
time it is vested, the common stock obtained on the exercise of the stock option
shall be restricted stock, which is subject to the applicable provisions of the
Aegean Plan relating to restricted stock and to the relevant award agreement. If
the Aegean Plan Committee imposes conditions upon exercise, then subsequent to
the date of grant, the Aegean Plan Committee may, in its sole discretion,
accelerate the date on which all or any portion of the stock option may be
exercised.
Subject to the other provisions of the Aegean Plan, the Aegean Plan
Committee shall specify in the award agreement the award period for a stock
option. No stock option granted under the Aegean Plan may be exercised at any
time after the end of its award period. The award period for any stock option
shall be no more than ten (10) years from the date of grant of the stock option.
However, if an employee owns or is deemed to own (by reason of the attribution
rules of Section 424(d) of the Code) more than ten percent (10%) of the combined
voting power of all classes of stock of Aegean or any of the Aegean Related
Entities and an incentive stock option is granted to such employee, the award
period of such incentive stock option (to the extent required by the Code at the
time of grant) shall be no more than five (5) years from the date of grant.
RESTRICTED STOCK
Restricted Stock granted to or received by a participant under an Aegean
Award (including under a stock option Aegean Incentive), may be subject to
restrictions imposed by the Aegean Plan Committee. Such grants may also be
subject to forfeiture in certain events (including, but not limited to,
termination of employment or directorship and/or performance-based events)
specified to occur prior to the lapse of any restrictions. In an award agreement
for restricted stock, the Aegean Plan Committee shall set forth (a) the number
of shares of Aegean common stock awarded, (b) the price, if any, to be paid for
such restricted stock, (c) the time or times within which such Aegean Award may
be subject to forfeiture, (d) specified performance goals which the Aegean Plan
Committee determines must be met in order to remove any restrictions (including
vesting) on the Aegean Award, and (e) all other terms, limitations,
restrictions, and conditions of the restricted stock. The provisions of
restricted stock need not be the same with respect to each participant. If the
Aegean Plan Committee establishes a purchase price for an Aegean Award of
restricted stock, the participant must accept the Aegean
27
Award within a period of thirty (30) days (or such shorter period as the Aegean
Plan Committee may specify) after the date of grant by executing the applicable
award agreement and paying the relevant purchase price.
Each participant who is awarded or receives restricted stock shall be issued
a stock certificate or certificates in respect of such shares of Aegean common
stock. The certificate(s) shall be registered in the name of the participant,
and shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to the restricted stock.
Shares of restricted stock shall be subject to the restrictions and
conditions of the Aegean Plan and the terms of the particular award agreements,
during such periods as may be determined by the Aegean Plan Committee commencing
on the date of grant or the date of exercise of an Aegean Award (the "Aegean
Restriction Period"). The participant shall not be permitted to sell, transfer,
pledge or assign shares of restricted stock. Except for these limitations, the
Aegean Plan Committee may in its sole discretion, remove any or all of the
restrictions on such restricted stock whenever it may determine that, by reason
of changes in applicable laws or other changes in circumstances arising after
the date of the Aegean Award, such action is appropriate. Except as provided in
the Aegean Plan or in an applicable award agreement, a participant shall have,
with respect to his restricted stock, all of the rights of a stockholder of
Aegean, including the right to vote the shares, and the right to receive any
dividends thereon.
The restriction period of restricted stock shall commence on the date of
grant (or the date of exercise in the case of stock options) of an Aegean Award,
as specified in the award agreement. Subject to Aegean Article 12 Events (see
"Additional Rights in Certain Events" below) of the Aegean Plan and unless
otherwise established by the Aegean Plan Committee in the award agreement
setting forth the terms of the restricted stock, the restriction period shall
expire upon satisfaction of the conditions set forth in the award agreement.
Such conditions may provide for vesting based on (i) length of continuous
service, (ii) achievement of specific business objectives, (iii) increases in
specified indices, (iv) attainment of specified growth rates, or (v) other
comparable measurements of Aegean's performance, as may be determined by the
Aegean Plan Committee in its sole discretion.
Except as otherwise provided in the particular award agreement, upon
termination of service for any reason during the restriction period, the
nonvested shares of restricted stock shall be forfeited by the participant. In
the event a participant has paid any consideration to Aegean for such forfeited
restricted stock, the Aegean Plan shall specify in the award agreement that
either (i) Aegean shall be obligated to, or (ii) Aegean may, in its sole
discretion, elect to, pay to the participant, as soon as practicable after the
event causing forfeiture, in cash, an amount equal to the lesser of the total
consideration paid by the participant for such forfeited shares or the fair
market value of such forfeited shares as of the date of termination of service,
as the Aegean Plan Committee, in its sole discretion shall select. Upon any
forfeiture, all rights of a participant with respect to the forfeited shares of
the restricted stock shall cease and terminate, without any further obligation
on the part of Aegean.
ADDITIONAL RIGHTS IN CERTAIN EVENTS
If Aegean shall be the surviving or resulting corporation in any merger,
consolidation or share exchange, any Incentive granted under the Aegean Plan
shall pertain to and apply to the securities or rights to which a holder of the
number of shares of common stock subject to the Incentive would have been
entitled.
In the event of any merger, consolidation or share exchange pursuant to
which Aegean is not the surviving corporation (an "Aegean Article 12 Event"),
there shall be substituted for each share of Aegean common stock subject to the
unexercised portion of outstanding stock options, that number of shares of each
class of stock or other securities or that amount of cash, property, or assets
of the
28
surviving, resulting or consolidated company which were distributed or
distributable to the stockholders of Aegean in respect to each share of Aegean
common stock held by them.
All stock options may be canceled by Aegean as of the effective date of any
reorganization, merger, consolidation, or share exchange, or any dissolution or
liquidation of Aegean, by giving notice to each holder thereof and by permitting
the purchase during the thirty (30) day period next preceding such effective
date of all shares of common stock (whether or not vested) subject to such
outstanding stock options. In the event of a sale of all or substantially all of
Aegean's property, its dissolution, liquidation, or winding up, then each
participant shall be entitled to the same kind and amount of securities or
assets that are distributable in accordance with such an event. In the event of
a partial distribution of assets outside the normal course of business in the
nature of a partial liquidation, then the exercise price in effect with respect
to each stock option shall be reduced in proportion to the percentage reduction
in the tangible value of Aegean's common stock.
AMENDMENT AND TERMINATION
The Aegean Board may at any time alter, amend, revise, suspend, or
discontinue the Aegean Plan in any respect, provided that no amendment which
requires stockholder approval in order for the Aegean Plan and Aegean Incentives
awarded thereunder to continue to comply with Sections 162(m), 421, and 422 of
the Internal Revenue Code, including any successors to such Sections, shall be
effective unless such amendment shall be approved by the requisite vote of the
stockholders of the Company entitled to vote thereon. Any such amendment shall,
to the extent deemed necessary or advisable by the Aegean Plan Committee, be
applicable to any outstanding Incentives granted under the Aegean Plan,
notwithstanding any contrary provisions contained in any Aegean award agreement.
In the event of any such amendment, the holder of any Aegean Incentive
outstanding under the Aegean Plan shall, upon request of the Aegean Plan
Committee and as a condition to the exercisability thereof, execute a conforming
amendment in the form prescribed by the Aegean Plan Committee to any award
agreement relating thereto.
The Aegean Plan shall be effective from January 1, 2001. Unless sooner
terminated by action of the Aegean Board, the Aegean Plan will terminate on
August 22, 2010, but Aegean Incentives granted before that date will continue to
be effective in accordance with their terms and conditions.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to awards granted under the
Aegean Plan and with respect to the sale of shares of Aegean common stock
acquired under the Aegean Plan.
INCENTIVE STOCK OPTIONS. In general, a participant will not recognize
taxable income upon the grant or exercise of an incentive stock option. Instead,
a participant will recognize taxable income with respect to an incentive stock
option only upon the sale of Aegean common stock acquired through the exercise
of the option ("Aegean ISO Shares"). The exercise of an incentive stock option
may, however, subject the participant to the alternative minimum tax.
Generally, the tax consequences of selling Aegean ISO Shares will vary with
the length of time that the participant has owned the Aegean ISO Shares at the
time they are sold. If the participant sells Aegean ISO Shares after having
owned them for at least two (2) years from the date the option was granted (the
"Grant Date") and one (1) year from the date the option was exercised (the
"Exercise Date"), then the participant will recognize long-term capital gain in
an amount equal to the excess of the sale price of the ISO Shares over the
exercise price.
Neither Aegean nor the Company will be entitled to a tax deduction with
respect to the grant or exercise of an Aegean incentive stock option or the
disposition of such shares if the participant sells the
29
Aegean ISO Shares after having owned them for at least two (2) years from the
Grant Date and one (1) year from the Exercise Date.
If the participant sells Aegean ISO Shares for more than the exercise price
prior to having owned them for at least two (2) years from the Grant Date and
one year from the Exercise Date (a "Disqualifying Disposition"), the participant
will recognize ordinary compensation income in an amount equal to the difference
between the fair market value (or, if less, the sales price) of the stock on the
date of exercise and the exercise price. Any subsequent increase in the price of
the stock will be treated as capital gain to the participant. This capital gain
will be a long-term capital gain if the participant has held the Aegean ISO
Shares for more than one (1) year prior to the date of sale. Aegean will be
entitled to a tax deduction in the amount of the ordinary compensation income
realized by the participant.
If a participant sells Aegean ISO Shares for less than the exercise price,
then the participant will recognize capital loss equal to the excess of the
exercise price over the sale price of the Aegean ISO Shares. This capital loss
will be a long-term capital loss if the participant has held the Aegean ISO
Shares for more than one (1) year prior to the date of sale.
NON-QUALIFIED STOCK OPTIONS. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a non-qualified
stock option. Neither Aegean nor the Company will be entitled to a tax deduction
by reason of such grant. Unlike the case of an incentive stock option, however,
a participant who exercises a non-qualified stock option generally will
recognize ordinary compensation income in an amount equal to the excess of the
fair market value of the Aegean common stock acquired through the exercise of
the option ("Aegean NSO Shares") on the exercise date over the exercise price.
Upon such exercise of a non-qualified stock option, Aegean may claim a tax
deduction in the amount of the ordinary compensation income recognized by the
participant. Any deduction will be subject to the limitations of Section 162(m)
of the Code, which provides for certain limitations on the deductibility of
non-performance based compensation. Aegean will have a withholding obligation
with respect to ordinary compensation income recognized by participants.
With respect to any Aegean NSO Shares, a participant will have a tax basis
equal to the exercise price plus any income recognized upon the exercise of the
option. Upon selling Aegean NSO Shares, a participant generally will recognize
capital gain or loss in an amount equal to the excess of the sale price of the
Aegean NSO Shares over the participant's tax basis in the Aegean NSO Shares.
This capital gain or loss will be a long-term gain or loss if the participant
has held the Aegean NSO Shares for more than one (1) year prior to the date of
the sale.
RESTRICTED STOCK. A participant granted shares of restricted stock will not
recognize any taxable income for federal income tax purposes until the first
time such participant's rights in the shares are transferable or are not subject
to a substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an election under Section 83(b) of the Code to be taxed
on receipt of the shares. In either case, the amount of such income will be
equal to the excess of the fair market value of the stock at the time the income
is recognized over the amount (if any) paid for the Aegean stock. Aegean, the
Company or one of their subsidiaries generally will be entitled to a deduction
for compensation paid in the same amount treated as compensation income to the
grantee.
OTHER TAX MATTERS. The exercise of a stock option by a participant or the
lapse of restrictions on restricted stock, in certain circumstances, may result
in (i) a 20% federal excise tax (in addition to federal income tax) to the
awardee on certain payments of Aegean common stock or cash resulting from such
exercise or, in the case of shares of restricted stock, on all or a portion of
the fair market value of the Aegean common stock on the date the restrictions
lapse, and (ii) the loss of a compensation deduction which would otherwise be
allowable to Aegean, the Company or one of their subsidiaries as explained
above.
30
FEDERAL SECURITIES LAW CONSIDERATIONS
With respect to participants subject to the reporting requirement of
Section 16 of the Securities Exchange Act of 1934 the Aegean Plan and all
transactions under the Aegean Plan are intended to comply with all applicable
conditions of Rule 16b-3 promulgated under the Exchange Act. To the extent any
provisions of the Aegean Plan or action by the Aegean Plan Committee fail to
comply with Section 16, it shall be deemed null and void AB INITIO, to the
extent permitted by law and deemed advisable by the Aegean Plan Committee. In no
event may an Aegean Incentive be exercised or shares of Aegean common stock be
issued pursuant to an Aegean Award if a necessary listing or quotation of the
shares of common stock on a stock exchange or inter-dealer quotation systems or
any registration under state or federal securities laws required under the
circumstances have not been accomplished.
PROPOSAL 4: APPROVE AND RATIFY THE CENTAURI NETSYSTEMS CORPORATION
2001 STOCK OPTION PLAN
Centauri NetSystems Corporation ("Centauri") is a Delaware corporation that
is a wholly owned subsidiary of the Company. The Centauri NetSystems,
Corporation 2001 Stock Option Plan (the "Centauri Plan") is a principal
component of Centauri's compensation program for the purpose of fostering and
promoting the long-term financial success of Centauri, its subsidiaries, and of
the Company and its subsidiaries (collectively, the "Centauri Related
Entities"). Under the Company's strategy, the Centauri business model
anticipates entrepreneurial activities and equity participations for strategic
partners. The start-up nature of the Centauri operations would benefit from
providing equity participations to attract, compensate and retain key
contributors to the formation, direction and technical, commercial and financial
success of the enterprise. Centauri's employees, consultants, and outside
directors as well as those of the other Centauri Related Entities are eligible
to receive grants under the Centauri Plan. In order to accomplish its purpose,
the Centauri Plan seeks to encourage long-term commitment, motivate performance,
encourage and provide ownership opportunities, attract and retain outstanding
individuals by providing incentive compensation opportunities, and enable
participation in the long-term growth and financial success of the Centauri
Related Entities. Under the Centauri Plan, Centauri may grant options that are
intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, nonstatutory options not intended to
qualify as incentive options, and/or may award restricted stock.
The Board of Directors of the Company and Centauri adopted and ratified the
Centauri Plan effective as of January 1, 2001. The Centauri Plan has already
been approved by the sole shareholder of Centauri and is being submitted to
stockholders for approval and ratification. No stock option may be granted, and
no award of restricted stock, may be made under the Centauri Plan after
August 22, 2010.
The Company's Board believes the Centauri Plan is necessary in order to
attract and retain expert personnel for key executive management and employee
positions, and to attract individuals as directors. The Company's Board also
believes that it is necessary to make shares of Centauri available for future
awards to allow both Centauri and the Company flexibility to compensate and add
incentive to employees, consultants, and directors. These grants can be used to
attract, motivate, and retain employees and directors of the Centauri Related
Entities. As Centauri expands, the needs to further attract, motivate, and
retain additional key employees will increase correspondingly. Therefore, the
Centauri Plan may be amended in the future to allow grants of additional awards
as they are needed.
BOARD RECOMMENDATION
The Company' Board of Directors unanimously recommends a vote FOR the
proposal to approve and ratify the Centauri Plan. In order to vote FOR this
proposal, you must complete, sign, date and return the proxy indicating your
affirmative vote for the Centauri Plan.
31
The following is a summary of the material provisions of the Centauri Plan.
The summary is subject to the terms of the Centauri Plan. The Company has
attached as Exhibit C to the Proxy Statement the form of the Centauri Plan. The
Company will provide, upon request, a copy of the full text of the Centauri Plan
to each person to whom a copy of this Proxy Statement is delivered. Requests
should be directed to Mr. Robert P. Capps, Secretary, TeraForce Technology
Corporation, 1240 East Campbell Road, Richardson, Texas 75081.
ADMINISTRATION AND ELIGIBILITY
The Centauri Plan shall be administered by the Board of Directors of
Centauri (the "Centauri Board") or such committee as is designated by the
Centauri Board (the "Centauri Plan Committee"). The Centauri Plan Committee
shall consist of not fewer than two persons, including but not limited to the
independent outside directors of Centauri's ultimate parent, the Company.
Subject to the provisions of the Centauri Plan, the Centauri Plan Committee
has the authority to construe award agreements granting stock options or
restricted stock. It shall also have authority to prescribe, amend and rescind
rules and regulations relating to the Centauri Plan and to make all other
interpretations and determinations in its judgment necessary or desirable for
the administration and purposes of the Centauri Plan. The Centauri Plan
Committee shall also establish performance goals for grants of awards and
certify the extent of their achievement. Any interpretation, determination, or
other action made or taken by the Centauri Plan Committee shall be final,
binding, and conclusive on all interested parties.
The Centauri Plan Committee shall determine and designate the eligible
persons to whom any incentive stock option, nonqualified stock option, or
restricted stock award will be granted (collectively referred to as "Centauri
Awards" and individually as a "Centauri Incentive"). Each related award
agreement shall set forth, where applicable, the award period, the date of
grant, and such other terms, provisions, limitations, and performance
requirements of the Centauri Award. The Centauri Plan Committee will determine
whether a Centauri Award includes one type of Centauri Incentive or more types
granted in combination.
Centauri Awards may be granted to any employee (including an employee who is
also a director or an officer), outside director, or consultant of the Centauri
Related Entities whose judgment, initiative, and efforts contributed or may be
expected to contribute to the successful performance of Centauri. Only employees
of the Centauri Related Entities are eligible to receive incentive stock
options. Except as required by the Centauri Plan, Centauri Awards granted at
different times need not contain similar provisions. Finally, the Centauri Plan
Committee's determination (including, without limitation, determinations as to
which participants are to receive Centauri Awards and the terms and provisions
of such Centauri Awards) need not be uniform and may be made selectively among
participants who receive, or are eligible to receive, Centauri Awards.
The Centauri Plan Committee, in its sole discretion, may determine that a
Centauri Incentive will be immediately vested in whole or in part, or that all
or any portion may not be vested until a date, or dates, subsequent to its date
of grant, or until the occurrence of one or more specified events. If the
Centauri Plan Committee imposes conditions upon vesting, then, subsequent to the
date of grant, the Centauri Plan Committee may, in its sole discretion,
accelerate the date on which all or any portion of the Incentive may be vested.
The Centauri Plan Committee may grant Centauri Awards prior to the time of
stockholder approval of the Centauri Plan; however, any such Centauri Award
granted prior to such approval of this proposal shall be made subject to such
stockholder approval.
32
NUMBER OF SHARES
Subject to adjustment as provided in the Centauri Plan, before amendment,
the maximum number of shares of Centauri's common stock that may be delivered
pursuant to Awards granted under the Centauri Plan is 20,000,000 shares. The
types of Centauri Awards that the Centauri Committee has authority to grant
consist of both incentive and nonstatutory stock options and of restricted
stock. Centauri will at all times reserve and keep available the number of
shares of common stock that shall be sufficient to satisfy the requirements of
the Centauri Plan.
As provided by the Centauri Plan, certain shares may be reused to the extent
that (a) a stock option shall expire or terminate for any reason without having
been exercised in full or (b) shares of restricted stock are forfeited for any
reason; provided, however, that if any dividends are paid with respect to shares
of restricted stock and such dividends were paid to the Centauri Plan
participant prior to the forfeiture of the restricted stock, such shares shall
not be reused for grants or awards.
In no event shall the number of shares of common stock subject to incentive
stock options exceed, in the aggregate, 2,000,000 shares of common stock plus
shares subject to incentive stock options which are forfeited or terminated, or
expire unexercised. No Participant may receive during any of Centauri's fiscal
year Centauri Awards covering an aggregate of more than 2,500,000 shares of
common stock.
EXERCISE PRICE AND TERMS OF STOCK OPTIONS
The grant of a Centauri Award of stock options shall be authorized by the
Centauri Plan Committee and shall be evidenced by an award agreement setting
forth (a) the Centauri Incentive or Centauri Incentives being granted, (b) the
total number of shares of Centauri common stock subject to the Incentive(s),
(c) the option price, (d) the award period, (e) the date of grant, and
(f) other terms, provisions, limitations, and performance objectives.
The option price for any share of Centauri common stock purchasable under a
nonqualified stock option may be less than, equal to, or greater than the fair
market value of the share on the date of grant. The option price for any share
of Centauri common stock purchasable under an incentive stock option must be at
least equal to the fair market value of the share on the date of grant. If an
incentive stock option is granted to an employee who owns or is deemed to own
(by reason of the attribution rules of Section 424(d) of the Internal Revenue
Code) more than ten percent (10%) of the combined voting power of all classes of
stock of Centauri or any of the Centauri Related Entities, then the option price
shall be at least 110% of the fair market value of the common stock on the date
of grant.
The Centauri Plan Committee may not grant incentive stock options under the
Centauri Plan to any employee which would permit the aggregate fair market value
(determined on the date of grant) of the Centauri common stock with respect to
which incentive stock options (under this and any other plan of Centauri and its
subsidiaries) are exercisable for the first time by such employee during any
calendar year to exceed $100,000. To the extent any stock option granted under
the Centauri Plan which is designated as an incentive stock option exceeds this
limit or otherwise fails to qualify as an incentive stock option, then such
stock option (or any such portion thereof) shall be deemed a nonqualified stock
option. In such case, the Centauri Plan Committee shall designate which stock
will be treated as incentive stock option stock by causing the issuance of a
separate stock certificate and identifying such stock as incentive stock option
stock on Centauri's stock transfer records.
The Centauri Plan Committee may, in its sole discretion, determine that a
stock option will be immediately exercisable, in whole or in part, or that all
or any portion may not be exercised until a future date or until the occurrence
of one or more specified events. If a stock option is exercisable prior to the
time it is vested, the common stock obtained on the exercise of the stock option
shall be restricted stock, which is subject to the applicable provisions of the
Centauri Plan relating to restricted stock and to the relevant award agreement.
If the Centauri Plan Committee imposes conditions upon
33
exercise, then subsequent to the date of grant, the Centauri Plan Committee may,
in its sole discretion, accelerate the date on which all or any portion of the
stock option may be exercised.
Subject to the other provisions of the Centauri Plan, the Centauri Plan
Committee shall specify in the award agreement the award period for a stock
option. No stock option granted under the Centauri Plan may be exercised at any
time after the end of its award period. The award period for any stock option
shall be no more than ten (10) years from the date of grant of the stock option.
However, if an employee owns or is deemed to own (by reason of the attribution
rules of Section 424(d) of the Code) more than ten percent (10%) of the combined
voting power of all classes of stock of Centauri or any of the Centauri Related
Entities and an incentive stock option is granted to such employee, the award
period of such incentive stock option (to the extent required by the Code at the
time of grant) shall be no more than five (5) years from the date of grant.
RESTRICTED STOCK
Restricted Stock granted to or received by a participant under a Centauri
Award (including a stock option Incentive), may be subject to restrictions
imposed by the Centauri Plan Committee. Such grants may also be subject to
forfeiture in certain events (including, but not limited to, termination of
employment or directorship and/or performance-based events) specified to occur
prior to the lapse of any restrictions. In an award agreement for restricted
stock, the Centauri Plan Committee shall set forth (a) the number of shares of
Centauri common stock awarded, (b) the price, if any, to be paid for such
restricted stock, (c) the time or times within which such Centauri Award may be
subject to forfeiture, (d) specified performance goals which the Centauri Plan
Committee determines must be met in order to remove any restrictions (including
vesting) on the Centauri Award, and (e) all other terms, limitations,
restrictions, and conditions of the restricted stock. The provisions of
restricted stock need not be the same with respect to each participant. If the
Centauri Plan Committee establishes a purchase price for a Centauri Award of
restricted stock, the participant must accept the Centauri Award within a period
of thirty (30) days (or such shorter period as the Centauri Plan Committee may
specify) after the date of grant by executing the applicable award agreement and
paying the relevant purchase price.
Each participant who is awarded or receives restricted stock shall be issued
a stock certificate or certificates in respect of such shares of Centauri common
stock. The certificate(s) shall be registered in the name of the participant,
and shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to the restricted stock.
Shares of restricted stock shall be subject to the restrictions and
conditions of the Centauri Plan and the terms of the particular award
agreements, during such periods as may be determined by the Centauri Plan
Committee commencing on the date of grant or the date of exercise of a Centauri
Award (the "Centauri Restriction Period"). The participant shall not be
permitted to sell, transfer, pledge or assign shares of restricted stock. Except
for these limitations, the Centauri Plan Committee may in its sole discretion,
remove any or all of the restrictions on such restricted stock whenever it may
determine that, by reason of changes in applicable laws or other changes in
circumstances arising after the date of the Centauri Award, such action is
appropriate. Except as provided in the Centauri Plan or in an applicable award
agreement, a participant shall have, with respect to his restricted stock, all
of the rights of a stockholder of Centauri, including the right to vote the
shares, and the right to receive any dividends thereon.
The restriction period of restricted stock shall commence on the date of
grant (or the date of exercise in the case of stock options) of a Centauri
Award, as specified in the award agreement. Subject to Centauri Article 12
Events (see "Additional Rights in Certain Events" below) of the Centauri Plan
and unless otherwise established by the Centauri Plan Committee in the award
agreement setting forth the terms of the restricted stock, the restriction
period shall expire upon
34
satisfaction of the conditions set forth in the award agreement. Such conditions
may provide for vesting based on (i) length of continuous service,
(ii) achievement of specific business objectives, (iii) increases in specified
indices, (iv) attainment of specified growth rates, or (v) other comparable
measurements of Centauri's performance, as may be determined by the Centauri
Plan Committee in its sole discretion.
Except as otherwise provided in the particular award agreement, upon
termination of service for any reason during the restriction period, the
nonvested shares of restricted stock shall be forfeited by the participant. In
the event a participant has paid any consideration to Centauri for such
forfeited restricted stock, the Centauri Plan shall specify in the award
agreement that either (i) Centauri shall be obligated to, or (ii) Centauri may,
in its sole discretion, elect to, pay to the participant, as soon as practicable
after the event causing forfeiture, in cash, an amount equal to the lesser of
the total consideration paid by the participant for such forfeited shares or the
fair market value of such forfeited shares as of the date of termination of
service, as the Centauri Plan Committee, in its sole discretion shall select.
Upon any forfeiture, all rights of a participant with respect to the forfeited
shares of the restricted stock shall cease and terminate, without any further
obligation on the part of Centauri.
ADDITIONAL RIGHTS IN CERTAIN EVENTS
If Centauri shall be the surviving or resulting corporation in any merger,
consolidation or share exchange, any Centauri Incentive granted under the
Centauri Plan shall pertain to and apply to the securities or rights to which a
holder of the number of shares of common stock subject to the Centauri Incentive
would have been entitled.
In the event of any merger, consolidation or share exchange pursuant to
which Centauri is not the surviving corporation (a "Centauri Article 12 Event"),
there shall be substituted for each share of Centauri common stock subject to
the unexercised portion of outstanding stock options, that number of shares of
each class of stock or other securities or that amount of cash, property, or
assets of the surviving, resulting or consolidated company which were
distributed or distributable to the stockholders of Centauri in respect to each
share of Centauri common stock held by them.
Notwithstanding the foregoing, all stock options may be canceled by Centauri
as of the effective date of any reorganization, merger, consolidation, or share
exchange, or any dissolution or liquidation of Centauri, by giving notice to
each holder thereof and by permitting the purchase during the thirty (30) day
period next preceding such effective date of all shares of common stock (whether
or not vested) subject to such outstanding stock options. Subject to this
paragraph, in the event of a sale of all or substantially all of Centauri's
property, its dissolution, liquidation, or winding up, then each participant
shall be entitled to the same kind and amount of securities or assets that are
distributable in accordance with such an event. In the event of a partial
distribution of assets outside the normal course of business in the nature of a
partial liquidation, then the exercise price in effect with respect to each
stock option shall be reduced in proportion to the percentage reduction in the
tangible value of Centauri's common stock.
AMENDMENT AND TERMINATION
The Centauri Board may at any time alter, amend, revise, suspend, or
discontinue the Centauri Plan in any respect, provided that no amendment which
requires stockholder approval in order for the Centauri Plan and Centauri
Incentives awarded thereunder to continue to comply with Sections 162(m), 421,
and 422 of the Code, including any successors to such Sections, shall be
effective unless such amendment shall be approved by the requisite vote of the
stockholders of the Company entitled to vote thereon. Any such amendment shall,
to the extent deemed necessary or advisable by the Centauri Plan Committee, be
applicable to any outstanding Incentives granted under the Centauri Plan,
notwithstanding any contrary provisions contained in any award agreement. In the
event of any such amendment, the holder of any Incentive outstanding under the
Centauri Plan shall, upon request of the
35
Centauri Plan Committee and as a condition to the exercisability thereof,
execute a conforming amendment in the form prescribed by the Centauri Plan
Committee to any award agreement relating thereto.
The Centauri Plan shall be effective from January 1, 2001. Unless sooner
terminated by action of the Centauri Board, the Centauri Plan will terminate on
August 22, 2010, but Centauri Incentives granted before that date will continue
to be effective in accordance with their terms and conditions.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to awards granted under the
Centauri Plan and with respect to the sale of shares of Centauri common stock
acquired under the Centauri Plan.
INCENTIVE STOCK OPTIONS. In general, a participant will not recognize
taxable income upon the grant or exercise of an incentive stock option. Instead,
a participant will recognize taxable income with respect to an incentive stock
option only upon the sale of Centauri common stock acquired through the exercise
of the option ("Centauri ISO Shares"). The exercise of an incentive stock option
may, however, subject the participant to the alternative minimum tax.
Generally, the tax consequences of selling Centauri ISO Shares will vary
with the length of time that the participant has owned the Centauri ISO Shares
at the time they are sold. If the participant sells Centauri ISO Shares after
having owned them for at least two (2) years from the date the option was
granted (the "Grant Date") and one (1) year from the date the option was
exercised (the "Exercise Date"), then the participant will recognize long-term
capital gain in an amount equal to the excess of the sale price of the Centauri
ISO Shares over the exercise price.
Neither Centauri nor the Company will be entitled to a tax deduction with
respect to the grant or exercise of a Centauri incentive stock option or the
disposition of such shares if the participant sells the Centauri ISO Shares
after having owned it for at least two (2) years from the Grant Date and one (1)
year from the Exercise Date.
If the participant sells Centauri ISO Shares for more than the exercise
price prior to having owned them for at least two (2) years from the Grant Date
and one (1) year from the Exercise Date (a "Disqualifying Disposition"), the
participant will recognize ordinary compensation income in an amount equal to
the difference between the fair market value (or, if less, the sales price) of
the stock on the date of exercise and the exercise price. Any subsequent
increase in the price of the stock will be treated as capital gain to the
participant. This capital gain will be a long-term capital gain if the
participant has held the Centauri ISO Shares for more than one (1) year prior to
the date of sale. Centauri will be entitled to a tax deduction in the amount of
the ordinary compensation income realized by the participant.
If a participant sells Centauri ISO Shares for less than the exercise price,
then the participant will recognize capital loss equal to the excess of the
exercise price over the sale price of the Centauri ISO Shares. This capital loss
will be a long-term capital loss if the participant has held the Centauri ISO
Shares for more than one year prior to the date of sale.
NON-QUALIFIED STOCK OPTIONS. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a non-qualified
stock option. Neither Centauri nor the Company will be entitled to a tax
deduction by reason of such grant. Unlike the case of an incentive stock option,
however, a participant who exercises a non-qualified stock option generally will
recognize ordinary compensation income in an amount equal to the excess of the
fair market value of the Centauri common stock acquired through the exercise of
the option ("Centauri NSO Shares") on the exercise date over the exercise price.
Upon such exercise of a non-qualified stock option, Centauri may claim a tax
deduction in the amount of the ordinary compensation income recognized by the
36
participant. Any deduction will be subject to the limitations of Section 162(m)
of the Code, which provides for certain limitations on the deductibility of
non-performance based compensation. Centauri will have a withholding obligation
with respect to ordinary compensation income recognized by participants.
With respect to any Centauri NSO Shares, a participant will have an equal to
the exercise price plus any income recognized upon the exercise of the option
(the "Tax Basis"). Upon selling Centauri NSO Shares, a participant generally
will recognize capital gain or loss in an amount equal to the excess of the sale
price of the Centauri NSO Shares over the participant's Tax Basis in the
Centauri NSO Shares. This capital gain or loss will be a long-term gain or loss
if the participant has held the Centauri NSO Shares for more than one year prior
to the date of the sale.
RESTRICTED STOCK. A participant granted shares of restricted stock will not
recognize any taxable income for federal income tax purposes until the first
time such participant's rights in the shares are transferable or are not subject
to a substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an election under Section 83(b) of the Code to be taxed
on receipt of the shares. In either case, the amount of such income will be
equal to the excess of the fair market value of the stock at the time the income
is recognized over the amount (if any) paid for the Centauri stock. Centauri,
the Company or one of their subsidiaries generally will be entitled to a
deduction for compensation paid in the same amount treated as compensation
income to the grantee.
OTHER TAX MATTERS. The exercise of a stock option by a participant or the
lapse of restrictions on restricted stock, in certain circumstances, may result
in (i) a 20% federal excise tax (in addition to federal income tax) to the
awardee on certain payments of Centauri common stock or cash resulting from such
exercise or, in the case of shares of restricted stock, on all or a portion of
the fair market value of the Centauri common stock on the date the restrictions
lapse, and (ii) the loss of a compensation deduction which would otherwise be
allowable to Centauri, the Company or one of their subsidiaries as explained
above.
FEDERAL SECURITIES LAW CONSIDERATIONS
With respect to participants subject to the reporting requirement of
Section 16 of the Securities Exchange Act of 1934, the Centauri Plan and all
transactions under the Centauri Plan are intended to comply with all applicable
conditions of Rule 16b-3 promulgated under the Exchange Act. To the extent any
provisions of the Centauri Plan or action by the Centauri Plan Committee fail to
comply with Section 16, it shall be deemed null and void AB INITIO, to the
extent permitted by law and deemed advisable by the Centauri Plan Committee. In
no event may a Centauri Incentive be exercised or shares of Centauri common
stock be issued pursuant to a Centauri Award if a necessary listing or quotation
of the shares of common stock on a stock exchange or inter-dealer quotation
systems or any registration under state or federal securities laws required
under the circumstances have not been accomplished.
PROPOSAL 5: APPROVAL OF AUDITORS
The Board of Directors, in accordance with the recommendation of its Audit
Committee, which is composed of non-employees of the Company, has unanimously
approved and requests you to vote FOR the ratification of the appointment by the
Board of Grant Thornton LLP ("Grant Thornton") to act as independent certified
public accountants of the Company until the next annual meeting of stockholders.
Proxies will be so voted unless stockholders specify otherwise in their proxies.
Representatives of Grant Thornton are expected to be present at the Meeting
and will have the opportunity to make a statement if they so desire and will be
available to respond to appropriate questions from stockholders.
37
The Company's Board of Directors, in accordance with the recommendation of
its Audit Committee, which is composed of non-employees of the Company, has
requested Grant Thornton to act as independent certified public accountants of
the Company for the 2001 fiscal year, subject to stockholder approval.
A proposal to ratify this appointment is being presented to the stockholders
at the Annual Meeting because the Board of Directors believes that it is a good
corporate practice and seeks stockholder ratification of and the selection of
the Company's independent auditors. If the appointment of Grant Thornton is not
ratified, the Board of Directors will evaluate the basis for the stockholders'
vote when evaluating whether to renew Grant Thornton's engagement.
During fiscal year 2000, the Company paid Grant Thornton an aggregate of
$117,500 for fees relating to the annual audit and quarterly reviews and $33,127
for other services.
ANNUAL REPORT
The 2000 Annual Report on Form 10-K for the Company's fiscal year ended
December 31, 2000, is being mailed to each stockholder receiving this Proxy
Statement, but does not form any part of the proxy solicitation material.
OTHER MATTERS
The Board of Directors does not intend to bring any other matters before the
Meeting nor does the Board of Directors know of any matters, which other persons
intend to bring before the Meeting. If, however, other matters not mentioned in
this Proxy Statement properly come before the Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance with the
recommendation of the Board of Directors.
STOCKHOLDER PROPOSALS AND SUBMISSIONS FOR 2002 ANNUAL MEETING
If any stockholder wishes to present a proposal to be considered for
inclusion in the proxy materials to be solicited by the Company's Board of
Directors with respect to the next Annual Meeting of Stockholders, such proposal
shall have been presented to the Company's management by January 2, 2002,
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934. Such proposals
should be directed to the Company, 1240 East Campbell Road, Richardson, Texas
75081, Attention: Secretary.
With respect to stockholder proposals not included in the Company's proxy
statement and form of proxy, the Company may utilize discretionary authority
conferred by proxy in voting on any such proposals if, among other situations,
the stockholder does not give timely notice of the matter to the Company by the
date determined under the Company's By-Laws for the submission of business by
stockholders. The Company's By-Laws state that to be timely, notice and certain
related information must be received at the principal executive offices not less
than 60 and no more than 90 days prior to the anniversary date of the previous
year's annual meeting of stockholders; provided, however, that in the event that
the annual meeting is called for a date that is not within 30 days before or
after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting is
mailed or such public disclosure of the date of the annual meeting is made,
whichever first occurs. It is currently expected that the 2002 Annual Meeting of
Stockholders will be held on or about June 14, 2002.
THE BOARD OF DIRECTORS ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE FILL IN, DATE,
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED ENVELOPE TO WHICH NO
POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
38
YOUR VOTE IS IMPORTANT. IF YOU ARE A STOCKHOLDER OF RECORD AND ATTEND THE
MEETING AND WISH TO VOTE IN PERSON, YOU MAY WITHDRAW YOUR PROXY AT ANY TIME
PRIOR TO THE VOTE.
By Order of the Board of Directors
Dated: April 30, 2001 /s/ HERMAN M. FRIETSCH
---------------------------------
HERMAN M. FRIETSCH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON WHOSE PROXY IS BEING
SOLICITED, UPON THE WRITTEN REQUEST OF ANY SUCH PERSON, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE FINANCIAL STATEMENTS
AND SCHEDULES THERETO. REQUESTS FOR COPIES OF SUCH REPORT SHOULD BE DIRECTED TO
ROBERT P. CAPPS, EXECUTIVE VICE PRESIDENT AND SECRETARY, TERAFORCE TECHNOLOGY
CORPORATION, 1240 EAST CAMPBELL ROAD, RICHARDSON, TEXAS 75081.
39
EXHIBIT "A"
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
I. AUDIT COMMITTEE PURPOSE
The Audit Committee is appointed by the Board of Directors to assist the
Board in fulfilling its oversight responsibilities. The Audit Committee's
primary duties and responsibilities are to:
Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal
compliance.
Monitor the independence and performance of the Company's independent
auditors.
Provide an avenue of communication among auditors, management, the Chief
Financial Officer, legal counsel and the Board of Directors.
Encourage adherence to, and continuous improvement of, the Company's
policies, procedures, and practices at all levels.
Review areas of potential significant financial risk to the Company.
Report to the Board of Directors concerning the foregoing matters.
The Audit Committee has the authority, upon prior notification of, and
consultation, as appropriate, with the Chairman of the Board, to conduct any
investigation appropriate to fulfilling its responsibilities, and it has direct
access to the independent auditors as well as employees. The Audit Committee has
the authority to retain, at the Company's expense, special legal, accounting, or
other consultants or experts it deems necessary in the performance of its
duties. The Audit Committee may request any officer or employee of the Company
or the Company's outside counsel or independent auditor to attend any meeting
the of the Committee or to meet with any members of, or consultants to, the
Committee.
II. AUDIT COMMITTEE COMPOSITION AND MEETINGS
The Audit Committee members shall meet the requirements of The Nasdaq Stock
Market. The Audit Committee shall be comprised of two or more directors (which
shall be increased to three or more directors on or before June 14, 2001) as
determined by the Board, each of whom shall be independent nonexecutive
directors, free from any relationship that would interfere with the exercise of
his or her independent judgment. All members of the Committee shall have a basic
understanding of finance and accounting and be able to read and understand
fundamental financial statements, and at least one member of the Committee shall
have accounting or related financial management expertise.
Audit Committee members shall be appointed by the Board. If the Board shall
have established a Nominating Committee, Audit Committee members shall be
appointed by the Board on recommendation of the Nominating Committee. The
members of the Committee shall designate a Chair by majority vote of the
Committee membership, and the Chair shall preside at all meetings of the
Committee.
The Committee shall meet at least three times annually, or more frequently
as circumstances dictate. The Audit Committee Chair shall prepare and/or approve
an agenda and circulate it to the other members of the Committee in advance of
each meeting. In developing the agenda, the Chair may consult with management,
legal counsel, the Chief Financial Officer and other committee members. The
agenda shall be consistent with this charter. The Committee shall meet privately
in executive session at least annually with management, the Chief Financial
Officer, the independent auditors, and as a committee to discuss any matters
that the Committee or each of these groups believes should be
A-1
discussed. In addition, the Committee, or at least its Chair, shall communicate
with management and the independent auditors quarterly to review the Company's
financial statements and significant findings based upon the auditors limited
review procedures.
III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES
REVIEW PROCEDURES
The Audit Committee shall:
Review and reassess the adequacy of the Charter at least annually. Submit
the Charter to the Board of Directors for approval and have the document
published periodically in accordance with SEC regulations.
Review the Company's annual audited financial statements prior to issuance
by the auditors of their report thereon, filing with the SEC and
distribution to third parties. Review shall include discussion with
management and independent auditors of significant issues regarding
accounting principles, practices, and judgments.
In consultation with the management, the independent auditors, and the Chief
Financial Officer, consider the integrity of the Company's financial
reporting processes and controls. Discuss significant financial risk
exposures and the steps management has taken to monitor, control, and report
such exposures. Review any significant findings prepared by the independent
auditors and the Chief Financial Officer together with management's
responses.
Review with management responsible for the financial statements and the
independent auditors the Company's quarterly financial results prior to the
release of earnings and/or the Company's quarterly financial statements
prior to filing or distribution. Discuss any significant changes to the
Company's accounting principles and any items required to be communicated by
the independent auditors in accordance with SAS 61 (see item 9). The Chair
of the committee may represent the entire Audit Committee for purposes of
this review.
INDEPENDENT AUDITORS
The independent auditors are ultimately accountable to the Audit Committee
and the Board of Directors. The Audit Committee shall review the independence
and performance of the auditors and annually recommend to the Board of Directors
the appointment of the independent auditors or approve any discharge of auditors
when circumstances warrant.
The Audit Committee shall approve the fees and other significant
compensation to be paid to the independent auditors.
On an annual basis, the committee shall (i) obtain a written statement from
the independent auditor delineating all relationships between the auditor and
the Company, (ii) review and discuss with the independent auditors all
significant relationships they have with the Company that could impair the
auditors' independence, and (iii) recommend to the Board that it take
appropriate action in response to the independent auditors' report to satisfy
the Committee of the independence of the auditors.
The Audit Committee shall review the independent auditors' audit
plan--discuss scope, staffing, locations, reliance upon management, and internal
audit and general audit approach.
Prior to releasing the year-end earnings, the Audit Committee shall discuss
the results of the audit with the independent auditors. The Audit Committee
shall discuss certain matters required to be communicated to audit committees in
accordance with AICPA SAS 61.
The Audit Committee shall consider the independent auditors' judgments about
the quality and appropriateness of the Company's accounting principles as
applied in its financial reporting.
A-2
AUDIT AND LEGAL COMPLIANCE
The Audit Committee shall:
Review the Company's system of internal controls, as needed.
Review the appointment, performance, and replacement of senior financial
management of the Company.
On at least an annual basis, review with the Company's legal counsel, any
legal matters that could have a significant impact on the organization's
financial statements, the Company's compliance with applicable laws and
regulations, and inquiries received from regulators or governmental
agencies.
OTHER AUDIT COMMITTEE RESPONSIBILITIES
The Audit Committee shall:
The Audit Committee shall prepare, or shall cause to be prepared and shall
review, the Audit Committee Report to be included in the proxy statement for
use in connection with the annual shareholders' meeting. The contents of the
report will comply with the requirements of the SEC.
Perform any other activities consistent with this Charter, the Company's
by-laws, and governing law, as the Committee or the Board deems necessary or
appropriate.
Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements are complete and
accurate and are in accordance with generally accepted accounting principles.
This is the responsibility of management and the independent auditor. Nor is it
the duty of the Audit Committee to conduct investigations, to resolve
disagreements, if any, between management and the independent auditor or to
assure compliance with laws.
A-3
EXHIBIT "B"
AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED STOCK INCENTIVE PLAN
The Company's Amended and Restated Stock Incentive Plan, as amended (the
"Plan"), shall be amended, as follows:
1. The first sentence of the introductory paragraph shall be amended to
read as follows:
The purposes of the Stock Incentive Plan (the "Plan") are to enable
TeraForce Technology Corporation (the "Company") and its Subsidiaries, if
any, to attract and retain directors and key employees and to provide
them with additional incentive to advance the interests of the Company.
2. The first sentence of Section 4 of the Plan shall be amended to read as
follows:
The aggregate number of shares of the Company's Common Stock, $.01 par
value ("Common Stock"), which may be issued and as to which grants or
awards of stock options, restricted stock, restricted stock units,
performance units or bonus stock may be made under the Plan is 9,500,000
shares (of which no more than 1,000,000 shares shall be available for the
grant of restricted stock or restricted stock units), subject to
adjustment and substitution as set forth in Section 8.
3. As amended hereby, the Plan remains in full force and effect.
IN WITNESS WHEREOF, this Amendment is executed this 30th day of April, 2001.
TERAFORCE TECHNOLOGY CORPORATION
By: /s/ HERMAN M. FRIETSCH
--------------------------------
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
B-1
EXHIBIT "C"
FORM OF SUBSIDIARY STOCK PLAN
[NAME OF SUBSIDIARY]
2001 STOCK OPTION PLAN
The [NAME OF SUBSIDIARY] 2001 Stock Option Plan (the "Plan") was adopted by
the Board of Directors of [NAME OF SUBSIDIARY], a Delaware corporation (the
"Company"), effective as of January 1, 2001.
ARTICLE 1
PURPOSE
The purpose of the Plan is to foster and promote the long-term financial
success of the Company and its Subsidiaries and materially increase the value of
the Company and its Subsidiaries by (a) encouraging the long-term commitment of
the Employees, Consultants, and Outside Directors of the Company, the ultimate
parent company of the Company and its Subsidiaries, (b) motivating performance
of the Employees, Consultants, and Outside Directors of the Company, the
ultimate parent company of the Company and its Subsidiaries by means of
long-term performance related incentives, (c) encouraging and providing
Employees, Consultants, and Outside Directors of the Company, the ultimate
parent company of the Company and its Subsidiaries with an opportunity to obtain
an ownership interest in the Company, (d) attracting and retaining outstanding
Employees, Consultants, and Outside Directors by providing incentive
compensation opportunities, and (e) enabling participation by Employees,
Consultants, and Outside Directors in the long-term growth and financial success
of the Company, the ultimate parent company of the Company and its Subsidiaries.
With respect to Reporting Participants, the Plan and all transactions under
the Plan are intended to comply with all applicable conditions of Rule 16b-3
promulgated under the Securities Exchange Act of 1934 (the "1934 Act"). To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void AB INITIO, to the extent permitted by law and
deemed advisable by the Committee.
ARTICLE 2
DEFINITIONS
For the purpose of the Plan, unless the context requires otherwise, the
following terms shall have the meanings indicated:
2.1 "Award" means the grant of any Incentive Stock Option, Nonqualified
Stock Option, or Restricted Stock whether granted singly or in combination (each
individually referred to herein as an "Incentive").
2.2 "Award Agreement" means a written agreement between a Participant and
the Company which sets out the terms of the grant of an Award.
2.3 "Award Period" means the period set forth in the Award Agreement with
respect to a Stock Option during which the Stock Option may be exercised, which
shall commence on the Date of Grant and expire at the time set forth in the
Award Agreement.
2.4 "Board" means the board of directors of the Company.
2.5 "Change of Control" means any of the following: (i) the stockholders of
the Company approve any plan or proposal for the liquidation or dissolution of
the Company; (ii) the stockholders of the entity that is the ultimate parent of
the Company approve any plan or proposal for the liquidation or dissolution of
the entity that is the ultimate parent of the Company (iii) any
C-1
consolidation, merger or share exchange of the Company or of the entity that is
the ultimate parent of the Company in which the Company or the entity that is
the ultimate parent of the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock or the
shares of common stock of the entity that is the ultimate parent of the Company
would be converted into cash, securities or other property; or (iv) any sale,
lease, exchange or other transfer (excluding transfer by way of pledge or
hypothecation) in one transaction or a series of related transactions, of all or
substantially all of the assets of the Company or of the entity that is the
ultimate parent of the Company; PROVIDED, HOWEVER, that a transaction described
in clause (iii) or (iv) shall not constitute a Change in Control hereunder if
after such transaction (I) Continuing Directors constitute at least fifty
percent (50%) of the members of the Board of Directors of the continuing,
surviving or acquiring entity, as the case may be or, if such entity has a
parent entity directly or indirectly holding at least a majority of the voting
power of the voting securities of the continuing, surviving or acquiring entity,
Continuing Directors constitute at least fifty percent (50%) of the members of
the Board of Directors of the entity that is the ultimate parent of the
continuing, surviving or acquiring entity, and (II) the continuing, surviving or
acquiring entity (or the ultimate parent of such continuing, surviving or
acquiring entity) assumes all outstanding Stock Options under this Plan.
"Continuing Directors" means Board members who (x) at the date of this Plan were
directors or (y) become directors after the date of this Plan and whose election
or nomination for election by the Company's stockholders was approved by a vote
of a majority of the directors then in office who were directors at the date of
this Plan or whose election or nomination for election was previously so
approved.
2.6 "Code" means the Internal Revenue Code of 1986, as amended.
2.7 "Committee" means the committee appointed or designated by the Board to
administer the Plan in accordance with Article 3 of this Plan.
2.8 "Common Stock" means the common stock, par value $0.01 per share, which
the Company is currently authorized to issue or may in the future be authorized
to issue, or any securities into which or for which the common stock of the
Company may be converted or exchanged, as the case may be, pursuant to the terms
of this Plan.
2.9 "Company" means [NAME OF SUBSIDIARY], a Delaware corporation, and any
successor entity.
2.10 "Consultant" means any person performing advisory or consulting services
for the Company, the ultimate parent company of the Company or a Subsidiary,
with or without compensation, to whom the Company chooses to grant an Award in
accordance with the Plan, provided that BONA FIDE services must be rendered by
such person and such services shall not be rendered in connection with the offer
or sale of securities in a capital raising transaction.
2.11 "Corporation" means any entity that (i) is defined as a limited
liability company or corporation under Code Section 7701 and (ii) is the Company
or is in an unbroken chain of limited liability company or corporations (other
than the Company) beginning with the Company, if each of the limited liability
company or corporations other than the last limited liability company or
corporation in the unbroken chain owns membership interests or stock possessing
a majority of the total combined voting power of all classes of membership
interests or stock in one of the other limited liability company or corporations
in the chain. For purposes of clause (ii) hereof, an entity shall be treated as
a "corporation" if it satisfies the definition of a corporation under
Section 7701 of the Code.
2.12 "Date of Grant" means the effective date on which an Award is made to a
Participant as set forth in the applicable Award Agreement; provided, however,
that solely for purposes of Section 16 of the 1934 Act and the rules and
regulations promulgated thereunder, the Date of Grant of an Award shall be the
date of stockholder approval of the Plan if such date is later than the
effective date of such Award as set forth in the Award Agreement.
C-2
2.13 "Employee" means common law employee (as defined in accordance with the
Regulations and Revenue Rulings then applicable under Section 3401(c) of the
Code) of the Company, the ultimate parent company of the Company or any
Subsidiary of the Company.
2.14 "Fair Market Value" means, as of a particular date, (a) if the shares of
Common Stock are listed on any securities exchange, the closing sales price per
share of Common Stock on the consolidated transaction reporting system for the
principal securities exchange for the Common Stock on that date, or, if there
shall have been no such sale so reported on that date, on the last preceding
date on which such a sale was so reported, (b) if the shares of Common Stock are
not so listed but are quoted on the Nasdaq National Market System, the closing
sales price per share of Common Stock on the Nasdaq National Market System on
that date, or, if there shall have been no such sale so reported on that date,
on the last preceding date on which such a sale was so reported, (c) if the
Common Stock is not so listed or quoted, the mean between the closing bid and
asked price on that date, or, if there are no quotations available for such
date, on the last preceding date on which such quotations shall be available, as
reported by Nasdaq, or, if not reported by Nasdaq, by the National Quotation
Bureau, Inc., or (d) if none of the above is applicable, such amount as may be
determined by the Committee in good faith, to be the fair market value per share
of Common Stock.
"Independent Third Party" means an individual or entity independent of the
Company having experience in providing investment banking or similar appraisal
or valuation services and with expertise generally in the valuation of
securities or other property for purposes of this Plan. The Board may utilize
one or more Independent Third Parties.
2.15 "Incentive Stock Option" means an incentive stock option within the
meaning of Section 422 of the Code, granted pursuant to this Plan.
2.16 "Nonpublicly Traded" means not listed on a national securities exchange
registered with the Securities and Exchange Commission or designated for trading
on the Nasdaq National Market.
2.17 "Nonqualified Stock Option" means a nonqualified stock option, granted
pursuant to this Plan, to which Section 421 of the Code does not apply.
2.18 "Option Price" means the price which must be paid by a Participant upon
exercise of a Stock Option to purchase a share of Common Stock.
2.19 "Outside Director" means a director of the Company or its ultimate
parent who is not an Employee
2.20 "Participant" shall mean an Employee, Consultant, or Outside Director of
the Company, its ultimate parent or a Subsidiary to whom an Award is granted
under this Plan.
2.21 "Plan" means this [NAME OF SUBSIDIARY] 2001 Stock Option Plan, as
amended from time to time.
2.22 "Reporting Participant" means a Participant who is subject to the
reporting requirements of Section 16 of the 1934 Act.
2.23 "Restricted Stock" means shares of Common Stock issued or transferred to
a Participant pursuant to Section 6.5 of this Plan which are subject to
restrictions or limitations set forth in this Plan and in the related Award
Agreement.
2.24 "Retirement" means any Termination of Service solely due to retirement
upon or after attainment of age fifty-five (55), or permitted early retirement
as determined by the Committee.
2.25 "Stock Option" means a Nonqualified Stock Option or an Incentive Stock
Option.
2.26 "Subsidiary" means (i) any Corporation (as defined herein), (ii) any
limited partnership, if the Company or any Corporation owns a majority of the
general partnership interest and a majority of the
C-3
limited partnership interests entitled to vote on the removal and replacement of
the general partner, and (iii) any partnership or limited liability company, if
the partners or members thereof are composed only of the Company, any
Corporation or any limited partnership listed in item (ii) above. "Subsidiaries"
means more than one of any such Corporations, limited partnerships, partnerships
or limited liability companies.
2.27 "Termination of Service" occurs when a Participant who is an Employee or
a Consultant of the Company or any Subsidiary shall cease to serve as an
Employee or Consultant of the Company and its Subsidiaries, for any reason; or,
when a Participant who is an Outside Director of the Company or a Subsidiary
shall cease to serve as a director of the Company and its Subsidiaries for any
reason.
2.28 "Total and Permanent Disability" means a Participant is qualified for
long-term disability benefits under the Company's or Subsidiary's disability
plan or insurance policy; or, if no such plan or policy is then in existence or
if the Participant is not eligible to participate in such plan or policy, that
the Participant, because of ill health, physical or mental disability or any
other reason beyond his or her control, is unable to perform his or her duties
of employment for a period of six (6) continuous months, as determined in good
faith by the Committee; PROVIDED THAT, with respect to any Incentive Stock
Option, Total and Permanent Disability shall have the meaning given it under the
rules governing Incentive Stock Options under the Code.
ARTICLE 3
ADMINISTRATION
Subject to the terms of this Article 3, the Plan shall be administered by
the Board or such committee of the Board as is designated by the Board to
administer the Plan including but not limited to the independent outside
directors of the ultimate parent company of the Company (the "Committee"). The
Committee shall consist of not fewer than two persons. Any member of the
Committee may be removed at any time, with or without cause, by resolution of
the Board. Any vacancy occurring in the membership of the Committee may be
filled by appointment by the Board. At any time there is no Committee to
administer the Plan, any references in this Plan to the Committee shall be
deemed to refer to the Chairman of the Board or the Board who is administering
the Plan.
If necessary to satisfy the requirements of Section 162(m) of the Code
and/or Rule 16b-3 promulgated under the 1934 Act, membership on the Committee
shall be limited to those members of the Board who are "outside directors" under
Section 162(m) of the Code and "non-employee directors" as defined in
Rule 16b-3 promulgated under the 1934 Act. The Committee shall select one of its
members to act as its Chairman. A majority of the Committee shall constitute a
quorum, and the act of a majority of the members of the Committee present at a
meeting at which a quorum is present shall be the act of the Committee.
The Committee shall determine and designate from time to time the eligible
persons to whom Awards will be granted and shall set forth in each related Award
Agreement, where applicable, the Award Period, the Date of Grant, and such other
terms, provisions, limitations, and performance requirements, as are approved by
the Committee, but not inconsistent with the Plan. The Committee shall determine
whether an Award shall include one type of Incentive or two or more Incentives
granted in combination. All decisions with respect to any Award, and the terms
and conditions thereof, to be granted under the Plan to any member of the
Committee shall be made solely and exclusively by the other members of the
Committee, or if such member is the only member of the Committee, by the Board.
The Committee, in its discretion, shall (i) interpret the Plan,
(ii) prescribe, amend, and rescind any rules and regulations necessary or
appropriate for the administration of the Plan, (iii) establish performance
goals for an Award and certify the extent of their achievement, and (iv) make
such other determinations or certifications and take such other action as it
deems necessary or advisable in the
C-4
administration of the Plan. Any interpretation, determination, or other action
made or taken by the Committee shall be final, binding, and conclusive on all
interested parties.
The Committee may delegate to officers of the Company, pursuant to a written
delegation, the authority to perform specified functions under the Plan. Any
actions taken by any officers of the Company pursuant to such written delegation
of authority shall be deemed to have been taken by the Committee.
Notwithstanding the foregoing, to the extent necessary to satisfy the
requirements of Section 162(m) of the Code and/or Rule 16b-3 promulgated under
the 1934 Act, any function relating to a Reporting Participant or a covered
employee (as defined in Section 162(m) of the Code) shall be performed solely by
the Committee.
With respect to restrictions in the Plan that are based on the requirements
of Rule 16b-3 promulgated under the 1934 Act, Section 422 of the Code,
Section 162(m) of the Code, the rules of any exchange or inter-dealer quotation
system upon which the Company's securities are listed or quoted, or any other
applicable law, rule or restriction (collectively, "applicable law"), to the
extent that any such restrictions are no longer required by applicable law, the
Committee shall have the sole discretion and authority to grant Awards that are
not subject to such mandated restrictions and/or to waive any such mandated
restrictions with respect to outstanding Awards.
ARTICLE 4
ELIGIBILITY
Any Employee (including an Employee who is also a director or an officer),
Outside Director, or Consultant of the Company, the ultimate parent company of
the Company or any Subsidiary of the Company or its ultimate parent company
whose judgment, initiative, and efforts contributed or may be expected to
contribute to the successful performance of the Company is eligible to
participate in the Plan; provided that only Employees of a Corporation shall be
eligible to receive Incentive Stock Options. The Committee, upon its own action,
may grant, but shall not be required to grant, an Award to any Employee, Outside
Director, or Consultant of the Company, the parent company of the Company or any
Subsidiary. Awards may be granted by the Committee at any time and from time to
time to new Participants, or to then Participants, or to a greater or lesser
number of Participants, and may include or exclude previous Participants, as the
Committee shall determine. Except as required by this Plan, Awards granted at
different times need not contain similar provisions. The Committee's
determinations under the Plan (including without limitation determinations of
which Employees, Outside Directors, or Consultants, if any, are to receive
Awards, the form, amount and timing of such Awards, the terms and provisions of
such Awards and the agreements evidencing same) need not be uniform and may be
made by it selectively among Participants who receive, or are eligible to
receive, Awards under the Plan.
ARTICLE 5
SHARES SUBJECT TO PLAN
5.1 NUMBER AVAILABLE FOR AWARDS. Subject to adjustment as provided in
Articles 11 and 12, the maximum number of shares of Common Stock that may be
delivered pursuant to Awards granted under the Plan is 20,000,000 shares. Shares
to be issued may be made available from authorized but unissued Common Stock,
Common Stock held by the Company in its treasury, or Common Stock purchased by
the Company on the open market or otherwise. During the term of this Plan, the
Company will at all times reserve and keep available the number of shares of
Common Stock that shall be sufficient to satisfy the requirements of this Plan.
C-5
5.2 REUSE OF SHARES. Subject to Section 5.2(c), if, and to the extent:
(a) A Stock Option shall expire or terminate for any reason without
having been exercised in full, or in the event that a Stock Option is
exercised or settled in a manner such that some or all of the shares of
Common Stock relating to the Stock Option are not issued to the Participant
(or beneficiary) (including as the result of the use of shares for
withholding taxes), the shares of Common Stock subject thereto which have
not become outstanding shall (unless the Plan shall have sooner terminated)
become available for issuance under the Plan; in addition, with respect to
any share-for-share exercise or cash-less exercise pursuant to Section 8.3
or otherwise, only the "net" shares issued shall be deemed to have become
outstanding for purposes of the Plan as a result thereof.
(b) Shares of Restricted Stock under the Plan are forfeited for any
reason, such shares of Restricted Stock shall (unless the Plan shall have
sooner terminated) become available for issuance under the Plan; provided,
however, that if any dividends paid with respect to shares of Restricted
Stock were paid to the Participant prior to the forfeiture thereof, such
shares shall not be reused for grants or awards.
(c) In no event shall the number of shares of Common Stock subject to
Incentive Stock Options exceed, in the aggregate, 2,000,000 shares of Common
Stock plus shares subject to Incentive Stock Options which are forfeited or
terminated, or expire unexercised.
ARTICLE 6
GRANT OF AWARDS
6.1 IN GENERAL. The Company shall execute an Award Agreement with a
Participant after the Committee approves the issuance of an Award. Any Award
granted pursuant to this Plan must be granted within ten (10) years after the
date of adoption of this Plan. The Plan shall be submitted to the Company's
stockholders for approval; however, the Committee may grant Awards under the
Plan prior to the time of stockholder approval. Any such Award granted prior to
such stockholder approval shall be made subject to such stockholder approval.
The grant of an Award to a Participant shall not be deemed either to entitle the
Participant to, or to disqualify the Participant from, receipt of any other
Award under the Plan.
6.2 STOCK OPTIONS. The grant of an Award of Stock Options shall be
authorized by the Committee and shall be evidenced by an Award Agreement setting
forth: (i) the Incentive or Incentives being granted, (ii) the total number of
shares of Common Stock subject to the Incentive(s), (iii) the Option Price,
(iv) the Award Period, (v) the Date of Grant, and (vi) such other terms,
provisions, limitations, and performance objectives, as are approved by the
Committee, but not inconsistent with the Plan.
6.3 OPTION PRICE. The Option Price for any share of Common Stock which may
be purchased under a Nonqualified Stock Option for any share of Common Stock may
be less than, equal to, or greater than the Fair Market Value of the share on
the Date of Grant. The Option Price for any share of Common Stock which may be
purchased under an Incentive Stock Option must be at least equal to the Fair
Market Value of the share on the Date of Grant; if an Incentive Stock Option is
granted to an Employee who owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than ten percent (10%) of
the combined voting power of all classes of stock of the Company (or any parent
or Subsidiary), the Option Price shall be at least 110% of the Fair Market Value
of the Common Stock on the Date of Grant.
6.4 MAXIMUM ISO GRANTS. The Committee may not grant Incentive Stock
Options under the Plan to any Employee which would permit the aggregate Fair
Market Value (determined on the Date of Grant) of the Common Stock with respect
to which Incentive Stock Options (under this and any
C-6
other plan of the Company and its Subsidiaries) are exercisable for the first
time by such Employee during any calendar year to exceed $100,000. To the extent
any Stock Option granted under this Plan which is designated as an Incentive
Stock Option exceeds this limit or otherwise fails to qualify as an Incentive
Stock Option, such Stock Option (or any such portion thereof) shall be a
Nonqualified Stock Option. In such case, the Committee shall designate which
stock will be treated as Incentive Stock Option stock by causing the issuance of
a separate stock certificate and identifying such stock as Incentive Stock
Option stock on the Company's stock transfer records.
6.5 RESTRICTED STOCK. If Restricted Stock is granted to or received by a
Participant under an Award (including a Stock Option), the Committee shall set
forth in the related Award Agreement: (i) the number of shares of Common Stock
awarded, (ii) the price, if any, to be paid by the Participant for such
Restricted Stock, (iii) the time or times within which such Award may be subject
to forfeiture, (iv) specified performance goals of the Company, a Subsidiary,
any division thereof or any group of Employees of the Company, or other
criteria, which the Committee determines must be met in order to remove any
restrictions (including vesting) on such Award, and (v) all other terms,
limitations, restrictions, and conditions of the Restricted Stock, which shall
be consistent with this Plan. The provisions of Restricted Stock need not be the
same with respect to each Participant. If the Committee establishes a purchase
price for an Award of Restricted Stock, the Participant must accept such Award
within a period of thirty (30) days (or such shorter period as the Committee may
specify) after the Date of Grant by executing the applicable Award Agreement and
paying such purchase price.
(a) LEGEND ON SHARES. Each Participant who is awarded or receives
Restricted Stock shall be issued a stock certificate or certificates in
respect of such shares of Common Stock. Such certificate(s) shall be
registered in the name of the Participant, and shall bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to
such Restricted Stock, substantially as provided in Section 15.11 of the
Plan.
The Committee may require that the stock certificates evidencing shares
of Restricted Stock be held in custody by the Company until the restrictions
thereon shall have lapsed, and that the Participant deliver to the Committee
a stock power or stock powers, endorsed in blank, relating to the shares of
Restricted Stock.
(b) RESTRICTIONS AND CONDITIONS. Shares of Restricted Stock shall be
subject to the following restrictions and conditions:
(i) Subject to the other provisions of this Plan and the terms of the
particular Award Agreements, during such period as may be determined by
the Committee commencing on the Date of Grant or the date of exercise of
an Award (the "Restriction Period"), the Participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock.
Except for these limitations, the Committee may in its sole discretion,
remove any or all of the restrictions on such Restricted Stock whenever
it may determine that, by reason of changes in applicable laws or other
changes in circumstances arising after the date of the Award, such action
is appropriate.
(ii) Except as provided in sub-paragraph (i) above or in the
applicable Award Agreement, the Participant shall have, with respect to
his or her Restricted Stock, all of the rights of a stockholder of the
Company, including the right to vote the shares, and the right to receive
any dividends thereon. Certificates for shares of Common Stock free of
restriction under this Plan shall be delivered to the Participant
promptly after, and only after, the Restriction Period shall expire
without forfeiture in respect of such shares of Common Stock.
Certificates for the shares of Common Stock forfeited under the
provisions of the Plan and the applicable Award Agreement shall be
promptly returned to the Company by the forfeiting Participant. Each
Award Agreement shall require that (x) each Participant, by his or her
acceptance of Restricted Stock, shall irrevocably grant to the Company a
power of attorney to
C-7
transfer any shares so forfeited to the Company and agrees to execute any
documents requested by the Company in connection with such forfeiture and
transfer, and (y) such provisions regarding returns and transfers of
stock certificates with respect to forfeited shares of Common Stock shall
be specifically performable by the Company in a court of equity or law.
(iii) The Restriction Period of Restricted Stock shall commence on the
Date of Grant or the date of exercise of an Award, as specified in the
Award Agreement, and, subject to Article 12 of the Plan, unless otherwise
established by the Committee in the Award Agreement setting forth the
terms of the Restricted Stock, shall expire upon satisfaction of the
conditions set forth in the Award Agreement; such conditions may provide
for vesting based on (i) length of continuous service, (ii) achievement
of specific business objectives, (iii) increases in specified indices,
(iv) attainment of specified growth rates, or (v) other comparable
measurements of Company performance, as may be determined by the
Committee in its sole discretion.
(iv) Except as otherwise provided in the particular Award Agreement,
upon Termination of Service for any reason during the Restriction Period,
the nonvested shares of Restricted Stock shall be forfeited by the
Participant. In the event a Participant has paid any consideration to the
Company for such forfeited Restricted Stock, the Committee shall specify
in the Award Agreement that either (i) the Company shall be obligated to,
or (ii) the Company may, in its sole discretion, elect to, pay to the
Participant, as soon as practicable after the event causing forfeiture,
in cash, an amount equal to the lesser of the total consideration paid by
the Participant for such forfeited shares or the Fair Market Value of
such forfeited shares as of the date of Termination of Service, as the
Committee, in its sole discretion shall select. Upon any forfeiture, all
rights of a Participant with respect to the forfeited shares of the
Restricted Stock shall cease and terminate, without any further
obligation on the part of the Company.
6.6 MAXIMUM INDIVIDUAL GRANTS. No Participant may receive during any
fiscal year of the Company Awards covering an aggregate of more than 2,500,000
shares of Common Stock.
ARTICLE 7
AWARD PERIOD; VESTING
7.1 AWARD PERIOD.
(a) Subject to the other provisions of this Plan, the Committee shall
specify in the Award Agreement the Award Period for a Stock Option. No Stock
Option granted under the Plan may be exercised at any time after the end of
its Award Period. The Award Period for any Stock Option shall be no more
than ten (10) years from the Date of Grant of the Stock Option. However, if
an Employee owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) more than ten percent (10%) of the combined
voting power of all classes of stock of the Company (or any parent or
Subsidiary) and an Incentive Stock Option is granted to such Employee, the
Award Period of such Incentive Stock Option (to the extent required by the
Code at the time of grant) shall be no more than five (5) years from the
Date of Grant.
(b) In the event of Termination of Service of a Participant, the Award
Period for a Stock Option shall be reduced or terminated in accordance with
the Award Agreement.
7.2 VESTING. The Committee, in its sole discretion, may determine that an
Incentive will be immediately vested in whole or in part, or that all or any
portion may not be vested until a date, or dates, subsequent to its Date of
Grant, or until the occurrence of one or more specified events, subject in any
case to the terms of the Plan. If the Committee imposes conditions upon vesting,
then,
C-8
subsequent to the Date of Grant, the Committee may, in its sole discretion,
accelerate the date on which all or any portion of the Incentive may be vested.
ARTICLE 8
EXERCISE OF INCENTIVE
8.1 IN GENERAL. The Committee, in its sole discretion, may determine that
a Stock Option will be immediately exercisable, in whole or in part, or that all
or any portion may not be exercised until a date, or dates, subsequent to its
Date of Grant, or until the occurrence of one or more specified events, subject
in any case to the terms of the Plan. If a Stock Option is exercisable prior to
the time it is vested, the Common Stock obtained on the exercise of the Stock
Option shall be Restricted Stock which is subject to the applicable provisions
of the Plan and the Award Agreement. If the Committee imposes conditions upon
exercise, then subsequent to the Date of Grant, the Committee may, in its sole
discretion, accelerate the date on which all or any portion of the Stock Option
may be exercised. No Stock Option may be exercised for a fractional share of
Common Stock. The granting of a Stock Option shall impose no obligation upon the
Participant to exercise that Stock Option.
8.2 SECURITIES LAW AND EXCHANGE RESTRICTIONS. In no event may an Incentive
be exercised or shares of Common Stock be issued pursuant to an Award if a
necessary listing or quotation of the shares of Common Stock on a stock exchange
or inter-dealer quotation system or any registration under state or federal
securities laws required under the circumstances has not been accomplished.
8.3 EXERCISE OF STOCK OPTION.
(a) NOTICE AND PAYMENT. Subject to such administrative regulations as
the Committee may from time to time adopt, a Stock Option may be exercised
by the delivery of written notice to the Committee setting forth the number
of shares of Common Stock with respect to which the Stock Option is to be
exercised and the date of exercise thereof (the "Exercise Date") which shall
be at least three (3) days after giving such notice unless an earlier time
shall have been mutually agreed upon. On the Exercise Date, the Participant
shall deliver to the Company consideration with a value equal to the total
Option Price of the shares to be purchased, payable in any one of the
following methods: (a) cash, check, bank draft, or money order payable to
the order of the Company, (b) Common Stock (including Restricted Stock)
owned by the Participant on the Exercise Date, valued at its Fair Market
Value on the Exercise Date, and which the Participant has not acquired from
the Company within six (6) months prior to the Exercise Date, (c) if the
Common Stock is no longer Nonpublicly Traded, by delivery (including by FAX)
to the Company or its designated agent of an executed irrevocable option
exercise form together with irrevocable instructions from the Participant to
a broker or dealer, reasonably acceptable to the Company, to sell certain of
the shares of Common Stock purchased upon exercise of the Stock Option or to
pledge such shares as collateral for a loan and promptly deliver to the
Company the amount of sale or loan proceeds necessary to pay such purchase
price, and/or (d) in any other form of valid consideration that is
acceptable to the Committee in its sole discretion. In the event that shares
of Restricted Stock are tendered as consideration for the exercise of a
Stock Option, a number of shares of Common Stock issued upon the exercise of
the Stock Option equal to the value of Restricted Stock used as
consideration therefor shall be subject to the same restrictions and
provisions as the Restricted Stock so tendered.
(b) ISSUANCE OF CERTIFICATE. Except as otherwise provided in
Section 6.5 hereof (with respect to shares of Restricted Stock) or in the
applicable Award Agreement, upon payment of all amounts due from the
Participant, the Company shall cause certificates for the Common Stock then
being purchased to be delivered as directed by the Participant (or the
person exercising the Participant's Stock Option in the event of his death)
at its principal business office promptly after the Exercise Date; provided
that if the Participant has exercised an Incentive Stock Option, the
C-9
Company may at its option retain physical possession of the certificate
evidencing the shares acquired upon exercise until the expiration of the
holding periods described in Section 422(a)(1) of the Code. The obligation
of the Company to deliver shares of Common Stock shall, however, be subject
to the condition that, if at any time the Committee shall determine in its
discretion that the listing, registration, or qualification of the Stock
Option or the Common Stock upon any securities exchange or inter-dealer
quotation system or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary as a condition
of, or in connection with, the Stock Option or the issuance or purchase of
shares of Common Stock thereunder, the Stock Option may not be exercised in
whole or in part unless such listing, registration, qualification, consent,
or approval shall have been effected or obtained free of any conditions not
reasonably acceptable to the Committee.
(c) FAILURE TO PAY. If the Participant fails to pay for any of the
Common Stock specified in such notice or fails to accept delivery thereof,
the Participant's Stock Option and right to purchase such Common Stock may
be forfeited by the Company.
8.4 DISQUALIFYING DISPOSITION OF INCENTIVE STOCK OPTION. If shares of
Common Stock acquired upon exercise of an Incentive Stock Option are disposed of
by a Participant prior to the expiration of either two (2) years from the Date
of Grant of such Stock Option or one (1) year from the transfer of shares of
Common Stock to the Participant pursuant to the exercise of such Stock Option,
or in any other disqualifying disposition within the meaning of Section 422 of
the Code, such Participant shall notify the Company in writing of the date and
terms of such disposition. A disqualifying disposition by a Participant shall
not affect the status of any other Stock Option granted under the Plan as an
Incentive Stock Option within the meaning of Section 422 of the Code.
ARTICLE 9
AMENDMENT OR DISCONTINUANCE
Subject to the limitations set forth in this Article 9, the Board may at any
time and from time to time, without the consent of the Participants, alter,
amend, revise, suspend, or discontinue the Plan in whole or in part; provided,
however, that no amendment which requires stockholder approval in order for the
Plan and Incentives awarded under the Plan to continue to comply with Sections
162(m), 421, and 422 of the Code, including any successors to such Sections,
shall be effective unless such amendment shall be approved by the requisite vote
of the stockholders of the Company entitled to vote thereon. Any such amendment
shall, to the extent deemed necessary or advisable by the Committee, be
applicable to any outstanding Incentives theretofore granted under the Plan,
notwithstanding any contrary provisions contained in any Award Agreement. In the
event of any such amendment to the Plan, the holder of any Incentive outstanding
under the Plan shall, upon request of the Committee and as a condition to the
exercisability thereof, execute a conforming amendment in the form prescribed by
the Committee to any Award Agreement relating thereto. Notwithstanding anything
contained in this Plan to the contrary, unless required by law, no action
contemplated or permitted by this ARTICLE 9 shall adversely affect any rights of
Participants or obligations of the Company to Participants with respect to any
Incentive theretofore granted under the Plan without the consent of the affected
Participant.
ARTICLE 10
TERM
The Plan shall be effective from the date that this Plan is approved by the
Board. Unless sooner terminated by action of the Board, the Plan will terminate
on August 22, 2010, but Incentives granted before that date will continue to be
effective in accordance with their terms and conditions.
C-10
ARTICLE 11
CAPITAL ADJUSTMENTS
In the event that the Committee shall determine that any dividend or other
distribution (whether in the form of cash, Common Stock, other securities, or
other property), recapitalization, stock split, reverse stock split, rights
offering, reorganization, merger, consolidation, split-up, spin-off, split-off,
combination, subdivision, repurchase, or exchange of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase
Common Stock or other securities of the Company, or other similar corporate
transaction or event affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate to prevent the dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee shall, in such manner as it may deem
equitable, adjust any or all of the (i) the number of shares and type of Common
Stock (or the securities or property) which thereafter may be made the subject
of Awards,(ii) the number of shares and type of Common Stock (or other
securities or property) subject to outstanding Awards,(iii) the number of shares
and type of Common Stock (or other securities or property) specified as the
annual per-participant limitation under Section 6.6 of the Plan, (iv) the number
of shares and type of Common Stock (or other securities or property) specified
as the annual per-participant limitation under Section 6.6 of the Plan, (v) the
Option Price of each outstanding Award, and (v) the amount, if any, the Company
pays for forfeited shares of Common Stock in accordance with Section 6.5;
PROVIDED HOWEVER, that the number of shares of Common Stock (or other securities
or property) subject to any Award shall always be a whole number. In lieu of the
foregoing, if deemed appropriate, the Committee may make provision for a cash
payment to the holder of an outstanding Award. Notwithstanding the foregoing, no
such adjustment or cash payment shall be made or authorized to the extent that
such adjustment or cash payment would cause the Plan or any Stock Option to
violate Code Section 422. Such adjustments shall be made in accordance with the
rules of any securities exchange, stock market, or stock quotation system to
which the Company is subject.
Upon the occurrence of any such adjustment or cash payment, the Company
shall provide notice to each affected Participant of its computation of such
adjustment or cash payment which shall be conclusive and shall be binding upon
each such Participant.
ARTICLE 12
RECAPITALIZATION, MERGER AND CONSOLIDATION
12.1 NO EFFECT ON COMPANY'S AUTHORITY. The existence of this Plan and
Incentives granted hereunder shall not affect in any way the right or power of
the Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Company's capital
structure and its business, or any merger or consolidation of the Company, or
any issuance of bonds, debentures, preferred or preference stocks ranking prior
to or otherwise affecting the Common Stock or the rights thereof (or any rights,
options, or warrants to purchase same), or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceeding, whether of a similar character or
otherwise.
12.2 CONVERSION OF INCENTIVES WHERE COMPANY SURVIVES. Subject to any
required action by the stockholders, if the Company shall be the surviving or
resulting corporation in any merger, consolidation or share exchange, any
Incentive granted hereunder shall pertain to and apply to the securities or
rights (including cash, property, or assets) to which a holder of the number of
shares of Common Stock subject to the Incentive would have been entitled.
12.3 EXCHANGE OR CANCELLATION OF INCENTIVES WHERE COMPANY DOES NOT
SURVIVE. In the event of any merger, consolidation or share exchange pursuant
to which the Company is not the surviving or resulting corporation, there shall
be substituted for each share of Common Stock subject to the unexercised
portions of outstanding Stock Options, that number of shares of each class of
stock or
C-11
other securities or that amount of cash, property, or assets of the surviving,
resulting or consolidated company which were distributed or distributable to the
stockholders of the Company in respect to each share of Common Stock held by
them, such outstanding Stock Options to be thereafter exercisable for such
stock, securities, cash, or property in accordance with their terms.
Notwithstanding the foregoing, however, all Stock Options may be canceled by
the Company as of the effective date of any such reorganization, merger,
consolidation, or share exchange, or any dissolution or liquidation of the
Company, by giving notice to each holder thereof or his personal representative
of its intention to do so and by permitting the purchase during the thirty
(30) day period next preceding such effective date of all of the shares of
Common Stock (whether or not vested) subject to such outstanding Stock Options.
ARTICLE 13
LIQUIDATION OR DISSOLUTION
Subject to Section 12.3 hereof, in case the Company shall, at any time while
any Incentive under this Plan shall be in force and remain unexpired, (i) sell
all or substantially all of its property, or (ii) dissolve, liquidate, or wind
up its affairs, then each Participant shall be entitled to receive, in lieu of
each share of Common Stock of the Company which such Participant would have been
entitled to receive under the Incentive, the same kind and amount of any
securities or assets as may be issuable, distributable, or payable upon any such
sale, dissolution, liquidation, or winding up with respect to each share of
Common Stock of the Company. If the Company shall, at any time prior to the
expiration of any Incentive, make any partial distribution of its assets other
than in the normal course of its business, in the nature of a partial
liquidation, whether payable in cash or in kind (but excluding the distribution
of a cash dividend payable out of earned surplus and designated as such) then in
such event the Option Prices then in effect with respect to each Stock Option
shall be reduced, on the payment date of such distribution, in proportion to the
percentage reduction in the tangible book value of the shares of the Company's
Common Stock (determined in accordance with generally accepted accounting
principles) resulting by reason of such distribution.
ARTICLE 14
INCENTIVES IN SUBSTITUTION FOR
INCENTIVES GRANTED BY OTHER ENTITIES
Incentives may be granted under the Plan from time to time in substitution
for similar instruments held by employees or directors of a corporation,
partnership, or limited liability company who become or are about to become
Employees or Outside Directors of the Company or any Subsidiary as a result of a
merger or consolidation of the employing corporation with the Company, the
acquisition by the Company of equity of the employing entity, or any other
similar transaction pursuant to which the Company becomes the successor
employer. The terms and conditions of the substitute Incentives so granted may
vary from the terms and conditions set forth in this Plan to such extent as the
Committee at the time of grant may deem appropriate to conform, in whole or in
part, to the provisions of the Incentives in substitution for which they are
granted.
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 INVESTMENT INTENT. The Company may require that there be presented to
and filed with it by any Participant under the Plan, such evidence as it may
deem necessary to establish that the Incentives granted or the shares of Common
Stock to be purchased or transferred are being acquired for investment and not
with a view to their distribution.
C-12
15.2 NONPUBLICLY TRADED COMMON STOCK. In the event a Participant receives,
as Restricted Stock or pursuant to the exercise of a Stock Option, shares of
Common Stock that are Nonpublicly Traded (as defined herein), the Committee may
impose restrictions and conditions on the transfer or other disposition of those
shares. The restrictions and conditions may be reflected in the Award Agreement
or in a separate stockholders' agreement.
15.3 NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any Incentive
granted under the Plan shall confer upon any Participant any right with respect
to continuance of employment by the Company or any Subsidiary.
15.4 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board or the
Committee, nor any officer or Employee of the Company acting on behalf of the
Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board and the Committee, each officer of the
Company, and each Employee of the Company acting on behalf of the Board or the
Committee shall, to the extent permitted by law, be fully indemnified and
protected by the Company in respect of any such action, determination, or
interpretation.
15.5 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any action
of the Board or the Committee shall be deemed to give any person any right to be
granted an Award or any other rights except as may be evidenced by an Award
Agreement, or any amendment thereto, duly authorized by the Committee and
executed on behalf of the Company, and then only to the extent and upon the
terms and conditions expressly set forth therein.
15.6 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding anything
contained herein to the contrary, the Company shall not be required to sell or
issue shares of Common Stock under any Incentive if the issuance thereof would
constitute a violation by the Participant or the Company of any provisions of
any law or regulation of any governmental authority or any national securities
exchange or inter-dealer quotation system or other forum in which shares of
Common Stock are quoted or traded (including without limitation Section 16 of
the 1934 Act and Section 162(m) of the Code); and, as a condition of any sale or
issuance of shares of Common Stock under an Incentive, the Committee may require
such agreements or undertakings, if any, as the Committee may deem necessary or
advisable to assure compliance with any such law or regulation. The Plan, the
grant and exercise of Incentives hereunder, and the obligation of the Company to
sell and deliver shares of Common Stock, shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
government or regulatory agency as may be required.
15.7 LOCK-UP AGREEMENT. The Company may require that an Award Agreement
include a provision requiring a Participant to agree that in connection with an
underwritten public offering of Common Stock, upon the request of the Company or
the principal underwriter managing such public offering, no shares of Common
Stock received by the Participant under such Award Agreement may be sold,
offered for sale or otherwise disposed of without the prior written consent of
the Company or such underwriter, as the case may be, for at least 180 days after
the effectiveness of the registration statement filed in connection with such
offering, or such longer period of time as the Board may determine, if all of
the Company's directors and officers agree to be similarly bound. The
obligations under this Section 15.7 shall remain effective for all underwritten
public offerings with respect to which the Company has filed a registration
statement on or before the date five (5) years after the closing of the
Company's initial public offering, provided, however, that this Section 15.7
shall cease to apply to any such shares of Common Stock sold to the public
pursuant to an effective registration statement or an exemption from the
registration requirements of the Securities Act in a transaction that complied
with the terms of the applicable Award Agreement.
15.8 TAX REQUIREMENTS. The Company shall have the right to deduct from all
amounts hereunder paid in cash or other form, any Federal, state, or local taxes
required by law to be withheld
C-13
with respect to such payments. The Participant receiving shares of Common Stock
issued under the Plan shall be required to pay the Company the amount of any
taxes which the Company is required to withhold with respect to such shares of
Common Stock. Notwithstanding the foregoing, in the event of an assignment of a
Nonqualified Stock Option pursuant to Section 15.9, the Participant who assigns
the Nonqualified Stock Option shall remain subject to withholding taxes upon
exercise of the Nonqualified Stock Option by the transferee to the extent
required by the Code or the rules and regulations promulgated thereunder. Such
payments shall be required to be made prior to the delivery of any certificate
representing such shares of Common Stock. Such payment may be made (i) by the
delivery of cash to the Company in an amount that equals or exceeds (to avoid
the issuance of fractional shares under (iii) below) the required tax
withholding obligation of the Company; (ii) the actual delivery by the
exercising Participant to the Company of shares of Common Stock that the
Participant has not acquired from the Company within six months prior to the
date of exercise, which shares so delivered have an aggregate Fair Market Value
that equals or exceeds (to avoid the issuance of fractional shares under
(iii) below) the required tax withholding payment; (iii) the Company's
withholding of a number of shares to be delivered upon the exercise of the Stock
Option, which shares so withheld have an aggregate fair market value that equals
(but does not exceed) the required tax withholding payment; or (iv) any
combination of (i), (ii), or (iii).
15.9 STOCK OPTION ASSIGNABILITY. Incentive Stock Options may not be
transferred, assigned, pledged, hypothecated or otherwise conveyed or encumbered
other than by will or the laws of descent and distribution and may be exercised
during the lifetime of the Participant only by the Participant or the
Participant's legally authorized representative, and each Award Agreement in
respect of an Incentive Stock Option shall so provide. The designation by a
Participant of a beneficiary will not constitute a transfer of the Stock Option.
The Committee may waive or modify any limitation contained in the preceding
sentences of this Section 15.9 that is not required for compliance with
Section 422 of the Code.
Except as otherwise provided herein, Nonqualified Stock Options may not be
transferred, assigned, pledged, hypothecated or otherwise conveyed or encumbered
other than by will or the laws of descent and distribution. The Committee may,
in its discretion, authorize all or a portion of a Nonqualified Stock Option
granted to a Participant to be on terms which permit transfer by such
Participant to (i) the spouse, children or grandchildren of the Participant
("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit
of such Immediate Family Members, (iii) a partnership in which the only partners
are (1) such Immediate Family Members and/or (2) entities which are controlled
by Immediate Family Members, (iv) an entity exempt from federal income tax
pursuant to Section 501(c)(3) of the Code or any successor provision, or (v) a
split interest trust or pooled income fund described in Section 2522(c)(2) of
the Code or any successor provision, PROVIDED THAT (x) there shall be no
consideration for any such transfer, (y) the Award Agreement pursuant to which
such Nonqualified Stock Option is granted must be approved by the Committee and
must expressly provide for transferability in a manner consistent with this
Section, and (z) subsequent transfers of transferred Nonqualified Stock Options
shall be prohibited except those by will or the laws of descent and
distribution.
Following any transfer, any such Nonqualified Stock Option shall continue to
be subject to the same terms and conditions as were applicable immediately prior
to transfer, provided that for purposes of Articles 8, 9, 11, 13 and 15 hereof
the term "Participant" shall be deemed to include the transferee. The events of
Termination of Service shall continue to be applied with respect to the original
Participant, following which the Nonqualified Stock Options shall be exercisable
by the transferee only to the extent and for the periods specified in the Award
Agreement. The Committee and the Company shall have no obligation to inform any
transferee of a Nonqualified Stock Option of any expiration, termination, lapse
or acceleration of such Stock Option. The Company shall have no obligation to
C-14
register with any federal or state securities commission or agency any Common
Stock issuable or issued under a Nonqualified Stock Option that has been
transferred by a Participant under this Section 15.9.
15.10 USE OF PROCEEDS. Proceeds from the sale of shares of Common Stock
pursuant to Incentives granted under this Plan shall constitute general funds of
the Company.
15.11 LEGEND. Each certificate representing shares of Restricted Stock
issued to a Participant shall bear the following legend, or a similar legend
deemed by the Company to constitute an appropriate notice of the provisions
hereof (any such certificate not having such legend shall be surrendered upon
demand by the Company and so endorsed):
On the face of the certificate:
"Transfer of this stock is restricted in accordance with
conditions printed on the reverse of this certificate."
On the reverse:
"The shares of stock evidenced by this certificate are
subject to and transferrable only in accordance with that
certain [NAME OF SUBSIDIARY] 2001 Stock Option Plan, a
copy of which is on file at the principal office of the
Company in Dallas, Texas. No transfer or pledge of the
shares evidenced hereby may be made except in accordance
with and subject to the provisions of said Plan. By
acceptance of this certificate, any holder, transferee or
pledgee hereof agrees to be bound by all of the provisions
of said Plan."
The following legend shall be inserted on a certificate evidencing Common
Stock issued under the Plan if the shares were not issued in a transaction
registered under the applicable federal and state securities laws:
"Shares of stock represented by this certificate have been
acquired by the holder for investment and not for resale,
transfer or distribution, have been issued pursuant to
exemptions from the registration requirements of
applicable state and federal securities laws, and may not
be offered for sale, sold or transferred other than
pursuant to effective registration under such laws, or in
transactions otherwise in compliance with such laws, and
upon evidence satisfactory to the Company of compliance
with such laws, as to which the Company may rely upon an
opinion of counsel satisfactory to the Company."
A copy of this Plan shall be kept on file in the principal office of the
Company.
C-15
IN WITNESS WHEREOF, the Company has caused this instrument to be executed as
of ____________, 2001 by its Chief Executive Officer and Secretary pursuant to
prior action taken by the Board.
[NAME OF SUBSIDIARY]
By:
---------------------------------------
Name: Herman M. Frietsch
Title: PRESIDENT
Attest:
-------------------------------------------
C-16
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
TERAFORCE TECHNOLOGY CORPORATION
June 15, 2001
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
--------------------------------------------------------------------------------
[X] Please mark your votes as in this example.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
1. FOR THE ELECTION OF WITHHOLD
ROBERT E. GARRISON II AUTHORITY
AS DIRECTOR TO TERM
EXPIRING 2004
(except as marked to the
contrary below)
FOR AGAINST ABSTAIN
2. Amend the Company's Amended [_] [_] [_]
and Restated Stock Incentive
[__] [__] Plan to increase the number
of shares reserved for issuance
FOR AGAINST ABSTAIN
3. Approval and Ratification of the [_] [_] [_]
Aegean Networks, Incorporated
2001 Stock Option Plan.
FOR AGAINST ABSTAIN
4. Approval and Ratification of the [_] [_] [_]
Centauri NetSystems Corporation
2001 Stock Option Plan.
FOR AGAINST ABSTAIN
5. Approval of appointment of [_] [_] [_]
Grant Thornton LLP as inde-
pendent certified public
accountants for the
year ending December 31, 2001.
In their discretion, the proxies
are authorized to vote upon matters not known to
the Board of Directors as of the date of the
accompanying Proxy Statement, matters incident to
the conduct of the Meeting and to vote for any
nominee of the Board whose nomination results from
the inability of any of the above named nominees
to serve.
UNLESS OTHERWISE SPECIFIED IN THE
SQUARES PROVIDED, THE PROXIES SHALL VOTE FOR
PROPOSALS 1 THROUGH 5.
Signature__________________________ Signature if held jointly__________________
Dated:____________________, 2001
NOTE: Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title. If a corporation, please sign in
full corporate name by president or other authorized officer. If a partnership,
please sign partnership name by authorized person.
--------------------------------------------------------------------------------
TERAFORCE TECHNOLOGY CORPORATION
PROXY SOLICITED BY DIRECTORS FOR ANNUAL MEETING
June 15, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having received the notice of Meeting, Proxy Statement, and
Annual Report for the year ended December 31, 2000, hereby appoints Herman M.
Frietsch and Robert P. Capps, and each of them, with full power of
substitution, are hereby authorized as attorneys and proxies of the
undersigned to represent and to vote all shares of the undersigned in
TeraForce Technology Corporation at the annual meeting of stockholders of
TeraForce Technology Corporation to be held on June 15, 2001, and at any
adjournments thereof.