UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
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PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
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EMRISE CORPORATION
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(Name of Registrant as Specified In Its Charter)
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EMRISE CORPORATION
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
November 8, 2007
Dear Stockholders:
You are cordially invited to attend the EMRISE Corporation 2007 annual
meeting of stockholders that will be held on December 12, 2007 at 10:00 a.m.
local time, at our headquarters located at 9485 Haven Avenue, Suite 100, Rancho
Cucamonga, California 91730. All holders of our outstanding common stock as of
the close of business on October 22, 2007 are entitled to vote at the 2007
annual meeting.
Enclosed are a copy of the notice of annual meeting of stockholders, a
proxy statement, a proxy card, and our annual report for the year ended December
31, 2006. A current report on our business operations and future plans will be
presented at the meeting, and stockholders will have an opportunity to ask
questions.
We hope you will be able to attend the 2007 annual meeting. Whether or
not you expect to attend, it is important that you complete, sign, date and
return the proxy card in the enclosed envelope in order to make certain that
your shares will be represented at the 2007 annual meeting.
Sincerely,
/s/ Carmine T. Oliva
-------------------------------------
Carmine T. Oliva,
President and Chief Executive Officer
EMRISE CORPORATION
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
----------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 12, 2007
----------------------
NOTICE IS HEREBY GIVEN that the 2007 annual meeting of stockholders of
EMRISE Corporation, a Delaware corporation, will be held at our headquarters
located at 9485 Haven Avenue, Suite 100, Rancho Cucamonga, California, on
December 12, 2007 at 10:00 a.m. local time, for the following purposes:
1. To elect Laurence P. Finnegan, Jr. as a Class II director to
serve a three-year term.
2. To consider and vote upon a proposal to ratify the adoption of
the EMRISE Corporation 2007 Stock Incentive Plan.
3. To consider and vote upon a proposal to ratify the selection of
our independent registered public accountants to audit our
consolidated financial statements for 2007.
4. To transact such other business as may properly come before the
meeting or any adjournments and postponements thereof.
Our board of directors has fixed the close of business on October 22,
2007 as the record date for determining those stockholders who will be entitled
to notice of and to vote at the meeting. Only holders of our common stock at the
close of business on the record date are entitled to vote at the meeting.
Stockholders whose shares are held in the name of a broker or other nominee and
who desire to vote in person at the meeting should bring with them a legal
proxy.
By Order of the Board of Directors,
/s/ D. John Donovan
--------------------------
D. John Donovan, Secretary
Rancho Cucamonga, California
November 8, 2007
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN AND
DATE THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE. Returning a signed proxy card will help us secure a quorum and avoid
the expense of additional proxy solicitation. If you later desire to revoke your
proxy for any reason, you may do so in the manner described in the attached
proxy statement.
TABLE OF CONTENTS
Page
VOTING AND PROXY..............................................................1
DIRECTORS, DIRECTOR NOMINEE AND EXECUTIVE OFFICERS............................3
EXECUTIVE COMPENSATION AND RELATED INFORMATION................................5
INFORMATION ABOUT OUR BOARD OF DIRECTORS, BOARD COMMITTEES AND
RELATED MATTERS............................................................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............27
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................29
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE......................31
PROPOSAL 1 ELECTION OF CLASS II DIRECTOR.....................................32
PROPOSAL 2 RATIFICATION OF ADOPTION OF 2007 STOCK INCENTIVE PLAN.............33
PROPOSAL 3 RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS.........................................................43
OTHER MATTERS................................................................46
STOCKHOLDER PROPOSALS........................................................46
ANNUAL REPORT AND AVAILABLE INFORMATION......................................47
-i-
EMRISE CORPORATION
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
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PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 12, 2007
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VOTING AND PROXY
We are furnishing this proxy statement in connection with the
solicitation of proxies by our board of directors for use at our 2007 annual
meeting of stockholders to be held at 10:00 a.m. local time on December 12,
2007, at our offices at 9485 Haven Avenue, Suite 100, Rancho Cucamonga,
California 91730, and at any and all adjournments and postponements of the
meeting. This proxy statement and the accompanying notice of annual meeting and
proxy card are first being mailed to stockholders on or about November 8, 2007.
Our annual report for the year ended December 31, 2006 is being mailed
to stockholders concurrently with this proxy statement. The annual report is not
to be regarded as proxy soliciting material or as a communication through which
any solicitation of proxies is made. A proxy card is enclosed for your use. The
shares represented by each properly executed unrevoked proxy card will be voted
as directed by the stockholder with respect to the matters described in the
proxy card. If no direction is made, the shares represented by each properly
executed proxy card will be voted "for" each of the proposals listed on the
proxy card. Any proxy given may be revoked at any time prior to its exercise by
filing with our secretary an instrument revoking the proxy or by filing a duly
executed proxy card bearing a later date. Any stockholder present at the meeting
who has given a proxy may withdraw it and vote his or her shares in person if he
or she so desires. However, a stockholder who holds shares through a broker or
other nominee must bring a legal proxy to the meeting if that stockholder
desires to vote in person at the meeting.
At the close of business on October 22, 2007, the record date for
determining the stockholders entitled to notice of and to vote at the 2007
annual meeting, we had issued and outstanding 38,254,250 shares of common stock.
Only holders of record of our common stock at the close of business on the
record date are entitled to notice of and to vote at the annual meeting or at
any adjournments and postponements of the meeting.
Each share of our common stock issued and outstanding on the record
date entitles the holder of that share to one vote at the 2007 annual meeting
for all matters to be voted on at the meeting. The holders of a majority of our
shares of common stock issued and outstanding and entitled to vote at the
meeting, present in person or represented by proxy, shall constitute a quorum
for purposes of voting on the proposals. Votes cast at the 2007 annual meeting
will be tabulated by the person or persons appointed by us to act as inspectors
of election for the meeting. Shares of our common stock represented in person or
by proxy (regardless of whether the proxy has authority to vote on all matters),
as well as abstentions and broker non-votes, will be counted for purposes of
determining whether a quorum is present at the meeting.
1
An "abstention" is the voluntary act of not voting by a stockholder who
is present at a meeting and entitled to vote. "Broker non-votes" are shares of
voting stock held in record name by brokers and nominees concerning which: (i)
the brokers or nominees do not have discretionary voting power under applicable
rules or the instruments under which they serve in such capacity and
instructions have not been received from the beneficial owners or persons
entitled to vote; or (ii) the record holder has indicated on the proxy or has
executed a proxy and otherwise notified us that it does not have authority to
vote such shares on that matter.
Directors are elected by a plurality. Therefore, for proposal 1, the
election of one Class II director to our board of directors, the nominee
receiving the highest number of votes will be elected. Approval of proposal 2,
the ratification of the adoption of our 2007 Stock Incentive Plan, requires the
affirmative vote of a majority of the shares of our common stock entitled to
vote at and present in person or represented by proxy at the meeting. Approval
of proposal 3, the ratification of the selection of our independent registered
public accountants, is not required. However, the affirmative vote of a majority
of the shares of our common stock entitled to vote at and present in person or
represented by proxy at the meeting will constitute stockholder ratification of
the selection of our independent registered public accountants.
Abstentions and broker non-votes are not be included in the vote totals
for the election of directors and therefore will have no effect on the vote for
that proposal. On proposals such as proposals 2 and 3 that require for approval
the affirmative vote of the majority of shares present in person or represented
by proxy at the meeting and entitled to vote on the proposal, abstentions but
not broker non-votes will be treated as shares present and entitled to vote on
the proposals. Applying that standard, an abstention will have the effect of a
vote "against" the proposals, and a broker non-vote will reduce the absolute
number (although not the percentage) of the affirmative votes needed for
approval of the proposals.
We will pay the expenses of soliciting proxies for the 2007 annual
meeting, including the cost of preparing, assembling and mailing the proxy
solicitation materials. Proxies may be solicited personally, by mail or by
telephone, or by our directors, officers and regular employees who will not be
additionally compensated. We have no present plans to hire special employees or
paid solicitors to assist in obtaining proxies, but we reserve the option to do
so if it appears that a quorum otherwise might not be obtained. The matters to
be considered and acted upon at the 2007 annual meeting are referred to in the
preceding notice and are discussed below more fully.
2
DIRECTORS, DIRECTOR NOMINEE AND EXECUTIVE OFFICERS
BIOGRAPHICAL INFORMATION
The names, ages and positions held by our directors, director nominee
and executive officers as of October 22, 2007 and their business experience are
as follows:
NAME AGE TITLES
---- --- ------
Carmine T. Oliva 65 Chairman of the Board, President, Chief Executive
Officer and Director
Graham Jefferies 50 Executive Vice President, Chief Operating Officer
and Managing Director of EMRISE Electronics Ltd.
D. John Donovan 42 Vice President Finance and Administration, Secretary
and Treasurer
Laurence P. Finnegan, Jr. (1)(2)(3) 70 Director
Otis W. Baskin(1)(2)(3) 62 Director and Director Nominee
Richard E. Mahmarian (2)(3) 70 Director
-----------
(1) Member of the compensation committee.
(2) Member of the nominating committee.
(3) Member of the audit committee.
CARMINE T. OLIVA has been Chairman of the Board, President and Chief
Executive Officer and a Class III director of EMRISE since March 26, 1997 and of
our subsidiary, EMRISE Electronics Corporation, since he founded EMRISE
Electronics Corporation in 1983. Mr. Oliva served as Acting Chief Financial
Officer and Secretary of EMRISE from August 18, 2006 to May 15, 2007 and served
as Acting Chief Financial Officer from April to July 2005. Mr. Oliva has been
Chairman of the Board of EMRISE Electronics Ltd. since 1985, and Chairman and
Chief Executive Officer of CXR Larus since March 1997. In 2002, Mr. Oliva
obtained a French government working permit and assumed responsibility as
President of our CXR-AJ subsidiary. From January 1999 to January 2000, Mr. Oliva
served as a director of Digital Transmission Systems Inc. From 1980 to 1983, Mr.
Oliva was Senior Vice President and General Manager, ITT Asia Pacific Inc. Prior
to holding that position, Mr. Oliva held a number of executive positions with
ITT Corporation and its subsidiaries over an eleven-year period. Mr. Oliva
attained the rank of Captain in the United States Army and is a veteran of the
Vietnam War. Mr. Oliva earned a B.A. degree in Social Studies from Seton Hall
University and an M.B.A. degree in Business from The Ohio State University.
GRAHAM JEFFERIES was appointed as Executive Vice President on October
21, 1999. Mr. Jefferies was also appointed as our Chief Operating Officer on
January 3, 2005, after having served as Chief Operating Officer of our
Telecommunications Group since October 21, 1999. Mr. Jefferies served as
Executive Vice President of EMRISE from April 1999 through October 1999. Mr.
Jefferies has served CXR-AJ as a director since March 1997 and as General
Manager since July 2002, has served as Managing Director of Belix Power
Conversions Ltd., Belix Wound Components Ltd. and Belix Company Ltd. since our
acquisition of those companies in April 2000, as Managing Director of XCEL Power
Systems, Ltd. since September 1996 and as Managing Director of EMRISE
Electronics Ltd. since March 1992. Prior to joining us in 1992, he was Sales and
Marketing Director of Jasmin Electronics PLC, a major United Kingdom software
and systems provider, from 1987 to 1992. Mr. Jefferies held a variety of project
management positions at GEC Marconi from 1978 to 1987. Mr. Jefferies earned a
B.S. degree in Engineering from Leicester University, and has experience in
mergers and acquisitions. Mr. Jefferies is a citizen and resident of the United
Kingdom.
3
D. JOHN DONOVAN was appointed as our Vice President Finance and
Administration, Secretary and Treasurer effective May 16, 2007. Mr. Donovan
served as a management consultant at DLC, Inc. He was employed at DLC from
December 2004 to April 2007 and during that time, handled various financial and
accounting functions for the firm's clients, including his principal client,
AeroVironment, Inc. (NasdaqGM: AVAV). From March 2002 to October 2004, Mr.
Donovan served as president and chief financial officer of Chem Lab Products,
Inc., a private manufacturer of chemicals. Prior to that, he served as chief
financial officer of Gainey Ceramics, as controller of Rembrandt Photo Services,
as director of financial reporting at Transamerica Corporation, as manager of
financial reporting at Capitol Multimedia, Inc., and as a certified public
accountant at Price Waterhouse and Ernst & Young LLP. Mr. Donovan earned a B.S.
degree in Accounting and a Master of Accountancy degree in Information Systems
from Brigham Young University and is a certified public accountant.
LAURENCE P. FINNEGAN, JR. has served as a Class II director since March
26, 1997. In addition to being a director of EMRISE Electronics from 1985 to
March 1997, Mr. Finnegan was EMRISE Electronics' part-time Chief Financial
Officer from 1994 to 1997. Mr. Finnegan has held positions with ITT (1970-1974)
as controller of several divisions, Narco Scientific (1974-1983) as Vice
President Finance, Chief Financial Officer, Executive Vice President and Chief
Operating Officer, and Fischer & Porter (1986-1994) as Senior Vice President,
Chief Financial Officer and Treasurer. Since August 1995, he has been a
principal of GwynnAllen Partners, Bethlehem, Pennsylvania, an executive
management consulting firm. Since December 1996, Mr. Finnegan has been a
director and the President of GA Pipe, Inc., a manufacturing company based in
Langhorne, Pennsylvania. From September 1997 to January 2001, Mr. Finnegan
served as Vice President Finance and Chief Financial Officer of QuestOne
Decision Sciences, an efficiency consulting firm based in Pennsylvania. Since
August 2001, Mr. Finnegan has served as a director and the Vice President and
Chief Financial Officer of VerdaSee Solutions, Inc., a consulting and software
company based in Pennsylvania. Mr. Finnegan earned a B.S. degree in Accounting
from St. Joseph's University.
OTIS W. BASKIN has served as a Class I director since February 6, 2004.
He has been a Professor of Management at The George L. Graziadio School of
Business and Management at Pepperdine University in Malibu, California since
June 1995 and also served as dean from 1995 to 2001. He has been a member of the
full-time faculty of the University of Houston - Clear Lake (1975-87), where he
served as Coordinator of the Management Faculty and Director of the Center for
Advanced Management Programs. He has also been Professor of Management at
Arizona State University, West Campus (1987-91) and The University of Memphis
(1991-95), in addition to serving as dean at both universities. Dr. Baskin
worked with AACSB International (Association for the Advancement of Collegiate
Schools of Business) as Special Advisor to the President and as Chief Executive
Officer from July 2002 to June 2004. He is an Associate with the Family Business
Consulting Group, where he advises family owned and closely held businesses. He
has served as an advisor to Exxon/Mobile Research and Engineering Corporation,
NASA and the United States Air Force. He earned a Ph.D. in Management, Public
Relations and Communication Theory from The University of Texas at Austin, an
M.A. degree in Speech Communication from the University of Houston, and a B.A.
degree in Religion from Oklahoma Christian University.
RICHARD E. MAHMARIAN was appointed as a Class III director on March 1,
2006. He is currently serving as a principal and Chairman, President and Chief
Executive Officer of Control Solutions, Inc., a company that specializes in
providing business systems including hardware, software, consumable products and
services to major United States corporations, since December 2003. Mr. Mahmarian
also is serving as the Managing Member and Chairman and Chief Executive Officer
of REM Associates, LLC, a private investment and consulting company, since 1997.
4
From 1998 until 2001, Mr. Mahmarian was the owner of Alpha Microsystems, LLC, a
company that manufactured and sold mini-computer systems, personal computers and
servers, provided network services and support, and information technology
hardware and software services throughout North America through 50 field
offices. In addition, from 1997 until 2006, Mr. Mahmarian owned R&R Palos Verdes
Enterprises, Inc., a home construction company in Los Angeles, California. He
served in the United States Navy and was honorably discharged. While in the
Navy, he received extensive training in advanced electronic technologies. Mr.
Mahmarian earned a B.A. degree in Accounting from Upsala College and an M.B.A.
in Marketing and Economics from Seton Hall University. Mr. Mahmarian is a member
of the Board of Regents of Seton Hall University and Board of Governors of
Crestmont College of the Salvation Army.
TERM OF OFFICE AND FAMILY RELATIONSHIPS
Our officers are appointed by, and serve at the discretion of, our
board of directors. There are no family relationships among our executive
officers, directors and director nominee.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION PHILOSOPHY AND COMPONENTS
This section discusses the principles underlying our executive
compensation policies and decisions and the most important factors relevant to
an analysis of these policies and decisions. It provides qualitative information
regarding the manner and context in which compensation is awarded to and earned
by our executive officers and places in perspective the data presented in the
tables and narrative that follow.
Our compensation committee is responsible for reviewing and approving
base salaries, bonuses and incentive awards for all executive officers,
reviewing and establishing the base salary, bonuses and incentive awards for the
chief executive officer, and reviewing, approving and recommending to the board
of directors the content, terms and conditions of all employee compensation and
benefit plans, or changes to those plans.
Our compensation philosophy is based upon four central objectives:
o To provide an executive compensation structure and system that
is both competitive in the outside industrial marketplace and
also internally equitable based upon the weight and level of
responsibilities in the respective executive positions;
o To attract, retain and motivate qualified executives within
this structure, and reward them for outstanding
performance-to-objectives and business results through
financial and other appropriate management incentives;
o To align our financial results and the compensation paid to
our executive officers with the enhancement of stockholder
value; and
o To structure our compensation policy so that executive
officers' compensation is dependent, in one part, on the
achievement of its current year business plan objectives, and
in another part, on the long-term increase in company net
worth and the resultant improvement in stockholder value, and
to maintain an appropriate balance between short- and
long-range performance objectives over time.
5
Our executive officers' compensation currently has three primary
components -- base compensation or salary, annual discretionary cash bonuses,
and stock option awards granted pursuant to our Amended and Restated 2000 Stock
Option Plan. In addition, we provide our executive officers a variety of
benefits that generally are available to all salaried employees in the
geographical location where they are based.
We view the various components of compensation as related but distinct.
Although our compensation committee does review total compensation, we do not
believe that significant compensation derived from one component of compensation
should negate or reduce compensation from other components. We determine the
appropriate level for each compensation component based in part, but not
exclusively, on our view of internal equity and consistency, and other
considerations we deem relevant, such as rewarding extraordinary performance.
Our compensation committee has not adopted any formal or informal policies or
guidelines for allocating compensation between long-term and currently paid out
compensation, between cash and non-cash compensation, or among different forms
of non-cash compensation.
BASE COMPENSATION
Base compensation is targeted to recognize each executive officer's
unique value and historical contributions to our success in light of salary
norms in our industries and the general marketplace. The criteria for
measurement include data available from objective, professionally-conducted
market studies, integrated with additional competitive intelligence secured from
a range of industry and general market sources. Our compensation committee
reviews the base compensation of the chief executive officer, and with the chief
executive officer, the base compensation of all other executive officers,
periodically to assure that a competitive position is maintained.
EQUITY COMPENSATION
We use stock options to reward long-term performance. Our compensation
committee and/or our board of directors act as administrator of our option plans
and perform functions that include selecting option recipients, determining the
timing of option grants and whether options are incentive or non-qualified, and
assigning the number of shares subject to each option, fixing the time and
manner in which options are exercisable, setting option exercise prices and
vesting and expiration dates, and from time to time adopting rules and
regulations for carrying out the purposes of our plans. For compensation
decisions regarding the grant of equity compensation to executive officers, our
compensation committee typically considers recommendations from our chief
executive officer.
We do not have any program, plan or obligation that requires us to
grant equity compensation on specified dates. We have not made equity grants in
connection with the release or withholding of material non-public information.
Historically, options granted to our directors and executive officers have
generally had exercise prices above the then trading price of our common stock.
Information about outstanding options held by our named executive officers and
directors is contained in the "Outstanding Equity Awards at December 31, 2006"
and "Director Compensation" tables. As discussed in Proposal 2 in this proxy
statement, our board of directors recently adopted and is submitting for
stockholder approval a new stock incentive plan pursuant to which awards may be
made to our executive officers and others.
6
CASH BONUSES
Executive bonuses are used to focus our management on achieving key
corporate financial objectives, to motivate certain desired individual behaviors
and to reward substantial achievement of these company financial objectives and
individual goals. We use cash bonuses to reward performance achievements
generally only as to years in which we are substantially profitable, and we use
salary as the base amount necessary to match our competitors for executive
talent.
Bonuses, if any, are determined and paid on an annual basis after
completion of the bonus year. We did not pay any bonuses to our named executive
officers for 2005 or 2006.
In the past, our compensation committee has based bonuses for our named
executive officers on net income and revenue growth because it believes that as
a growth company, we should reward growth in net income and revenue, but only if
the revenue growth is achieved cost-effectively. Likewise, our compensation
committee believes a profitable company with little or no growth is not
acceptable. Our compensation committee considers the chosen metrics of net
income and growth in revenue to be the best indicators of our financial success
and creation of stockholder value.
Individual performance objectives are determined by the executive
officer to whom the potential bonus recipient reports or, in the case of our
chief executive officer, by our compensation committee. For example, the basis
for Mr. Oliva's bonus might include such objectives as developing bank and
equity financing, successfully concluding and integrating acquisitions,
developing strategic opportunities or developing our executive team.
Our compensation committee has not considered whether it would attempt
to recover bonuses paid based on our financial performance where our financial
statements are restated in a downward direction sufficient to reduce the amount
of bonus that should have been paid under applicable bonus criteria.
ACCOUNTING AND TAX TREATMENT
We account for equity compensation paid to our employees under the
rules of SFAS No. 123R, which requires us to estimate and record an expense over
the service period of the award. Accounting rules also require us to record cash
compensation as an expense at the time the obligation is accrued. Unless and
until we achieve sustained profitability, the availability to us of a tax
deduction for compensation expense will not be material to our financial
position. We structure cash bonus compensation so that it is taxable to our
executives at the time it becomes available to them. We currently intend that
all cash compensation paid will be tax deductible for us. However, with respect
to equity compensation awards, while any gain recognized by employees from
nonqualified options should be deductible, to the extent that an option
constitutes an incentive stock option, gain recognized by the optionee will not
be deductible if there is no disqualifying disposition by the optionee. In
addition, if we grant restricted stock or restricted stock unit awards that are
not subject to performance vesting, they may not be fully deductible by us at
the time the award is otherwise taxable to the employee.
OTHER BENEFITS
We also maintain other executive benefits that we consider necessary in
order to offer fully competitive opportunities to our executive officers. These
include, without limitation, 401(k) retirement savings plans, car allowances and
employment agreements. The compensation committee continues to monitor and
evaluate our executive compensation system and its application throughout our
organization to assure that it continues to reflect our compensation philosophy
and objectives.
7
Executive officers are eligible to participate in all of our employee
benefit plans, such as medical, dental, group life, disability, and accidental
death and dismemberment insurance, in each case on the same basis as other
employees. Our officers and employees in Europe generally have somewhat
different employee benefit plans than those we offer domestically, typically
based on the requirements of their respective countries of domicile.
During 2006, we matched $1,532, which was the lesser of $2,000 and 20%
of the contributions made by our then Chief Financial Officer, Randolph D.
Foote, to his 401(k) account. This matching arrangement was generally made
available to all employees of EMRISE Corporation and provides for the same
method of allocation of benefits between management and non-management
participants. Also, one of our subsidiaries, XCEL Power Systems, Ltd., makes
matching contributions of up to 6% of Mr. Jefferies' salary to an executives'
defined contribution plan. Other employees of XCEL Power Systems, Ltd. may
receive matching contributions to a defined contribution plan of up to 6% of
their salary. Amounts contributed to the defined contribution plans are intended
to be used to purchase annuities upon retirement. During 2006, Mr. Jefferies
received a matching contribution of $17,131, which was 6% of his salary.
SUMMARY COMPENSATION TABLE - 2006
The following table provides information concerning the compensation
for the year ended December 31, 2006 for our principal executive officer, our
principal financial officer and our chief operating officer, who was the only
other person who served as an executive officer during 2006 (collectively, the
"named executive officers"). In August 2006, Mr. Foote resigned his positions
with us, Mr. Oliva assumed the position of Acting Chief Financial Officer
through May 15, 2007 and, as described under the heading "Potential Payments on
Termination of Employment or Change in Control," Mr. Foote assumed temporary
employment with us through May 15, 2007.
ALL OTHER
NAME AND SALARY COMPENSATION TOTAL
PRINCIPAL POSITION YEAR ($) ($) ($)
--------------------------------- ------ ---------- ------------ -------
Carmine T. Oliva
Chief Executive Officer 2006 350,000 13,821(1) 363,821
Graham Jefferies (2)
Chief Operating Officer 2006 279,165 27,216(3) 306,381
Randolph D. Foote
Former Chief Financial Officer 2006 183,750(4) 8,732(5) 192,482
---------------
(1) Represents $4,821 of insurance premiums we paid with respect to a
$1,000,000 term life insurance policy for the benefit of Mr. Oliva's spouse
and a $9,000 cash car allowance.
(2) Mr. Jefferies is based in the United Kingdom and receives his remuneration
in British pounds sterling. The compensation amounts listed for Mr.
Jefferies are shown in United States dollars, converted from British pounds
sterling using the average monthly conversion rates in effect during 2006.
(3) Represents $17,131 in company contributions to Mr. Jefferies' retirement
account and a $10,085 cash car allowance.
(4) Includes $13,461 of vacation accrual that was paid to Mr. Foote in
connection with his resignation. Also includes $56,021 paid to Mr. Foote
during 2006 in connection with his temporary employment, as described under
the heading "Potential Payments on Termination of Employment or Change in
Control."
(5) Represents $1,532 in company contributions to Mr. Foote's 401(k) retirement
account and a $7,200 cash car allowance.
8
EMPLOYMENT AGREEMENTS - 2006
Carmine T. Oliva
----------------
On February 24, 2006, we executed a five-year employment agreement with
Carmine T. Oliva, our Chairman of the Board, President and Chief Executive
Officer. The agreement became effective as of January 1, 2006 and replaced his
previous employment agreement that was scheduled to automatically renew on that
date. The agreement provided for an initial base salary of $350,000 during the
first twelve months the agreement was in effect. Mr. Oliva is eligible to
receive increases and bonuses at the discretion of our compensation committee
and to participate in benefit and incentive programs we may offer.
The agreement contains non-competition provisions that prohibit Mr.
Oliva from engaging or participating in a competitive business or soliciting our
customer or employees during his employment with us and for two years afterward.
The agreement also contains provisions that restrict disclosure by Mr. Oliva of
our confidential information and assign ownership to us of inventions created by
him in connection with his employment. In addition, the agreement contains
termination and change in control provisions as described under "Potential
Payments on Termination of Employment or Change in Control."
Effective November 1, 2007, we entered into a new employment agreement
with Mr. Oliva This agreement replaces the February 24, 2006 agreement and is
described below under the heading "Employment Agreements -- 2007."
Graham Jefferies
----------------
On February 24, 2006, we entered into a three-year employment agreement
with Graham Jefferies, our Executive Vice President and Chief Operating Officer.
The agreement became effective as of January 1, 2006 and replaced his previous
employment agreement that was scheduled to expire in July 2006. The agreement
provides for an initial base salary of 152,800 British pounds sterling per year
(approximately $263,350 as of January 1, 2006) during the first twelve months
that the agreement is in effect, which amount is to be paid by our subsidiary,
EMRISE Electronics Ltd. Mr. Jefferies is eligible to receive increases and
bonuses at the discretion of our compensation committee and to participate in
other benefit and incentive programs we may offer.
The agreement contains non-competition provisions that prohibit Mr.
Jefferies from engaging or participating in a competitive business or soliciting
our customer or employees during his employment with us and for two years
afterward. The agreement also contains provisions that restrict disclosure by
Mr. Jefferies of our confidential information and assign ownership to us of
inventions created by Mr. Jefferies in connection with his employment. In
addition, the agreement contains termination and change in control provisions as
described under "Potential Payments on Termination of Employment or Change in
Control."
Effective November 1, 2007, we executed a new employment agreement with
Mr. Jefferies. This agreement replaces the February 24, 2006 agreement and is
described below under the heading "Employment Agreements -- 2007."
9
Randolph D. Foote
-----------------
On February 24, 2006, we entered into a two-year employment agreement
with Randolph D. Foote, our then Senior Vice President, Chief Financial Officer
and Secretary. The agreement was effective as of January 1, 2006 and replaced
his existing employment agreement that was scheduled to expire in July 2006. The
agreement provided for an initial base salary of $175,000 during the first
twelve months the agreement was to be in effect. Mr. Foote was eligible to
receive increases and bonuses at the discretion of our compensation committee
and to participate in other benefit and incentive programs we may offer. As
described under "Potential Payments on Termination of Employment or Change in
Control," Mr. Foote's employment agreement was terminated in August 2006, and we
entered into a separation agreement with him.
GRANTS OF PLAN-BASED AWARDS
No plan-based awards were granted to the named executive officers
during 2006.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
The following table sets forth information about outstanding equity
awards held by our named executive officers as of December 31, 2006.
OPTION AWARDS
----------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED OPTION
OPTIONS EXERCISE OPTION
(#) PRICE EXPIRATION
NAME EXERCISABLE ($) DATE
----------------------- ------------------------ ---------------- --------------------
Carmine T. Oliva 100,000 0.50 01/31/2011
53,000 0.35 01/22/2013
26,000 1.00 02/24/2014
50,000 2.00 12/29/2015
Graham Jefferies 30,000 0.20 11/15/2009
30,000 0.20 05/15/2010
30,000 1.13 05/01/2008
54,000 0.35 01/22/2013
40,000 1.00 02/24/2014
50,000 2.00 12/29/2015
Randolph D. Foote 50,000 0.20 11/15/2009 (1)
35,000 0.35 01/22/2013 (1)
25,000 1.00 02/24/2014 (1)
50,000 2.00 12/29/2015 (1)
-------------------
(1) Mr. Foote's options expired three months after the termination of his
temporary employment with us to the extent not exercised before that date.
His temporary employment with us terminated May 15, 2007.
10
OPTION EXERCISES AND STOCK VESTED
No option awards were exercised by any of the named executive officers
during the year ended December 31, 2006. No stock awards were held by any of the
named executive during the year ended December 31, 2006.
POTENTIAL PAYMENTS ON TERMINATION OF EMPLOYMENT OR CHANGE IN CONTROL
The following discussions and tables describe and illustrate potential
payments to Messrs. Oliva and Jefferies under contracts, agreements, plans or
arrangements, whether written or unwritten, that were in effect at December 31,
2006, for various scenarios involving a change in control or termination of
employment, assuming a December 31, 2006 termination date.
The tables do not include any pro rated incentive bonus that would have
been payable upon termination for death, incapacity, good reason or without due
cause because no bonuses were payable for 2006. Mr. Jefferies is based in the
United Kingdom and receives his remuneration in British pounds sterling. The
amounts listed for Mr. Jefferies are shown in United States dollars, converted
from British pounds sterling using the exchange rate of $1.958 per British pound
sterling in effect on December 31, 2006.
Carmine T. Oliva
----------------
As described under the heading "Summary Compensation Table - Employment
Agreements - 2006," at December 31, 2006, we were a party to an employment
agreement dated February 24, 2006 with Carmine T. Oliva, our Chairman of the
Board, President and Chief Executive Officer. If we had terminated Mr. Oliva's
employment for due cause or due to Mr. Oliva's breach of his employment
agreement by refusing to continue his employment, our obligation to pay any
further compensation, severance allowance, or other amounts payable under the
agreement would have terminated on the date of termination, other than benefits
under retirement and benefit plans and programs that were earned and vested by
the date of termination, pro rata annual salary through the date of termination,
any stock options that were vested as of the date of termination, and accrued
vacation as required by California law. "Due cause" includes any intentional
misapplication of our funds or other material assets, or any other act of
dishonesty injurious to us, or conviction of a felony or a crime involving moral
turpitude. "Due cause" also included abuse of controlled substances or alcohol
and breach, nonperformance or nonobservance of any of the terms of the
agreement, provided that Mr. Oliva failed to satisfactorily remedy the
performance problem following 90 days' written notice.
We had the right to terminate Mr. Oliva's employment immediately upon
written notice to him. Mr. Oliva had the right to terminate the agreement at any
time for good reason within 30 days after he learned of an event or condition
constituting good reason. "Good reason" included: changes in Mr. Oliva's
position, duties, responsibilities, titles or status; a reduction in his base
salary to an amount less than the greater of $350,000 or 10% below the base
salary in effect at the time of the reduction; our failure to continue in effect
benefits required under the agreement, to obtain the assumption of the agreement
by any successor or assign, or to timely cure any material breach after Mr.
Oliva gave us written notice; a material reduction in support services, staff,
office space and accouterments which reduction is not generally effective for
all officers; or if we availed ourselves of or were subjected by any third party
to any other proceeding involving insolvency or the protection of or from
creditors and the proceeding was not discharged or terminated within 90 days.
11
If Mr. Oliva's service had terminated without due cause or for good
reason prior to the originally scheduled expiration of the agreement on January
1, 2011, Mr. Oliva would have been entitled to his salary through the end of the
month in which termination occurred plus credit for accrued vacation, a
severance payment equal to three times his then current annual salary, net of
taxes, a pro rated incentive bonus, if any, for the fiscal year during which
termination occurred, and all medical and life insurance benefits to which he
was entitled immediately prior to the date of termination (or at the election of
Mr. Oliva in the event of a change in control, immediately prior to the date of
the change in control) for a period of three years or the date or dates that Mr.
Oliva's continued participation in our medical and/or life insurance plans was
not possible under the plans, whichever was earlier. If our medical and/or life
insurance plans did not allow Mr. Oliva's continued participation, then we would
have been required to pay to Mr. Oliva, in monthly installments, the monthly
premium or premiums that had been payable by us covering the three-year period.
A "change in control" includes: a consolidation or merger in which we
were not the surviving corporation or pursuant to which all or substantially all
of our common stock was be converted into cash, securities or other property,
other than a merger in which the holders of our common stock immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger; a sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of our assets; stockholder approval of any plan or
proposal for liquidation or dissolution; any person other than persons who were
stockholders on January 1, 2006, became the beneficial owner of 50% or more of
our outstanding common stock; during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire board
ceased to constitute a majority of the board unless the election, or the
nomination for election by our stockholders, of each new director was approved
by a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period; or there is any change of control of a
nature required to be reported in response to Item 6 (e) of Schedule 14A under
the Exchange Act.
If Mr. Oliva had become mentally or physically incapable of performing
the services required under the agreement for a period of 240 consecutive days,
and the incapacity was confirmed by the written opinion of two practicing
medical doctors, we could have terminated Mr. Oliva's employment under the
agreement upon 30 days' prior written notice. Upon Mr. Oliva's death, the
agreement was to terminate immediately. If Mr. Oliva's employment was terminated
due to his incapacity or death, Mr. Oliva or his estate or legal representative
would have been entitled to receive benefits under our retirement and benefits
plans and programs that were earned and vested at the date of termination, a pro
rated incentive bonus for the fiscal year in which incapacity or death occurred,
and Mr. Oliva's annual salary then in effect for one year following the date of
termination, offset, however, by any payments received by Mr. Oliva as a result
of any disability insurance maintained by us for Mr. Oliva's benefit.
12
TOTAL CASH CONTINUATION OF GROUP
CASH SEVERANCE SEVERANCE MEDICAL AND LIFE TOTAL TERMINATION
CARMINE T. OLIVA PAYMENT(S) TAX GROSS UP PAYMENT(S) INSURANCE BENEFITS
------------------------- ----------------------- ------------------ ----------- ----------------------- --------------------
Due Cause, Retirement or $0 $0 $0 $0 $0
Voluntary Termination
Death or Incapacity $350,000, representing $0 $350,000 $0 $350,000
one times annual
salary, payable in
semi-monthly
installments over
one year
Good Reason or Without $1,050,000, representing $710,563, $1,789,730 $36,387, represents $1,826,117
Due Cause three times annual assuming 40.36% premiums payable for
salary, payable in effective tax up to three years
lump sum rate
$29,167 payable in lump
sum for accrued vacation
Graham Jefferies
----------------
As described under the heading "Summary Compensation Table - Employment
Agreements - 2006," we were a party to an employment agreement dated February
24, 2006 with Graham Jefferies, our Executive Vice President and Chief Operating
Officer. If Mr. Jefferies' employment under that agreement terminated for due
cause or due to Mr. Jefferies' breach of the agreement by refusing to continue
his employment, our obligation to pay any further compensation, severance
allowance, or other amounts payable under the agreement would have terminated on
the date of termination, other than benefits under retirement and benefit plans
and programs that were earned and vested by the date of termination, Mr.
Jefferies' pro rata annual salary through the date of termination, any stock
options that had vested as of the date of termination, and accrued vacation as
required by applicable law.
We had the right to terminate Mr. Jefferies' employment immediately
upon written notice. Mr. Jefferies had the right to terminate the agreement at
any time for good reason within 30 days after Mr. Jefferies learned of an event
or condition constituting good reason. If termination without due cause by us or
for good reason by Mr. Jefferies occurred prior to the originally scheduled
expiration of the agreement on January 1, 2009, Mr. Jefferies would have been
entitled to his salary through the end of the month during which the termination
occurred plus credit for accrued vacation, a severance payment in an amount
equal to two times his then current annual salary, net of applicable taxes, a
pro rated incentive bonus, if any, for the fiscal year during which termination
occurred, and all medical and life insurance benefits to which Mr. Jefferies was
entitled immediately prior to the date of termination (or at the election of Mr.
Jefferies in the event of a change in control, immediately prior to the date of
the change in control) for a period of two years or the date or dates that Mr.
Jefferies' continued participation in our medical and/or life insurance plans is
not possible under the plans, whichever is earlier. If our medical and/or life
13
insurance plans did not allow Mr. Jefferies' continued participation, then we
would have been obligated to pay to Mr. Jefferies, in monthly installments, the
monthly premium or premiums that had been payable by us covering the two-year
period.
If Mr. Jefferies had become mentally or physically incapable of
performing the services required under the agreement for a period of 180
consecutive days, the agreement would have terminated; provided, however, that
Mr. Jefferies would have remained an employee of EMRISE Electronics Ltd. and be
entitled to remuneration in an amount equal to the amount paid under EMRISE
Electronics Ltd.'s permanent health insurance scheme, subject to the paragraph
immediately below. Upon Mr. Jefferies' death, the agreement would have
terminated immediately.
If Mr. Jefferies' employment had terminated due to his incapacity or
death, Mr. Jefferies or his estate or legal representative would have been
entitled to receive benefits under retirement and benefits plans and programs
that were earned and vested at the date of termination, a pro rated incentive
bonus for the fiscal year in which incapacity or death occurred, and Mr.
Jefferies' annual salary then in effect for one year following the date of
termination, offset by any payments received by Mr. Jefferies as a result of any
permanent health insurance scheme maintained by us for Mr. Jefferies' benefit.
The terms "due cause," "good reason" and "change in control" have the
same meanings as in Mr. Oliva's employment agreement described above.
TOTAL CASH CONTINUATION OF GROUP
CASH SEVERANCE SEVERANCE MEDICAL AND LIFE TOTAL TERMINATION
GRAHAM JEFFERIES PAYMENT(S) TAX GROSS UP PAYMENT(S) INSURANCE BENEFITS
------------------------- ----------------------- ------------------ ----------- ----------------------- --------------------
Due Cause, Retirement or $0 $0 $0 $0 $0
Voluntary Termination
Death or Incapacity $299,182, representing $0 $299,182 $1,566, represents $300,748
one times annual salary, estimated permanent
payable in semi-monthly health scheme premiums
installments over one for one year
year
Good Reason or Without $598,364, representing $398,909, $997,273 $9,344, represents $1,006,617
Due Cause two times annual salary, assuming 40.0% premiums payable for
payable in lump sum effective tax up to two years
rate
Randolph D. Foote
-----------------
As described under the heading "Summary Compensation Table - Employment
Agreements - 2006," we were a party to an employment agreement with Randolph D.
Foote, our former Senior Vice President, Chief Financial Officer and Secretary.
On August 18, 2006, Mr. Foote resigned from all positions with us and our
subsidiaries. We entered into a resignation and separation agreement with him,
which became effective on August 25, 2006. Under the agreement, Mr. Foote
resigned all of his positions with us, and we and Mr. Foote jointly terminated
his employment agreement dated effective as of January 1, 2006. The resignation
and separation agreement provided that effective as of August 21, 2006, Mr.
Foote would be assigned to temporary employment with us, which we and Mr. Foote
14
anticipated would terminate by approximately December 31, 2006. On December 31,
2006, we and Mr. Foote amended the separation agreement to extend Mr. Foote's
temporary employment to no later than March 30, 2007. Subsequently, Mr. Foote's
temporary employment was extended to May 15, 2007. During the time of his
temporary employment, Mr. Foote assisted us in, among other things, the
preparation of our restated financial statements and our filings with the
Securities and Exchange Commission and continued to receive his base salary and
employment benefits (other than paid vacation benefits, bonus or incentive
compensation). Mr. Foote's unexercised stock options terminated three months
after termination of his temporary employment. For twelve months following
termination of his temporary employment, Mr. Foote has agreed to continue to
provide reasonable cooperation and assistance to us as needed, and subject to
Mr. Foote's performance of his obligations under the separation agreement, we
have agreed to pay to Mr. Foote in installments on our regular pay dates during
that period the total gross amount of $182,200 and to reimburse Mr. Foote for
health plan benefit premiums at the same benefit level he had as of his
resignation date.
EMPLOYMENT AGREEMENTS - 2007
D. John Donovan was appointed as our Vice President Finance and
Administration, Secretary and Treasurer effective May 16, 2007. We entered into
an employment agreement with Mr. Donovan effective as of that date. However,
effective as of November 1, 2007, we entered into new employment agreements with
Mr. Donovan, Mr. Oliva and Mr. Jefferies. The new employment agreements replaced
the May 16, 2007 agreement with Mr. Donovan and the February 24, 2006 agreements
with Mr. Oliva and Mr. Jefferies, and are described generally below.
Carmine T. Oliva
----------------
Under the November 1, 2007 executive employment agreement with Mr.
Oliva, Mr. Oliva has agreed to serve as our Chairman of the Board, President and
Chief Executive Officer on an at-will basis. The agreement provides for a base
salary of $350,000, paid vacation of at least four weeks per year, a monthly
automobile allowance of at least $750, and non-exclusive use of our corporate
residence. Mr. Oliva is eligible to receive increases and annual cash incentive
bonuses at the discretion of our compensation committee and to participate in
benefit and incentive programs we may offer. We have agreed to nominate Mr.
Oliva as a Class III member of our board and to seek stockholder approval of the
nomination at our 2008 annual meeting of stockholders. We have also agreed to
maintain in effect a directors' and officers' liability insurance policy with a
minimum limit of liability of $10 million and that we would enter into an
indemnification agreement with Mr. Oliva upon terms mutually acceptable to us
and Mr. Oliva.
The agreement contains non-competition provisions that prohibit Mr.
Oliva from engaging or participating in a competitive business or soliciting our
customer or employees during his employment with us and for two years afterward.
The agreement also contains provisions that restrict disclosure by Mr. Oliva of
our confidential information and assign ownership to us of inventions related to
our business that are created by him during his employment and for two years
afterward.
We may terminate the agreement at any time, with or without due cause.
"Due cause" includes any intentional misapplication of our funds or other
material assets, or any other act of dishonesty injurious to us, or conviction
of a felony or a crime involving moral turpitude. "Due cause" also includes
abuse of controlled substances or alcohol and breach, nonperformance or
nonobservance of any of the terms of the agreement, provided that Mr. Oliva
fails to satisfactorily remedy the performance problem following 30 days'
written notice.
15
Mr. Oliva may terminate the agreement at any time, with or without good
reason. However, termination for good reason must occur within 90 days of the
occurrence of an event constituting good reason, and Mr. Oliva must furnish us
with written notice of the event within 30 days after the initial existence of
the event and provide us with at least a 30-day cure period. "Good reason"
includes: a material diminution in his authority, duties, responsibilities,
titles or offices; a purported reduction in Mr. Oliva's base salary amounting to
a material diminution in his salary to an amount less than the greater of
$350,000 or 10% below the base salary in effect at the time of the reduction;
our failure to timely cure or diligently initiate a cure of any material breach
within 30 days after Mr. Oliva gives us written notice of the breach.
If we terminate Mr. Oliva's employment for due cause or due to Mr.
Oliva's breach of his employment agreement by refusing to continue his
employment, or if Mr. Oliva terminates his employment without good reason, then
all compensation and benefits for Mr. Oliva will cease, other than amounts under
retirement and benefit plans and programs that were earned and vested by the
date of termination, pro rata annual salary through the date of termination, any
stock options that were vested as of the date of termination, and accrued
vacation as required by California law.
If Mr. Oliva becomes incapacitated, we may terminate his employment
under the agreement upon 30 days' prior written notice. Upon Mr. Oliva's death,
the agreement terminates immediately. If Mr. Oliva's employment terminates due
to his incapacity or death, Mr. Oliva or his estate or legal representative will
be entitled to receive benefits under our retirement and benefits plans and
programs that were earned and vested at the date of termination, a pro rated
incentive bonus for the fiscal year in which incapacity or death occurred (to
the extent he would otherwise be eligible), and a lump sum cash payment in an
amount equal to one year of his then current annual salary, grossed up to cover
applicable taxes that are deducted from such amount.
If Mr. Oliva's employment terminates for good reason or other than as a
result of due cause, incapacity, death or retirement, Mr. Oliva will be entitled
to his salary through the end of the month in which termination occurs plus
credit for accrued vacation, and a pro rated incentive bonus, if eligible, for
the fiscal year during which termination occurred. In addition, under those
circumstances, if Mr. Oliva enters into a separation and release agreement with
us, then he will be entitled to receive (i) a severance payment equal to three
times his then current annual salary (grossed up to cover applicable taxes that
are deducted from such amount), (ii) all medical insurance benefits to which he
was entitled immediately prior to the date of termination for a period of
eighteen months or the date that Mr. Oliva's continued participation in our
medical insurance plan was not possible under the plan, whichever was earlier,
(iii) a lump-sum cash payment equal to eighteen times the estimated monthly
COBRA premiums at the time of termination (taking into account all known or
anticipated premium increases) to be used by Mr. Oliva to maintain his medical
insurance coverage for an additional eighteen months, and (iv) a lump-sum cash
payment equal to thirty-six times the estimated monthly life insurance premiums
at the time of termination (taking into account all known or anticipated premium
increases) to be used by Mr. Oliva to maintain his existing group life insurance
coverage and the $1,000,000 life insurance policy on his life for three years.
If our medical insurance plan did not allow Mr. Oliva's continued participation,
then we will be required to pay to Mr. Oliva, in monthly installments, the
monthly premium or premiums for COBRA coverage, covering the eighteen month
period described in clause (ii) in the preceding sentence.
Immediately preceding the occurrence of a change in control, and
regardless of whether Mr. Oliva's employment terminates and/or he receives
severance payments as a result of the change in control, Mr. Oliva will be
entitled to receive a payment equal to three times his then current annual
salary (grossed up to cover applicable taxes that are deducted from such
amount). A "change in control" includes the following circumstances:
16
(a) the acquisition by any person or group of beneficial ownership
of securities entitled to vote generally in the election of
our directors ("voting securities") that represent 40% or more
of the combined voting power of our then outstanding voting
securities or 50% or more of the combined fair market value of
our then outstanding stock, other than:
(i) an acquisition by a trustee or other fiduciary holding
securities under any employee benefit plan (or related
trust) sponsored or maintained by us or any person
controlled by us or by any employee benefit plan (or
related trust) sponsored or maintained by us or any
person controlled by us, or
(ii) an acquisition of voting securities by us or a
corporation owned, directly or indirectly, by our
stockholders in substantially the same proportions as
their ownership of our stock;
Notwithstanding circumstance (a) above, however, if we make an
acquisition of our securities that (x) causes our voting securities beneficially
owned by a person or group to represent 40% or more of the combined voting power
of our then outstanding voting securities or (y) causes our stock beneficially
owned by a person or group to represent 50% or more of the combined fair market
value of our then outstanding stock, the acquisition will not be considered an
acquisition by any person or group for purposes of circumstance (a) unless the
person or group subsequently becomes the beneficial owner of additional
securities of ours.
(b) a majority of members of our board is replaced during any
12-month period by directors whose appointment or election is
not endorsed by a majority of members of our board before the
date of the appointment or election, excluding any individual
whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
person other than our board;
(c) the acquisition by any person or group, or combined
acquisitions during the 12-month period ending on the date of
the most recent acquisition by such person or group, of
ownership of assets from us that have a total gross fair
market value equal to or more than 40% of the total gross fair
market value of all of our assets immediately before such
acquisition; and
(d) stockholder approval of a complete liquidation or dissolution
of our company.
For purposes of circumstance (a) above, the calculation of voting power
will be made as if the date of the acquisition were a record date for a vote of
our stockholders, and for purposes of circumstance (c) above, the calculation of
voting power will be made as if the date of the consummation of the transaction
were a record date for a vote of our stockholders.
Notwithstanding the above, there will be no change in control event
when there is a transfer to an entity that is controlled by our stockholders
immediately after the transfer. A transfer of assets by us is not treated as a
change in control if the assets are transferred to: a stockholder of ours
(immediately before the asset transfer) in exchange for or with respect to the
stockholders' stock; an entity, 50% or more of the total value or voting power
of which is owned, directly or indirectly, by us; a person or group that owns,
directly or indirectly, 50% or more of the total value or voting power of all of
our outstanding stock; or an entity, at least 50% of the total value or voting
power of which is owned, directly or indirectly, by a person or group described
in the immediately preceding clause.
17
Graham Jefferies
----------------
Under the November 1, 2007 executive employment agreement with Mr.
Jefferies, Mr. Jefferies has agreed to serve as our Executive Vice President and
Chief Operating Officer on an at-will basis. The agreement provides for a base
salary of 152,800 British pounds sterling per year (approximately $316,600 as of
November 1, 2007), which amount is to be paid by our subsidiary, EMRISE
Electronics Ltd., paid vacation of 25 working days per year and public holidays
in the United Kingdom, and a monthly automobile allowance of at least 460
British pounds sterling. Mr. Jefferies is eligible to receive increases and
annual cash incentive bonuses at the discretion of our compensation committee
and to participate in benefit and incentive programs we may offer. We have also
agreed to maintain in effect a directors' and officers' liability insurance
policy with a minimum limit of liability of $10 million and that we would enter
into an indemnification agreement with Mr. Jefferies upon terms mutually
acceptable to us and Mr. Jefferies.
The agreement contains non-competition provisions that prohibit Mr.
Jefferies from engaging or participating in a competitive business or soliciting
our customer or employees during his employment with us and for two years
afterward. The agreement also contains provisions that restrict disclosure by
Mr. Jefferies of our confidential information and assign ownership to us of
inventions related to our business that are created by Mr. Jefferies in
connection with his employment and for two years afterward.
Mr. Jefferies may terminate the agreement at any time, with or without
good reason. However, termination for good reason must occur within 30 days of
the occurrence of an event constituting good reason. The term "good reason" has
the same meaning as in Mr. Oliva's employment agreement described above, except
that Mr. Jefferies' base salary is 152,800 British pounds sterling per year.
We may terminate the agreement at any time, immediately upon written
notice, with or without due cause. The term "due cause" has the same meaning as
in Mr. Oliva's employment agreement described above, except that Mr. Jefferies
may satisfactorily remedy the performance problem following 90 days' written
notice. If we terminate Mr. Jefferies' employment for due cause or due to Mr.
Jefferies' breach of his employment agreement by refusing to continue his
employment, or if Mr. Jefferies terminates his employment without good reason,
then all compensation and benefits for Mr. Jefferies will cease, other than
amounts under retirement and benefit plans and programs that were earned and
vested by the date of termination, pro rata annual salary through the date of
termination, and any stock options that were vested as of the date of
termination, and accrued vacation as required by applicable law.
If Mr. Jefferies becomes mentally or physically incapable of performing
the services required under the agreement for a period of 180 consecutive days,
the agreement terminates; provided, however, that Mr. Jefferies will remain an
employee of EMRISE Electronics Ltd. and be entitled to remuneration in an amount
equal to the amount paid under EMRISE Electronics Ltd.'s permanent health
insurance scheme, subject to the paragraph immediately below. Upon Mr.
Jefferies' death, the agreement terminates immediately.
If Mr. Jefferies' employment terminates due to his incapacity or death,
Mr. Jefferies or his estate or legal representative will be entitled to receive
benefits under our retirement and benefits plans and programs that were earned
and vested at the date of termination, a pro rated incentive bonus for the
fiscal year in which incapacity or death occurred (to the extent he would
otherwise be eligible), and a lump sum cash payment in an amount equal to one
year of his then current annual salary, grossed up to cover applicable taxes
that are deducted from such amount.
18
If Mr. Jefferies' employment terminates for good reason or other than
as a result of due cause, incapacity, death or retirement, Mr. Jefferies will be
entitled to his salary through the end of the month in which termination occurs
plus credit for accrued vacation, and a pro rated incentive bonus, if eligible,
for the fiscal year during which termination occurred. In addition, under those
circumstances, if Mr. Jefferies enters into a separation and release agreement
with us, then he will be entitled to receive a severance payment equal to two
times his then current annual salary (grossed up to cover applicable taxes that
are deducted from such amount), to receive all medical and life insurance
benefits to which he was entitled immediately prior to the date of termination
(or at the election of Mr. Jefferies in the event of a change in control,
immediately prior to the date of the change in control) for a period of two
years or the date or dates that Mr. Jefferies' continued participation in our
medical and/or life insurance plans was not possible under the plans, whichever
was earlier. If our medical and/or life insurance plans did not allow Mr.
Jefferies' continued participation, then we will be required to pay to Mr.
Jefferies, in monthly installments, the monthly premium or premiums that had
been payable by us covering the two-year period.
Immediately preceding the occurrence of a change in control, and
regardless of whether Mr. Jefferies' employment terminates and/or he receives
severance payments as a result of the change in control, Mr. Jefferies will be
entitled to receive a payment equal to two times his then current annual salary
(grossed up to cover applicable taxes that are deducted from such amount). The
term "change in control" has the same meaning as in Mr. Oliva's employment
agreement described above.
D. John Donovan
---------------
Under the November 1, 2007 executive employment agreement with Mr.
Donovan, Mr. Donovan has agreed to serve as our Vice President Finance and
Administration, Secretary and Treasurer on an at-will basis. The agreement
provides for an initial base salary of $223,000 during the first six months of
employment followed by a 10% increase to his base salary to $245,300, an
objective-based additional cash compensation for up to $20,000 during the first
seven months of employment to be awarded based solely on the CEO's determination
(and payable as to one-half of this amount, if at all, on November 30, 2007 and
May 1, 2008), reimbursement for up to $5,000 per year for Certified Public
Accountant continuing professional education programs, paid vacation of at least
three weeks per year, and a monthly automobile allowance of at least $600. Mr.
Donovan is eligible to receive increases and annual cash incentive bonuses at
the discretion of our compensation committee and to participate in benefit and
incentive programs we may offer. We have also agreed to maintain in effect a
directors' and officers' liability insurance policy with a minimum limit of
liability of $10 million and that we would enter into an indemnification
agreement with Mr. Donovan upon terms mutually acceptable to us and Mr. Donovan.
The agreement contains non-competition provisions that prohibit Mr.
Donovan from engaging or participating in a competitive business or soliciting
our customer or employees during his employment with us and for two years
afterward. The agreement also contains provisions that restrict disclosure by
Mr. Donovan of our confidential information and assign ownership to us of
inventions related to our business that are created by him during his employment
and for two years afterward.
Mr. Donovan may terminate the agreement at any time, with or without
good reason. However, termination for good reason must occur within 90 days of
the occurrence of an event constituting good reason, and Mr. Donovan must
furnish us with written notice of the event within 30 days after the initial
existence of the event and provide us with at least a 30-day cure period. The
term "good reason" has the same meaning as in Mr. Oliva's employment agreement
described above, except that Mr. Donovan's initial base salary is $223,000
during the first six months of employment, and $245,300 thereafter per year.
19
If we terminate Mr. Donovan's employment for due cause or due to Mr.
Donovan's breach of his employment agreement by refusing to continue his
employment, or if Mr. Donovan terminates his employment without good reason,
then all compensation and benefits for Mr. Donovan will cease, other than
amounts under retirement and benefit plans and programs that were earned and
vested by the date of termination, pro rata annual salary through the date of
termination, any stock options that were vested as of the date of termination,
and accrued vacation as required by California law.
If Mr. Donovan becomes incapacitated, we may terminate his employment
under the agreement upon 30 days' prior written notice. Upon Mr. Donovan's
death, the agreement terminates immediately. If Mr. Donovan's employment
terminates due to his incapacity or death, Mr. Donovan or his estate or legal
representative will be entitled to receive benefits under our retirement and
benefits plans and programs that were earned and vested at the date of
termination, a pro rated incentive bonus for the fiscal year in which incapacity
or death occurred (to the extent he would otherwise be eligible), and a lump sum
cash payment in an amount equal to one year of his then current annual salary,
grossed up to cover applicable taxes that are deducted from such amount.
If Mr. Donovan's employment terminates for good reason or other than as
a result of due cause, incapacity, death or retirement, Mr. Donovan will be
entitled to his salary through the end of the month in which termination occurs
plus credit for accrued vacation, and a pro rated incentive bonus, if eligible,
for the fiscal year during which termination occurred. In addition, under those
circumstances, if Mr. Donovan enters into a separation and release agreement
with us, then he will be entitled to receive (i) a severance payment equal to
his then current annual salary (grossed up to cover applicable taxes that are
deducted from such amount), (ii) all medical insurance benefits to which he was
entitled immediately prior to the date of termination for a period of eighteen
months or the date that Mr. Donovan's continued participation in our medical
insurance plan was not possible under the plan, whichever was earlier, and (iii)
a lump-sum cash payment equal to $1,650 to be used by Mr. Donovan to maintain
his existing life insurance coverage for a period of eighteen months. If our
medical insurance plan did not allow Mr. Donovan's continued participation, then
we will be required to pay to Mr. Donovan, in monthly installments, the monthly
premium or premiums for COBRA coverage, covering the eighteen month period
described in clause (ii) in the preceding sentence.
Immediately preceding the occurrence of a change in control, and
regardless of whether Mr. Donovan's employment terminates and/or he receives
severance payments as a result of the change in control, Mr. Donovan will be
entitled to receive a payment equal to his then current annual salary (grossed
up to cover applicable taxes that are deducted from such amount).
The terms "due cause" and "change in control" have the same meaning as
in Mr. Oliva's employment agreement described above.
20
DIRECTOR COMPENSATION
Each non-employee director is entitled to receive $1,000 per month as
compensation for his services. In addition, each board member chairing a
standing committee is entitled to receive $500 per month as compensation for his
services. We reimburse all directors for out-of-pocket expenses incurred in
connection with attendance at board and committee meetings. We may periodically
award options or warrants to our directors under our existing option and
incentive plans. On April 16, 2006, we granted to Mr. Mahmarian an option to
purchase 50,000 shares of our common stock at an exercise price of $1.00 per
share. The option vested in two equal installments of 25,000 shares on October
17, 2006 and April 17, 2007.
The following table provides information concerning the compensation of
our directors for the year ended December 31, 2006.
FEES EARNED
OR PAID IN CASH OPTION AWARDS TOTAL
NAME ($) ($) ($)
------------------------- --------------- ------------- --------
Laurence P. Finnegan, Jr. 18,000 - (1) 18,000
Otis W. Baskin 18,000 - (2) 18,000
Richard E. Mahmarian 14,400 39,000(3) 53,400
-------------------
(1) At December 31, 2006, Mr. Finnegan held options to purchase an aggregate
of 216,000 shares of common stock.
(2) At December 31, 2006, Mr. Baskin held options to purchase an aggregate
of 85,000 shares of common stock.
(3) The dollar amount reflected in the table is the compensation cost we
recognized for financial statement reporting purposes during 2006 under
SFAS 123R for the grant made to Mr. Mahmarian in 2006, estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: dividend yield of 0%; expected
volatility of 87%; risk-free interest rate of 4.75%; expected option life
of 7 years; and weighted-average fair value per share of $0.79. At
December 31, 2006, Mr. Mahmarian held options to purchase an aggregate of
50,000 shares of common stock, all of which were granted during 2006.
INFORMATION ABOUT OUR BOARD OF DIRECTORS,
BOARD COMMITTEES AND RELATED MATTERS
BOARD OF DIRECTORS
GENERAL
Our business, property and affairs are managed under the direction of
our board. Directors are kept informed of our business through discussions with
our executive officers, by reviewing materials provided to them and by
participating in meetings of our board and its committees.
Our bylaws provide that our board of directors shall consist of at
least four directors. Our board is divided into three classes of directors:
Class I, Class II and Class III. The term of office of each class of directors
is three years, with one class expiring each year at our annual meeting of
stockholders. We currently have four directors on our board, with no vacancies.
Our current board consists of one Class I director whose term expires at our
2009 annual meeting, one Class II director whose term expires at our 2007 annual
meeting, and two Class III directors whose term expires at our 2008 annual
meeting.
21
During 2006, our board held three meetings and took action by unanimous
written consent on four occasions. During 2006, no incumbent director attended
fewer than 75% of the aggregate of: (1) the total number of meetings of the
board of directors (held during the period for which he has been a director);
and (2) the total number of meetings held by all committees of the board on
which he served (during the periods that he served).
BOARD COMMITTEES
Our board of directors currently has an audit committee, a compensation
committee and a nominating committee.
Audit Committee
---------------
The audit committee selects our independent registered public
accountants, reviews the results and scope of the audit and other services
provided by our independent registered public accountants, reviews our financial
statements for each interim period and for our year end and our internal
financial and accounting controls, and recommends, establishes and monitors our
disclosure controls and procedures. Messrs. Finnegan and Baskin served on our
audit committee throughout and since 2006, with Mr. Finnegan serving as
chairman. Mr. Mahmarian was appointed as the third member of the audit committee
when he joined our board on March 1, 2006. The audit committee held five
meetings during 2006. Our board of directors has determined that Messrs.
Finnegan and Mahmarian are audit committee financial experts. The audit
committee operates pursuant to a charter approved by our board of directors and
audit committee, according to the rules and regulations of the Securities and
Exchange Commission. A copy of the charter was attached as Appendix A to our
definitive proxy statement for our 2005 annual meeting of stockholders.
Compensation Committee
----------------------
The compensation committee is responsible for establishing and
administering our policies involving the compensation of all of our executive
officers and establishing and recommending to our board of directors the terms
and conditions of all employee and consultant compensation and benefit plans.
Our entire board of directors also may perform these functions with respect to
our employee stock option plans. Messrs. Finnegan and Mr. Baskin have served on
the compensation committee throughout and since 2006, with Mr. Baskin serving as
chairman. The compensation committee held two meetings during 2006. The
compensation committee operates pursuant to a charter approved by our board of
directors and compensation committee. A copy of the charter was attached as
Appendix B to the proxy statement for our 2005 annual meeting of stockholders.
Robert B. Runyon, who is a former director and former compensation
committee chairman of EMRISE Corporation, provides compensation consultation
services to our compensation committee and executive management. Mr. Runyon's
role includes collecting compensation data for us and assisting us in evaluating
candidates for executive level positions.
Nominating Committee
--------------------
The nominating committee recommends nominees to our board of directors
and committees of our board of directors, develops and recommends to our board
of directors corporate governance principles, and oversees the evaluation of the
board of directors and management. Messrs. Finnegan and Baskin have served on
the nominating committee throughout and since 2006. Mr. Mahmarian was appointed
chair of the nominating committee in April 2006. The nominating committee held
one meeting during 2006. The nominating committee utilizes a variety of methods
for identifying and evaluating nominees for director, including candidates that
may be referred by stockholders.
22
The nominating committee will consider candidates for director
recommended by any stockholder that is the beneficial owner of shares
representing more than 1.0% of the then-outstanding shares of our common stock
and that has beneficially owned those shares for at least one year. The
nominating committee will evaluate those recommendations by applying its regular
nominee criteria and considering the additional information described in the
nominating committee's below-referenced charter. Stockholders that desire to
recommend candidates for the board for evaluation may do so by contacting EMRISE
Corporation in writing, identifying the potential candidate and providing
background and other information in the manner described in the nominating
committee's charter. Candidates may also come to the attention of the nominating
committee through current board members, professional search firms and other
persons. In evaluating potential candidates, the nominating committee will take
into account a number of factors, including, among others, the following:
o independence from management;
o depth of understanding of technology, manufacturing, sales and
marketing, finance and/or other elements directly relevant to
the technology and business of our company;
o education and professional background;
o judgment, skill, integrity and reputation;
o existing commitments to other businesses as a director,
executive or owner;
o personal conflicts of interest, if any; and
o the size and composition of the board of directors.
In addition, prior to nominating a sitting director for re-election at
an annual meeting of stockholders, the nominating committee considers the
director's past attendance at, and participation in, meetings of our board of
directors and its committees and the director's formal and informal
contributions to their respective activities.
The nominating committee operates pursuant to a charter approved by our
board of directors and nominating committee. A copy of the charter was attached
as Appendix C to the definitive proxy statement for our 2005 annual meeting of
stockholders.
Director Independence
---------------------
Our board of directors has determined that each of Messrs. Baskin,
Finnegan and Mahmarian is independent under Rule 5.3(k) of the NYSE Arca
Equities Rules because none of those directors has, or during the past three
years has had, a material relationship with us, either directly or as a partner,
stockholder or officer of an organization that has a relationship with us, and
none of those directors is disqualified from being deemed independent under any
of subparagraphs (A)-(F) of Rule 5.3(k)(1) of the NYSE Arca Equities Rules. Our
board of directors has also determined that each of member of the audit
committee is independent under Rule 10A-3(b)(1) of the Securities and Exchange
Commission.
23
Under the NYSE Arca Equities Rules, the non-management members of our
board of directors must meet at regularly scheduled executive sessions without
management, with a non-management director presiding over each executive
session. A presiding director for each session is selected by the board members
in attendance at the session based upon the topics to be discussed at the
session. The non-management directors can be contacted by calling the chairman
of the audit committee. Further, if the non-management directors include
directors who are not independent, then we should at least once a year schedule
an executive session including only independent directors. Under the NYSE Arca
Equities Rules, we must disclose if any member of our nominating committee or
compensation committee is not independent.
Charters
--------
The charters of our audit, compensation and nominating committees, and
our codes of business conduct and ethics, are included on our website at
http://www.emrise.com. The foregoing information is also available in print to
any stockholder who requests it.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Throughout and since 2006, the compensation committee has consisted of
Messrs. Finnegan and Mr. Baskin. No member of the board of directors has a
relationship that would constitute an interlocking relationship with executive
officers and directors of another entity.
SECURITY HOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
The board of directors has established a process to receive
communications from security holders. Security holders and other interested
parties may contact any member (or all members) of the board of directors, or
the independent directors as a group, any committee of the board of directors or
any chair of any such committee, by mail or electronically. To communicate with
the board of directors, any individual directors or any group or committee of
directors, correspondence should be addressed to the board of directors or any
such individual directors or group or committee of directors by either name or
title. All such correspondence should be sent "c/o Secretary" at 9485 Haven
Avenue, Suite 100, Rancho Cucamonga, California 91730. To communicate with any
of our directors electronically, security holders should send an email to our
Secretary at: jdonovan@emrise.com.
All communications received as set forth in the preceding paragraph
will be opened by the Secretary for the sole purpose of determining whether the
contents represent a message to our directors. Any contents that are not in the
nature of advertising, promotions of a product or service, patently offensive
material or matters deemed inappropriate for the board of directors will be
forwarded promptly to the addressee. In the case of communications to the board
of directors or any group or committee of directors, our Secretary will make
sufficient copies (or forward such information in the case of e-mail) of the
contents to send to each director who is a member of the group or committee to
which the envelope or e-mail is addressed.
POLICY WITH REGARD TO BOARD MEMBERS' ATTENDANCE AT ANNUAL MEETINGS
It is our policy that our directors are invited and encouraged to
attend all of our annual meetings. At the date of our 2006 annual meeting, we
had four members on our board of directors, all of whom were in attendance at
our 2006 annual meeting.
24
COMPENSATION COMMITTEE REPORT
Our compensation committee reviewed and discussed with our management
the "Compensation Discussion and Analysis" contained in this proxy statement.
Based on that review and discussions, our compensation committee recommended to
our board of directors that the "Compensation Discussion and Analysis" be
included in this proxy statement.
Compensation Committee
EMRISE Corporation
Otis W. Baskin, Chairman
Laurence P. Finnegan, Jr., Member
CODE OF ETHICS
Our board of directors has adopted an Amended and Restated Code of
Business Conduct and Ethics that applies to all of our directors, officers and
employees and an additional Code of Business Ethics that applies to our Chief
Executive Officer and senior financial officers. We filed copies of these codes
as exhibits to the initial filing of our annual report on Form 10-K for the year
ended December 31, 2005 and have posted these codes on our Internet website,
located at http://www.emrise.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form
8-K relating to amendments to or waivers from provision of these codes that
relate to one or more of the items set forth in Item 406(b) of Regulation S-K,
by describing on our Internet website within four business days following the
date of a waiver or a substantive amendment, the date of the waiver or
amendment, the nature of the amendment or waiver, and the name of the person to
whom the waiver was granted.
Information on our Internet website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Securities and Exchange Commission.
AUDIT COMMITTEE REPORT
The audit committee of the board of directors of EMRISE Corporation
discussed with EMRISE's independent registered public accountants all matters
required to be discussed by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees." Prior to the inclusion and filing with
the Securities and Exchange Commission of the audited consolidated financial
statements in EMRISE's Annual Report on Form 10-K for the year ended December
31, 2006, the audit committee discussed with management and reviewed EMRISE's
audited consolidated financial statements. In addition, the audit committee
obtained from the independent registered public accountants a formal written
statement describing all relationships between the independent registered public
accountants and EMRISE that might bear on the accountants' independence
consistent with Independence Standards Board Standard No. 1, "Independent
Discussions with Audit Committees," and discussed with the independent
registered public accountants any relationships that may impact their
objectivity and independence and satisfied itself as to the accountants'
independence. Prior to the filing of the Form 10-K with the Securities and
Exchange Commission, and based on the review and discussions referenced above,
the audit committee recommended to the board of directors that the audited
consolidated financial statements be included in the Form 10-K.
Respectfully submitted,
Audit Committee
EMRISE Corporation
Laurence P. Finnegan, Jr., Chairman
Otis W. Baskin, Member
Richard E. Mahmarian, Member
25
PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES AND SERVICES FOR 2006 AND 2005
We dismissed Grant Thornton LLP as our principal accountant on April
13, 2006 and retained Hein & Associates LLP as our principal accountant on April
17, 2006. We had no relationship with Hein & Associates LLP prior to their
retention as our principal accountant. On June 28, 2006, we engaged Hein &
Associates LLP to reaudit our consolidated financial statements for the years
ended December 31, 2005, 2004 and 2003.
The following table sets forth the aggregate fees billed to us by Hein
& Associates LLP, our principal accountant, for professional services rendered
in the audit of our consolidated financial statements for the year ended
December 31, 2006 and the reaudit of our consolidated financial statements for
the years ended December 31, 2005, 2004 and 2003.
FEE CATEGORY 2006 2005
------------ ---------------- ---------------
Audit Fees........................ $ 320,000 $ 957,000
Audit-Related Fees................ -- --
Tax Fees.......................... 53,000 --
All Other Fees.................... -- --
--------------- ---------------
Total..................... $ 373,000 $ 957,000
=============== ===============
AUDIT FEES. Audit fees in the 2006 column of the above table consist of
fees billed for professional services for audit of our 2006 consolidated
financial statements and review of the interim consolidated financial statements
included in our 2006 quarterly reports and services that are normally provided
by an independent registered public accounting firm in connection with statutory
and regulatory filings or engagements.
Due to the impracticality of segregating reaudit fees relating solely
to 2005, the audit fees shown in the 2005 column of the above table consist of
an aggregate of $957,000 of fees billed with respect to the simultaneous reaudit
of our consolidated financial statements for 2005, 2004 and 2003 and review of
the interim consolidated financial statements included in our quarterly reports
for 2005 and services that are normally provided by an independent registered
public accounting firm in connection with statutory and regulatory filings or
engagements.
AUDIT-RELATED FEES. No audit-related fees were incurred for 2006 or
2005.
TAX FEES. Tax fees for 2006 consisted of fees billed for professional
services for tax compliance, tax advice and tax planning. These services include
assistance regarding federal, state and international tax compliance, tax audit
defense, customs and duties, mergers and acquisitions, and international tax
planning. No tax fees were incurred for 2005.
ALL OTHER FEES. No other fees were incurred for 2006 or 2005.
PRE-APPROVAL POLICIES AND PROCEDURES
Our audit committee pre-approves all services provided by our principal
accountant. Our audit committee also considers in advance whether or not to
approve any non-audit services to be performed by the independent accounting
firm required to be approved by the audit committee pursuant to any applicable
rules and regulations.
26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP TABLE
Except as otherwise indicated in the related footnotes, the following
table sets forth information with respect to the beneficial ownership of our
common stock as of October 22, 2007, by:
o each person known by us to beneficially own more than 5% of
the outstanding shares of our common stock;
o each of our directors, including our director nominee;
o each of the named executive officers in the summary
compensation table contained in the "Management" section of
this report; and
o all of our directors, our director nominee and our executive
officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or dispositive power
with respect to the securities. To our knowledge, except as indicated by
footnote, and subject to community property laws where applicable, the persons
named in the table below have sole voting and dispositive power with respect to
all shares of common stock shown as beneficially owned by them. Except as
indicated in the discussion of contractual beneficial ownership limitations
below and except as indicated in the footnotes to the table below, shares of
common stock underlying derivative securities, if any, that currently are
exercisable or convertible or are scheduled to become exercisable or convertible
for or into shares of common stock within 60 days after the date of the table
are deemed to be outstanding in calculating the percentage ownership of each
listed person or group but are not deemed to be outstanding as to any other
person or group. Percentage of beneficial ownership is based on 38,254,250
shares of common stock outstanding as of the date of the table.
The warrants described in the footnotes to the table contain provisions
limiting the exercise of the warrants to the extent necessary to insure that
following the exercise, the total number of shares of common stock then
beneficially owned by the warrant holder and its affiliates and others whose
beneficial ownership would be aggregated with the holder's for purposes of
Section 13(d) of the Exchange Act does not exceed 9.999% of the total number of
then issued and outstanding shares of our common stock (including for such
purpose the shares of common stock issuable upon such exercise or call). The
9.999% beneficial ownership limitation may not be waived. However, the
beneficial ownership limitation does not preclude a holder from exercising a
warrant and selling the shares underlying the warrant in stages over time where
each stage does not cause the holder and its affiliates to beneficially own
shares in excess of the limitation amount.
The address of each of the following stockholders, unless otherwise
indicated in the footnotes to the table, is c/o EMRISE Corporation, 9485 Haven
Avenue, Suite 100, Rancho Cucamonga, California 91730. Messrs. Oliva, Finnegan,
Baskin, and Mahmarian are directors of EMRISE Corporation. Messrs. Oliva and
Jefferies are named executive officers and current executive officers of EMRISE
Corporation. Mr. Foote is a named executive officer who is no longer an
executive officer of EMRISE Corporation.
27
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------------ ----------------------- --------
Carmine T. Oliva................................................. 1,408,305 (1) 3.66%
Laurence P. Finnegan, Jr......................................... 260,171 (2) *
Otis W. Baskin................................................... 90,000 (3) *
Richard E. Mahmarian............................................. 60,000 (4) *
Graham Jefferies................................................. 237,276 (5) *
Randolph D. Foote................................................ 10,000 (6) *
Austin W. Marxe and David M. Greenhouse.......................... 3,955,922 (7) 10.34%
Gruber and McBaine Capital Management, LLC, Jon D. Gruber,
J. Patterson McBaine and Eric B. Swergold..................... 2,421,600 (8) 6.27%
All executive officers and directors as a group (6 persons)...... 2,060,356 (9) 5.27%
-------------------
* Less than 1.00%
(1) Includes 81,889 shares held individually by Mr. Oliva's spouse, and
229,000 shares underlying options.
(2) Includes 216,000 shares underlying options.
(3) Includes 85,000 shares underlying options.
(4) Includes 50,000 shares underlying options.
(5) Includes 234,000 shares underlying options.
(6) Mr. Foote is a former executive officer.
(7) Based on share beneficial ownership information contained in a Form 4
filed October 23, 2007 by Austin W. Marxe and David M. Greenhouse, the
controlling principals of AWM Investment Company, Inc. ("AWM"). AWM serves
as the general partner of MGP Advisers Limited Partnership, the general
partner of and investment advisor to Special Situations Fund III QP, L.P.
Messrs. Marxe and Greenhouse share voting and investment power over
3,955,922 shares of common stock owned by Special Situations Fund III QP,
L.P. Messrs. Marxe and Greenhouse have indicated their respective
interests in the shares owned by that fund is limited to the extent of
their respective pecuniary interest. The address for Messrs. Marxe and
Greenhouse is 527 Madison Avenue, Suite 2600, New York, New York 10022.
(8) Based in part on share beneficial ownership information contained in a
Schedule 13G filed January 26, 2007, in which Gruber and McBaine Capital
Management, LLC ("GMCM"), Jon D. Gruber, J. Patterson McBaine and Eric B.
Swergold indicated that they constitute a group, each of whom shares
voting and dispositive power over 1,691,200 outstanding shares. Also, Mr.
Gruber and Mr. McBaine indicated they have sole voting and dispositive
power over an additional 284,650 and 108,250 shares of our common stock,
respectively. In addition, warrants to purchase shares of our common stock
were beneficially owned as follows: Gruber and McBaine International -
50,000; Mr. Gruber - 41,250; Mr. McBaine - 21,250; and Lagunitas Partners
LP, an investment limited partnership of which GMCM is the general partner
- 225,000. GMCM is a registered investment advisor whose clients have the
right to receive or the power to direct the receipt of dividends from, or
the proceeds from the sale of shares of our common stock. Messrs. Gruber
and McBaine indicated they were the managers, controlling persons and
portfolio managers of GMCM. No individual client's holdings of our common
stock were more than 5.0% of our outstanding common stock. The address for
these beneficial owners is 50 Osgood Place, Penthouse, San Francisco,
California 94133.
(9) Includes 814,000 shares underlying options and 81,889 outstanding shares
held individually by Mr. Oliva's wife.
28
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2006.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
------------------------------------------- ------------------------- ---------------------- ---------------------------------
(A) (B) (C)
Equity compensation plans approved
by security holders..................... 1,965,448(1) $1.08 365,052(2)
Equity compensation plans not approved
by security holders..................... 4,161,185(3) $1.70 --
Total................................. 6,126,633 365,052
-----------
(1) Represents shares of common stock underlying options that are outstanding
under our 1993 Stock Option Plan, our Employee Stock and Stock Option
Plan, our 1997 Stock Incentive Plan and our Amended and Restated 2000
Stock Option Plan. The material features of these plans are described in
note 8 to our consolidated financial statements for the years ended
December 31, 2006, 2005 and 2004.
(2) Represents shares of common stock available for issuance under options
that may be issued under our Amended and Restated 2000 Stock Option Plan.
(3) Represents shares of common stock underlying warrants that are described
in note 8 to our consolidated financial statements for the years ended
December 31, 2006, 2005 and 2004.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH RELATED PERSONS
We are party to indemnification agreements with each of our directors
and executive officers. The indemnification agreements and our certificate of
incorporation and bylaws require us to indemnify our directors and officers to
the fullest extent permitted by Delaware law.
REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
In January 2007, our board of directors and nominating committee
adopted written policies and procedures relating to approval or ratification of
"interested transactions" with "related parties." Under the policies and
procedures, our nominating committee is to review the material facts of all
interested transactions that require the committee's approval and either approve
or disapprove of the entry into the interested transactions, subject to certain
exceptions, by taking into account, among other factors it deems appropriate,
whether the interested transaction is on terms no less favorable than terms
generally available to an unaffiliated third-party under the same or similar
circumstances and the extent of the related person's interest in the
transaction. No director may participate in any discussion or approval of an
interested transaction for which he or she is a related party. If an interested
transaction will be ongoing, the committee may establish guidelines for our
management to follow in its ongoing dealings with the related party and then at
least annually must review and assess ongoing relationships with the related
party.
29
Under the policies and procedures, an "interested transaction" is any
transaction, arrangement or relationship or series of similar transactions,
arrangements or relationships (including any indebtedness or guarantee of
indebtedness) in which the aggregate amount involved will or may be expected to
exceed $100,000 in any calendar year, we are a participant, and any related
party has or will have a direct or indirect interest (other than solely as a
result of being a director or a less than 10% beneficial owner of another
entity). A "related party" is any person who is or was since the beginning of
the last fiscal year for which we have filed a Form 10-K and proxy statement,
even if they do not presently serve in that role an executive officer, director
or nominee for election as a director, any greater than 5% beneficial owner of
our common stock, or any immediate family member of any of the foregoing.
Immediate family member includes a person's spouse, parents, stepparents,
children, stepchildren, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law and anyone residing in such
person's home (other than a tenant or employee).
The committee has reviewed and pre-approved certain types of interested
transactions described below. In addition, our board of directors has delegated
to the chair of the committee the authority to pre-approve or ratify (as
applicable) any interested transaction with a related party in which the
aggregate amount involved is expected to be less than $120,000. Pre-approved
interested transactions include:
o Employment of executive officers either if the related
compensation is required to be reported in our proxy statement
or if the executive officer is not an immediate family member
of another executive officer or a director of our company and
the related compensation would be reported in our proxy
statement if the executive officer was a "named executive
officer" and our compensation committee approved (or
recommended that the board approve) such compensation.
o Any compensation paid to a director if the compensation is
required to be reported in our proxy statement.
o Any transaction with another company at which a related
person's only relationship is as an employee (other than an
executive officer), director or beneficial owner of less than
10% of that company's shares, if the aggregate amount involved
does not exceed the greater of $120,000 or 2% of that
company's total annual revenues.
o Any transaction where the related person's interest arises
solely from the ownership of our common stock and all holders
of our common stock received the same benefit on a pro rata
basis (e.g., dividends).
o Any transaction involving a related party where the rates or
charges involved are determined by competitive bids.
o Any transaction with a related party involving the rendering
of services as a common or contract carrier, or public
utility, at rates or charges fixed in conformity with law or
governmental authority.
o Any transaction with a related party involving services as a
bank depositary of funds, transfer agent, registrar, trustee
under a trust indenture, or similar services.
30
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who beneficially own more than 10% of a registered class
of our common stock, to file initial reports of ownership and reports of changes
in ownership with the Securities and Exchange Commission. These officers,
directors and stockholders are required by the Securities and Exchange
Commission regulations to furnish us with copies of all reports that they file.
Based solely upon a review of copies of the reports furnished to us
during the year ended December 31, 2006 and thereafter, or any written
representations received by us from directors, officers and beneficial owners of
more than 10% of our common stock ("reporting persons") that no other reports
were required, we believe that, during 2006, all Section 16(a) filing
requirements applicable to our reporting persons were met, except that Austin W.
Marxe and David M. Greenhouse filed three late Form 4s to report three
transactions.
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PROPOSAL 1
ELECTION OF CLASS II DIRECTOR
Our bylaws provide that our board of directors shall consist of at
least four directors. Our board is divided into three classes of directors:
Class I, Class II and Class III. The term of office of each class of directors
is three years, with one class expiring each year at our annual meeting of
stockholders.
Our current board consists of one Class I director, Otis W. Baskin,
whose term expires at our 2009 annual meeting, one Class II director, Laurence
P. Finnegan, Jr., whose term expires at our 2007 annual meeting, and two Class
III directors, Carmine T. Oliva and Richard E. Mahmarian, whose terms expire at
our 2008 annual meeting. Mr. Finnegan is named as a nominee for election to
serve a three-year term expiring at our 2010 annual meeting or until he is
succeeded by another qualified director who has been duly elected.
The proxy holders intend to vote all proxies received by them in favor
of the election of Mr. Finnegan unless instructions to the contrary are marked
on the proxy card. If Mr. Finnegan is unable or declines to serve as a director
at the time of the annual meeting, an event not now anticipated, the proxies
will be voted for any nominee designated by our present board. However, the
proxy holders may not vote proxies for a greater number of persons than the
number of nominees named on the proxy card.
REQUIRED VOTE OF STOCKHOLDERS AND BOARD RECOMMENDATION
Directors are elected by a plurality vote of shares present in person
or represented by proxy at the meeting. This means that the director nominee
with the most votes for a particular slot on the board is elected for that slot.
In an uncontested election for directors, the plurality requirement is not a
factor.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION
OF LAURENCE P. FINNEGAN, JR. AS A CLASS II DIRECTOR.
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PROPOSAL 2
RATIFICATION OF ADOPTION OF
2007 STOCK INCENTIVE PLAN
APPROVAL AND ADOPTION OF THE 2007 PLAN
Effective November 1, 2007, our board of directors unanimously approved
and adopted the EMRISE Corporation 2007 Stock Incentive Plan (the "2007 Plan"),
subject to stockholder approval. Our board is seeking approval of the 2007 Plan
by our stockholders. The 2007 Plan will become effective immediately upon
stockholder approval. As soon as practicable following stockholder approval of
this proposal, we intend to register the issuance of our securities under the
2007 Plan on Form S-8 under the Securities Act of 1933, as amended. We also
intend that no further awards will be made under our existing option plans after
such time as we are able to begin making awards under the 2007 Plan.
The principal features of the 2007 Plan are summarized below, but the
summary is qualified in its entirety by reference to the 2007 Plan, a copy of
which is attached to this proxy statement as Appendix A. We encourage you to
read the 2007 Plan carefully.
PURPOSE OF THE 2007 PLAN
The purpose of the 2007 Plan is to promote the success and enhance the
value of our company by linking the personal interests of the members of our
board, employees, and consultants to those of our stockholders and by providing
those individuals with an incentive for outstanding performance to generate
superior returns to our stockholders. The 2007 Plan is further intended to
provide flexibility in our efforts to motivate, attract and retain the services
of members of our board, employees and consultants upon whose judgment,
interest, and special effort the successful conduct of our operations is largely
dependent.
SECURITIES SUBJECT TO THE 2007 PLAN
Pursuant to the 2007 Plan, the maximum aggregate number of shares of
common stock that may be issued or transferred pursuant to awards is 5,000,000.
In the event of any dividend or other distribution, recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin off or other transaction that affects our common
stock in a manner that would, in the administrator's discretion, require
adjustment to such limit in order to prevent the dilution or enlargement of the
potential benefits intended to be made available under the 2007 Plan, the
administrator of the 2007 Plan has the authority in its sole discretion to
appropriately adjust any or all of:
o the number and kind of shares of common stock (or other
securities or property) with respect to which awards may be
granted or awarded under the 2007 Plan (including, but not
limited to, adjusting the limitation on the maximum number and
kind of shares that may be issued to any one individual during
any calendar year and the maximum number and kind of shares
that may be issued pursuant to various types of awards);
o the number and kind of shares of common stock (or other
securities or property) subject to outstanding awards under
the 2007 Plan; and
o the grant or exercise price with respect to any outstanding
award.
33
To the extent that an award terminates, expires or lapses for any
reason, any shares subject to the award at such time will be available for
future grants under the 2007 Plan. Additionally, shares tendered or withheld to
satisfy the grant or exercise price or tax withholding obligation with respect
to any award under the 2007 Plan will be available for future grants under the
2007 Plan. If any shares of restricted stock are surrendered by a participant or
repurchased by us pursuant to the terms of the 2007 Plan, those shares also will
be available for future grants under the 2007 Plan. To the extent permitted by
applicable law or any exchange rule, shares issued in assumption of, or in
substitution for, any outstanding awards of any entity acquired in any form of
combination by us or any of our subsidiaries will not be counted against the
shares available for issuance under the 2007 Plan.
The shares of common stock covered by the 2007 Plan may be treasury
shares, authorized but unissued shares, or shares purchased in the open market.
For purposes of the 2007 Plan, the fair market value of a share of common stock
as of any given date will be:
o if our common stock is listed or admitted for trading on any
United States national securities exchange and/or is quoted on
a system of automated dissemination of quotations of
securities prices in common use, the last reported sale price
of a share of common stock on the principal exchange or system
on which shares are trading on such date (or if no sale
occurred on such date, then on the next preceding date on
which a trade occurred); provided, however, that if our common
stock is not a last sale reported security, then the fair
market value will be the average of the closing high bid and
low asked quotations for a share on the principal exchange or
system on that date (or if bid and asked prices were not both
reported on that date, then on the next preceding date on
which bid and asked prices were both reported); or
o if our common stock is not listed or admitted for trading on
such an exchange or system on such date, the fair market value
will be established by the administrator acting in good faith,
taking into account all material information available with
respect to the value of a share of common stock, including,
without limitation, the value of our tangible and intangible
assets, the present value of our anticipated future cash
flows, the market value of the stock or equity interests in
other entities engaged in substantially the same business,
recent arm's length transactions involving the sale of our
common stock, and other relevant factors such as control
premiums or discounts for lack of marketability.
The closing sale price for our common stock on November 2, 2007 was
$0.85, as reported on NYSE Arca.
ELIGIBILITY
Our employees, consultants and directors are eligible to receive awards
under the 2007 Plan. As of October 22, 2007, we had approximately 300 employees
and also had four directors, three of whom were independent directors. The
administrator determines which of our employees, consultants and directors will
be granted awards, except that in the case of the granting of options and
restricted stock to independent directors, such determinations will be made by
our board of directors. No employee, independent director or consultant is
entitled to participate in the 2007 Plan as a matter of right, nor does any such
participation constitute assurance of continued employment or board service.
Only those employees, independent directors and consultants who are selected to
receive grants by the administrator may participate in the 2007 Plan.
34
AWARDS UNDER THE 2007 PLAN
The 2007 Plan provides that the administrator may grant or issue stock
options, stock appreciation rights ("SARs"), restricted stock, restricted stock
units, performance awards and stock payments, or any combination thereof. Each
award will be set forth in a separate agreement with the person receiving the
award and will indicate the type, terms and conditions of the award.
NON-QUALIFIED STOCK OPTIONS
Non-qualified stock options ("NQSOs") will provide for the right to
purchase shares of common stock at a specified price that may not be less than
fair market value on the date of grant, and usually will become exercisable (in
the discretion of the administrator) in one or more installments after the grant
date, subject to the completion of the applicable vesting service period or the
attainment of pre-established performance milestones. NQSOs may be granted for
any term specified by the administrator, but may not exceed ten years.
INCENTIVE STOCK OPTIONS
Incentive stock options ("ISOs") will be designed to comply with the
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and will be subject to certain restrictions contained in the Code.
Among such restrictions, ISOs must have an exercise price not less than the fair
market value of a share of common stock on the date of grant, may only be
granted to employees, and must not be exercisable after a period of ten years
measured from the date of grant. ISOs, however, may be subsequently modified to
disqualify them from treatment as ISOs. The total fair market value of shares
(determined as of the respective date or dates of grant) for which one or more
options granted to any employee by us (including all options granted under the
2007 Plan and all other option plans of us or any parent or subsidiary of us)
may for the first time become exercisable as ISOs during any one calendar year
shall not exceed $100,000. To the extent this limit is exceeded, the options
granted will be NQSOs. In the case of an ISO granted to an individual who owns
(or is deemed to own) more than 10% of the total combined voting power of all of
our classes of stock (a "10% Owner"), the 2007 Plan provides that the exercise
price must be at least 110% of the fair market value of a share of common stock
on the date of grant and the ISO must not be exercisable after a period of five
years measured from the date of grant.
STOCK APPRECIATION RIGHTS
Stock appreciation rights provide for the payment of an amount to the
holder based upon increases in the price of our common stock over a set base
price. The base price of any SAR granted under the 2007 Plan must be at least
100% of the fair market value of a share of common stock on the date of grant.
SARs under the 2007 Plan will be settled in shares of common stock.
RESTRICTED STOCK
Restricted stock may be issued at such price, if any, and may be made
subject to such restrictions (including time vesting or satisfaction of
performance milestones), as may be determined by the administrator. Restricted
stock, typically, may be repurchased by us at the original purchase price, or
surrendered to us if no consideration was paid, if the conditions or
restrictions are not met. In general, restricted stock may not be sold, or
otherwise hypothecated or transferred, until the vesting restrictions applicable
to such shares are removed or expire. Recipients of restricted stock, unlike
recipients of options, generally will have voting rights and will receive
dividends prior to the time when the restrictions lapse.
35
RESTRICTED STOCK UNITS
Restricted stock units entitle the holder to receive vested shares of
common stock, subject to the removal of restrictions which may include
completion of the applicable vesting service period or the attainment of
performance milestones. The shares of common stock issued pursuant to restricted
stock units may be delayed beyond the time at which the restricted stock units
vest. Restricted stock units may not be sold, or otherwise hypothecated or
transferred.
PERFORMANCE AWARDS
Performance awards may be granted by the administrator to employees,
consultants or independent directors based upon, among other things, the
contributions, responsibilities and other compensation of the particular
recipient. Generally, these awards will be based on specific performance
criteria and will be paid in shares of common stock. Performance awards may also
include bonuses granted by the administrator, payable in shares of common stock.
STOCK PAYMENTS
Stock payments may be authorized by the administrator in the form of
common stock or an option or other right to purchase common stock and may,
without limitation, be issued as part of a deferred compensation arrangement in
lieu of all or any part of compensation--including, without limitation, salary,
bonuses, commissions and directors' fees--that would otherwise be payable in
cash to the employee, independent director or consultant.
TERMS OF OPTIONS
TERM OF OPTIONS
For options granted to our employees, directors and consultants, the
term of an option will be set by the administrator, but will not be set or
extended to a date that is more than ten years from the date the option is
granted (five years in the case of an ISO granted to a 10% Owner). Generally, an
option granted to an employee, director or consultant may only be exercised
while such person remains our employee, director or consultant, as applicable,
or for a specified period of time following the optionee's termination of
employment, directorship or the consulting relationship, as applicable.
VESTING OF OPTIONS
Each option agreement will contain the period during which the right to
exercise the option in whole or in part vests in the optionee. Subject to
Section 409A of the Code (as discussed below), at any time after the grant of an
option, the administrator may accelerate the period during which such option
vests. No portion of an option that is unexercisable at an optionee's
termination of employment or termination of consulting relationship will
subsequently become exercisable, except as may be otherwise provided by the
administrator either in the agreement relating to the stock option or by action
following the grant of the option.
EXERCISE OF OPTIONS
An option may be exercised for any vested portion of the shares subject
to the option until the option terminates. Only whole shares of common stock may
be purchased. An option may be exercised by delivering to our Secretary a
written or electronic notice of exercise on a form provided by us, together with
full payment for the shares in the form of cash or a check payable to us in the
36
amount of the aggregate option exercise price and such other representations and
documents as the administrator requires. However, the administrator may in its
discretion and subject to applicable laws allow payment through one or more of
the following:
o the delivery of shares of common stock that have been owned by
the optionee for at least six months;
o the surrender of shares of common stock that would otherwise
be issuable upon exercise of the option;
o the delivery of property of any kind which constitutes good
and valuable consideration;
o a special sale and remittance procedure pursuant to which the
optionee will place a market sell order with a broker with
respect to the shares of common stock then issuable upon
exercise of the option and the broker pays a sufficient
portion of the net proceeds of the sale to us in satisfaction
of the option exercise price for the purchased shares plus all
applicable income and employment taxes we are required to
withhold by reason of such exercise; or
o any combination of the foregoing.
TRANSFERABILITY OF AWARDS
Awards generally may not be sold, pledged, transferred, or disposed of
in any manner other than by will or by the laws of descent and distribution or,
with the administrator's consent, pursuant to a qualified domestic relations
order. NQSOs may be transferred with the administrator's consent to certain
family members and trusts. Awards may be exercised, during the lifetime of the
holder, only by the holder or a permitted transferee.
ADMINISTRATION OF 2007 PLAN
With respect to awards granted to our independent directors, the
administrator of the 2007 Plan is our board of directors. The compensation
committee of our board of directors is the administrator of the 2007 Plan for
all other persons, unless our board of directors assumes authority for
administration. The compensation committee must consist of two or more
directors, each of whom qualifies as a "non-employee director" pursuant to Rule
16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and an "outside director" for purposes of Section 162(m) of the Code. The
compensation committee may delegate to a committee consisting of one or more
members of the compensation committee and/or of one or more officers of our
company its authority to grant awards under the 2007 Plan to persons other than
individuals who are subject to the reporting rules under Section 16(a) of the
Exchange Act, who are covered by Section 162(m) of the Code or who are the
officers, if any, who were delegated authority to grant awards under the 2007
Plan. The administrator has the power to:
o select which directors, employees and consultants are to
receive Awards and the terms of such Awards, consistent with
the 2007 Plan;
o determine whether options are to be NQSOs or ISOs, or whether
Awards are to qualify as "performance-based" compensation
under Section 162(m) of the Code;
o construe and interpret the terms of the 2007 Plan and awards
granted pursuant to the 2007 Plan;
37
o adopt, interpret, amend or revoke any of the rules adopted for
the administration, interpretation and application of the 2007
Plan; and
o amend one or more outstanding awards in a manner that does not
materially and adversely affect the rights and obligations of
the holder of such award.
AMENDMENT AND TERMINATION OF 2007 PLAN
The administrator may amend the 2007 Plan at any time, subject to
stockholder approval to the extent required by applicable law or regulation or
the listing standards of any market or stock exchange on which our common stock
is at the time primarily traded. Additionally, stockholder approval will be
specifically required to (i) increase the number of shares available for
issuance under the 2007 Plan, (ii) expand the classes of persons to whom awards
may be granted under the 2007 Plan, or (iii) decrease the exercise price of any
outstanding option or stock appreciation right granted under the 2007 Plan.
The administrator may terminate the 2007 Plan at any time. However, in
no event may an award be granted pursuant to the 2007 Plan on or after November
1, 2017.
FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH THE 2007 PLAN
The following is a general summary of the material federal income tax
consequences to participants in the 2007 Plan. This summary deals with the
general tax principles that apply and is provided only for general information.
Some kinds of taxes, such as state and local income taxes, are not discussed.
Tax laws are complex and subject to change and may vary depending on individual
circumstances and from locality to locality. The summary does not discuss all
aspects of income taxation that may be relevant in light of a holder's personal
circumstances. This summarized tax information is not tax advice.
NON-QUALIFIED STOCK OPTIONS
If an optionee is granted an NQSO under the 2007 Plan, the optionee
will not have taxable income on the grant of the option. Generally, the optionee
will recognize ordinary income at the time of exercise in an amount equal to the
difference between the option exercise price and the fair market value of a
share of common stock at that time. The optionee's basis in the stock for
purposes of determining gain or loss on subsequent disposition of the shares
generally will be the fair market value of the common stock on the date the
optionee exercises the option. Any subsequent gain or loss generally will be
taxable as a capital gain or loss.
INCENTIVE STOCK OPTIONS
No taxable income is recognized by the optionee at the time of the
grant of an ISO, and no taxable income is recognized for regular tax purposes at
the time the option is exercised; however, the excess of the fair market value
of the common stock received over the option price is an "item of adjustment"
for alternative minimum tax purposes. The optionee will recognize taxable income
in the year in which the purchased shares are sold or otherwise made the subject
of a taxable disposition. For federal tax purposes, dispositions are divided
into two categories: qualifying and disqualifying. A qualifying disposition
occurs if the sale or other disposition is made more than two years after the
date the option for the shares involved in the sale or disposition is granted
and more than one year after the date the shares are transferred upon exercise.
If the sale or disposition occurs before these two periods are satisfied, then a
disqualifying disposition will result.
38
Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of the amount realized upon the
sale or other disposition of the purchased shares over the exercise price paid
for the shares. We will not be entitled to any income tax deduction if the
optionee makes a qualifying disposition of the shares.
If there is a disqualifying disposition of the shares, then the excess
of the fair market value of those shares on the exercise date over the exercise
price paid for the shares will be taxable as ordinary income to the optionee.
Any additional gain or loss recognized upon the disposition will be recognized
as a capital gain or loss by the optionee. Also, if the optionee makes a
disqualifying disposition of the purchased shares, then we will be entitled to
an income tax deduction, for the taxable year in which the disposition occurs,
equal to the excess of the fair market value of the shares on the option
exercise date over the exercise price paid for the shares.
STOCK APPRECIATION RIGHTS
No taxable income is generally recognized upon the receipt of a SAR,
but upon exercise of the SAR the fair market value of the shares received will
be taxable as ordinary income to the recipient in the year of such exercise.
RESTRICTED STOCK
In general, a participant will not be taxed upon the grant or purchase
of restricted stock that is subject to a "substantial risk of forfeiture,"
within the meaning of Section 83 of the Code. However, at the time the
restricted stock is no longer subject to the substantial risk of forfeiture, the
participant will be taxed on the difference, if any, between the fair market
value of the common stock on the date the restrictions lapsed and the amount the
participant paid, if any, for the restricted stock. Recipients of restricted
stock under the 2007 Plan may, however, make an election under Section 83(b) of
the Code to be taxed at the time of the grant or purchase on an amount equal to
the difference, if any, between the fair market value of the common stock on the
date of transfer and the amount the participant paid, if any, for such
restricted stock. If the Section 83(b) election is made, the participant will
not recognize any additional income as and when the restrictions applicable to
the restricted stock lapses.
RESTRICTED STOCK UNITS
A participant generally will not have ordinary income upon grant of
restricted stock units. When the shares of common stock are delivered under the
terms of the award, the participant will recognize ordinary income equal to the
fair market value of the shares delivered, less any amount paid by the
participant for the shares.
PERFORMANCE AWARDS
A participant who has been granted a performance award generally will
not recognize taxable income at the time of grant. When an award is paid, the
participant generally will recognize ordinary income in the amount as if he or
she received a cash payment.
STOCK PAYMENTS
A participant who receives a stock payment generally will be taxed as
ordinary income in the amount as if he or she received a cash payment.
39
TAX DEDUCTIONS AND SECTION 162(M) OF THE CODE
In general, we will be entitled to a compensation deduction when and
for the same amount as the recipient recognizes ordinary income.
Under Section 162(m), income tax deductions of publicly-held
corporations may be limited to the extent total compensation (including base
salary, annual bonus, stock option exercises and non-qualified benefits paid)
for specified executive officers exceeds $1,000,000 in any one year. This
Section 162(m) deduction limit, however, does not apply to certain
"performance-based compensation" as provided for by the Code and established by
an independent compensation committee. In particular, stock options and SARs
will satisfy the "performance-based compensation" exception if the awards are
made by a qualifying compensation committee, the underlying plan sets the
maximum number of shares that can be granted to any person within a specified
period and the compensation is based solely on an increase in the stock price
after the grant date (i.e., the exercise price or base price is greater than or
equal to the fair market value of the stock subject to the award on the grant
date). Performance or incentive awards granted under the 2007 Plan may qualify
as "qualified performance-based compensation" for purposes of Section 162(m), if
such awards are granted or vest upon the pre-established objective performance
goals described above.
The 2007 Plan is structured in a manner that is intended to provide our
compensation committee with the ability to provide awards that satisfy the
requirements for "qualified performance-based compensation" under Section 162(m)
of the Code, as described in the following paragraphs. If the compensation
committee determines that it is in our best interests to make use of such
awards, the remuneration attributable to those awards should not be subject to
the $1,000,000 limitation. We have not, however, requested a ruling from the
Internal Revenue Service or an opinion of counsel regarding this issue. This
discussion will neither bind the Internal Revenue Service nor preclude the
Internal Revenue Service from adopting a contrary position.
The administrator may designate employees as participants whose
compensation for a given fiscal year may be subject to the limit on deductible
compensation imposed by Section 162(m) of the Code. The administrator may grant
to such persons stock options, SARs, restricted stock, restricted stock units,
performance awards, cash bonuses and stock payments that are paid, vest or
become exercisable upon the achievement of specified performance criteria which
are related to one or more of the following performance goals, as applicable to
us or any subsidiary, division, operating unit or individual:
o net earnings (either before or after interest, taxes,
depreciation and/or amortization);
o sales or revenue;
o net income (either before or after taxes);
o operating earnings;
o cash flow (including, but not limited to, operating cash flow
and free cash flow);
o return on assets;
o return on stockholders' equity;
o return on sales;
40
o gross or net profit margin;
o expense;
o working capital;
o earnings per share;
o price per share of common stock; and
o market share.
Any of the specified performance criteria may be measured either in
absolute terms or as compared to any incremental increase or as compared to
results of a peer group. Each performance criteria will be measured in
accordance with generally accepted accounting principles to the extent
applicable, unless otherwise specified by the administrator at the time of the
grant.
The maximum number of shares that may be subject to awards granted
under the 2007 Plan to any individual during any calendar year may not exceed
500,000 shares of common stock, subject to adjustment in the event of any
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin off or other transaction
that affects the common stock in a manner that would require adjustment to such
limit in order to prevent the dilution or enlargement of the potential benefits
intended to be made available under the 2007 Plan. In addition, certain
employees--those whose compensation in the year of grant is, or in a future
fiscal year may be, subject to the limitation on deductibility under Section
162(m) of the Code--may not receive performance awards payable in the form of a
cash bonus in excess of $500,000 with respect to any calendar year.
SECTION 409A OF THE CODE
Certain awards under the 2007 Plan may be considered "nonqualified
deferred compensation" for purposes of Section 409A of the Code, which section
imposes certain additional requirements regarding the payment of deferred
compensation. Generally, if at any time during a taxable year a nonqualified
deferred compensation plan fails to meet the requirements of Section 409A, or is
not operated in accordance with those requirements, all amounts deferred under
the plan for the taxable year and all preceding taxable years, by any
participant with respect to whom the failure relates, are includible in gross
income for the taxable year to the extent not subject to a substantial risk of
forfeiture and not previously included in gross income. If a deferred amount is
required to be included in income under Section 409A, the amount also is subject
to interest and an additional income tax. The interest imposed is equal to the
interest at the underpayment rate plus one percentage point, imposed on the
underpayments that would have occurred had the compensation been includible in
income for the taxable year when first deferred, or if later, when not subject
to a substantial risk of forfeiture. The additional income tax is equal to 20%
of the compensation required to be included in gross income.
41
PLAN BENEFITS
As of November 8,, 2007, no awards had been made under the 2007 Plan.
Because awards under the 2007 Plan are subject to the discretion of the plan
administrator, future awards are undeterminable.
REQUIRED VOTE OF STOCKHOLDERS AND BOARD RECOMMENDATION
NYSE Arca Equities Rule 5.3(d) generally requires us to obtain
stockholder approval of plans or other arrangements that provide for the
delivery of equity securities to employees, directors or other service providers
as compensation for services. The ratification of the adoption of our 2007 Plan
requires the affirmative vote of a majority of the shares of our common stock
entitled to vote at and present in person or represented by proxy at the
meeting. Abstentions but not broker non-votes will be treated as shares present
and entitled to vote on this proposal. Applying that standard, an abstention
will have the effect of a vote "against" this proposal, and a broker non-vote
will reduce the absolute number (although not the percentage) of the affirmative
votes needed for approval of this proposal.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
RATIFICATION OF OUR 2007 STOCK INCENTIVE PLAN.
42
PROPOSAL 3
RATIFICATION OF SELECTION OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Our audit committee has selected Hein & Associates LLP, independent
registered public accountants, to audit our consolidated financial statements
for 2007, and our board of directors has concurred in this selection. Additional
information regarding our relationship with our independent public accountants
is contained in this proxy statement under the headings "Audit Committee
Report," "Principal Accountant Fees and Services," and "Policy on Audit
Committee Pre-Approval of Audit and Non-Audit Services of Principal
Accountants." We anticipate that a representative of Hein & Associates LLP will
be present at our 2007 annual meeting, will have the opportunity to make a
statement if they desire to do so at the meeting, and will be available to
respond to appropriate questions at the meeting.
CHANGE IN ACCOUNTANTS
On April 13, 2006, we notified Grant Thornton LLP ("GT"), the
independent registered public accounting firm that was engaged as our principal
accountant to audit our consolidated financial statements, that we intended to
engage new certifying accountants and thereby were terminating our relationship
with GT.
Our decision to change accountants was approved by our audit committee
and board of directors. The reason for the change was to allow us to engage an
alternative firm that we believe has adequate resources and experience to
provide us with the auditing and tax services we require, on a more
cost-effective basis.
The audit reports of GT on our consolidated financial statements and
consolidated financial statement schedules as of and for the years ended
December 31, 2005 and 2004 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
During the years ended December 31, 2005 and 2004 and the subsequent
interim period through April 13, 2006, there were no disagreements with GT on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which disagreements, if not resolved
to GT's satisfaction, would have caused GT to make reference to the subject
matter of the disagreement in connection with its opinion.
During the years ended December 31, 2005 and 2004 and the subsequent
interim period through April 13, 2006, there were no reportable events as
described in Item 304(a)(1)(v) of Regulation S-K under the Securities Act of
1933, as amended, except as described below:
o On April 5, 2005, in connection with its audit of our
consolidated financial statements for the year ended December
31, 2004, GT advised our audit committee and management of two
matters that GT considered to be "material weaknesses" as that
term is defined under standards established by the Public
Company Accounting Oversight Board (United States), or PCAOB.
A material weakness is a control deficiency or combination of
control deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or
detected. The first matter related to our need for additional
staff with expertise in preparing required disclosures in the
notes to the financial statements, and our need to develop
greater internal resources for researching and evaluating the
appropriateness of complex accounting principles and for
evaluating the effects of new accounting pronouncements on us.
43
Our growth during and since 2004 as a result of our
acquisitions of Larus Corporation, Pascall Electronic
(Holdings) Limited and RO Associates Incorporated and the
increased complexity surrounding our financing arrangements
are major contributors to the need for additional resources in
financial reporting. The second matter related to segregation
of duties relating to cash disbursements. Both our assistant
controller and accounts payable clerk had access to initiate
the payment of invoices and print electronically signed
checks. Both individuals had the ability to record
transactions in the accounting system. The lack of segregation
of these two functions - check-writing ability and the
recording of disbursement transactions in our accounting
system - represented a material weakness in the cash
disbursements cycle. We considered these matters in connection
with the preparation of the December 31, 2004 consolidated
financial statements and also determined that no prior period
financial statements were materially affected by such matters.
In response to the observations made by GT, on April 7, 2005,
we engaged financial consultants who are certified public
accountants with the requisite background and experience to
prepare required disclosures in the notes to our financial
statements and to provide greater internal resources for
researching and evaluating the appropriateness of complex
accounting principles and for evaluating the effects that new
accounting pronouncements may have on us. In addition, we
recognize that the risk of an unauthorized disbursement exists
without proper segregation of duties between check-writing and
record keeping. However, every month we review the listing of
checks produced and research any check number that is missing
or questionable. We believe this type of detective control
would identify unauthorized disbursements. Additionally, on
May 6, 2005, we limited the system access for those
individuals performing this review such that there are
appropriate mitigating controls over the incompatible duties
with regard to our disbursements. We believe these steps
addressed the matters GT raised.
o On August 15, 2005, in connection with its review of our
condensed consolidated financial statements for the quarter
ended June 30, 2005, GT advised our management of a matter
that GT considered to be a material weakness. GT noted that we
recorded revenue in our Pascall division for certain items
previously recorded as "bill and hold" inventory. We had
shipped the items to the customer on June 30, 2005, the
customer took title to the items and paid for the items.
However, the customer requested that Pascall modify the items
and returned the items to Pascall on July 7, 2005 under a
separate contract. The return of the items by the customer
subsequent to June 30, 2005 resulted in the transaction not
meeting the revenue recognition criteria under Staff
Accounting Bulletin ("SAB") No. 104. The recording of these
items as sales in the quarter ended June 30, 2005 resulted in
an adjusting journal entry to reduce revenue by $841,000 and
to reduce net income by $314,000 ($0.01 per share). GT met
with our audit committee on August 18, 2005 and recommended
that we review the control procedures over bill and hold
arrangements to determine adherence to SAB No. 104. Our audit
committee and management have undertaken an extensive review
of SAB No. 104. We have sought and plan to continue to seek
guidance from our financial consultants, who are certified
public accountants with the requisite background and
experience, to assist us in our future compliance with SAB No.
104 as it relates to control procedures over bill and hold
matters and believe we have therefore remediated the material
weakness.
o On March 28, 2006, in connection with its audit of our
consolidated financial statements for the year ended December
31, 2005, GT advised our management and audit committee of two
matters that GT considered material weaknesses.
o We did not have a sufficient complement of personnel with
appropriate training and experience in accounting principles
generally accepted in the United States of American ("GAAP")
and with Securities and Exchange Commission disclosure
requirements.
44
o We lacked procedures to ensure that our principal accounting
and financial officer can closely monitor information
submitted to our corporate headquarters by our subsidiaries
and oversee accounting for reserves and other areas that
involve significant judgment at all of our locations. We also
lacked procedures to ensure that personnel familiar with GAAP
and with Securities and Exchange Commission disclosure
requirements can thoroughly evaluate activities and
transactions at all of our locations in order to make all
required disclosures in a timely manner.
o During the quarter ended June 30, 2007, we implemented a
variety of changes to our internal control over financial
reporting intended to remediate these material weaknesses.
Based on management's evaluation of the effectiveness of the
design and operation of our disclosure controls and
procedures, our Chief Executive Officer and Vice President of
Finance and Administration concluded that, as of June 30,
2007, the first material weakness identified above had been
fully remediated while the second material weakness identified
above remained. Following is a summary description of the
changes in our internal control over financial reporting
implemented during the quarter ended June 30, 2007.
o With respect to the first material weakness identified above,
effective May 16, 2007, D. John Donovan was appointed as our
Vice President of Finance and Administration. Mr. Donovan
assumed the role of principal financial and accounting officer
on that date. Also in May 2007, we established the position of
and appointed a new Corporate Controller for our U.S.
operations. Mr. Donovan and the new Corporate Controller each
have expertise in public company financial reporting
compliance. As a result, we believe we now have a sufficient
complement of personnel with appropriate training and
experience in GAAP and Securities and Exchange Commission
disclosure requirements.
o With respect to the second material weakness identified above,
through the efforts of our Vice President of Finance and
Administration and Corporate Controller we began the process
of developing policies and procedures, including an adequate
supervisory structure, necessary to ensure that our principal
accounting and financial officer can closely monitor financial
information throughout our company and oversee all accounting
that involves significant judgment on the part of personnel
located at our operating subsidiaries, within the U.S., Europe
and Asia. In addition, our Vice President of Finance and
Administration and Corporate Controller began the process of
establishing policies and procedures necessary to ensure that
personnel familiar with GAAP and with Securities and Exchange
Commission disclosure requirements are capable of evaluating
activities and transactions at all of our operating
subsidiaries in order to make all required disclosures in a
timely manner. Our Vice President of Finance and
Administration and Corporate Controller are working closely
with our Director of Financial Controls for Europe, whom we
hired in late 2005 to oversee our three European Controllers
and who reports to our Vice President of Finance and
Administration, on these matters. Management was unsure, at
the time of the filing of its quarterly report on Form 10-Q
for the period ended June 30, 2007, when the actions described
above would remediate the second material weakness identified
above. Management may need to hire outside consultants to
assist us in satisfying our financial reporting obligations.
On April 17, 2006, we engaged Hein & Associates LLP as our new
certifying accountants. We had not consulted with Hein in the past regarding the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on our financial statements or as to any
disagreement or reportable event as described in Item 304(a)(1)(iv) and Item
304(a)(1)(v) of Regulation S-K.
45
REQUIRED VOTE OF STOCKHOLDERS AND BOARD RECOMMENDATION
Although stockholder ratification is not required, our board of
directors has directed that this selection be submitted to our stockholders for
ratification at our 2007 annual meeting. The affirmative vote of a majority of
the shares of our common stock entitled to vote at and present in person or
represented by proxy at the meeting will constitute stockholder ratification of
the selection. Abstentions but not broker non-votes will be treated as shares
present and entitled to vote on this proposal. Applying that standard, an
abstention will have the effect of a vote "against" this proposal, and a broker
non-vote will reduce the absolute number (although not the percentage) of the
affirmative votes needed for approval of this proposal. If stockholder approval
of this proposal is not obtained, our audit committee and board of directors may
reconsider our appointment of Hein & Associates LLP as our independent
registered public accountants.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
OTHER MATTERS
The board knows of no matter to come before the annual meeting other
than as specified in this proxy statement. If other business should, however, be
properly brought before the meeting, the persons voting the proxies will vote
them in accordance with their best judgment.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, proposals by
stockholders that are intended for inclusion in our proxy statement and proxy
card and to be presented at our next annual meeting need to be received by us no
later than 120 calendar days in advance of the one-year anniversary of the date
of this proxy statement in order to be considered for inclusion in our proxy
materials relating to the next annual meeting. Proposals intended for inclusion
in our proxy statement and proxy card for our 2008 annual meeting must be
addressed to our secretary at our corporate headquarters and may be included in
next year's annual meeting proxy materials if they comply with rules and
regulations of the Securities and Exchange Commission governing stockholder
proposals.
Proposals by stockholders that are not intended for inclusion in our
proxy materials may be made by any stockholder who timely and completely
complies with the notice procedures contained in our bylaws, was a stockholder
of record at the time of giving of notice and is entitled to vote at the
meeting, so long as the proposal is a proper matter for stockholder action and
the stockholder otherwise complies with the provisions of our bylaws and
applicable law. However, stockholder nominations of persons for election to our
board of directors at a special meeting may only be made if our board of
directors has determined that directors are to be elected at the special
meeting.
To be timely, a stockholder's notice regarding a proposal not intended
for inclusion in our proxy materials must be delivered to our secretary at our
corporate headquarters not later than:
o Typically in the case of an annual meeting, the close of
business on the 45th day before the first anniversary of the
date on which we first mailed our proxy materials for the
prior year's annual meeting of stockholders. However, if the
date of our 2008 annual meeting changes more than 30 days from
the date of our 2007 annual meeting, in order for the
stockholder's notice to be timely it must be delivered to our
secretary a reasonable time before we mail our proxy materials
for the current year's meeting. For purposes of the preceding
sentence, a "reasonable time" coincides with any adjusted
deadline we publicly announce.
46
o In the case of a special meeting, the close of business on the
7th day following the day on which we first publicly announce
the date of the special meeting.
Except as otherwise provided by law, if the chairperson of the meeting
determines that a nomination or any business proposed to be brought before a
meeting was not made or proposed in accordance with the procedures set forth in
our bylaws and summarized above, the chairperson may prohibit the nomination or
proposal from being presented at the meeting.
ANNUAL REPORT AND AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act.
In accordance with that act, we file reports, proxy statements and other
information with the Securities and Exchange Commission. These materials can be
inspected and copied at the Public Reference Room maintained by the Securities
and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330. Our common
stock trades on NYSE Arca under the symbol "ERI."
A copy of our annual report for the year ended December 31, 2006 is
included with this proxy statement. The reports described in the preceding
paragraph are not incorporated by reference into this proxy statement and are
not deemed to be a part of our proxy solicitation materials.
A copy of those reports (without exhibits) will be furnished by first
class mail, without charge, to any person from whom the accompanying proxy is
solicited upon written or oral request to EMRISE Corporation, 9485 Haven Avenue,
Suite 100, Rancho Cucamonga, California 91730, Attention: Vice President Finance
and Administration, telephone (909) 987-9220. If exhibit copies are requested, a
copying charge of $0.20 per page will be made. In addition, all of our public
filings, including our annual report on Form 10-K, can be found free of charge
on the Securities and Exchange Commission's website at http://www.sec.gov.
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN AND RETURN PROMPTLY THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
47
APPENDIX A
EMRISE CORPORATION
2007 STOCK INCENTIVE PLAN
The purpose of the Plan is to promote the success and enhance the value
of the Company by linking the personal interests of the members of the Board,
Employees, and Consultants to those of the Company's stockholders and by
providing such individuals with an incentive for outstanding performance to
generate superior returns to the Company's stockholders. The Plan is further
intended to provide flexibility to the Company in its ability to motivate,
attract, and retain the services of members of the Board, Employees, and
Consultants upon whose judgment, interest, and special effort the successful
conduct of the Company's operation is largely dependent.
ARTICLE I
DEFINITIONS
-----------
Wherever the following terms are used in the Plan they shall have the
meanings specified below, unless the context clearly indicates otherwise. The
singular pronoun shall include the plural where the context so indicates.
1.1 "ADMINISTRATOR" shall mean the entity that conducts the general
administration of the Plan as provided herein. With reference to the
administration of the Plan with respect to Awards granted to Independent
Directors, the term "Administrator" shall refer to the Board. With reference to
the administration of the Plan with respect to any other Award, the term
"Administrator" shall refer to the Committee unless the Board has assumed the
authority for administration of the Plan generally as provided in SECTION 11.2.
With reference to the duties of the Committee under the Plan that have been
delegated to one or more persons pursuant to SECTION 11.5, the term
"Administrator" shall refer to such person(s) unless the Committee or the Board
has revoked such delegation.
1.2 "AWARD" shall mean an Option, a Restricted Stock award, a
Restricted Stock Unit award, a Performance Award, a Stock Payment award or a
Stock Appreciation Right, that may be awarded or granted under the Plan
(collectively, "AWARDS").
1.3 "AWARD AGREEMENT" shall mean a written agreement executed by an
authorized officer of the Company and the Holder that shall contain such terms
and conditions with respect to an Award as the Administrator shall determine,
consistent with the Plan.
1.4 "AWARD LIMIT" shall mean 500,000 shares of Common Stock, as
adjusted pursuant to SECTION 12.3.
1.5 "BOARD" means the board of directors of the Company.
1.6 "CAUSE" shall mean "cause" or "due cause" as defined in a Holder's
employment or consulting agreement with the Company or a Subsidiary, if any, or
if not defined therein, shall have the meaning set forth in a written agreement
between the Company and the Holder relating to an Award, or if not defined
therein, shall mean (i) acts or omissions by the Holder that constitute
intentional material misconduct or a knowing violation of a material policy of
the Company or a Subsidiary, (ii) the Holder personally receiving a benefit in
money, property or services from the Company or a Subsidiary or from another
person dealing with the Company or a Subsidiary in material violation of
A-1
applicable law or Company policy, (iii) an act of fraud, conversion,
misappropriation or embezzlement by the Holder or his conviction of, or entering
a guilty plea or plea of no contest with respect to, a felony, or the equivalent
thereof (other than driving under the influence) or (iv) any material misuse or
improper disclosure of confidential or proprietary information of the Company or
a Subsidiary. A termination for Cause may also include any resignation in
anticipation of discharge for Cause or resignation accepted by the Company in
lieu of a formal discharge for Cause.
1.7 "CHANGE IN CONTROL" means the occurrence of any of the following
events:
(a) the acquisition, directly or indirectly, by any "person"
or "group" (as those terms are defined in Sections 3(a)(9), 13(d), and
14(d) of the Exchange Act and the rules thereunder) of "beneficial
ownership" (as determined pursuant to Rule 13d-3 under the Exchange
Act) of securities entitled to vote generally in the election of
directors ("voting securities") of the Company that represent 40% or
more of the combined voting power of the Company's then outstanding
voting securities or 50% or more of the combined Fair Market Value of
the Company's then outstanding stock, other than:
(i) an acquisition by a trustee or other fiduciary
holding securities under any employee benefit plan (or related
trust) sponsored or maintained by the Company or any person
controlled by the Company or by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any
person controlled by the Company, or
(ii) an acquisition of voting securities by the
Company or a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same
proportions as their ownership of the stock of the Company.
provided, however, that notwithstanding the foregoing, an acquisition
of the Company's securities by the Company that (x) causes the
Company's voting securities beneficially owned by a person or group to
represent 40% or more of the combined voting power of the Company's
then outstanding voting securities or (y) cause the Company's stock
beneficially owned by a person or group to represent 50% or more of the
combined Fair Market Value of the Company's then outstanding stock
shall not be considered an acquisition by any person or group for
purposes of this subsection (a); provided, however, that if a person or
group shall become the beneficial owner of 40% or more of the combined
voting power of the Company's then outstanding voting securities or 50%
or more of the combined Fair Market Value of the Company's then
outstanding stock by reason of share acquisitions by the Company as
described above and shall, after such share acquisitions by the
Company, become the beneficial owner of any additional securities of
the Company, then such acquisition shall constitute a Change in
Control;
(b) the date a majority of members of the Board is replaced
during any 12-month period by directors whose appointment or election
is not endorsed by a majority of the members of the Board before the
date of the appointment or election, but excluding, for this purpose,
any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other
than the Board;
(c) the acquisition by any "person" or "group" (as those terms
are defined in Sections 3(a)(9), 13(d), and 14(d) of the Exchange Act
and the rules thereunder), or combined acquisitions during the 12-month
period ending on the date of the most recent acquisition by such person
or group, of ownership of assets from the Company that have a total
gross fair market value equal to or more than 40% of the total gross
fair market value of all of the assets of the Company immediately
before such acquisition; and
A-2
(d) stockholder approval of a complete liquidation or
dissolution of the Company.
For purposes of subsection (a) above, the calculation of
voting power shall be made as if the date of the acquisition were a
record date for a vote of the Company's stockholders, and for purposes
of subsection (c) above, the calculation of voting power shall be made
as if the date of the consummation of the transaction were a record
date for a vote of the Company's stockholders.
Notwithstanding the foregoing, there is no Change in Control
event under this SECTION 1.7 when there is a transfer to an entity that
is controlled by the stockholders of the Company immediately after the
transfer. A transfer of assets by the Company is not treated as a
Change in Control if the assets are transferred to:
(i) a stockholder of the Company (immediately before
the asset transfer) in exchange for or with respect to the
stockholders' stock;
(ii) an entity, 50% or more of the total value or
voting power of which is owned, directly or indirectly, by the
Company;
(iii) a person or group that owns, directly or
indirectly, 50% or more of the total value or voting power of
all the outstanding stock of the Company; or
(iv) an entity, at least 50% of the total value or
voting power of which is owned, directly or indirectly, by a
person or group described in (iii) above.
1.8 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
1.9 "COMMITTEE" shall mean the Compensation Committee of the Board, or
another committee or subcommittee of the Board, appointed as provided in SECTION
11.2.
1.10 "COMMON STOCK" shall mean the common stock of the Company, par
value $0.0033 per share.
1.11 "COMPANY" means EMRISE Corporation, a Delaware corporation.
1.12 "CONSULTANT" shall mean any consultant or adviser if: (a) the
consultant or adviser renders bona fide services to the Company; (b) the
services rendered by the consultant or adviser are not in connection with the
offer or sale of securities in a capital-raising transaction and do not directly
or indirectly promote or maintain a market for the Company's securities; and (c)
the consultant or adviser is a natural person who has contracted directly with
the Company to render such services.
1.13 "DIRECTOR" shall mean a member of the Board.
1.14 "DRO" shall mean a domestic relations order as defined by the Code
or Title I of the Employee Retirement Income Security Act of 1974, as amended,
or the rules thereunder.
1.15 "EMPLOYEE" shall mean any officer or other employee (as defined in
accordance with Section 3401(c) of the Code) of the Company, or of any
corporation that is a Subsidiary.
1.16 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
A-3
1.17 "FAIR MARKET VALUE" of a share of Common Stock as of a given date
shall be: (a) if the Common Stock is listed or admitted for trading on any
United States national securities exchange and/or is quoted on a system of
automated dissemination of quotations of securities prices in common use, the
last reported sale price of a share of Common Stock on the principal exchange or
system on which shares of Common Stock are trading on such date (or if no sale
occurred on such date, then on the next preceding date on which a trade
occurred); provided, however, that if the Common Stock is not a last sale
reported security, then the Fair Market Value shall be the average of the
closing high bid and low asked quotations for a share of Common Stock on such
principal exchange or system on such date (or if bid and asked prices were not
both reported on such date, then on the next preceding date on which bid and
asked prices were both reported); provided further, that the sale, bid and asked
prices referred to in this clause (a) shall be as reported in a newspaper of
general circulation or by such other source as the Administrator deems reliable;
or (b) if the Common Stock is not listed or admitted for trading on such an
exchange or system on such date, the Fair Market Value of a share of Common
Stock as established by the Administrator acting in good faith, taking into
account all material information available with respect to the value of a share
of Common Stock, including, without limitation, the value of the tangible and
intangible assets of the Company, the present value of its anticipated future
cash flows, the market value of the stock or equity interests in other entities
engaged in substantially the same business, recent arm's length transactions
involving the sale of Common Stock, and other relevant factors such as control
premiums or discounts for lack of marketability.
1.18 "HOLDER" shall mean a person who has been granted or awarded an
Award.
1.19 "INCENTIVE STOCK OPTION" shall mean an option that conforms to the
applicable provisions of Section 422 of the Code and that is designated as an
Incentive Stock Option by the Administrator.
1.20 "INDEPENDENT DIRECTOR" shall mean a member of the Board who is not
an Employee.
1.21 "NON-QUALIFIED STOCK OPTION" shall mean an Option that is not
designated as an Incentive Stock Option by the Administrator.
1.22 "OPTION" shall mean a stock option granted under ARTICLE IV of the
Plan. An Option granted under the Plan shall, as determined by the
Administrator, be either a Non-Qualified Stock Option or an Incentive Stock
Option; provided, however, that Options granted to Independent Directors and
Consultants shall be Non-Qualified Stock Options.
1.23 "PERFORMANCE AWARD" shall mean a stock bonus or other performance
or incentive award that is paid in Common Stock, awarded under SECTION 8.2 of
the Plan.
1.24 "PERFORMANCE CRITERIA" means the criteria that the Committee
selects for an Award for purposes of establishing the Performance Goal or
Performance Goals for a Performance Period. The Performance Criteria that will
be used to establish Performance Goals are limited to the following: (a) net
earnings (either before or after (i) interest, (ii) taxes, (iii) depreciation
and (iv) amortization), (b) sales or revenue, (c) net income (either before or
after taxes), (d) operating earnings, (e) cash flow (including, but not limited
to, operating cash flow and free cash flow), (f) return on assets, (g) return on
stockholders' equity, (h) return on sales, (i) gross or net profit margin, (j)
expense, (k) working capital, (l) earnings per share, (m) price per share of
Common Stock, and (n) market share, any of which may be measured either in
absolute terms or as compared to any incremental increase or as compared to
results of a peer group. The Committee shall, within the time prescribed by
Section 162(m) of the Code, define in an objective fashion the manner of
calculating the Performance Criteria it selects to use for such Performance
Period for such Award; provided, however, that each Performance Criteria shall
be determined in accordance with generally accepted accounting principles unless
otherwise specified by the Committee at the time of grant.
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1.25 "PERFORMANCE GOALS" means, for a Performance Period, the goals
established in writing by the Committee for the Performance Period based upon
the Performance Criteria. Depending on the Performance Criteria used to
establish such Performance Goals, the Performance Goals may be expressed in
terms of overall Company performance or the performance of a division, business
unit, or an individual. The Committee, in its discretion, may, within the time
prescribed by Section 162(m) of the Code, adjust or modify the calculation of
Performance Goals for such Performance Period in order to prevent the dilution
or enlargement of the rights of any Holder of a Performance Award (a) in the
event of, or in anticipation of, any unusual or extraordinary corporate item,
transaction, event, or development, or (b) in recognition of, or in anticipation
of, any other unusual or nonrecurring events affecting the Company, or the
financial statements of the Company, or in response to, or in anticipation of,
changes in applicable laws, regulations, accounting principles, or business
conditions.
1.26 "PERFORMANCE PERIOD" means one or more periods of time, which may
be of varying and overlapping durations, as the Committee may select, over which
the attainment of one or more Performance Goals will be measured for the purpose
of determining a Holder's right to, and the payment of, a Performance Award.
1.27 "PLAN" shall mean the 2007 Stock Incentive Plan, as amended and/or
restated from time to time, of EMRISE Corporation.
1.28 "RESTRICTED STOCK" shall mean Common Stock awarded under ARTICLE
VII of the Plan.
1.29 "RESTRICTED STOCK UNITS" shall mean rights to receive Common Stock
awarded under SECTION 8.4 of the Plan.
1.30 "RULE 16B-3" shall mean Rule 16b-3 promulgated under the Exchange
Act, as such Rule may be amended from time to time.
1.31 "SECTION 162(M) PARTICIPANT" shall mean any key Employee
designated by the Administrator as a key Employee whose compensation for the
fiscal year in which the key Employee is so designated or a future fiscal year
may be subject to the limit on deductible compensation imposed by Section 162(m)
of the Code.
1.32 "SECTION 409A AWARD" has the meaning set forth in SECTION 10.1 of
the Plan.
1.33 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
1.34 "STOCK APPRECIATION RIGHT" shall mean a stock appreciation right
granted under ARTICLE IX of the Plan.
1.35 "STOCK PAYMENT" shall mean: (a) a payment in the form of shares of
Common Stock, or (b) an option or other right to purchase shares of Common
Stock, as part of a deferred compensation arrangement, made in lieu of all or
any portion of the compensation, including without limitation, salary, bonuses,
commissions and directors' fees, that would otherwise become payable to a key
Employee, Independent Director or Consultant in cash, awarded under SECTION 8.3
of the Plan.
1.36 "SUBSIDIARY" shall mean any corporation in an unbroken chain of
corporations, beginning with the Company as parent, if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
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1.37 "SUBSTITUTE AWARD" shall mean an Option granted under this Plan
upon the assumption of, or in substitution for, outstanding equity awards
previously granted by a company or other entity, in connection with a corporate
transaction, such as a merger, combination, consolidation or acquisition of
property or stock; provided, however, that in no event shall the term
"SUBSTITUTE AWARD" be construed to refer to an award made in connection with the
cancellation and repricing of an Option.
1.38 "TERMINATION OF CONSULTANCY" shall mean the time when the
engagement of a Holder as a Consultant to the Company or a Subsidiary is
terminated for any reason, with or without Cause, including, but not by way of
limitation, by resignation, discharge, death or retirement, but excluding
terminations where there is a simultaneous commencement of employment with the
Company or any Subsidiary. The Administrator, in its absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for Cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Consultancy. Notwithstanding any other provision of the Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate a Consultant's
service at any time for any reason whatsoever, with or without Cause, except to
the extent expressly provided otherwise in writing.
1.39 "TERMINATION OF DIRECTORSHIP" shall mean the time when a Holder
who is an Independent Director ceases to be a Director for any reason,
including, but not by way of limitation, a termination by resignation, failure
to be elected, death or retirement. The Board, in its sole and absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Directorship with respect to Independent Directors.
1.40 "TERMINATION OF EMPLOYMENT" shall mean the time when the
employee-employer relationship between a Holder and the Company or any
Subsidiary is terminated for any reason, with or without Cause, including, but
not by way of limitation, a termination by resignation, discharge, death,
disability or retirement; but excluding: (a) terminations where there is a
simultaneous reemployment or continuing employment of a Holder by the Company or
any Subsidiary, (b) at the discretion of the Administrator, terminations that
result in a temporary severance of the employee-employer relationship, and (c)
at the discretion of the Administrator, terminations that are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Administrator, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
of whether a Termination of Employment resulted from a discharge for Cause, and
all questions of whether a particular leave of absence constitutes a Termination
of Employment; provided, however, that, with respect to Incentive Stock Options,
unless otherwise determined by the Administrator in its discretion, a leave of
absence, change in status from an employee to an independent contractor or other
change in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under that
section.
1.41 "TREASURY REGULATIONS" mean regulations promulgated under the
Code.
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ARTICLE II
SHARES SUBJECT TO PLAN
----------------------
2.1 SHARES SUBJECT TO PLAN.
(a) Subject to SECTION 12.3 and SECTION 2.1(B), the maximum
number of shares of Common Stock that may be issued or transferred
pursuant to Awards under the Plan shall be 5,000,000 shares.
(b) To the extent that an Award terminates, expires, or lapses
for any reason, any shares of Common Stock then subject to such Award
shall again be available for the grant of an Award pursuant to the
Plan. Additionally, any shares of Common Stock tendered or withheld to
satisfy the grant or exercise price or tax withholding obligation
pursuant to any Award shall again be available for the grant of an
Award pursuant to the Plan. To the extent permitted by applicable law
or any exchange rule, shares of Common Stock issued in assumption of,
or in substitution for, any outstanding awards of any entity acquired
in any form of combination by the Company or any Subsidiary shall not
be counted against shares of Common Stock available for grant pursuant
to this Plan. If any shares of Restricted Stock are surrendered by the
Holder or repurchased by the Company pursuant to SECTION 7.4 OR 7.5
hereof, such shares may again be optioned, granted or awarded
hereunder, subject to the limitations of Section 2.1(a).
Notwithstanding the provisions of this SECTION 2.1(B), no shares of
Common Stock may again be optioned, granted or awarded if such action
would cause an Incentive Stock Option to fail to qualify as an
incentive stock option under Section 422 of the Code.
2.2 STOCK DISTRIBUTED. Any Common Stock distributed pursuant to an
Award may consist, in whole or in part, of authorized and unissued Common Stock,
shares of Common Stock held in treasury or shares of Common Stock purchased on
the open market.
2.3 LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding
any provision in the Plan to the contrary, and subject to ARTICLE II, the
maximum number of shares of Common Stock with respect to one or more Awards that
may be granted to any one Employee, Independent Director or Consultant during
each calendar year shall not exceed the Award Limit. To the extent required by
Section 162(m) of the Code, shares subject to Awards that are canceled continue
to be counted against the Award Limit.
ARTICLE III
GRANTING OF AWARDS
------------------
3.1 AWARD AGREEMENT. Each Award shall be evidenced by an Award
Agreement. Award Agreements evidencing Awards intended to qualify as
performance-based compensation (as described in Section 162(m)(4)(C) of the
Code) shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code. Award Agreements evidencing
Incentive Stock Options shall contain such terms and conditions as may be
necessary to meet the applicable provisions of Section 422 of the Code.
3.2 PROVISIONS APPLICABLE TO SECTION 162(M) PARTICIPANTS.
(a) The Committee, in its discretion, may determine whether an
Award is to qualify as performance-based compensation (as described in
Section 162(m)(4)(C) of the Code).
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(b) Notwithstanding anything in the Plan to the contrary, the
Committee may grant any Award to a Section 162(m) Participant,
including Restricted Stock the restrictions with respect to which lapse
upon the attainment of performance goals that are related to one or
more of the Performance Criteria and any performance or incentive award
described in ARTICLE VIII that vests or becomes exercisable or payable
upon the attainment of performance goals that are related to one or
more of the Performance Criteria.
(c) To the extent necessary to comply with the
performance-based compensation requirements of Section 162(m)(4)(C) of
the Code, with respect to any Award granted under ARTICLES VII AND VIII
that may be granted to one or more Section 162(m) Participants, no
later than ninety (90) days following the commencement of any fiscal
year in question or any other designated fiscal period or period of
service (or such other time as may be required or permitted by Section
162(m) of the Code), the Committee shall, in writing, (i) designate one
or more Section 162(m) Participants, (ii) select the Performance
Criteria applicable to the fiscal year or other designated fiscal
period or period of service, (iii) establish the various performance
targets, in terms of an objective formula or standard, and amounts of
such Awards, as applicable, which may be earned for such fiscal year or
other designated fiscal period or period of service, and (iv) specify
the relationship between Performance Criteria and the performance
targets and the amounts of such Awards, as applicable, to be earned by
each Section 162(m) Participant for such fiscal year or other
designated fiscal period or period of service. Following the completion
of each fiscal year or other designated fiscal period or period of
service, the Committee shall certify in writing whether the applicable
performance targets have been achieved for such fiscal year or other
designated fiscal period or period of service. In determining the
amount earned by a Section 162(m) Participant, the Committee shall have
the right to reduce (but not to increase) the amount payable at a given
level of performance to take into account additional factors that the
Committee may deem relevant to the assessment of individual or
corporate performance for the fiscal year or other designated fiscal
period or period of service.
(d) Furthermore, notwithstanding any other provision of the
Plan, any Award that is granted to a Section 162(m) Participant and is
intended to qualify as performance-based compensation (as described in
Section 162(m)(4)(C) of the Code) shall be subject to any additional
limitations set forth in Section 162(m) of the Code (including any
amendment to Section 162(m) of the Code) or any regulations or rulings
issued thereunder that are requirements for qualification as
performance-based compensation (as described in Section 162(m)(4)(C) of
the Code), and the Plan shall be deemed amended to the extent necessary
to conform to such requirements.
3.3 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS. Notwithstanding any
other provision of the Plan, the Plan, and any Award granted or awarded to any
individual who is then subject to Section 16 of the Exchange Act, shall be
subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of
the Exchange Act) that are requirements for the application of such exemptive
rule. To the extent permitted by applicable law, the Plan and Awards granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule.
3.4 CONSIDERATION. In consideration of the granting of an Award under
the Plan, the Holder shall agree, in the Award Agreement, to remain in the
employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year (or
such shorter period as may be fixed in the Award Agreement or by action of the
Administrator following grant of the Award) after the Award is granted (or, in
the case of an Independent Director, until the next annual meeting of
stockholders of the Company).
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3.5 AT-WILL EMPLOYMENT. Nothing in the Plan or in any Award Agreement
hereunder shall confer upon any Holder any right to continue in the employ of,
or as a Consultant for, the Company or any Subsidiary, or as a Director of the
Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which rights are hereby expressly reserved, to
discharge any Holder at any time for any reason whatsoever, with or without
Cause, except to the extent expressly provided otherwise in a written employment
agreement between the Holder and the Company and any Subsidiary.
ARTICLE IV
GRANTING OF OPTIONS TO EMPLOYEES,
CONSULTANTS AND INDEPENDENT DIRECTORS
-------------------------------------
4.1 ELIGIBILITY. Any Employee or Consultant selected by the
Administrator pursuant to SECTION 4.4(A)(I) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be granted
Options at the times and in the manner set forth in SECTION 4.5.
4.2 DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted an
Incentive Stock Option under the Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any then
existing Subsidiary or parent corporation (within the meaning of Section 422 of
the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3 QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock Option
shall be granted to any person who is not an Employee.
4.4 GRANTING OF OPTIONS TO EMPLOYEES AND CONSULTANTS.
(a) The Administrator shall from time to time, in its absolute
discretion, and, subject to applicable limitations of the Plan:
(i) Determine which Employees are key Employees and
select from among the key Employees or Consultants (including
Employees or Consultants who have previously received Awards
under the Plan) such of them as in its opinion should be
granted Options;
(ii) Subject to the Award Limit, determine the number
of shares to be subject to such Options granted to the
selected key Employees or Consultants;
(iii) Subject to SECTION 4.3, determine whether such
Options are to be Incentive Stock Options or Non-Qualified
Stock Options and whether such Options are to qualify as
performance-based compensation (as described in Section
162(m)(4)(C) of the Code); and
(iv) Determine the terms and conditions of such
Options, consistent with the Plan; provided, however, that the
terms and conditions of Options intended to qualify as
performance-based compensation (as described in Section
162(m)(4)(C) of the Code) shall include, but not be limited
to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) Upon the selection of a key Employee or Consultant to be
granted an Option, the Administrator shall instruct the Secretary of
the Company to issue the Option and may impose such conditions on the
grant of the Option as it deems appropriate.
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(c) Any Incentive Stock Option granted under the Plan may be
modified by the Administrator, with the consent of the Holder, to
disqualify such Option from treatment as an "incentive stock option"
under Section 422 of the Code.
4.5 GRANTING OF OPTIONS TO INDEPENDENT DIRECTORS. The Board shall from
time to time, in its absolute discretion, and subject to applicable limitations
of the Plan:
(a) Select from among the Independent Directors (including
Independent Directors who have previously received Awards under the
Plan) such of them as in its opinion should be granted Non-Qualified
Stock Options;
(b) Subject to the Award Limit, determine the number of shares
to be subject to such Non-Qualified Stock Options granted to the
selected Independent Directors; and
(c) Subject to the provisions of ARTICLE V, determine the
terms and conditions of such Non-Qualified Stock Options, consistent
with the Plan.
All the foregoing Non-Qualified Stock Option grants authorized by this
SECTION 4.5 are subject to stockholder approval of the Plan.
4.6 OPTIONS IN LIEU OF CASH COMPENSATION. Options may be granted under
the Plan to Employees and Consultants in lieu of cash bonuses which would
otherwise be payable to such Employees and Consultants, and to Independent
Directors in lieu of directors' fees which would otherwise be payable to such
Independent Directors, pursuant to such policies that may be adopted by the
Administrator from time to time.
ARTICLE V
TERMS OF OPTIONS
----------------
5.1 OPTION PRICE. The price per share of the shares subject to each
Option granted to Employees, Independent Directors and Consultants shall be set
by the Administrator; provided, however, that:
(a) In the case of Incentive Stock Options, such price shall
not be less than 100% of the Fair Market Value of a share of Common
Stock on the date the Option is granted (or the date the Option is
modified, extended or renewed for purposes of Section 424(h) of the
Code);
(b) In the case of Incentive Stock Options granted to an
individual then owning (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes
of stock of the Company or any Subsidiary or parent corporation thereof
(within the meaning of Section 422 of the Code), such price shall not
be less than 110% of the Fair Market Value of a share of Common Stock
on the date the Option is granted (or the date the Option is modified,
extended or renewed for purposes of Section 424(h) of the Code); and
(c) In the case of Non-Qualified Stock Options, such price
shall not be less than 100% of the Fair Market Value of a share of
Common Stock on the date the Option is granted.
5.2 OPTION TERM. The term of an Option granted to an Employee,
Independent Director or Consultant shall be set by the Administrator in its
discretion; provided, however, that the term (as may be extended by the
Administrator in its discretion) shall not be more than ten years from the date
of grant of the Option, or in the case of an Incentive Stock Option, five years
from the date of grant if the Incentive Stock Option is granted to an individual
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then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code). The Administrator may amend the terms or conditions of an Option in
connection with any Termination of Employment, Termination of Directorship or
Termination of Consultancy, and may extend the term of any outstanding Option in
connection with any Termination of Employment, Termination of Directorship or
Termination of Consultancy of the Holder, provided that in no event shall the
Administrator have the discretion to extend the term of any Option past the
tenth anniversary of the original date of grant at a time when the exercise
price of the stock right does not equal or exceed the Fair Market Value of the
stock that could be purchased.
5.3 OPTION VESTING.
(a) The period during which the right to exercise, in whole or
in part, an Option granted to an Employee, Independent Director or a
Consultant vests in the Holder shall be set by the Administrator, and
the Administrator may determine that an Option may not be exercised in
whole or in part for a specified period after it is granted; provided,
however, that, unless the Administrator otherwise provides in the terms
of the Award Agreement or otherwise, no Option shall be exercisable by
any Holder who is then subject to Section 16 of the Exchange Act within
the period ending six months and one day after the date the Option is
granted. Subject to SECTION 10.3, at any time after grant of an Option,
the Administrator may, in its sole and absolute discretion and subject
to whatever terms and conditions it selects, accelerate the period
during which an Option granted to an Employee, Independent Director or
Consultant vests.
(b) No portion of an Option granted to an Employee,
Independent Director or Consultant that is unexercisable at Termination
of Employment, Termination of Directorship or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except
as may be otherwise provided by the Administrator either in the Award
Agreement or by action of the Administrator following the grant of the
Option. Options that are exercisable by an Employee at Termination of
Employment shall continue to be exercisable by the Employee (a) for a
period of at least six months from the date of the Termination of
Employment if Termination of Employment was caused by death or
disability, and (b) for a period of at least 30 days after the date of
Termination of Employment if Termination of Employment was caused by
other than death or disability, unless Termination of Employment
constituted a termination for Cause, in which case Options would
terminate and no longer be exercisable immediately upon Termination of
Employment for Cause.
(c) To the extent that the aggregate fair market value of
stock with respect to which "incentive stock options" (within the
meaning of Section 422 of the Code, but without regard to Section
422(d) of the Code) are exercisable for the first time by a Holder
during any calendar year under the Plan, and all other plans of the
Company and any Subsidiary or parent corporation thereof, within the
meaning of Section 424 of the Code, exceeds $100,000, the Options shall
be treated as Non-Qualified Stock Options to the extent required by
Section 422 of the Code. The rule set forth in the preceding sentence
shall be applied by taking Options and other "incentive stock options"
into account in the order in which they were granted. For purposes of
this SECTION 5.3(C), the fair market value of stock shall be determined
as of the time the Option or other "incentive stock options" with
respect to such stock is granted.
5.4 SUBSTITUTE AWARDS. Notwithstanding the foregoing provisions of this
ARTICLE V to the contrary, in the case of an Option that is a Substitute Award,
the price per share of the shares subject to such Option may be less than the
Fair Market Value per share on the date of grant, provided, that the excess of:
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(a) the aggregate Fair Market Value (as of the date such Substitute Award is
granted) of the shares subject to the Substitute Award, over (b) the aggregate
exercise price thereof does not exceed the excess of: (x) the aggregate fair
market value (as of the time immediately preceding the transaction giving rise
to the Substitute Award, such fair market value to be determined by the
Administrator) of the shares of the predecessor entity that were subject to the
grant assumed or substituted for by the Company, over (y) the aggregate exercise
price of such shares.
ARTICLE VI
EXERCISE OF OPTIONS
-------------------
6.1 PARTIAL EXERCISE. An exercisable Option may be exercised in whole
or in part. However, an Option shall not be exercisable with respect to
fractional shares, and the Administrator may require that, by the terms of the
Option, a partial exercise be with respect to a minimum number of shares.
6.2 MANNER OF EXERCISE. All or a portion of an exercisable Option shall
be deemed exercised upon delivery of all of the following to the Secretary of
the Company, or such other person or entity designated by the Board, or his, her
or its office, as applicable:
(a) A written notice complying with the applicable rules
established by the Administrator stating that the Option, or a portion
thereof, is exercised. The notice shall be signed by the Holder or
other person then entitled to exercise the Option or such portion of
the Option;
(b) Such representations and documents as the Administrator,
in its absolute discretion, deems necessary or advisable to effect
compliance with all applicable provisions of the Securities Act and any
other federal or state securities laws or regulations. The
Administrator may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates
and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant
to SECTION 12.1 by any person or persons other than the Holder,
appropriate proof of the right of such person or persons to exercise
the Option; and
(d) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is
exercised. However, the Administrator may, in its discretion, (i) allow
payment, in whole or in part, through the delivery of shares of Common
Stock that have been owned by the Holder for at least six months, duly
endorsed for transfer to the Company with a Fair Market Value on the
date of delivery equal to the aggregate exercise price of the Option or
exercised portion thereof; (ii) allow payment, in whole or in part,
through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option
exercise equal to the aggregate exercise price of the Option or
exercised portion thereof; (iii) allow payment, in whole or in part,
through the delivery of property of any kind that constitutes good and
valuable consideration; (iv) allow payment, in whole or in part,
through the delivery of a notice that the Holder has placed a market
sell order with a broker with respect to shares of Common Stock then
issuable upon exercise of the Option, and that the broker has been
directed to pay a sufficient portion of the net proceeds of the sale to
the Company in satisfaction of the Option exercise price, provided that
payment of such proceeds is then made to the Company upon settlement of
such sale; or (v) allow payment through any combination of the
consideration provided in the foregoing subparagraphs (i), (ii), (iii)
and (iv); provided, however, that the payment in the manner prescribed
in the preceding paragraphs shall not be permitted to the extent that
the Administrator determines that payment in such manner shall result
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in an extension or maintenance of credit, an arrangement for the
extension of credit, or a renewal or an extension of credit in the form
of a personal loan to or for any Director or executive officer of the
Company that is prohibited by Section 13(k) of the Exchange Act or
other applicable law.
6.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges or quotation systems on which such class of stock is then
listed or admitted for trading;
(b) The completion of any registration or other qualification
of such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Administrator shall, in its
absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency that the Administrator shall, in
its absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Administrator may establish from time to
time for reasons of administrative convenience, provided that in no
event shall such lapse constitute an additional deferral of
compensation under Section 409A of the Code; and
(e) The receipt by the Company of full payment for such
shares, including payment of any applicable withholding tax, which in
the discretion of the Administrator may be in the form of consideration
used by the Holder to pay for such shares under SECTION 6.2(D).
6.4 RIGHTS AS STOCKHOLDERS. Holders shall not be, nor have any of the
rights or privileges of, stockholders of the Company in respect of any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
Holders.
6.5 OWNERSHIP AND TRANSFER RESTRICTIONS. Options granted pursuant to
this Plan shall not be transferable during the lifetime of the holder of the
Option, except that the Administrator may allow for transfer by will, by the
laws of descent and distribution, to a revocable trust, or as permitted by Rule
701 of the Securities Act. The Administrator, in its absolute discretion, may
impose such additional restrictions on the ownership and transferability of the
shares purchasable upon the exercise of an Option as it deems appropriate. Any
such restriction shall be set forth in the respective Award Agreement and may be
referred to on the certificates evidencing such shares. The Holder shall give
the Company prompt notice of any disposition of shares of Common Stock acquired
by exercise of an Incentive Stock Option within (a) two years from the date of
granting (including the date the Option is modified, extended or renewed for
purposes of Section 424(h) of the Code) such Option to such Holder, or (b) one
year after the transfer of such shares to such Holder.
6.6 ADDITIONAL LIMITATIONS ON EXERCISE OF OPTIONS. Holders may be
required to comply with any timing or other restrictions with respect to the
settlement or exercise of an Option, including a window-period limitation, as
may be imposed in the discretion of the Administrator.
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ARTICLE VII
AWARD OF RESTRICTED STOCK
-------------------------
7.1 ELIGIBILITY. Subject to the Award Limit, Restricted Stock may be
awarded to any Employee who the Administrator determines is a key Employee, or
any Independent Director or any Consultant who the Administrator determines
should receive such an Award.
7.2 AWARD OF RESTRICTED STOCK.
(a) The Administrator may from time to time, in its absolute
discretion:
(i) Determine which Employees are key Employees, and
select from among the Key Employees, Independent Directors or
Consultants (including Employees, Independent Directors or
Consultants who have previously received Awards under the
Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and other
terms and conditions applicable to such Restricted Stock,
consistent with the Plan.
(b) The Administrator shall establish the purchase price, if
any, and form of payment for Restricted Stock; provided, however, that
such purchase price shall be no less than the par value of the Common
Stock to be purchased, unless otherwise permitted by applicable state
law. In all cases, legal consideration shall be required for each
issuance of Restricted Stock.
(c) Upon the selection of an Employee, Independent Director or
Consultant to be awarded Restricted Stock, the Administrator shall
instruct the Secretary of the Company to issue such Restricted Stock
and may impose such conditions on the issuance of such Restricted Stock
as it deems appropriate.
7.3 RIGHTS AS STOCKHOLDERS. Subject to SECTION 7.4, upon delivery of
the shares of Restricted Stock to the escrow holder pursuant to SECTION 7.6, the
Holder shall have, unless otherwise provided by the Administrator, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his or her Award Agreement, including the right to receive all dividends and
other distributions paid or made with respect to the shares; provided, however,
that, in the discretion of the Administrator, any extraordinary distributions
with respect to the Common Stock shall be subject to the restrictions set forth
in SECTION 7.4.
7.4 RESTRICTION. All shares of Restricted Stock issued under the Plan
(including any shares received by Holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Award Agreement, be
subject to such restrictions as the Administrator shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment,
directorship or consultancy with the Company, Company performance and individual
performance; provided, however, that, unless the Administrator otherwise
provides in the terms of the Award Agreement or otherwise, no share of
Restricted Stock granted to a person subject to Section 16 of the Exchange Act
shall be sold, assigned or otherwise transferred until at least six months and
one day have elapsed from the date on which the Restricted Stock was issued, and
provided, further, that, except with respect to shares of Restricted Stock
granted to Section 162(m) Participants, by action taken after the Restricted
Stock is issued, the Administrator may, on such terms and conditions as it may
determine to be appropriate, remove any or all of the restrictions imposed by
the terms of the Award Agreement. Restricted Stock may not be sold or encumbered
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until all restrictions are terminated or expire. If no consideration was paid by
the Holder upon issuance, a Holder's rights in unvested Restricted Stock shall
lapse, and such Restricted Stock shall be surrendered to the Company without
consideration, upon Termination of Employment, Termination of Directorship, or
Termination of Consultancy, as applicable; and, provided, however, that the
Administrator in its sole and absolute discretion may provide that such rights
shall not lapse in the event of a Termination of Employment, Termination of
Directorship or Termination of Consultancy, as applicable, following a "change
of ownership or control" (within the meaning of Treasury Regulation Section
1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or because
of the Holder's death or disability; and, provided, further, except with respect
to shares of Restricted Stock granted to Section 162(m) Participants, the
Administrator in its sole and absolute discretion may provide that no such lapse
or surrender shall occur in the event of a Termination of Employment,
Termination of Directorship, or Termination of Consultancy, as applicable, that
occurs without Cause or following any Change in Control or because of the
Holder's retirement, or otherwise.
7.5 REPURCHASE OF RESTRICTED STOCK. The Administrator shall provide in
the terms of each individual Award Agreement that the Company shall have the
right to repurchase from the Holder the Restricted Stock then subject to
restrictions under the Award Agreement, which right shall arise immediately upon
a Termination of Employment, Termination of Directorship, or Termination of
Consultancy, as applicable, and shall be exercisable by the Company for up to
six months from the date of such termination, at a cash price per share equal to
the price paid by the Holder for such Restricted Stock; provided, however, that
to the extent the Company is subject to Section 260.140.8 of the California Code
of Regulations, such right of repurchase shall lapse at the rate of at least 20%
of the Restricted Stock per year; provided further, the Administrator in its
sole and absolute discretion may provide that no such right of repurchase shall
exist in the event of a Termination of Employment, Termination of Directorship
or Termination of Consultancy, as applicable, following a "change of ownership
or control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v)
or any successor regulation thereto) of the Company or because of the Holder's
death or disability; and, provided further, that, except with respect to shares
of Restricted Stock granted to Section 162(m) Participants, the Administrator in
its sole and absolute discretion may provide that no such right of repurchase
shall exist in the event of a Termination of Employment, Termination of
Directorship, or Termination of Consultancy, as applicable, that occurs without
Cause or following any Change in Control or because of the Holder's retirement,
or otherwise.
7.6 ESCROW. The Secretary of the Company or such other escrow holder as
the Administrator may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Award Agreement with respect to the shares evidenced by such certificate expire
or shall have been removed.
7.7 LEGEND. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Administrator shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Award Agreements, which legend or legends
shall make appropriate reference to the conditions imposed thereby.
7.8 SECTION 83(B) ELECTION. If a Holder makes an election under Section
83(b) of the Code, or any successor section thereto, to be taxed with respect to
the Restricted Stock as of the date of transfer of the Restricted Stock rather
than as of the date or dates upon which the Holder would otherwise be taxable
under Section 83(a) of the Code, the Holder shall deliver a copy of such
election to the Company immediately after filing such election with the Internal
Revenue Service.
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ARTICLE VIII
PERFORMANCE AWARDS, STOCK PAYMENTS, RESTRICTED STOCK UNITS
----------------------------------------------------------
8.1 ELIGIBILITY. Subject to the Award Limit, one or more Performance
Awards, Stock Payment awards, and/or Restricted Stock Unit awards may be granted
to any Employee whom the Administrator determines is a key Employee, or any
Independent Director or any Consultant whom the Administrator determines should
receive such an Award.
8.2 PERFORMANCE AWARDS.
(a) Any key Employee, Independent Director or Consultant
selected by the Administrator may be granted one or more Performance
Awards. The amount of such Performance Awards may be linked to any one
or more of the Performance Criteria or other specific performance
criteria determined appropriate by the Administrator, in each case on a
specified date or dates or over any period or periods determined by the
Administrator. In making such determinations, the Administrator shall
consider (among such other factors as it deems relevant in light of the
specific type of award) the contributions, responsibilities and other
compensation of the particular key Employee, Independent Director or
Consultant.
(b) Without limiting SECTION 8.2(A), the Administrator may
grant Performance Awards to any Section 162(m) Participant upon the
attainment of objective performance goals that are established by the
Administrator and relate to one or more of the Performance Criteria, in
each case on a specified date or dates or over any period or periods
determined by the Administrator. Any such Performance Awards granted to
Section 162(m) Participants shall be based upon objectively
determinable formulas established in accordance with the provisions of
SECTION 3.2. The maximum aggregate amount of all Performance Awards
granted to a Section 162(m) Participant under this SECTION 8.2(B)
during any calendar year shall not exceed the Award Limit. Unless
otherwise specified by the Administrator at the time of grant, the
Performance Criteria with respect to a Performance Award payable to a
Section 162(m) Participant shall be determined on the basis of
generally accepted accounting principles.
8.3 STOCK PAYMENTS. Any key Employee, Independent Director or
Consultant selected by the Administrator may receive Stock Payments in the
manner determined from time to time by the Administrator. The number of shares
shall be determined by the Administrator and may be based upon the Performance
Criteria or other specific performance criteria determined appropriate by the
Administrator, determined on the date such Stock Payment is made or on any date
thereafter.
8.4 RESTRICTED STOCK UNITS. Any key Employee, Independent Director or
Consultant selected by the Administrator may be granted an award of Restricted
Stock Units in the manner determined from time to time by the Administrator. The
Administrator is authorized to make awards of Restricted Stock Units in such
amounts and subject to such terms and conditions as determined by the
Administrator. The Administrator shall specify the date or dates on which the
Restricted Stock Units shall become fully vested and nonforfeitable, and may
specify such conditions to vesting as it deems appropriate, and may specify that
such Restricted Stock Units become fully vested and nonforfeitable pursuant to
the satisfaction of one or more Performance Goals or other specific performance
goals as the Administrator determines to be appropriate at the time of the grant
of the Restricted Stock Units or thereafter, in each case on a specified date or
dates or over any period or periods determined by the Administrator. The
Administrator shall specify the distribution dates applicable to each award of
Restricted Stock Units, which shall be no earlier than the vesting dates or
events of the award and may be determined at the election of the Employee,
Independent Director or Consultant. On the distribution dates, the Company shall
issue to the Holder one unrestricted, fully transferable share of Common Stock
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for each Restricted Stock Unit distributed. The Administrator shall specify the
purchase price, if any, to be paid by the Employee, Independent Director or
Consultant to the Company for such shares of Common Stock to be distributed
pursuant to the Restricted Stock Unit award.
8.5 TERM. The term of a Performance Award, Stock Payment award and/or
Restricted Stock Unit award shall be set by the Administrator in its discretion.
8.6 EXERCISE OR PURCHASE PRICE. The Administrator may establish the
exercise or purchase price of a Performance Award, shares distributed as a Stock
Payment award or shares distributed pursuant to a Restricted Stock Unit award;
provided, however, that such price shall not be less than the par value of a
share of Common Stock, unless otherwise permitted by applicable state law.
8.7 EXERCISE UPON TERMINATION OF EMPLOYMENT, TERMINATION OF CONSULTANCY
OR TERMINATION OF DIRECTORSHIP. A Performance Award, Stock Payment award and/or
Restricted Stock Unit award is exercisable or distributable only while the
Holder is an Employee, Consultant or Independent Director, as applicable;
provided, however, that the Administrator in its sole and absolute discretion
may provide that the Performance Award, Stock Payment award and/or Restricted
Stock Unit award may be exercised or distributed subsequent to a Termination of
Employment, Termination of Directorship or Termination of Consultancy following
a "change of control or ownership" (within the meaning of Treasury Regulation
Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company;
and, provided, further, that, except with respect to Performance Awards granted
to Section 162(m) Participants, the Administrator in its sole and absolute
discretion may provide that Performance Awards may be exercised or paid
following a Termination of Employment, Termination of Directorship or
Termination of Consultancy that occurs without Cause or following a Change in
Control or because of the Holder's retirement, death or disability, or
otherwise.
8.8 FORM OF PAYMENT. Payment of the amount determined under SECTION 8.2
above shall be in cash, in Common Stock or a combination of both, as determined
by the Administrator. To the extent any payment under this ARTICLE VIII is
effected in Common Stock, it shall be made subject to satisfaction of all
provisions of SECTION 6.3.
ARTICLE IX
STOCK APPRECIATION RIGHTS
-------------------------
9.1 GRANT OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right may
be granted to any key Employee, Independent Director or Consultant selected by
the Administrator. A Stock Appreciation Right may be granted: (a) in connection
and simultaneously with the grant of an Option, (b) with respect to a previously
granted Option, or (c) independent of an Option. A Stock Appreciation Right
shall be subject to such terms and conditions not inconsistent with the Plan as
the Administrator shall impose and shall be evidenced by an Award Agreement.
9.2 COUPLED STOCK APPRECIATION RIGHTS.
(a) A Coupled Stock Appreciation Right ("CSAR") shall be
related to a particular Option and shall be exercisable only when and
to the extent the related Option is exercisable.
(b) A CSAR may be granted to the Holder for no more than the
number of shares subject to the simultaneously or previously granted
Option to which it is coupled.
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(c) A CSAR shall entitle the Holder (or other person entitled
to exercise the Option pursuant to the Plan) to surrender to the
Company unexercised a portion of the Option to which the CSAR relates
(to the extent then exercisable pursuant to its terms) and to receive
from the Company in exchange therefor an amount determined by
multiplying the difference obtained by subtracting the Option exercise
price from the Fair Market Value of a share of Common Stock on the date
of exercise of the CSAR by the number of shares of Common Stock with
respect to which the CSAR shall have been exercised, subject to any
limitations the Administrator may impose.
9.3 INDEPENDENT STOCK APPRECIATION RIGHTS.
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Administrator.
An ISAR shall be exercisable in such installments as the Administrator
may determine. An ISAR shall cover such number of shares of Common
Stock as the Administrator may determine; provided, however, that
unless the Administrator otherwise provides in the terms of the ISAR or
otherwise, no ISAR granted to a person subject to Section 16 of the
Exchange Act shall be exercisable until at least six months have
elapsed following the date on which the Option was granted. The
exercise price per share of Common Stock subject to each ISAR shall be
set by the Administrator; provided, that such exercise price per share
shall not be less than 100% of the Fair Market Value of a share of
Common Stock on the date the ISAR is granted. An ISAR is exercisable
only while the Holder is an Employee, Independent Director or
Consultant; provided, that the Administrator may determine that the
ISAR may be exercised subsequent to Termination of Employment,
Termination of Directorship or Termination of Consultancy without
Cause, or following a Change in Control of the Company, or because of
the Holder's retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Holder (or other person entitled
to exercise the ISAR pursuant to the Plan) to exercise all or a
specified portion of the ISAR (to the extent then exercisable pursuant
to its terms) and to receive from the Company an amount determined by
multiplying (i) the difference obtained by subtracting the exercise
price per share of the ISAR from the Fair Market Value of a share of
Common Stock on the date of exercise of the ISAR by (ii) the number of
shares of Common Stock with respect to which the ISAR shall have been
exercised, subject to any limitations the Administrator may impose.
9.4 PAYMENT AND LIMITATIONS ON EXERCISE.
(a) Payment of the amounts determined under SECTION 9.2(C) AND
9.3(B) above shall be in shares of Common Stock (based on its Fair
Market Value as of the date the Stock Appreciation Right is exercised).
The Company shall not be required to issue or deliver any certificate
or certificates for shares of stock issuable upon the exercise of any
Stock Appreciation Right prior to fulfillment of the conditions set
forth in SECTION 6.3 above.
(b) Holders of Stock Appreciation Rights may be required to
comply with any timing or other restrictions with respect to the
settlement or exercise of a Stock Appreciation Right, including a
window-period limitation, as may be imposed in the discretion of the
Administrator.
ARTICLE X
COMPLIANCE WITH SECTION 409A OF THE CODE
----------------------------------------
Terms used in this ARTICLE X and not otherwise defined in the Plan
shall have the respective meanings ascribed thereto under Section 409A of the
Code and the Treasury Regulations thereunder.
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10.1 AWARDS SUBJECT TO CODE SECTION 409A. Any Award that constitutes,
or provides for, a deferral of compensation subject to Section 409A of the Code
(a "SECTION 409A AWARD") shall satisfy the requirements of Section 409A of the
Code and this ARTICLE X, to the extent applicable. The Award Agreement with
respect to a Section 409A Award shall incorporate the terms and conditions
required by Section 409A of the Code and this ARTICLE X.
10.2 DISTRIBUTIONS UNDER A SECTION 409A AWARD.
(a) Subject to subsection (b), any shares of Common Stock or
other property or amounts to be paid or distributed upon the grant,
issuance, vesting, exercise or payment of a Section 409A Award shall be
distributed in accordance with the requirements of Section 409A(a)(2)
of the Code, and shall not be distributed earlier than:
(i) the Holder's separation from service, as
determined in accordance with Section 1.409A-1 of the Treasury
Regulations and such other guidance as is promulgated from
time to time by the Secretary of the Treasury,
(ii) the date the Holder becomes disabled,
(iii) the Holder's death,
(iv) a specified time (or pursuant to a fixed
schedule) specified under the Award Agreement at the date of
the deferral of compensation,
(v) to the extent provided by Section 1.409A-1 and
Section 1.409A-3 of the Treasury Regulations and such other
guidance as it promulgated from time to time by the Secretary
of the Treasury, a change in the ownership or effective
control of the Company or a Subsidiary, or in the ownership of
a substantial portion of the assets of the Company or a
Subsidiary, or
(vi) the occurrence of an unforeseeable emergency
with respect to the Holder.
(b) In the case of a Holder who is a specified employee (as
defined in the following sentence), the requirement of paragraph (a)(i)
shall be met only if the distributions with respect to the Section 409A
Award may not be made before the date that is six months after the
Holder's separation from service (or, if earlier, the date of the
Holder's death). For purposes of this subsection (b), a Holder shall be
a specified employee if such Holder is a key employee (as defined in
Section 416(i) of the Code without regard to paragraph (5) thereof) of
a corporation any stock of which is publicly traded on an established
securities market or otherwise, as determined under Section
409A(a)(2)(B)(i) of the Code and the Treasury Regulations thereunder.
(c) The requirement of paragraph (a)(vi) shall be met only if,
as determined under Treasury Regulations under Section
409A(a)(2)(B)(ii) of the Code, the amounts distributed with respect to
the unforeseeable emergency do not exceed the amounts necessary to
satisfy such unforeseeable emergency plus amounts necessary to pay
taxes reasonably anticipated as a result of the distribution, after
taking into account the extent to which such unforeseeable emergency is
or may be relieved through reimbursement or compensation by insurance
or otherwise or by liquidation of the Holder's assets (to the extent
the liquidation of such assets would not itself cause severe financial
hardship).
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10.3 PROHIBITION ON ACCELERATION OF BENEFITS. The time or schedule of
any distribution or payment of any shares of Common Stock or other property or
amounts under a Section 409A Award shall not be accelerated if and to the extent
such acceleration is prohibited under Section 409A(a)(3) of the Code and the
Treasury Regulations thereunder.
10.4 ELECTIONS UNDER SECTION 409A AWARDS.
(a) Any deferral election provided under or with respect to an
Award to any Employee, Independent Director or Consultant, or to the
Holder of a Section 409A Award, shall satisfy the requirements of
Section 409A(a)(4)(B) of the Code, to the extent applicable, and,
except as otherwise permitted under paragraph (i) or (ii), any such
deferral election with respect to compensation for services performed
during a taxable year shall be made not later than the close of the
preceding taxable year, or at such other time as provided in Treasury
Regulations.
(i) In the case of the first year in which an
Employee, Independent Director or Consultant, or the Holder,
becomes eligible to participate in the Plan, any such deferral
election may be made with respect to services to be performed
subsequent to the election within thirty (30) days after the
date the Employee, Independent Director or Consultant, or the
Holder, becomes eligible to participate in the Plan, as
provided under Section 409A(a)(4)(B)(ii) of the Code.
(ii) In the case of any performance-based
compensation based on services performed by an Employee,
Independent Director or Consultant, or the Holder, over a
period of at least twelve months, any such deferral election
may be made no later than six months before the end of the
period, as provided under Section 409A(a)(4)(B)(iii) of the
Code.
(b) In the event that a Section 409A Award permits, under a
subsequent election by the Holder of such Section 409A Award, a delay
in a distribution or payment of any shares of Common Stock or other
property or amounts under such Section 409A Award, or a change in the
form of distribution or payment, such subsequent election must satisfy
the requirements of Section 409A(a)(4)(C) of the Code, and:
(i) such subsequent election may not take effect
until at least twelve months after the date on which the
election is made,
(ii) in the case such subsequent election relates to
a distribution or payment not described in SECTION
10.2(A)(II), (III) OR (VI), the first payment with respect to
such election may be deferred for a period of not less than
five years from the date such distribution or payment
otherwise would have been made, and
(iii) in the case such subsequent election relates to
a distribution or payment described in SECTION 10.2(A)(IV),
such election may not be made less than twelve months prior to
the date of the first scheduled distribution or payment under
SECTION 10.2(A)(IV).
10.5 COMPLIANCE IN FORM AND OPERATION. A Section 409A Award, and any
election under or with respect to such Section 409A Award, shall comply in form
and operation with the requirements of Section 409A of the Code and the Treasury
Regulations thereunder.
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ARTICLE XI
ADMINISTRATION
--------------
11.1 COMPENSATION COMMITTEE. The Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under the Plan) shall consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16b-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment, which need not be in
writing. Committee members may resign at any time by delivering written notice
to the Board. Vacancies in the Committee may be filled by the Board.
11.2 DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the
Committee to conduct the general administration of the Plan in accordance with
its provisions. The Committee shall have the power to interpret the Plan and the
Award Agreements, and to adopt such rules for the administration, interpretation
and application of the Plan as are consistent therewith, to interpret, amend or
revoke any such rules and to amend any Award Agreement provided that the rights
or obligations of the Holder of the Award that is the subject of any such Award
Agreement are not affected materially and adversely. Any such grant or award
under the Plan need not be the same with respect to each Holder. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan except with respect to matters
that under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules
issued thereunder, are required to be determined in the sole discretion of the
Committee. Notwithstanding the foregoing, the full Board, acting by a majority
of its members in office, shall conduct the general administration of the Plan
with respect to Awards granted to Independent Directors.
11.3 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall act
by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
11.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members
of the Committee shall receive such compensation, if any, for their services as
members as may be determined by the Board. All expenses and liabilities that
members of the Committee incur in connection with the administration of the Plan
shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Holders, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or Awards, and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
11.5 DELEGATION OF AUTHORITY TO GRANT AWARDS. The Committee may, but
need not, delegate from time to time some or all of its authority to grant
Awards under the Plan to a committee consisting of one or more members of the
Committee and/or of one or more officers of the Company; provided, however, that
the Committee may not delegate its authority to grant Awards to individuals (a)
who are subject on the date of the grant to the reporting rules under Section
16(a) of the Exchange Act, (b) who are Section 162(m) Participants, or (c) who
are officers of the Company who are delegated authority by the Committee
hereunder. Any delegation hereunder shall be subject to the restrictions and
limits that the Committee specifies at the time of such delegation of authority
and may be rescinded at any time by the Committee. At all times, any committee
appointed under this SECTION 11.5 shall serve in such capacity at the pleasure
of the Committee.
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ARTICLE XII
MISCELLANEOUS PROVISIONS
------------------------
12.1 TRANSFERABILITY OF AWARDS.
(a) Except as otherwise provided in SECTION 12.1(B):
(i) No Award under the Plan may be sold, pledged,
assigned or transferred in any manner other than by will or
the laws of descent and distribution or, subject to the
consent of the Administrator, pursuant to a DRO, unless and
until such Award has been exercised, or the shares underlying
such Award have been issued, and all restrictions applicable
to such shares have lapsed;
(ii) No Option, Restricted Stock award, Performance
Award, Stock Appreciation Right, Stock Payment award or
Restricted Stock Unit award or interest or right therein shall
be liable for the debts, contracts or engagements of the
Holder or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law
by judgment, levy, attachment, garnishment or any other legal
or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no
effect, except to the extent that such disposition is
permitted by the preceding sentence; and
(iii) During the lifetime of the Holder, only the
Holder may exercise an Option or other Award (or any portion
thereof) granted to him under the Plan, unless it has been
disposed of pursuant to a DRO; after the death of the Holder,
any exercisable portion of an Option or other Award may, prior
to the time when such portion becomes unexercisable under the
Plan or the applicable Award Agreement, be exercised by his
personal representative or by any person empowered to do so
under the deceased Holder's will or under the then applicable
laws of descent and distribution.
(b) Notwithstanding SECTION 12.1(A), the Administrator, in its
sole discretion, may determine to permit a Holder to transfer a
Non-Qualified Stock Option to any one or more Permitted Transferees (as
defined below), subject to the following terms and conditions: (i) a
Non-Qualified Stock Option transferred to a Permitted Transferee shall
not be assignable or transferable by the Permitted Transferee other
than by will or the laws of descent and distribution; (ii) any
Non-Qualified Stock Option that is transferred to a Permitted
Transferee shall continue to be subject to all the terms and conditions
of the Non-Qualified Stock Option as applicable to the original Holder
(other than the ability to further transfer the Non-Qualified Stock
Option); and (iii) the Holder and the Permitted Transferee shall
execute any and all documents requested by the Administrator,
including, without limitation documents to (A) confirm the status of
the transferee as a Permitted Transferee, (B) satisfy any requirements
for an exemption for the transfer under applicable federal and state
securities laws and (C) evidence the transfer. For purposes of this
SECTION 12.1(B), "PERMITTED TRANSFEREE" shall mean, with respect to a
Holder, any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, including adoptive relationships, any
person sharing the Holder's household (other than a tenant or
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employee), a trust in which these persons (or the Holder) control the
management of assets, a foundation in which these persons (or the
Holder) control the management of assets, and any other entity in which
these persons (or the Holder) own more than 50% of the voting
interests, or any other transferee specifically approved by the
Administrator after taking into account any state or federal tax or
securities laws applicable to transferable Non-Qualified Stock Options.
12.2 AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. Except as
otherwise provided in this SECTION 12.2, the Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Administrator. However, without approval of the Company's
stockholders given within twelve months before or after the action by the
Administrator, no action of the Administrator may, except as provided in SECTION
12.3, (i) increase the limits imposed in SECTION 2.1 on the maximum number of
shares that may be issued under the Plan, (ii) expand the classes of persons to
whom Awards may be granted under the Plan, or (iii) decrease the exercise price
of any outstanding Option or Stock Appreciation Right granted under the Plan. No
amendment, suspension or termination of the Plan shall, without the consent of
the Holder, alter or impair any rights or obligations under any Award
theretofore granted or awarded, unless the Award itself otherwise expressly so
provides. No Awards may be granted or awarded during any period of suspension or
after termination of the Plan, and in no event may any Award be granted under
the Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is
adopted by the Board; or
(b) The expiration of ten years from the date the Plan is
approved by the Company's stockholders under SECTION 12.4.
12.3 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR
LIQUIDATION OF THE COMPANY AND OTHER CORPORATE EVENTS.
(a) Subject to Section 12.3(e), in the event that the
Administrator determines that any dividend or other distribution
(whether in the form of cash, Common Stock, other securities or other
property), recapitalization, reclassification, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, liquidation, dissolution, or sale, transfer,
exchange or other disposition of all or substantially all of the assets
of the Company, 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, in the Administrator's sole discretion, affects
the Common Stock such that an adjustment is determined by the
Administrator to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the Plan or with respect to an Award, then the
Administrator shall, in such manner as it may deem equitable, adjust
any or all of:
(i) The number and kind of shares of Common Stock (or
other securities or property) with respect to which Awards may
be granted or awarded (including, but not limited to,
adjustments of the limitations in SECTION 2.1 on the maximum
number and kind of shares that may be issued under the Plan,
and the maximum number and kind of shares that may be granted
or issued as Restricted Stock awards, Restricted Stock Unit
awards, Performance Awards or Stock Payment awards, and
adjustments of the Award Limit);
(ii) The number and kind of shares of Common Stock
(or other securities or property) subject to outstanding
Awards; and
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(iii) The grant or exercise price with respect to any
Award.
(b) Subject to SECTIONS 12.3(C) AND 12.3(E), in the event of
any transaction or event described in SECTION 12.3(A) or any unusual or
nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or
any affiliate, or of changes in applicable laws, regulations or
accounting principles, the Administrator, in its sole and absolute
discretion, and on such terms and conditions as it deems appropriate,
either by the terms of the Award or by action taken prior to the
occurrence of such transaction or event and either automatically or
upon the Holder's request, is hereby authorized to take any one or more
of the following actions whenever the Administrator determines that
such action is appropriate in order to prevent dilution or enlargement
of the benefits or potential benefits intended to be made available
under the Plan or with respect to any Award under the Plan, to
facilitate such transactions or events or to give effect to such
changes in laws, regulations or principles:
(i) To provide for either the purchase of any such
Award for an amount of cash equal to the amount that could
have been attained upon the exercise of such Award or
realization of the Holder's rights had such Award been
currently exercisable or payable or fully vested or the
replacement of such Award with other rights or property
selected by the Administrator in its sole discretion;
(ii) To provide that the Award cannot vest, be
exercised or become payable after such event;
(iii) To provide that such Award shall be exercisable
as to all shares covered thereby, notwithstanding anything to
the contrary in SECTION 5.3 or the provisions of such Award;
(iv) To provide that such Award be assumed by the
successor or survivor corporation, or a parent or subsidiary
thereof, or shall be substituted for by similar options,
rights or awards covering the stock of the successor or
survivor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares
and prices;
(v) To make adjustments in the number and type of
shares of Common Stock (or other securities or property)
subject to outstanding Awards, and/or in the terms and
conditions of (including the grant, exercise or purchase
price), and the criteria included in, outstanding options,
rights and awards and options, rights and awards that may be
granted in the future; and
(vi) To provide that, for a specified period of time
prior to such event, the restrictions imposed under an Award
Agreement upon some or all shares of Restricted Stock or
Restricted Stock Units may be terminated, and, in the case of
Restricted Stock, some or all shares of such Restricted Stock
may cease to be subject to repurchase under SECTION 7.5 or
forfeiture under SECTION 7.4 after such event.
(vii) Notwithstanding any other provision of the
Plan, in the event of a merger of the Company with or into
another corporation, or the sale of substantially all of the
assets of the Company, the Committee may cause any or all
Awards outstanding hereunder to be assumed or an equivalent
option substituted by the successor corporation or a parent or
subsidiary of the successor corporation. In the event that the
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successor corporation refuses to assume or substitute for any
such Award, the Committee may cause any or all of such Awards
to become fully exercisable immediately prior to the
consummation of such transaction and all forfeiture
restrictions on any or all of such Awards to lapse. Upon, or
in anticipation of, a merger, consolidation or other similar
transaction involving the Company, the Committee may cause any
and all Awards outstanding hereunder to terminate at a
specific time in the future, including but not limited to the
date of such transaction; provided, however, that each
Participant shall have the right to exercise such Awards
during a period of time as the Committee, in its sole and
absolute discretion, shall determine. If any agreement between
the Company or any Company subsidiary or affiliate and a
Participant contains provisions that conflict with and are
more restrictive than the provisions of this SECTION 12.3(C),
this SECTION 12.3(C) shall prevail and control and the more
restrictive terms of such agreement (and only such terms)
shall be of no force or effect.
(viii) Subject to SECTIONS 12.3(E), 3.2 AND 3.3, the
Administrator may, in its discretion, include such further
provisions and limitations in any Award, agreement or
certificate, as it may deem equitable and in the best
interests of the Company.
(ix) With respect to Awards that are granted to
Section 162(m) Participants and are intended to qualify as
performance-based compensation under Section 162(m)(4)(C), no
adjustment or action described in this SECTION 12.3 or in any
other provision of the Plan shall be authorized to the extent
that such adjustment or action would cause such Award to fail
to so qualify under Section 162(m)(4)(C), or any successor
provisions thereto. No adjustment or action described in this
SECTION 12.3 or in any other provision of the Plan shall be
authorized to the extent that such adjustment or action would
cause the Plan to violate Section 422(b)(1) of the Code.
Furthermore, no such adjustment or action shall be authorized
to the extent such adjustment or action would result in
short-swing profits liability under Section 16 or violate the
exemptive conditions of Rule 16b-3 unless the Administrator
determines that the Award is not to comply with such exemptive
conditions. The number of shares of Common Stock subject to
any Award shall always be rounded to the nearest whole number.
(x) The existence of the Plan, the Award Agreement
and the Awards granted hereunder shall not affect or restrict
in any way the right or power of the Company or the
stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change
in the Company's capital structure or its business, any merger
or consolidation of the Company, any issue of stock or of
options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights
are superior to or affect the Common Stock or the rights
thereof or that are convertible into or exchangeable for
Common Stock, 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.
(xi) No action shall be taken under this SECTION 12.3
that shall cause an Award to fail to comply with Section 409A
of the Code or the Treasury Regulations thereunder, to the
extent applicable to such Award.
12.4 APPROVAL OF PLAN BY STOCKHOLDERS. The Plan will be submitted for
the approval of the Company's stockholders within twelve months after the date
of the Board's initial adoption of the Plan. No Awards may be granted or awarded
prior to such stockholder approval. In addition, if the Board determines that
Awards, other than Options or Stock Appreciation Rights, that may be granted to
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Section 162(m) Participants should continue to be eligible to qualify as
performance-based compensation under Section 162(m)(4)(C) of the Code, then to
the extent required by Section 162(m) of the Code, the Performance Criteria must
be disclosed to and approved by the Company's stockholders no later than the
first stockholder meeting that occurs in the fifth year following the year in
which the Company's stockholders previously approved the Plan containing the
Performance Criteria.
12.5 TAX WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Holder to remit to
the Company, an amount sufficient to satisfy federal, state, local and foreign
taxes (including the Holder's FICA obligation) required by law to be withheld
with respect to any taxable event concerning a Holder arising as a result of
this Plan. The Administrator may in its discretion and in satisfaction of the
foregoing requirement allow a Holder to elect to have the Company withhold
shares of Common Stock otherwise issuable under an Award (or allow the return of
shares of Common Stock) having a Fair Market Value equal to the sums required to
be withheld. Notwithstanding any other provision of the Plan, the number of
shares of Common Stock that may be withheld with respect to the issuance,
vesting, exercise or payment of any Award (or that may be repurchased from the
Holder of such Award within six months (or such other period as may be
determined by the Administrator) after such shares of Common Stock were acquired
by the Holder from the Company) in order to satisfy the Holder's federal, state,
local and foreign income and payroll tax liabilities with respect to the
issuance, vesting, exercise or payment of the Award shall be limited to the
number of shares which have a Fair Market Value on the date of withholding or
repurchase equal to the aggregate amount of such liabilities based on the
minimum statutory withholding rates for federal, state, local and foreign income
tax and payroll tax purposes that are applicable to such supplemental taxable
income.
12.6 PROHIBITION ON REPRICING. Subject to SECTION 12.3, the
Administrator shall not, without the approval of the stockholders of the Company
authorize the amendment of any outstanding Award to reduce its price per share.
Furthermore, no Award shall be canceled and replaced with the grant of an Award
having a lesser price per share without the further approval of stockholders of
the Company.
12.7 FORFEITURE PROVISIONS. Pursuant to its general authority to
determine the terms and conditions applicable to Awards under the Plan, the
Administrator shall have the right to provide, in the terms of Awards made under
the Plan, or to require a Holder to agree by separate written instrument, that:
(a)(i) any proceeds, gains or other economic benefit actually or constructively
received by the Holder upon any receipt or exercise of the Award, or upon the
receipt or resale of any Common Stock underlying the Award, must be paid to the
Company, and (ii) the Award shall terminate and any unexercised portion of the
Award (whether or not vested) shall be forfeited, if (b)(i) a Termination of
Employment, Termination of Directorship or Termination of Consultancy occurs
prior to a specified date, or within a specified time period following receipt
or exercise of the Award, or (ii) the Holder at any time, or during a specified
time period, engages in any activity in competition with the Company, or that is
inimical, contrary or harmful to the interests of the Company, as further
defined by the Administrator or (iii) the Holder incurs a Termination of
Employment, Termination of Directorship or Termination of Consultancy for Cause.
12.8 EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption
of the Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in the Plan shall be construed to
limit the right of the Company: (a) to establish any other forms of incentives
or compensation for Employees, Directors or Consultants of the Company or any
Subsidiary, or (b) to grant or assume options or other rights or awards
otherwise than under the Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership,
limited liability company, firm or association.
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12.9 COMPLIANCE WITH LAWS. The Plan, the granting and vesting of Awards
under the Plan and the issuance and delivery of shares of Common Stock and the
payment of money under the Plan or under Awards granted or awarded hereunder are
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law and
federal margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Awards granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.
12.10 TITLES. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of the Plan.
12.11 GOVERNING LAW. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws principles thereof.
12.12 FINANCIAL INFORMATION. Security holders are to receive financial
statements of the Company at least annually as and to the extent required by
Section 260.140.46 of the California Code of Regulations.
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APPENDIX B
PROXY - EMRISE CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 12, 2007
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Carmine T. Oliva and D. John Donovan,
or either of them individually, as the attorney, agent and proxy holder of the
undersigned, with the power to appoint his substitute, to represent and vote, as
designated below, all shares of common stock of EMRISE Corporation, a Delaware
corporation (the "Company"), held of record by the undersigned at the close of
business on October 22, 2007, at the 2007 annual meeting of stockholders to be
held at the Company's headquarters located at 9485 Haven Avenue, Suite 100,
Rancho Cucamonga, California 91730 on December 12, 2007, at 10:00 a.m. local
time, and at any and all adjournments and postponements thereof. The Company's
board of directors recommends a vote FOR each of the proposals indicated herein.
THIS PROXY CARD, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
CARD WILL BE VOTED FOR THE PROPOSALS INDICATED AND IN ACCORDANCE WITH THE
DISCRETION OF THE PROXY HOLDER ON ANY OTHER BUSINESS. ALL OTHER PROXIES
HERETOFORE GIVEN BY THE UNDERSIGNED IN CONNECTION WITH THE ACTIONS PROPOSED ON
THIS PROXY CARD ARE HEREBY EXPRESSLY REVOKED. THIS PROXY CARD MAY BE REVOKED AT
ANY TIME BEFORE IT IS VOTED BY WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY,
BY ISSUANCE OF A SUBSEQUENT PROXY CARD OR BY VOTING AT THE ANNUAL MEETING IN
PERSON. HOWEVER, A STOCKHOLDER WHO HOLDS SHARES THROUGH A BROKER OR OTHER
NOMINEE MUST BRING A LEGAL PROXY TO THE MEETING IF THAT STOCKHOLDER DESIRES TO
VOTE IN PERSON AT THE MEETING.
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Annual Meeting Proxy Card
A. ELECTION OF DIRECTOR - To elect a Class II director to serve a three-year
term. The Board of Directors recommends a vote FOR the nominee below.
1. Nominee:
01 - Laurence P. Finnegan, Jr. [ ] FOR [ ] WITHHOLD
B. PROPOSAL - THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL BELOW.
2. To consider and vote upon a proposal to ratify the adoption of
the Company's 2007 Stock Incentive Plan.
[ ] FOR [ ] AGAINST [ ] WITHHOLD
C. PROPOSAL - THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL BELOW.
3. To consider and vote upon a proposal to ratify the selection of
the Company's independent registered public accountants to
audit the Company's consolidated financial statements for 2007.
[ ] FOR [ ] AGAINST [ ] WITHHOLD
D. NON-VOTING ITEMS
CHANGE OF ADDRESS - Please print your new address below.
MEETING ATTENDANCE - Mark the box to the right if you plan to attend the Annual
Meeting. [ ]
D. AUTHORIZED SIGNATURES - THIS SECTION MUST BE COMPLETED FOR YOUR VOTE TO BE
COUNTED. -DATE AND SIGN BELOW
Please mark, date, sign and return this proxy card promptly in the enclosed
envelope. When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
Date (mm/dd/yyyy):____/____/2007
Signature 1 - Please keep signature Signature 2 - Please keep signature
within the box within the box
[----------------------------------] [----------------------------------]
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