sec document
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
FALCONSTOR SOFTWARE, INC.
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(Name of Registrant as Specified in Charter)
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(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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FALCONSTOR SOFTWARE,INC.
April 5, 2005
To Our Stockholders:
We invite you to attend our annual stockholders' meeting on Tuesday, May
10, 2005 at our worldwide headquarters located at 2 Huntington Quadrangle, Suite
2S01, Melville, New York at 9:00 a.m.
At the meeting, you will hear an update on our operations, have a chance to
meet our directors and executives, and will be asked to elect two directors and
ratify the appointment of our auditors. Your Board of Directors recommends a
vote "FOR" each of the nominees and proposals.
This booklet includes a formal notice of the meeting and the proxy
statement. The proxy statement tells you more about the agenda and procedures
for the meeting. It also describes how our Board of Directors operates and gives
personal information about our director nominees.
Only stockholders of record at the close of business on March 22, 2005 will
be entitled to vote at the annual meeting. Even if you only own a few shares, we
want your shares to be represented at the annual meeting. I urge you to
complete, sign, date, and return your proxy card promptly in the enclosed
envelope.
Sincerely yours,
/s/ ReiJane Huai
ReiJane Huai
Chairman and Chief Executive Officer
FALCONSTOR SOFTWARE, INC.
2 HUNTINGTON QUADRANGLE
MELVILLE, NY 11747
-----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 10, 2005
----------------
To Our Stockholders:
The 2005 Annual Meeting of Stockholders ("Annual Meeting") of FalconStor
Software, Inc. (the "Company"), a Delaware corporation, will be held at the
Company's headquarters at 2 Huntington Quadrangle, Suite 2S01, Melville, NY,
commencing at 9:00 a.m. (EDT) on Tuesday, May 10, 2005, to consider and vote on
the following matters described in this notice and the accompanying Proxy
Statement:
1) To elect two directors to the Company's Board of Directors to
three-year terms and until the directors' successors are elected and
qualified; and
2) To ratify the appointment of KPMG LLP as our independent accountants
for fiscal 2005; and
3) Any other matters that properly come before the meeting.
At the Annual Meeting, the Company intends to nominate Steven R. Fischer
and Alan W. Kaufman for election to the Board of Directors. Mr. Fischer is
currently a member of the Company's Board of Directors. For more information
concerning Mr. Fischer and Mr. Kaufman, please see the Proxy Statement.
The Board of Directors has fixed the close of business on March 22, 2005 as
the record date for determination of stockholders entitled to vote at the Annual
Meeting or any adjournment thereof, and only recordholders of common stock at
the close of business on that day will be entitled to vote. At the record date,
47,670,186 shares of common stock were issued and outstanding.
TO ASSURE REPRESENTATION AT THE ANNUAL MEETING, STOCKHOLDERS ARE URGED TO
RETURN A PROXY AS PROMPTLY AS POSSIBLE BY SIGNING, DATING AND RETURNING THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. ANY STOCKHOLDER
ATTENDING THE ANNUAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE PREVIOUSLY
RETURNED A PROXY.
If you plan to attend the Annual Meeting in person, we would appreciate
your response by indicating so when returning the proxy.
By Order of the Board of Directors,
/s/ Seth R. Horowitz
Seth R. Horowitz
SECRETARY
Melville, NY
April 5, 2005
FALCONSTOR SOFTWARE, INC.
2 Huntington Quadrangle
Melville, New York 11747
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2005 PROXY STATEMENT
GENERAL INFORMATION
This proxy statement contains information related to the annual meeting of
stockholders of FalconStor Software, Inc. to be held on Tuesday, May 10, 2005,
beginning at 9:00 a.m. (EDT), at the Company's headquarters at 2 Huntington
Quadrangle, Suite 2S01, Melville, New York, and at any postponements or
adjournments thereof.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING
At the Company's annual meeting, stockholders will hear an update on the
Company's operations, have a chance to meet some of its directors and executives
and will act on the following matters:
1) To elect two directors to the Company's Board of Directors to
three-year terms and until the directors' successors are elected and
qualified; and
2) To ratify the appointment of KPMG LLP as our independent accountants
for fiscal 2005; and
3) Any other matters that properly come before the meeting.
WHO MAY VOTE
Stockholders of FalconStor Software, Inc., as recorded in our stock
register on March 22, 2005 (the "Record Date"), may vote at the meeting. As of
this date, we had 47,670,186 shares of common stock eligible to vote. We have
only one class of voting shares. All shares in this class have equal voting
rights of one vote per share.
HOW TO VOTE
You may vote in person at the meeting or by proxy. We recommend that you
vote by proxy even if you plan to attend the meeting. You can always change your
vote at the meeting.
HOW PROXIES WORK
Our Board of Directors is asking for your proxy. Giving us your proxy means
you authorize us to vote your shares at the meeting in the manner you direct.
You may vote for or against the proposals or abstain from voting.
Proxies submitted will be voted by the individuals named on the proxy card
in the manner you indicate. If you give us your proxy but do not specify how you
want your shares voted, they will be voted in accordance with the Board of
Directors recommendations, i.e., in favor of our director nominees, and in favor
of the ratification of the appointment of KPMG LLP as our independent
accountants.
You may receive more than one proxy or voting card depending on how you
hold your shares. If you hold shares through someone else, such as a
stockbroker, you may get materials from them asking how you want to vote. The
latest proxy card we receive from you will determine how we will vote your
shares.
REVOKING A PROXY
There are three ways to revoke your proxy. First, you may submit a new
proxy with a later date up until the existing proxy is voted. Second, you may
vote in person at the meeting. Last, you may notify our Chief Financial Officer
in writing at 2 Huntington Quadrangle, Suite 2S01, Melville, New York 11747.
QUORUM
In order to carry on the business of the meeting, we must have a quorum.
This means at least a majority of the outstanding shares eligible to vote must
be represented at the meeting, either by proxy or in person. Shares that we own
are not voted and do not count for this purpose.
VOTES NEEDED
The director nominees receiving a majority of the votes cast during the
meeting will be elected to fill the seats of our directors. For the other
proposals to be approved, we require the favorable vote of a majority of the
votes cast. Only votes for or against a proposal count. Votes which are withheld
from voting on a proposal will be excluded entirely and will have no effect in
determining the quorum or the majority of votes cast. Abstentions and broker
non-votes count for quorum purposes only and not for voting purposes. Broker
non-votes occur when a broker returns a proxy but does not have the authority to
vote on a particular proposal. Brokers that do not receive instructions are
entitled to vote on the election of the directors and the ratification of the
auditors.
ATTENDING IN PERSON
Only stockholders, their proxy holders, and our invited guests may attend
the meeting. If you wish to attend the meeting in person but you hold your
shares through someone else, such as a stockbroker, you must bring proof of your
ownership and an identification with a photo to the meeting. For example, you
could bring an account statement showing that you owned FalconStor Software,
Inc., shares as of March 22, 2005 as acceptable proof of ownership.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of the
Common Stock of FalconStor Software, Inc., outstanding at March 22, 2005, by (i)
each person known by the Company to be the beneficial owner of more than five
percent of its Common Stock, (ii) each director and nominee for director, (iii)
each of the current officers named in the summary compensation table, and (iv)
all directors, nominees for director and executive officers of the Company as a
group.
Shares Beneficially Percentage
Name and Address of Beneficial Owner (1) Owned of Class (2)
----------------------------------------- ------------------- ------------
ReiJane Huai (3) 10,804,460 22.7%
c/o FalconStor Software, Inc.
2 Huntington Quadrangle
Melville, NY 11747
Barry Rubenstein (4) 6,643,053 13.9%
68 Wheatley Road
Brookville, NY 11545
Irwin Lieber (5) 4,602,689 9.7%
80 Cuttermill Road Suite 311
Great Neck, NY 11021
Eli Oxenhorn (6) 3,140,009 6.6%
56 The Intervale
Roslyn Estates, NY 11576
Barry Fingerhut (7) 3,157,664 6.6%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Seth Lieber (8) 3,014,474 6.3%
200 East 72 Street, PH N
New York, NY 10021
Jonathan Lieber (9) 2,927,852 6.1%
271 Hamilton Road
Chappaqua, NY 10514
Marilyn Rubenstein (10) 2,475,424 5.2%
c/o Barry Rubenstein
68 Wheatley Road
Brookville, NY 11545
Steven L. Bock (11) 0 *
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Patrick B. Carney (12) 38,829 *
Lawrence S. Dolin (13) 97,805 *
Steven R. Fischer (14) 62,305 *
Alan W. Kaufman (15) 0 *
Wayne Lam (16) 426,245 *
James Weber (17) 123,279 *
Bernard Wu (18) 317,919 *
All Directors, Nominees for Director
and Executive Officers as a Group (19)
(9 persons) 11,855,842 24.5%
*Less than one percent
(1) A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days after the record date upon the
exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that options,
warrants or convertible securities that are held by such person (but not
those held by any other person) and that are currently exercisable (i.e.,
that are exercisable within 60 days from the date hereof) have been
exercised. Unless otherwise noted, we believe that all persons named in the
table have sole voting and investment power with respect to all shares
beneficially owned by them.
(2) Based upon shares of Common Stock outstanding at the Record Date of
47,670,186.
(3) Based upon information contained in a Form 5 filed by Mr. Huai and certain
other information. Consists of (i) 10,760,760 shares of Common Stock held
by Mr. Huai and (ii) 43,700 shares of Common Stock held by The 2002 ReiJane
Huai Revocable Trust, of which Mr. Huai is a trustee. Mr. Huai disclaims
beneficial ownership of the securities held by The 2002 ReiJane Huai
Revocable Trust, except to the extent of his equity interest therein.
(4) Based upon information contained in a Form 4 and a report on Schedule 13D,
as amended (the "Wheatley 13D") filed jointly by Barry Rubenstein,
Brookwood Partners, L.P. ("Brookwood"), Seneca Ventures ("Seneca"),
Wheatley Associates III, L.P. ("Wheatley Associates"), Wheatley Foreign
Partners, L.P. ("Wheatley Foreign"), Wheatley Foreign Partners III, L.P.
("Wheatley Foreign III"), Wheatley Partners, L.P. ("Wheatley"), Wheatley
Partners II, L.P. ("Wheatley II"), Wheatley Partners III, L.P. ("Wheatley
III"), Woodland Partners, Woodland Venture Fund ("Woodland Fund"), and
certain other entities with the Securities and Exchange Commission ("SEC"),
as well as certain other information. Consists of (i) 1,500,903 shares of
Common Stock held by Mr. Rubenstein, (ii) 395,217 shares of common stock
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held by Brookwood, (iii) 642,453 shares of common stock held by Seneca,
(iv) 299,809 shares of common stock held by Wheatley Associates, (v) 41,008
shares of common stock held by Wheatley Foreign, (vi) 293,012 shares of
common stock held by Wheatley Foreign III, (vii) 484,051 shares of common
stock held by Wheatley, (viii) 180,089 shares of common stock held by
Wheatley II, (ix) 1,370,015 shares of common stock held by Wheatley III,
(x) 692,983 shares of common stock held by Woodland Partners and (xi)
743,513 shares of common stock held by Woodland Fund. Does not include
1,258 shares of common stock held by Mr. Rubenstein's spouse, Marilyn
Rubenstein. Mr. Rubenstein disclaims beneficial ownership of the securities
held by Wheatley, Wheatley Foreign, Wheatley II, Wheatley III, Wheatley
Foreign III, Wheatley Associates, Seneca, Woodland Fund, Woodland Partners
and Brookwood, except to the extent of his respective equity interest
therein.
(5) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 1,934,705 shares of Common Stock held by Irwin
Lieber, (ii) 484,051 shares of Common Stock held by Wheatley, (iii) 41,008
shares of Common Stock held by Wheatley Foreign, (iv) 180,089 shares of
Common Stock held by Wheatley II, (v) 1,370,015 shares of Common Stock held
by Wheatley III, (vi) 293,012 shares of Common Stock held by Wheatley
Foreign III, and (vii) 299,809 shares of Common Stock held by Wheatley
Associates. Mr. Lieber disclaims beneficial ownership of the securities
held by Wheatley, Wheatley Foreign, Wheatley II, Wheatley III, Wheatley
Foreign III and Wheatley Associates, except to the extent of his respective
equity interests therein.
(6) Based on information contained in a report on Schedule 13G filed jointly on
January 7, 2005 by Eli Oxenhorn and the Eli Oxenhorn Family Limited
Partnership (the "EOFLP"). Consists of (i) 2,898,932 shares of Common Stock
held by Mr. Oxenhorn (including 3,500 shares held by the Eli Oxenhorn SEP
IRA account and 8,000 shares held by the Eli Oxenhorn Rollover IRA Account)
and (ii) 241,077 shares of Common Stock held by the EOFLP. Mr. Oxenhorn
disclaims beneficial ownership of the securities held by the EOFLP, except
to the extent of his respective equity interests therein.
(7) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 469,680 shares of Common Stock held by Barry
Fingerhut, (ii) 484,051 shares of Common Stock held by Wheatley, (iii)
41,008 shares of Common Stock held by Wheatley Foreign, (iv) 180,089 shares
of Common Stock held by Wheatley II, (v) 1,370,015 shares of Common Stock
held by Wheatley III, (vi) 293,012 shares of Common Stock held by Wheatley
Foreign III, (vii) 299,809 shares of Common Stock held by Wheatley
Associates, and (viii) 20,000 shares held by a partnership in which Mr.
Fingerhut is a general partner. Mr. Fingerhut disclaims beneficial
ownership of the securities held by Wheatley, Wheatley Foreign, Wheatley
II, Wheatley III, Wheatley Foreign III and Wheatley Associates, except to
the extent of his respective equity interests therein.
(8) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 86,622 shares of Common Stock held by Seth
Lieber, (ii) 484,051 shares of Common Stock held by Wheatley, (iii) 41,008
shares of Common Stock held by Wheatley Foreign, (iv) 180,089 shares of
Common Stock held by Wheatley II, (v) 1,370,015 shares of Common Stock held
by Wheatley III, (vi) 293,012 shares of Common Stock held by Wheatley
Foreign III, (vii) 299,809 shares of Common Stock held by Wheatley
Associates and (viii) 259,868 shares of Common Stock held by Applegreen.
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Mr. Lieber disclaims beneficial ownership of the securities held by
Wheatley, Wheatley Foreign, Wheatley II, Wheatley III, Wheatley Foreign
III, Wheatley Associates and Applegreen, except to the extent of his
respective equity interests therein.
(9) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 484,051 shares of Common Stock held by
Wheatley, (ii) 41,008 shares of Common Stock held by Wheatley Foreign,
(iii) 180,089 shares of Common Stock held by Wheatley II, (iv) 1,370,015
shares of Common Stock held by Wheatley III, (v) 293,012 shares of Common
Stock held by Wheatley Foreign III, (vi) 299,809 shares of Common Stock
held by Wheatley Associates and (vii) 259,868 shares of Common Stock held
by Applegreen Partners. Mr. Lieber disclaims beneficial ownership of the
securities held by Wheatley, Wheatley Foreign, Wheatley II, Wheatley III,
Wheatley Foreign III, Wheatley Associates and Applegreen, except to the
extent of his respective equity interests therein.
(10) Based upon information contained in the Wheatley 13D and certain other
information. Consists of (i) 1,258 shares of Common Stock held by Marilyn
Rubenstein, (ii) 642,453 shares of Common Stock held by Seneca, (iii)
743,513 shares of Common Stock held by Woodland Fund, (iv) 692,983 shares
of Common Stock held by Woodland Partners and (v) 395,217 shares of Common
Stock held by Brookwood. Mrs. Rubenstein disclaims beneficial ownership of
the securities held by Seneca, Woodland Fund, Woodland Partners and
Brookwood, except to the extent of her respective equity interests therein.
Does not include 1,500,903 shares of Common Stock held by Mrs. Rubenstein's
spouse, Barry Rubenstein.
(11) Based on information contained in a Form 3 and a Form 4 filed by Mr. Bock
and certain other information.
(12) Based on information contained in a Form 3 and a Form 4 filed by Mr. Carney
and certain other information. Consists of (i) 500 shares held by Mr.
Carney and (ii) 38,329 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will be exercisable within 60
days of March 22, 2005.
(13) Based on information contained in a Form 4 filed by Mr. Dolin and certain
other information. Consists of (i) 40,000 shares held by Northern Union
Club and (ii) 57,805 shares of Common Stock issuable upon exercise of
options that are currently exercisable or will be exercisable within 60
days of March 22, 2005. Mr. Dolin is a general partner of Mordo Partners,
which is a general partner of Northern Union Club. Mr. Dolin disclaims
beneficial ownership of the securities held by Northern Union Club, except
to the extent of his equity interest therein.
(14) Based on information contained in a Form 4 filed by Mr. Fischer and certain
other information. Consists of (i) 19,500 shares held by Mr. Fischer and
(ii) 42,805 shares of Common Stock issuable upon exercise of options that
are currently exercisable or will be exercisable within 60 days of March
22, 2005. Excludes 1,000 shares of Common Stock held by Mr. Fischer as a
custodian for his daughter. Mr. Fischer disclaims beneficial ownership of
the securities held as a custodian for his daughter, except to the extent
of his equity interest therein.
(15) Based on certain information provided by Mr. Kaufman.
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(16) Based on information contained in a Form 4 filed by Mr. Lam and certain
other information. Consists of (i) 60,503 shares held by Mr. Lam and (ii)
365,742 shares of Common Stock issuable upon exercise of options that are
currently exercisable or will be exercisable within 60 days of March 22,
2005.
(17) Based on information contained in a Form 3 and a Form 4 filed by Mr. Weber
and certain other information. Consists of 123,279 shares of Common Stock
issuable upon exercise of options that are currently exercisable or will be
exercisable within 60 days of March 22, 2005.
(18) Based on certain information provided by Mr. Wu. Consists of (i) 212,020
shares held by Mr. Wu and (ii) 105,899 shares of Common Stock issuable upon
exercise of options that are currently exercisable or will be exercisable
within 60 days of March 22, 2005.
(19) Consists of (i) 11,121,983 shares held by all directors, nominees for
director and executive officers as a group and (ii) 733,859 shares of
Common Stock issuable upon exercise of options that are currently
exercisable or will be exercisable within 60 days of March 22, 2005.
BOARD OF DIRECTORS
INDEPENDENCE
In accordance with the Company's Corporate Governance Guidelines, and the
Nasdaq Stock Market corporate governance listing standards (the "Nasdaq
Standards"), a majority of the Company's directors must be independent as
determined by the Board. In making its independence determinations for
directors, the Board looks to the Nasdaq Standards.
Under the Nasdaq Standards, a director is independent if: the director is
not employed, nor is the director a family member of anyone employed, by the
Company or any parent or subsidiary; the director is not, and does not have a
family member who is, a partner of the Company's outside auditor or a former
partner or employee of the outside auditor who worked on the Company's audit
during the past three years; the director has not, and does not have a family
member who has, accepted more than $60,000 during the current or past three
fiscal years from the Company or any of its affiliates; the director is not, nor
is any family member of the director, a partner in, or a controlling shareholder
or an executive officer of, any organization to which the Company made, or from
which the Company received, payments for property or services that exceed five
percent of the recipient's consolidated gross revenues or $200,000, whichever is
more; and the director is not, and does not have any family member who is, an
executive officer of another company where any of the Company's executive
officers serve on the other company's compensation committee.
The Board of Directors currently consists of five directors, four of whom,
Messrs. Bock, Carney, Dolin and Fischer, are independent. If Mr. Kaufman is
elected as a director, he will be independent. Mr. Huai is a non-independent
management director.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's bylaws authorize the Board of Directors to fix the number of
directors and provide that the directors shall be divided into three classes,
with the classes of directors serving for staggered, three-year terms. From
October, 2001, until March, 2003, the number of directors was fixed at four. In
March, 2003, the Company's directors voted to increase the number of members of
the Board of Directors to five. The Company's directors are proposing that the
number of members of the Board of Directors be increased to six.
On August 6, 2004, Steven Owings resigned from the Board of Directors due
to personal health issues. On January 6, 2005, Steven L. Bock was elected by the
Board of Directors to fill the remainder of Mr. Owings's term.
The Company's nominating procedures, including procedures for director
candidates proposed to be nominated by stockholders, and director
qualifications, are set forth below.
Steve R. Fischer and Alan W. Kaufman were nominated by the Company's
Nominating and Corporate Governance Committee as the Board of Directors'
nominees for director. Mr. Fischer is currently a director of the Company. Mr.
Fischer would be elected for a full three-year term. Mr. Kaufman would be
elected to serve a full three-year term in a newly created directorship. It is
proposed that Mr. Fischer and Mr. Kaufman be elected to serve until the Annual
Meeting of Stockholders to be held in 2008 and until their successors are
elected and shall have qualified.
Unless authority is specifically withheld, proxies will be voted for the
election of each of the nominees below to serve as a director of the Company for
a term which will expire at the Company's 2008 Annual Meeting of Stockholders
and until a successor is elected and qualified. If any one or more of such
nominees should for any reason become unavailable for election, the persons
named in the accompanying form of proxy may vote for the election of such
substitute nominees as the Board of Directors may propose. The accompanying form
of proxy contains a discretionary grant of authority with respect to this
matter.
Director
Name Position Age Since
---- -------- --- -----
Steven R. Fischer Director Nominee 59 2000
Alan W. Kaufman Director Nominee 66 N/A
STEVEN R. FISCHER has been president of North Fork Business Capital, a
provider of asset based and structured finance loans of up to $150 million for
corporate mergers and acquisitions, recapitalizations, and for general working
capital purposes, since July 2004. From February 2004 until July 2004, he was a
consultant to financial institutions. From 1992 to February, 2004, he held
multiple executive management and financial positions, including most recently
President, with Transamerica Business Capital Corporation, a member of the
Transamerica Finance Corporation family of companies, specializing in secured
lending for mergers, acquisitions and restructurings. From 1981 to 1992, he
served as vice president and regional manager of Citibank, N.A. Since 1995, he
has served as a director of ScanSource, Inc., a value-added distributor of POS
and bar code products. Beginning in 2001 he served on the board of advisors of
Keltic Financial LLC., a privately held finance company that funds middle market
companies. He holds a B.S. in Economics and Accounting from Queens College and
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an M.B.A. from Baruch College. Mr. Fischer has been a director of the Company
since August 2001.
ALAN W. KAUFMAN has been a director of NetIQ Corporation, a provider of
integrated systems and security management solutions, since August 1997. Mr.
Kaufman served as a director of QueryObject Systems Corp., a developer and
marketer of proprietary business intelligence software, from October 1997 to
March 2002. He also served as QueryObject Systems' Chairman of the Board from
May 1998 to October 1999, and as President and Chief Executive Officer from
October 1997 to December 1998, when he retired. From December 1996 to October
1997, Mr. Kaufman was an independent consultant. From April 1986 to December
1996, Mr. Kaufman held various positions at Cheyenne Software, most recently as
Executive Vice President of Sales. Mr. Kaufman was the founding president of,
and currently serves on the Board of Directors of, the New York Software
Industry Association. He serves as a Trustee of Outward Bound USA and is on the
Advisory Board of the CUNY (City University of New York) Institute for Software
Design and Development. Mr. Kaufman holds a B.S. in electrical engineering from
Tufts University.
The names of the directors, whose terms expire at the 2006 and 2007 Annual
Meetings of Stockholders of the Company, who are currently serving their terms,
are set forth below:
Director
Name Position Age Since
---- -------- --- -----
Steven L. Bock Director 51 2005
Patrick B. Carney Director 40 2003
Lawrence S. Dolin Director 60 2001
STEVEN L. BOCK has been Chairman and CEO of Unger Software Corporation, a
leading provider of financial planning and profiling software for advisors and
other finance industry professionals, since December 2002. Prior to joining
Unger Software, Mr. Bock was a consultant to early-stage companies. He served as
a Director and Interim Chief Operating Officer of B2BVideo Network from November
2001 to May 2002. From December 1990 through July 2000, Mr. Bock was Chairman,
Chief Executive Officer and President of Specialty Catalog Corp., a direct
marketer targeting niche consumer product categories through a variety of
catalogs and E-commerce web sites. Prior to joining Specialty Catalog, Mr. Bock
was an officer at investment holding and management firms and was a partner of a
law firm. Mr. Bock holds a B.S. from the State University of New York at Albany,
and a J.D. from Harvard Law School. Mr. Bock has been a Director of the Company
since January 2005, and his term expires in 2006.
PATRICK B. CARNEY has been General Manager of Melillo Consulting, Inc., a
solutions oriented systems integrator, since April 1, 2005. From November, 2004,
through March, 2005, Mr. Carney was an independent consultant to senior
management and senior IT executives. From October 2003, through October, 2004,
Mr. Carney was the Chief Technology Officer for Barr Laboratories Inc., a
specialty pharmaceutical company. From August 2000 through July 2003 he served
as the Chief Information Officer for the North Shore - Long Island Jewish Health
System where he was responsible for strategic IS planning and managing the IS
and Telecommunications operations throughout the Health System. From 1995 to
July, 2000, Mr. Carney was the Vice President & Chief Information Officer for
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Staten Island University Hospital. Mr. Carney's career also includes IT
management experience in other industries as he was also the Director of
Information Systems for ABB Power Generation Inc., a subsidiary of the
Zurich-based Asea Brown Boveri, and also held positions at KPMG Peat Marwick,
Wang Laboratories, and IBM Corporation. Mr. Carney received a BS degree from
Manhattan College. Mr. Carney has been a director of the Company since May 2003,
and his term as a director of the Company expires in 2006.
LAWRENCE S. DOLIN has held several positions with Noteworthy Medical
Systems, Inc. ("Noteworthy"), a provider of computerized patient record
software, since July 1998. He is currently serving as Noteworthy's chairman,
president and chief executive officer. Since January 1996, Mr. Dolin has been a
general partner of Mordo Partners, an investment management partnership. Since
1981, Mr. Dolin has served as a director of Morgan's Foods, Inc., which owns,
through wholly-owned subsidiaries, KFC restaurants, Taco Bell restaurants and
Pizza Hut restaurants. Mr. Dolin holds a B.A. from Case Western Reserve
University and a J.D. from Case Western Reserve University. Mr. Dolin has been a
director of the Company since August 2001, and his term as a director of the
Company expires in 2007.
REIJANE HUAI has served as President and Chief Executive Officer of the
Company and its predecessor since December 2000 and has served as Chairman of
the Board of the Company since August 2001. Mr. Huai also served as a director
of the Company's predecessor from July 2000 to August 2001. Mr. Huai came to the
Company with a career in software development and management. As executive vice
president and general manager, Asia, for Computer Associates International,
Inc., he was responsible for sales, marketing and the development of strategic
joint ventures in the region. Mr. Huai joined Computer Associates in 1996 with
its acquisition of Cheyenne Software, Inc., where he was president and chief
executive officer. Mr. Huai joined Cheyenne Software, Inc., in 1985 as manager
of research and development of ARCserve, the industry's first storage management
solution for the client/server environment. Mr. Huai received a master's degree
in computer science from the State University of New York at Stony Brook in
1985. Mr. Huai's term as a director of the Company expires in 2007.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES.
MEETINGS
The Board of Directors met on twelve occasions during the fiscal year ended
December 31, 2004. In addition to the meetings, the members of the Board of
Directors sometimes take action by unanimous written consent in lieu of a
meeting, which is permitted. All Directors attended at least 75% of the meetings
of the Board of Directors.
10
COMMITTEES
The Board of Directors currently has three committees: the Audit Committee;
the Compensation and Stock Option Committee; and the Nominating and Corporate
Governance Committee. The charter of each committee is available on the
Company's website at www.falconstor.com/governance.asp. From January 1, 2004
through November 8, 2004, the Board of Directors had four committees: the Audit
Committee; the Compensation Committee; the Stock Option Committee; and the
Nominating and Corporate Governance Committee. The Compensation Committee and
the Stock Option Committee were merged in November, 2004.
AUDIT COMMITTEE
The Audit Committee consists of Messrs. Bock, Dolin, and Fischer (Chair).
From January 1, 2004 through August 6, 2004, the Audit Committee consisted of
Messrs. Dolin and Fischer and Steven H. Owings. From August 6, 2004, through
January 6, 2005, the Audit Committee consisted of Messrs. Dolin and Fischer. The
Audit Committee is appointed by the Board to assist the Board in monitoring (1)
the integrity of the financial statements of the Company, (2) the independent
auditor's qualifications and independence, (3) the performance of the Company's
internal audit function and independent auditors, (4) the integrity of
management and information systems and internal controls, and (5) the compliance
by the Company with legal and regulatory requirements.
Each member of the Audit Committee is required to be "independent" as
defined in the Nasdaq Standards and in Section 301of the Sarbanes-Oxley Act of
2002 (the "Act") and Rule 10A-3 of the Securities Exchange Act of 1934, as
amended. The Board has determined that each member of the Audit Committee is
"independent" under these standards. In addition, the Board has determined that,
as required by the Nasdaq Standards, each member of the Audit Committee was able
to read and to understand financial statements at the time of his appointment to
the Audit Committee.
The Board has further determined that Mr. Fischer meets the definition of
"audit committee financial expert," and therefore meets comparable Nasdaq
Standard requirements, because he has an understanding of financial statements
and generally accepted accounting principles ("GAAP"); has the ability to assess
GAAP in connection with the accounting for estimates, accruals, and reserves;
has experience in analyzing and evaluating financial statements that present a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably be
expected to be raised by the Company's financial statements; has an
understanding of internal controls and procedures for financial reporting; and
has an understanding of audit committee functions. Mr. Fischer acquired these
attributes through education and experience consistent with the requirements of
the Act.
The Audit Committee met four times during the fiscal year ended December
31, 2004. All members of the Audit Committee attended at least 75% of the
meetings of the committee during the times they were members of the Audit
Committee.
The Company's Board of Directors has adopted, and annually reviews, an
Audit Committee Charter and Guidelines for Pre-Approval of Independent Auditor
Services. The Charter and the Guidelines are attached to this Proxy Statement as
Exhibits A and B, respectively.
11
COMPENSATION AND STOCK OPTION COMMITTEE
The Compensation and Stock Option Committee consists of Messrs. Carney,
Dolin (Chair) and Fischer. Prior to November 8, 2004, the Board of Directors had
a Compensation Committee and a Stock Option Committee. From January 1, 2004,
through August 6, 2004, the Compensation Committee consisted of Messrs. Carney
and Fischer and Steven H. Owings. From August 6, 2004, through November 8, 2004,
it consisted of Messrs. Carney and Fischer. From January 1, 2004, through August
6, 2004, the Stock Option Committee consisted of Messrs. Carney and Dolin and
Steven H. Owings. From August 6, 2004, through November 8, 2004, the Stock
Option Committee consisted of Messrs. Carney and Dolin. The Compensation and
Stock Option Committee is appointed by the Board (i) to discharge the
responsibilities of the Board relating to compensation of the Company's
executives, (ii) to produce the annual report on executive compensation that is
required by the rules of the Securities and Exchange Commission to be included
in the Company's annual proxy statement, and (iii) to administer, and to approve
awards under, the Company's equity-based compensation plans for employees. Under
the Compensation and Stock Option Committee Charter adopted in January 2005, all
members of the Compensation Committee are required to be "independent" as
defined in the Nasdaq Standards. The Board has determined that all of the
current members of the Compensation Committee are "independent" under these
standards.
The Compensation Committee met three times during the fiscal year ended
December 31, 2004. The Stock Option Committee met two times during the fiscal
year ended December 31, 2004. All members of the Compensation Committee and the
Stock Option Committee attended at least 75% of the meetings of the committee
during the times they were members of the Compensation and Stock Option
Committee. The Compensation Committee also took action by unanimous written
consent in lieu of a meeting.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The Nominating and Corporate Governance Committee consists of Messrs. Bock,
Carney (Chair), Dolin, and Fischer. From January 1, 2004, through August 6,
2004, it consisted of Messrs. Carney, Dolin and Fischer and Steven H. Owings.
From August 6, 2004, through January 6, 2005, it consisted of Messrs. Carney,
Dolin and Fischer. The Nominating and Corporate Governance Committee is
appointed by the Board: (i) to identify individuals qualified to become Board
members, (ii) to recommend to the Board director candidates for each annual
meeting of stockholders or as necessary to fill vacancies and newly created
directorships and (iii) to perform a leadership role in shaping the Company's
corporate governance policies, including developing and recommending to the
Board a set of corporate governance principles. Under the Nominating and
Corporate Governance Committee Charter, all members of the Nominating and
Corporate Governance Committee are required to be "independent" as defined in
the Nasdaq Standards. The Board has determined that all of the current members
of the Nominating and Corporate Governance Committee are "independent" under
these standards.
The Nominating and Corporate Governance Committee met two times during the
fiscal year ended December 31, 2004. All members of the Nominating and Corporate
Governance Committee attended at least 75% of the meetings of the committee
during the times they were members of the Nominating and Corporate Governance
Committee.
12
COMPENSATION
Directors who are also employees receive no compensation for serving on the
Company's Board of Directors. Non-employee directors are reimbursed for all
travel and other expenses incurred in connection with attending Board and
Committee meetings.
Pursuant to the 2004 Outside Directors Stock Option Plan (the "2004 Plan"),
each non-employee director of the Company is entitled upon becoming a
non-employee director to receive an initial grant of options to acquire 50,000
shares of Common Stock and an annual grant of options to acquire 10,000 shares
of Common Stock on the date of each Annual Meeting of Stockholders of the
Company. These stock options are granted with per share exercise prices equal to
the fair market value of the Common Stock on the date of grant. A director who
received an initial grant of options to acquire 50,000 shares of Common Stock
within six months prior to an Annual Meeting of Stockholders is not entitled to
receive an annual grant of options to acquire 10,000 shares of Common Stock on
the date of the Annual Meeting. A director who serves as Chairperson of a
committee of the Board of Directors for at least six months during a fiscal year
is entitled to receive an additional grant of options to acquire 5,000 shares on
the date of the next Annual Meeting of Stockholders. One-third of the options
vest on the first anniversary of the date of grant, and one-twenty fourth of the
remainder vests each month thereafter for twenty-four months.
In May 2004, each of Messrs. Dolin and Fischer received options to purchase
15,000 shares of Common Stock, and Mr. Carney received options to purchase
10,000 shares of Common Stock at an exercise price of $6.32 per share as an
annual grant under the 2004 Plan. Mr. Bock received options to purchase 50,000
shares of Common Stock at an exercise price of $8.20 per share as his initial
grant of options upon becoming a director in January, 2005.
NOMINATING PROCEDURES AND DIRECTOR QUALIFICATIONS
The Nominating and Corporate Governance Committee has adopted the following
policies regarding nominations and director qualifications:
I. Consideration of Nominees Recommended by Shareholders
The Committee recognizes that qualified candidates for nomination for
Director can come from many different sources, including from the Company's
shareholders. The Committee will therefore consider any nominee who meets the
minimum qualifications set forth below.
To propose a nominee, a shareholder must provide the following information:
1. The shareholder's name and, if different, the name of the holder of
record of the shares.
2. The shareholder's address and telephone number.
3. The name of the proposed nominee.
4. The address and phone number of the proposed nominee.
5. A listing of the proposed nominee's qualifications.
13
6. A statement by the shareholder revealing whether the proposed nominee
has assented to the submission of her/his name by the shareholder.
7. A statement from the shareholder describing any business or other
relationship with the nominee.
8. A statement from the shareholder stating why the shareholder believes
the nominee would be a valuable addition to the Company's Board of
Directors.
The shareholder should submit the required information to:
Nominating and Corporate Governance Committee
c/o General Counsel
FalconStor Software, Inc.
2 Huntington Quadrangle
Melville, NY 11747
With a copy to:
Director Human Resources
FalconStor Software, Inc.
2 Huntington Quadrangle
Melville, NY 11747
If any information is missing, the proposed nominee will not be considered.
II. Qualifications for Candidates
The Committee believes that the Company and its shareholders are best
served by having directors from diverse backgrounds who can bring different
skills to the Company. It is therefore not possible to create a rigid list of
qualifications for Director candidates. However, absent unique circumstances,
the Committee expects that each candidate should have the following minimum
qualifications:
o Substantial experience with technology companies. This experience may
be the result of employment with a technology company or may be gained
through other means, such as financial analysis of technology
companies;
o The highest level of personal and professional ethics, integrity and
values;
o An inquiring and independent mind;
o Practical wisdom and mature judgment;
o Expertise that is useful to the Company and complementary to the
background and experience of other Board members, so that an optimal
balance of Board members can be achieved and maintained;
o Willingness to devote the required time to carrying out the duties and
responsibilities of Board membership;
14
o Commitment to serve on the Board for several years to develop
knowledge about the Company's business;
o Willingness to represent the best interests of all stockholders and
objectively appraise management performance; and
o Involvement only in activities or interests that do not conflict with
the director's responsibilities to the Company and its stockholders.
At any time, the Committee may be looking for director candidates with
certain qualifications or skills to replace departing directors or to complement
the skills of existing directors and to add to the value of the Board of
Directors.
III. Identification and Evaluation of Candidates
Candidates for director may come from many different sources including,
among others, recommendations from current directors, recommendations from
management, third-party search organizations, and shareholders.
In each instance, the Committee will perform a thorough examination of the
candidate. An initial screening will be performed to ensure that the candidate
meets the minimum qualifications set forth above and has skills that would
enhance the Board of Directors. Following the initial screening, if the
candidate is still viewed as a potential nominee, the Committee will perform
additional evaluations including, among other things, some or all of the
following: Detailed resume review; personal interviews; interviews with
employer(s); and interviews with peer(s).
All candidates will be reviewed to determine whether they meet the
independence standards of the Nasdaq Standards. Failure to meet the independence
standards may be a disqualifying factor based on the Board of Director's
composition at the time. Even if failure to meet the independence standards is
not by itself disqualifying, it will be taken into account by the Committee in
determining whether the candidate would make a valuable contribution to the
Board of Directors.
CONTACTING THE BOARD OF DIRECTORS
Stockholders and others may contact FalconStor's Board of Directors by
sending a letter to:
Board of Directors
FalconStor Software, Inc.
2 Huntington Quadrangle, Suite 2S01
Melville, NY 11747
or by clicking on the "Contact FalconStor's Board of Directors" link on the
FalconStor Corporate Governance home page at www.falconstor.com/governance.asp.
Communications directed to the Board of Directors are screened by the
Company's Legal and/or Investor Relations departments. Routine requests for
Company information are handled by the appropriate Company department. Other
communications are reviewed to determine if forwarding to the Board of Directors
is necessary or appropriate. The Board of Directors receives a quarterly summary
15
of all communications that are not forwarded to the Board's attention. All
communications are kept on file for two years for any Director who wishes to
view them.
16
MANAGEMENT
EXECUTIVE OFFICERS OF THE COMPANY
The following table contains the names, positions and ages of the executive
officers of the Company who are not directors.
NAME POSITION AGE
---- -------- ---
Wayne Lam Vice President 41
James Weber Chief Financial Officer, Treasurer and Vice President 34
Bernard Wu Vice President, Business Development 47
WAYNE LAM has served as a vice president of the Company and its predecessor
entity since April 2000. Mr. Lam has more than 15 years of software development
and corporate management experience. As vice president at Computer Associates,
he held various roles in product marketing, business development and product
development. Mr. Lam joined Computer Associates in 1996 with its acquisition of
Cheyenne Software, where he held various positions including general manager of
Cheyenne Software Netware Division, director of business development, and head
of Cheyenne Communications, a business development unit focusing on
communication software. From 1989 to 1993 he was co-founder and chief executive
officer of Applied Programming Technologies, where he managed all aspects of its
operations and development projects. From 1987 to 1989 he was vice president of
engineering at Advanced Graphic Applications, where he managed the development
of PC-based document management systems and optical storage device drivers. Mr.
Lam has a B.E. in Electrical Engineering from Cooper Union, where he was
involved with a privately funded research project studying the feasibility of
building paperless offices using optical storage devices. The success of the
project led to the formation of Advanced Graphic Applications.
JAMES WEBER has served as Chief Financial Officer, Treasurer and a Vice
President since February, 2004. Mr. Weber has over 10 years of financial,
accounting and management experience. Prior to becoming Chief Financial Officer,
Mr. Weber served as worldwide Corporate Controller of FalconStor since April
2001. From 1998 through 2001, Mr. Weber served as Corporate Controller for
theglobe.com, an Internet community. Before joining theglobe.com, Mr. Weber had
been an audit manager with KPMG and had several years of public accounting
experience. Mr. Weber is a Certified Public Accountant in the State of New York
and received his Bachelor of Science degree in accounting from Fordham
University.
BERNARD WU has served as Vice President of Business Development, since
November, 2000. From 1998 to October 2000, Mr. Wu was Senior Vice President of
sales and marketing for the Internet Outsourcing Division of Trend Micro, a
leading Internet security software company. Mr. Wu had worldwide responsibility
for defining, launching, and managing OEM, service, and alliance partnerships
with ISPs, ASPs, telecommunication carriers, and other software companies for
the purpose of offering network-based security services. Prior to that, Mr. Wu
had 15 years' experience in various executive and managerial positions at
companies such as Intel, Seagate, Conner Peripherals, and Computer
Associates/Cheyenne in areas including product development, marketing, and
OEM/channel sales of RAID, optical, and tape-based storage management software
and subsystems. In 1996 he co-authored a patent in the area of SCSI enclosure
management services which has been widely adopted in the industry. Mr. Wu has a
17
BS/MS in engineering from the University of California at Berkeley and an MBA
from University of California at Los Angeles Anderson School of Management.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth, for the fiscal
years indicated, all compensation awarded to, paid to or earned by the Company's
chief executive officer and the Company's other executive officers
(collectively, the "Named Executive Officers"). The executive compensation
provided below reflects the executive compensation information of the Company
for the years indicated.
SUMMARY COMPENSATION TABLE
Name and Principal Long Term
Position Annual Compensation Compensation
---------------------------------- ------------------------------------------ ------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Year ($) ($) ($)(2) Options (#) ($)
----------- -------- ------------- ------------ ------------ ------------
ReiJane Huai ..................... 2004 $191,667 -- $ 16,000 -- --
Chairman and Chief 2003 $150,000 -- $ 24,000 -- --
Executive Officer 2002 $150,000 -- $ 24,000 -- --
James Weber (1) .................. 2004 $150,000 -- -- -- --
Chief Financial Officer 2003 $ 90,000 $ 18,000 -- 50,000 --
and Vice President 2002 $ 85,833 $ 13,500 -- 41,340 --
Wayne Lam ........................ 2004 $150,000 -- -- -- --
Vice President 2003 $120,000 -- -- 100,000 --
2002 $100,000 -- -- 225,000 --
Bernard Wu ....................... 2004 $150,000 -- -- -- --
Vice President-Business 2003 $150,000 -- -- 100,000 --
Development 2002 $150,000 -- -- 80,000 --
(1) Mr. Weber was appointed Chief Financial Officer and Vice President on
February 4, 2004.
(2) Mr. Huai was given automobile allowances of $16,000 in 2004 and $24,000 in
2003 and 2002.
OPTION GRANTS DURING 2004 FISCAL YEAR
The Company did not grant any options to purchase Common Stock to the
Company's Named Executive Officers during the 2004 fiscal year. The Company
currently does not have any plans providing for the grant of stock appreciation
rights.
18
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning unexercised
stock options held by the Named Executive Officers as of December 31, 2004. No
options were exercised by the Named Executive Officers during 2004.
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at 2004 Money Options at 2004 Fiscal
Fiscal Year-End (#) Year-End ($)(1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- -------------------------------- -------------------------
ReiJane Huai 0/0 0/0
James Weber 102,923/47,556 $729,344/$215,798
Wayne Lam 340,241/143,502 $2,272,028/$473,170
Bernard Wu 95,699/104,401 $374,148/$272,702
-------------------
(1) On December 31, 2004, the last reported sales price of the Common Stock as
reported on The Nasdaq National Market was $9.57.
19
EQUITY COMPENSATION PLAN INFORMATION
The Company currently does not have any equity compensation plans not
approved by security holders.
Number of Number of Securities
Securities to be Weighted - Remaining Available for
Issued upon Average exercise Future Issuance Under
Exercise of Price of Equity Compensation
Outstanding Outstanding Plans (Excluding
Options, Warrants Options, Warrants Securities Reflected in
and Rights(1) and Rights(1) Column (a))(1)
Plan Category (a) (b) (c)
------------- --- --- ---
Equity compensation
plans approved by
security holders........................ 8,973,358 $ 4.71 2,698,974
(1) As of December 31, 2004.
EMPLOYMENT AGREEMENTS
The Company entered into an amended and restated employment agreement with
ReiJane Huai dated as of September 1, 2004, providing for the employment of Mr.
Huai as President and Chief Executive Officer. The employment agreement provides
that Mr. Huai shall devote substantially all of his professional time to the
business of the Company. The employment agreement provides a base salary in the
amount of $275,000. The agreement further provides for the potential payment of
bonuses to Mr. Huai for the periods ending December 31, 2005, December 31, 2006,
and December 31, 2007. For a description of these bonuses, please see the 2004
COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION, below.
The agreement contains non-competition, confidentiality and non-solicitation
provisions that apply for twenty-four months after cessation of employment. The
agreement expires on December 31, 2007.
SEVERANCE AGREEMENTS
The Company has entered into Change of Control Contracts with each of
ReiJane Huai, Wayne Lam, and Bernard Wu dated as of December 2001, and with
James Weber, dated as of February 2004, that provide for severance pay and
incidental benefits if there is a change in control of the Company (as defined
in the Change of Control Contracts). The payment for each of Messrs. Huai and
Lam is a lump sum payment equal to 4.0 times one year's annual compensation. The
payment for each of Mr. Weber and Mr. Wu is a lump sum payment equal to 3.0
times one year's annual compensation. The agreements also provide such
individuals with the right to replace all stock options whether vested or not
with fully vested stock options, or alternatively the right to receive a cash
20
payment for surrendering the options equal to the difference between the full
exercise price of each option surrendered and the greater of the price per share
paid by the acquirer in the change of control transaction or the market price of
the Company's Common Stock on the date of the change of control. Finally, the
agreements provide that if any excise taxes are imposed on Messrs. Huai, Lam,
Weber and Wu by Section 4999 of the Internal Revenue Code of 1986, as amended,
the Company will make them whole.
REPORT ON REPRICING OF OPTIONS. None of the stock options granted under any
of the Company's plans was repriced in the fiscal year ended December 31, 2004.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCK AND INSIDER
PARTICIPATION. Messrs. Patrick B. Carney, Lawrence S. Dolin, Steven R. Fischer,
and Steven H. Owings served as members of the Compensation and Stock Option
Committee of the Board of Directors at various times during the fiscal year
ended December 31, 2004. There were no transactions involving the Company and
such individuals.
AUDIT COMMITTEE REPORT
The Board of Directors appoints an Audit Committee each year to review the
Company's financial matters. Please see the AUDIT COMMITTEE discussion in the
BOARD OF DIRECTORS section, above, for a discussion of the Audit Committee.
The Audit Committee meets with the Company's independent accountants and
reviews the scope of their audit, report and recommendations. The Audit
Committee members reviewed and discussed the audited financial statements for
the fiscal year ended December 31, 2004 with management. The Audit Committee
also discussed all the matters required to be discussed by Statement of Auditing
Standard No. 61 with the Company's independent auditors, KPMG LLP. The Audit
Committee received the written disclosures and the letter from KPMG LLP as
required by Independence Standards Board Standard No. 1 and has discussed the
independence of KPMG LLP with representatives of such firm.
Based on their review and the discussions described above, the Audit
Committee recommended to the Board of Directors that the Company's audited
financial statements be included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, to be filed with the SEC.
AUDIT COMMITTEE
---------------
Steven L. Bock
Lawrence S. Dolin
Steven R. Fischer
2004 COMPENSATION AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION:
GENERAL
During the fiscal year ended December 31, 2004, the Compensation and Stock
Option Committee determined the cash and other incentive compensation, if any,
to be paid to the Company's executive officers and key employees. Please see the
21
Compensation and Stock Option Committee discussion in the Board of Directors
section, above, for a discussion of the Compensation and Stock Option Committee.
COMPENSATION PHILOSOPHY
The Compensation and Stock Option Committee's executive compensation
philosophy is to base management's compensation, in part, on achievement of the
Company's annual and long-term performance goals, to provide competitive levels
of compensation, to recognize individual initiative, achievement and length of
service to the Company, and to assist the Company in attracting and retaining
qualified management. The Compensation and Stock Option Committee also believes
that the potential for equity ownership by management is beneficial in aligning
management's and stockholders' interests in the enhancement of stockholder
value. The Company has not established a policy with regard to Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), since the Company
has not paid and does not currently anticipate paying compensation in excess of
$1 million per annum to any employee. The Company believes, however, that any
compensation received by executive officers pursuant to the exercise of options
granted under the FalconStor Software, Inc., 2000 Stock Option Plan qualifies as
"performance-based" compensation.
SALARIES
Base salaries for the Company's executive officers are determined initially
by evaluating the responsibilities of the position held and the experience of
the individual, and by reference to the competitive marketplace for management
talent, including a comparison of base salaries for comparable positions at
other comparable companies. Base salary compensation of executive officers is
reviewed annually by the Compensation and Stock Option Committee, and
recommendations of the Compensation and Stock Option Committee in that regard
are acted upon by the Board of Directors. Annual salary adjustments are
determined by evaluating the competitive marketplace; the performance of the
Company, which includes operating results of the Company and cash management;
quality of products; the performance of the executive; and the length of the
executive's service to the Company and any increased responsibilities assumed by
the executive. The Company places itself between the low and medium levels in
determining salaries compared to the other comparable storage software
companies. The Company does this for two primary reasons. First, the Company has
granted stock options to executive officers to align the interest of the
executive officers with that of the Company and its stockholders: long-term
growth. Second, the Company and its executive officers agree that keeping cash
compensation to a low level will help the Company to reach profitability and to
continue the long-term growth of the Company.
INCENTIVE COMPENSATION
The Company has in the past granted, and may continue to grant,
discretionary bonuses to individual executive officers for personal performance
that substantially exceeded the Company's expectations. This has included, and
might include in the future, taking on tasks outside the normal scope of the
executive officer's responsibilities or overseeing the successful completion of
unforeseen projects. No discretionary bonuses exceeded thirty percent of any
executive officer's salary during 2004.
22
The Company from time to time will consider the payment of discretionary
bonuses to its executive officers on an annual basis after the close of each
fiscal year. Bonuses would be determined based, first, upon the level of
achievement by the Company of its strategic and operating goals and, second,
upon the level of personal achievement by participants. The achievement of goals
by the Company includes, among other things, the performance of the Company as
measured by the operating results of the Company and quality of products. The
achievement of personal goals includes the actual performance of the department
of the Company for which the executive officer has responsibility as compared to
the planned performance thereof, other individual contributions, the ability to
manage and motivate employees and the achievement of assigned projects. Despite
achievement of personal goals, bonuses might not be given based upon the
performance of the Company as a whole. To date, the Company has not granted any
such discretionary bonuses.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Huai's salary for the period January 1, 2004 through August 31, 2004,
was $150,000 on an annual basis. This salary was set in Mr. Huai's initial
employment agreement signed with the Company in September 2001. Mr. Huai also
received a car allowance of $16,000 for the first nine months of 2004 as
provided by the initial employment agreement. Pursuant to the initial employment
agreement, Mr. Huai's salary was to be increased by $15,000 for each year in
which the Company's earnings exceeded the previous year's earnings. Because the
Company was not profitable until the fourth quarter of 2004, no salary increases
were made. The initial employment agreement provided that the Company's Board of
Directors could grant discretionary bonuses to Mr. Huai. The Compensation and
Stock Option Committee determined that because the Company was not yet
profitable, it would not recommend any such bonuses, and no bonuses were paid to
Mr. Huai.
In September, 2004, the Company entered into an Amended and Restated
Employment Agreement (the "Employment Agreement") with Mr. Huai. In setting the
terms of the Employment Agreement, the Compensation and Stock Option Committee
considered the following items, among others:
o the Company's salary structure and compensation philosophy with regard
to all executive officers
o the Company's progress to that point under Mr. Huai's leadership
o the Company's prospects during the term of the Employment Agreement
(September 1, 2004 to December 31, 2007)
o Mr. Huai's expertise and leadership in the field of network storage
software
o the cost to the Company if Mr. Huai departed, including;
o compensation that would be paid to his successor
o the cost of identifying and hiring a successor
o the disruption to the Company's business that might be caused by
his departure
o the intangible cost of the loss of Mr. Huai's vision and
leadership
23
o the compensation paid to chief executive officers of peer companies
both nationwide and in the region of the Company's headquarters.
Based on these criteria, the Compensation and Stock Option Committee
determined that Mr. Huai's base salary was significantly lower than the level
appropriate to a leader with Mr. Huai's experience, vision, and expertise,
particularly in light of the Company's growth under his leadership. The
Compensation and Stock Option Committee set a new base salary of $275,000, which
it believes is still in the low to moderate range. In addition, the Compensation
and Stock Option Committee determined that a provision for non-discretionary
bonuses based on the Company's performance would be appropriate. The Employment
Agreement provides for bonuses as follows:
The Employee shall be entitled to receive a cash bonus (i) for the
period from September 1, 2004 through December 31, 2005 (the "First
Bonus Period") in an amount equal to 2.50% of the Corporation's net
operating income for such period as determined by reference to the
Corporation's income statements (hereinafter referred to as the
"Operating Income") during the First Bonus Period, (ii) for the fiscal
year of the Corporation ending December 31, 2006 (the "Second Bonus
Period") in an amount equal to the product of (A) the Applicable
Percentage (as defined below) and (B) the Operating Income for the
Second Bonus Period and (iii) for the fiscal year of the Corporation
ending December 31, 2007 (the "Third Bonus Period") in an amount equal
to the product of (A) the Applicable Percentage and (B) the Operating
Income for the Third Bonus Period. Each bonus payable to the Employee
shall be paid within 100 days after the last day of the applicable
Bonus Period. For purposes hereof, "Applicable Percentage" shall mean
(I) 1.50%, if the percentage obtained by dividing (x) the Operating
Income for the Second Bonus Period or the Third Bonus Period, as the
case may be, by (y) the shareholders equity of the Corporation during
the Second Bonus Period or the Third Bonus Period, as the case may be,
as determined by reference to the annual audited balance sheet of the
Corporation for the year ending as of the end of such Bonus Period
(hereinafter referred to as "Shareholders Equity") is less than or
equal to 5%, (II) 2.00%, if the percentage obtained by dividing (x)
the Operating Income for the Second Bonus Period or the Third Bonus
Period, as the case may be, by (y) the Shareholders Equity is more
than 5% but less than or equal to 10%, (III) 2.25%, if the percentage
obtained by dividing (x) the Operating Income for the Second Bonus
Period or the Third Bonus Period, as the case may be, by (y) the
Shareholders Equity is more than 10% but less than or equal to 15%,
(IV) 2.50%, if the percentage obtained by dividing (x) the Operating
Income for the Second Bonus Period or the Third Bonus Period, as the
case may be, by (y) the Shareholders Equity is more than 15% but less
than or equal to 20% and (V) 3.00%, if the percentage obtained by
dividing (x) the Operating Income for the Second Bonus Period or the
Third Bonus Period, as the case may be, by (y) the Shareholders Equity
is more than 20%.
The Compensation and Stock Option Committee is currently reevaluating the
baseline for Mr. Huai's bonus calculations to take into account extraordinary or
unusual events, including the expected impact on operating income of new
accounting rules that will require all stock-based compensation to be recognized
as an expense in the Company's financial statements.
24
As set forth above, the first potential bonus under the Employment
Agreement is not payable until calendar year 2006. The Company made no payments
to Mr. Huai in 2004 based on the Company's performance.
STOCK OPTION AND OTHER PLANS
The Company awarded no options to the Named Executive Officers in 2004. It
is the philosophy of the Compensation and Stock Option Committee that stock
options should be awarded to employees of the Company to promote long-term
interests between such employees and the Company's stockholders through an
equity interest in the Company and to assist in the retention of such employees.
The Compensation and Stock Option Committee also considers the amount and terms
of options previously granted to Named Executive Officers. The Compensation and
Stock Option Committee believes the potential for equity ownership by management
is beneficial in aligning management's and stockholders' interest in the
enhancement of stockholder value.
Compensation and Stock Option Committee:
----------------------------------------
Patrick B. Carney
Lawrence S. Dolin
Steven R. Fischer
COMMON STOCK PERFORMANCE: The following graph compares, for each of the periods
indicated, the percentage change in the Company's cumulative total stockholder
return on the Company's Common Stock with the cumulative total return of a) an
index consisting of Computer Software and Services companies, a peer group
index, and b) the Russell 3000 Index, a broad equity market index. The stock
price information for the Company at fiscal year ends prior to fiscal year ended
December 31, 2001, reflects the stock price of Network Peripherals, Inc.
25
[GRAPHIC OMITTED]
ASSUMES $100 INVESTED ON DEC. 31, 1999
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2004
Fiscal year ending
----------------------------------------------------------------------------------------------------------------
12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
----------------------------------------------------------------------------------------------------------------
FalconStor Software, Inc. 100.00 13.63 19.17 8.21 18.50 20.25
MG Group Computer
Software & Services Index 100.00 60.08 53.23 36.25 46.88 51.49
Russell 3000 Index 100.00 91.47 79.91 61.68 79.41 87.41
----------------------------------------------------------------------------------------------------------------
There can be no assurance that the Common Stock's performance will continue
with the same or similar trends depicted in the graph above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
26
PROPOSAL NO. 2
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of KPMG LLP has been selected as the independent public
accountants for the Company for the fiscal year ending December 31, 2005.
Although the selection of accountants does not require ratification, the Audit
Committee of the Board of Directors has directed that the appointment of KPMG
LLP be submitted to stockholders for ratification due to the significance of
their appointment by the Company. If stockholders do not ratify the appointment
of KPMG LLP, the Audit Committee will consider the appointment of other
certified public accountants. A representative of that firm, which served as the
Company's independent public accountants for the fiscal year ended December 31,
2004, is expected to be present at the Meeting and, if he so desires, will have
the opportunity to make a statement, and in any event will be available to
respond to appropriate questions.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees for services rendered by KPMG LLP for the years 2004 and 2003 fell
into the following categories:
AUDIT FEES: Fees billed for professional services rendered by KPMG LLP for
the audit of the Company's annual financial statements for the fiscal years
ended December 31, 2004 and 2003 and the reviews of the financial statements
included in the Company's Form 10-Qs for such fiscal years. Includes, for 2004,
the audit of internal controls under Section 404 of the Sarbanes-Oxley Act of
2002, which fees aggregated $421,075.
AUDIT RELATED FEES: Fees billed for professional services rendered by KPMG
LLP for audit related services.
TAX FEES: Fees billed for tax related services rendered by KPMG LLP to the
Company. These fees consisted primarily of tax compliance services.
ALL OTHER FEES: Fees billed for non-audit related services rendered by KPMG
LLP to the Company.
The approximate fees for each category were as follows:
Year Ended December 31,
Description 2004 2003
Audit Fees $642,175 $204,600
Audit Related Fees $16,550 $7,500
Tax Fees $54,000 $52,450
Other Fees $-- $--
27
The Audit Committee has considered whether the provision by KPMG LLP of the
services covered by the fees other than the audit fees is compatible with
maintaining KPMG LLP's independence and believes that it is compatible.
AUDIT COMMITTEE PRE-APPROVAL PROCEDURES. The Audit Committee's Pre-Approval
Procedures are attached to this Proxy Statement as Exhibit B.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE SELECTION OF THE INDEPENDENT
PUBLIC ACCOUNTANTS.
28
SOLICITATION STATEMENT
The Company will bear all expenses in connection with the solicitation of
proxies. In addition to the use of the mail, solicitations may be made by the
Company's regular employees, by telephone, telegraph or personal contact,
without additional compensation. The Company will, upon their request, reimburse
brokerage houses and persons holding shares of Common Stock in the names of the
Company's nominees for their reasonable expenses in sending solicited material
to their principals.
STOCKHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials to be
distributed in connection with the next annual meeting of stockholders of the
Company, stockholder proposals for such meeting must be submitted to the Company
no later than December 6, 2005.
On May 21, 1998 the SEC adopted an amendment to Rule 14a-4, as promulgated
under the Securities and Exchange Act of 1934, as amended. The amendment to Rule
14a-4(c)(1) governs the Company's use of its discretionary proxy voting
authority with respect to a stockholder proposal, which is not addressed in the
Company's proxy statement. The amendment provides that if the Company does not
receive notice of the proposal at least 45 days prior to the first anniversary
of the date of mailing of the prior year's proxy statement, then the Company
will be permitted to use its discretionary voting authority when the proposal is
raised at the annual meeting, without any discussion of the matter in the proxy
statement.
With respect to the Company's 2006 Annual Meeting of Stockholders, if the
Company is not provided notice of a stockholder proposal, which has not been
timely submitted, for inclusion in the Company's proxy statement by February 19,
2006 the Company will be permitted to use its discretionary voting authority as
outlined above.
OTHER MATTERS
So far as now known, there is no business other than that described above
to be presented for action by the stockholders at the Annual Meeting, but it is
intended that the proxies will be voted upon any other matters and proposals
that may legally come before the Annual Meeting or any adjournment thereof, in
accordance with the discretion of the persons named therein.
ANNUAL REPORT
The Company has sent, or is concurrently sending, to all of its
stockholders of record as of March 22, 2005 a copy of its Annual Report for the
fiscal year ended December 31, 2004. Such report contains the Company's audited
consolidated financial statements for the fiscal year ended December 31, 2004.
29
By Order of the Board of Directors,
/s/ Seth R. Horowitz
Seth R. Horowitz
Secretary
Dated: Melville, New York
April 5, 2005
THE COMPANY WILL FURNISH A FREE COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2004 (WITHOUT EXHIBITS) TO ALL OF ITS
STOCKHOLDERS OF RECORD AS OF MARCH 22, 2005 WHO WILL MAKE A WRITTEN REQUEST TO
MR. JAMES WEBER, CHIEF FINANCIAL OFFICER, FALCONSTOR SOFTWARE, INC., 2
HUNTINGTON QUADRANGLE, SUITE 2S01, MELVILLE, NEW YORK 11747.
30
EXHIBIT A
AUDIT COMMITTEE CHARTER
PURPOSE
The Audit Committee of the Board of Directors is appointed by the Board to
assist the Board in monitoring (1) the integrity of the financial statements of
the Company, (2) the independent auditor's qualifications and independence, (3)
the performance of the Company's internal audit function and independent
auditors, (4) the integrity of management and information systems and internal
controls, and (5) the compliance by the Company with legal and regulatory
requirements.
The Audit Committee shall prepare the report required by the rules of the
Securities and Exchange Commission (the "Commission") to be included in the
Company's annual proxy statement.
COMMITTEE MEMBERSHIP
The Audit Committee shall consist of no fewer than three members. The members of
the Audit Committee shall meet the independence and experience requirements of
the NASDAQ, Section 10A(m)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations of the Commission. At least one
member of the Audit Committee shall be an "audit committee financial expert" as
defined by the Commission. Audit Committee members shall not simultaneously
serve on the audit committees of more than two other public companies. The
members of the Audit Committee shall be appointed by the Board. Audit Committee
members may be replaced by the Board.
MEETINGS
The Audit Committee shall meet as often as it determines, but not less
frequently than quarterly. The Audit Committee shall meet periodically with
management and the independent auditor in separate executive sessions. The Audit
Committee may request any officer or employee of the Company or the Company's
outside counsel or independent auditor to attend a meeting of the Committee or
to meet with any members of, or consultants to, the Committee.
COMMITTEE AUTHORITY AND RESPONSIBILITIES
The Audit Committee shall have the sole authority to appoint or replace the
independent auditor (subject, if applicable, to shareholder ratification). The
Audit Committee shall be directly responsible for the compensation and oversight
of the work of the independent auditor (including resolution of disagreements
between management and the independent auditor regarding financial reporting)
for the purpose of preparing or issuing an audit report or related work. The
independent auditor shall report directly to the Audit Committee.
The Audit Committee shall preapprove all auditing services and permitted
non-audit services (including the fees and terms thereof) to be performed for
the Company by its independent auditor, subject to the de minimis exceptions for
A-1
non-audit services described in Section 10A(i)(1)(B) of the Exchange Act which
are approved by the Audit Committee prior to the completion of the audit. The
Audit Committee may form and delegate authority to subcommittees consisting of
one or more members when appropriate, including the authority to grant
preapprovals of audit and permitted non-audit services, provided that decisions
of such subcommittee to grant preapprovals shall be presented to the full Audit
Committee at its next scheduled meeting.
The Audit Committee shall review and pre-approve all related-party transactions.
The Audit Committee shall establish procedures for the receipt, retention, and
treatment of complaints received by the Company regarding accounting, internal
accounting controls or auditing matters. The Audit Committee shall ensure that
such complaints are treated confidentially and anonymously.
The Audit Committee
shall have the authority, to the extent it deems necessary or appropriate, to
retain independent legal, accounting or other advisors. The Company shall
provide for appropriate funding, as determined by the Audit Committee, for
payment of compensation to the independent auditor for the purpose of rendering
or issuing an audit report and to any advisors employed by the Audit Committee.
The Audit Committee shall make regular reports to the Board. The Audit Committee
shall review and reassess the adequacy of this Charter annually and recommend
any proposed changes to the Board for approval. The Audit Committee shall
annually review the Audit Committee's own performance.
The Audit Committee, to the extent it deems necessary or appropriate, shall:
FINANCIAL STATEMENT AND DISCLOSURE MATTERS
------------------------------------------
1. Review and discuss with management and the independent auditor the
annual audited financial statements, including disclosures made in
management's discussion and analysis, and recommend to the Board
whether the audited financial statements should be included in the
Company's Form 10-K. This includes reviewing management's and the
independent auditor's judgment about the quality, not just the
acceptability, of accounting principles, the reasonableness of
significant judgments and the clarity of the disclosures in the
financial statements.
2. Review and discuss with management and the independent auditor the
Company's quarterly financial statements prior to the filing of its
Form 10-Q, including the results of the independent auditor's review
of the quarterly financial statements.
3. Discuss with management and the independent auditor significant
financial reporting issues and judgments made in connection with the
preparation of the Company's financial statements, including any
significant changes in the Company's selection or application of
accounting principles, any major issues as to the adequacy of the
Company's internal controls and any special steps adopted in light of
material control deficiencies.
A-2
4. Review and discuss quarterly reports from the independent auditors on:
a. All critical accounting policies and practices to be used.
b. All alternative treatments of financial information within
generally accepted accounting principles that have been discussed
with management, ramifications of the use of such alternative
disclosures and treatments, and the treatment preferred by the
independent auditor.
c. Other material written communications between the independent
auditor and management, such as any management letter or schedule
of unadjusted differences.
5. Discuss with management the Company's earnings press releases,
including the use of "pro forma" or "adjusted" non-GAAP information,
as well as financial information and earnings guidance provided to
analysts and rating agencies. Such discussion may be done generally
(consisting of discussing the types of information to be disclosed and
the types of presentations to be made).
6. Discuss with management and the independent auditor the effect of
regulatory and accounting initiatives as well as off-balance sheet
structures, if any, on the Company's financial statements.
7. Discuss with management the Company's major financial risk exposures
and the steps management has taken to monitor and control such
exposures, including the Company's risk assessment and risk management
policies
8. Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the
conduct of the audit, including any difficulties encountered in the
course of the audit work, any restrictions on the scope of activities
or access to requested information, and any significant disagreements
with management.
9. Review disclosures made to the Audit Committee by the Company's CEO
and CFO during their certification process for the Form 10-K and Form
10-Q about any significant deficiencies in the design or operation of
internal controls or material weaknesses therein and any fraud
involving management or other employees who have a significant role in
the Company's internal controls.
OVERSIGHT OF THE COMPANY'S RELATIONSHIP WITH THE INDEPENDENT AUDITOR
----------------------------------------------------------------------
1. Review and evaluate the lead partner of the independent auditor team.
2. Obtain and review a report from the independent auditor at least
annually regarding (a) the independent auditor's internal
quality-control procedures, (b) any material issues raised by the most
recent internal quality-control review, or peer review, of the firm,
A-3
or by any inquiry or investigation by governmental or professional
authorities within the preceding five years respecting one or more
independent audits carried out by the firm, (c) any steps taken to
deal with any such issues, and (d) all relationships between the
independent auditor and the Company. Evaluate the qualifications,
performance and independence of the independent auditor, including
considering whether the auditor's quality controls are adequate and
the provision of permitted non-audit services is compatible with
maintaining the auditor's independence, taking into account the
opinions of management and internal auditors. The Audit Committee
shall present its conclusions with respect to the independent auditor
to the Board.
3. Ensure the rotation of the audit partners as required by law. Consider
whether, in order to assure continuing auditor independence, it is
appropriate to adopt a policy of rotating the independent auditing
firm on a regular basis.
4. Recommend to the Board policies for the Company's hiring of employees
or former employees of the independent auditor who participated in any
capacity in the audit of the Company.
5. Discuss with the national office of the independent auditor issues on
which they were consulted by the Company's audit team and matters of
audit quality and consistency.
6. Meet with the independent auditor prior to the audit to discuss the
planning and staffing of the audit.
COMPLIANCE OVERSIGHT RESPONSIBILITIES
-------------------------------------
1. Obtain from the independent auditor assurance that Section 10A(b) of
the Exchange Act has not been implicated.
2. Obtain reports from management and the Company's senior internal
auditing executive that the Company and its subsidiary/foreign
affiliated entities are in conformity with applicable legal
requirements and the Company's Code of Business Conduct and Ethics.
Review reports and disclosures of insider and affiliated party
transactions. Advise the Board with respect to the Company's policies
and procedures regarding compliance with applicable laws and
regulations and with the Company's Code of Business Conduct and
Ethics.
3. Establish procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and the confidential,
anonymous submission by employees of concerns regarding questionable
accounting or auditing matters.
4. Discuss with management and the independent auditor any correspondence
with regulators or governmental agencies and any published reports
which raise material issues regarding the Company's financial
statements or accounting policies.
A-4
5. Discuss with the Company's General Counsel legal matters that may have
a material impact on the financial statements or the Company's
compliance policies.
LIMITATION OF AUDIT COMMITTEE'S ROLE
While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements and disclosures are
complete and accurate and are in accordance with generally accepted accounting
principles and applicable rules and regulations. These are the responsibilities
of management and the independent auditor.
A-5
EXHIBIT B
AUDIT COMMITTEE PRE-APPROVAL PROCEDURES
Guidelines of the FalconStor Software, Inc., Audit Committee
for Pre-Approval of Independent Auditor Services
The Audit Committee has adopted the following guidelines regarding the
engagement of the Company's independent auditor to perform services for the
Company:
For audit services (including statutory audit engagements as required under
local country laws), the independent auditor will provide the Audit Committee
with an engagement letter during the first quarter of each year outlining the
scope of the audit services proposed to be performed during the fiscal year. If
agreed to by the Audit Committee, this engagement letter will be formally
accepted by the Audit Committee at its first quarter meeting.
The independent auditor will submit to the Audit Committee for approval an
audit services fee proposal after acceptance of the engagement letter.
For non-audit services, Company management will submit to the Audit
Committee for approval (during the second quarter of each fiscal year) the list
of non-audit services that it recommends the Audit Committee engage the
independent auditor to provide for the fiscal year. Company management and the
independent auditor will each confirm to the Audit Committee that each non-audit
service on the list is permissible under all applicable legal requirements. In
addition to the list of planned non-audit services, a budget estimating
non-audit service spending for the fiscal year will be provided. The Audit
Committee will approve both the list of permissible non-audit services and the
budget for such services. The Audit Committee will be informed routinely as to
the non-audit services actually provided by the independent auditor pursuant to
this pre-approval process.
To ensure prompt handling of unexpected matters, the Audit Committee
delegates to the Chair the authority to amend or modify the list of approved
permissible non-audit services and fees. The Chair will report action taken to
the Audit Committee at the next Audit Committee meeting.
The independent auditor must ensure that all audit and non-audit services
provided to the Company have been approved by the Audit Committee. The Company
Controller will be responsible for tracking all independent auditor fees against
the budget for such services and report at least annually to the Audit
Committee.
B-1
PROXY
FALCONSTOR SOFTWARE, INC.
Proxy for Annual Meeting of Stockholders
Solicited by the Board of Directors
The undersigned hereby appoints ReiJane Huai and James Weber, and each of
them, with full power of substitution to represent the undersigned and to vote
all of the shares of common stock of FalconStor Software, Inc. ("FalconStor")
which the undersigned is entitled to vote at the Annual Meeting of Stockholders
of FalconStor to be held at FalconStor Software, Inc., 2 Huntington Quadrangle,
Suite 2S01, Melville, New York, on Tuesday, May 10, 2005, at 9:00 a.m., local
time, and at any adjournment thereof, (1) as hereinafter specified upon the
proposals listed below and (2) in their discretion, upon such other matters as
may properly come before the meeting.
IMPORTANT: PLEASE DATE, SIGN AND MAIL PROMPTLY THIS PROXY IN THE ENCLOSED
RETURN ENVELOPE TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. If
you attend the meeting, you may vote in person should you wish to do so even
though you have already sent in your Proxy.
1. To elect the following directors: (01) Steven R. Fischer and (02) Alan W.
Kaufman, to serve as directors until the 2008 Annual Meeting of
Stockholders of the Company and until successors have been duly elected and
qualified.
FOR ALL NOMINEES WITHHELD FROM ALL NOMINEES
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---------------------------------------------------------------
FOR ALL NOMINEES EXCEPT AS NOTED ABOVE
2. To ratify the appointment of KPMG LLP as the independent public accountants
of the Company for the fiscal year ending December 31, 2005.
FOR AGAINST ABSTAIN
----------- ----------- -----------
3. With discretionary authority, upon such other matters as may properly come
before the meeting. At this time, the persons making this solicitation know
of no other matters to be presented at the meeting.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
------
MARK HERE IF YOU PLAN TO ATTEND THE MEETING
------
Please sign your name exactly as it appears on the stock certificate
representing your shares. If signing for estates, trusts or corporations, title
or capacity should be stated. If shares are held jointly, both should sign.
Signature: Date
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Signature: Date
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