SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment no. 1)
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 [X] Definitive
Proxy Statement Commission Only (as permitted by [ ] Definitive Additional
Materials Rule 14a-6(e)(2)) [ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
INTEGRATED SYSTEMS, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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(3) Per unit price or other underlying value of transaction computed pursuant
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
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paid previously. Identify the previous filing by registration statement
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[INTEGRATED SYSTEMS, INC. Logo]
INTEGRATED SYSTEMS, INC.
201 Moffett Park Drive
Sunnyvale, California 94089
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Integrated Systems, Inc. (the "Company") will be held at the Company, 201
Moffett Park Drive, Sunnyvale, California, 94089 on July 15, 1998 at 2:00 p.m.
for the following purposes:
1. To elect seven directors of the Company to serve until the next
Annual Meeting of Shareholders and until their respective successors
have been elected and qualified or until such directors' earlier
resignation or removal. The Company's Board of Directors has nominated
the following candidates: Narendra K. Gupta, John C. Bolger, Michael A.
Brochu, Vinita Gupta, Thomas Kailath, Richard C. Murphy, and David P.
St. Charles.
2. To approve the adoption of the Company's 1998 Equity Incentive Plan.
3. To approve an amendment to the 1994 Directors Stock Option Plan to
eliminate the provision which limits the maximum number of shares that
may be issued to any one director to 40,000 shares.
4. To ratify the selection of Coopers & Lybrand L.L.P. as independent
accountants for the Company for the current fiscal year.
5. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on May 21, 1998
are entitled to notice of and to vote at the meeting and any adjournments or
postponements thereof.
By Order of the Board of Directors
/s/ NARENDRA K. GUPTA
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Narendra K. Gupta
Chairman of the Board
Sunnyvale, California
June 12, 1998
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WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
================================================================================
[INTEGRATED SYSTEMS, INC. Logo]
INTEGRATED SYSTEMS, INC.
201 Moffett Park Drive
Sunnyvale, California 94089
PROXY STATEMENT
June 12, 1998
The accompanying proxy is solicited on behalf of the Board of Directors
of Integrated Systems, Inc., a California corporation (the "Company"), for use
at the Annual Meeting of Shareholders of the Company to be held at the Company,
201 Moffett Park Drive, Sunnyvale, California, 94089 on July 15, 1998 at 2:00
p.m. (the "Meeting"). Only holders of record of the Company's Common Stock at
the close of business on May 21, 1998 will be entitled to vote at the Meeting.
At the close of business on that date, the Company had 23,504,566 shares of
Common Stock outstanding and entitled to vote. Shares will be deemed to be
represented at the meeting both where a shareholder specifically abstains from
voting and where a broker or other nominee holding shares for beneficial owners
is able to vote on certain matters at the Meeting pursuant to discretionary
authority or instruction from beneficial owners but with respect to other
matters may not have received instructions from the beneficial owner and may not
exercise voting power ("broker non-votes"). A majority, or 11,752,284 of these
shares, represented in person or by proxy, will constitute a quorum for the
transaction of business. This Proxy Statement and accompanying proxy will first
be mailed to shareholders on or about June 12, 1998.
VOTING RIGHTS; SOLICITATION AND REVOCABILITY OF PROXIES
Holders of Common Stock are entitled to one vote for each share held as
of the above record date. Any person signing a proxy in the form accompanying
this Proxy Statement has the power to revoke it prior to the Meeting or at the
Meeting prior to the vote pursuant to the proxy. A proxy may be revoked by a
writing delivered to the Secretary of the Company stating that the proxy is
revoked, by a subsequent proxy that is signed by the person who signed the
earlier proxy and is presented at the Meeting or by attendance at the Meeting
and voting in person. Please note, however, that if a shareholder's shares are
held of record by a broker, bank or other nominee, and that shareholder wishes
to vote at the Meeting, the shareholder must bring to the Meeting a letter from
the broker, bank or other nominee confirming that shareholder's beneficial
ownership of the shares.
The expenses of soliciting proxies in the form accompanying this Proxy
Statement will be paid by the Company. Following the original mailing of the
proxies and other soliciting materials, the Company will request brokers,
custodians, nominees and other record holders to forward copies of the proxy and
other soliciting materials to persons for whom they hold shares of Common Stock
and to request authority for the exercise of proxies. In such cases, the
Company, upon the request of the record holders, will reimburse such holders for
their reasonable expenses.
- 1 -
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
At the Meeting, shareholders will elect directors to hold office until
the next Annual Meeting of Shareholders and until their respective successors
have been elected and qualified or until such directors' earlier resignation or
removal. The size of the Company's Board of Directors (the "Board") is currently
set at seven members. Shares represented by the accompanying proxy will be voted
for the election of the seven nominees recommended by the Board unless the proxy
is marked in such a manner as to withhold authority so to vote. If any nominee
for any reason is unable to serve or for good cause will not serve, the proxies
may be voted for such substitute nominee as the proxy holder may determine. The
Company is not aware of any nominee who will be unable to or for good cause will
not serve as a director. Directors are elected by a plurality of the shares
voting, in person or by proxy, at the Meeting. The seven nominees receiving the
highest number of affirmative votes of the shares entitled to be voted for them
will be elected. Votes withheld, abstentions and broker non-votes have no legal
effect.
Directors/Nominees
The names of the nominees, and certain information about them
(including their respective terms of service), are set forth below:
Director
Name of Nominee Age Principal Occupation Since
- --------------- --- -------------------- -----
Narendra K. Gupta 49 Chairman of the Board and 1980
Secretary of the Company
David P. St. Charles 49 President and Chief Executive Officer 1993
of the Company
John C. Bolger (1) (2) 51 Retired Chief Financial Officer 1993
Cisco Systems, Inc.
Michael A. Brochu 44 President and Chief Executive Officer 1998
Primus, Inc.
Vinita Gupta 47 Chairperson of the Board 1980
Digital Link Corporation
Thomas Kailath (1) 62 Professor of Engineering, 1980
Stanford University
Richard C. Murphy (1) (2) 53 Director 1994
<FN>
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(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
All nominees, except Michael A. Brochu, were reelected at the Company's
Annual Meeting of Shareholders held on July 15, 1997.
Dr. Gupta is a founder of the Company and has been a director of the
Company since its formation in 1980. He has been the Chairman of the Board of
the Company since March 1993 and Secretary since September 1989. Dr. Gupta was
Chief Executive Officer from 1988 to May 1994 and President from the Company's
formation in 1980 to May 1994. He was elected a Fellow of the Institute of
Electrical and Electronic Engineers ("IEEE") in November 1991. Dr. Gupta serves
on the board of Digital Link Corporation, a manufacturer of data communications
equipment. Dr. Gupta holds a M.S. degree from the California Institute of
Technology and a Ph.D. degree from Stanford University. He is Vinita Gupta's
husband.
Mr. St. Charles joined the Company in August 1993 and was appointed
President and Chief Executive Officer of the Company in May 1994. He has been a
director since he joined the Company in August 1993. From April 1990 until
August 1993, Mr. St. Charles served as President and a director of Wind River
Systems, Inc., a real-time software company. Mr. St. Charles holds a B.A. in
Liberal Arts and a M.A. in International Economics from Carleton University and
a M.S. from the Sloan School of Management at the Massachusetts Institute of
Technology.
Mr. Bolger has been a director of the Company since July 1993. He
served as Vice President, Finance and Administration, and Secretary of Cisco
Systems, Inc., a networking systems company, from 1989 until his retirement in
1992. Mr. Bolger is also a director of Integrated Device Technology, Inc., a
semiconductor manufacturer, TCSI, a communication software company, Sanmina
Corporation, a backplane and contract assembly manufacturer, and Mission West
Properties, a R.E.I.T. He holds a B.A. in English Literature from the University
of Massachusetts and a M.B.A. from Harvard University.
- 2 -
Mr. Brochu has been a director of the Company since April 1998. Since
November 1997, Mr. Brochu has been President and Chief Executive Officer of
Primus, Inc., a developer of problem resolution software. Prior to joining
Primus, Mr. Brochu was President and Chief Operating Officer of Sierra-On-line,
Inc. Mr. Brochu was also appointed Senior Vice President of CUC International
Inc., the parent corporation pursuant to their acquisition of Sierra-On-Line,
Inc. in July 1996. From 1982 to 1994, Mr. Brochu held several executive
positions at Burlington Northern Inc., as well as several of its subsidiaries.
His last position with Burlington Northern Inc. was that of Chief Financial
Officer and Senior Vice President of Burlington Environmental, Inc. Mr. Brochu
is a graduate of the University of Texas at El Paso with B.S. degrees in
Accounting and Finance.
Mrs. Gupta has been a director of the Company since its formation in
1980. Since May 1985, she has been Chairperson of Digital Link Corporation, a
manufacturer of data communications equipment. In addition, from May 1985 to
September 1996, Mrs. Gupta served as President and Chief Executive Officer of
Digital Link Corporation. Mrs. Gupta holds a M.S. degree in Electrical
Engineering from the University of California, Los Angeles. She is Narendra K.
Gupta's spouse.
Dr. Kailath is a founder of the Company and has been a director of the
Company since its formation in 1980. He served as Vice Chairman of the Board of
Directors from January 1990 to March 1993 and Chairman of the Board of Directors
from April 1980 to January 1990. He is currently the Hitachi America Professor
of Engineering at Stanford University, where he has been on the faculty since
January 1963. Dr. Kailath is a member of the National Academy of Engineering,
the American Academy of Arts and Sciences and a Fellow of the IEEE. Dr. Kailath
holds M.S. and Sc.D. degrees in Electrical Engineering from the Massachusetts
Institute of Technology.
Mr. Murphy has been a director of the Company since December 1994. He
is an independent business consultant. Mr. Murphy is also a director of
Objectivity, Inc., an object database software company, iXOS Software Inc., a
distributor of image management software, Intraspect Software, Inc., an internet
software company and Intermax Solutions, Inc., an applications development
software tools company. He holds a B.S. in Mechanical Engineering from the
University of Illinois and a M.B.A. from Northwestern University.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION
OF EACH OF THE NOMINEES LISTED ABOVE.
Board of Directors' Meetings and Committees
The Board met six times and acted by unanimous written consent once
during the year ended February 28, 1998. All directors attended every meeting of
the Board and of the committees of the Board either in person or by phone on
which he or she served.
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or a
committee performing a similar function.
Mr. Bolger and Mr. Murphy are currently the members of the Audit
Committee. The Audit Committee met three times during fiscal year 1998. The
Audit Committee meets with the Company's independent accountants to review the
adequacy of the Company's internal control systems and financial reporting
procedures, reviews the general scope of the Company's annual audit and the fees
charged by the independent accountants and reviews and monitors the performance
of non-audit services by the Company's independent accountants.
Mr. Bolger, Mr. Murphy and Dr. Kailath are currently the members of the
Company's Compensation Committee. The Compensation Committee met three times and
acted by unanimous written consent once during fiscal year 1998. The
Compensation Committee administers the Company's Stock Option Plans and 1990
Employee Stock Purchase Plan and determines salaries and other compensation for
officers and employees.
Directors Compensation
The Company paid Mr. Bolger, Mr. Murphy, Dr. Kailath and Mrs. Gupta
$19,000, $19,000, $18,500 and $17,500, respectively in directors' fees during
fiscal year 1998.
Members of the Board of Directors who are not employees, consultants or
independent contractors of the Company, or any parent, subsidiary or affiliate
of the Company, are eligible to participate in the Company's 1994 Directors
Stock Option Plan (the "Directors Plan"). For a discussion of the provisions of
the Directors Plan, see "Proposal No. 3 - Approval of an Amendment to the 1994
Directors Stock Option Plan." In fiscal year 1998, each eligible director was
granted an option to purchase 5,000 shares of the Company's Common Stock on the
anniversary of such director joining the Board, at the following exercise
prices: Mr. Bolger, $12.875 per share; Mrs. Gupta and Dr. Kailath, $10.25 per
share; and Mr. Murphy, $13.375 per share.
- 3 -
PROPOSAL NO. 2 - APPROVAL OF THE ADOPTION OF THE
1998 EQUITY INCENTIVE PLAN
The Company's 1988 Stock Option Plan (the "1988 Plan") will expire in
September 1998. Accordingly, on March 30, 1998, the Board of Directors of the
Company approved the adoption of the 1998 Equity Incentive Plan (the "1998
Plan"), which provides for awards of options to purchase shares of Common Stock
("Options"), Restricted Stock and Stock Bonuses (collectively "Awards"). The
number of shares of Common Stock issuable under the proposed 1998 Plan is
1,000,000 shares. The Shareholders are being asked to approve the 1998 Plan. A
description of the principle features of the 1998 Plan is set forth below.
Options to purchase Common Stock will continue to be granted under the 1988 Plan
until it expires, at which time the 1998 Plan will become effective. All equity
awards previously granted under the 1988 Plan would continue to be governed by
the terms of the 1988 Plan and the individual option grants. All shares
previously reserved for and still available for grant under the 1988 Plan, as
well as shares that become available due to cancellations or forfeiture of
equity awards outstanding under the 1988 Plan will become available for issuance
under the 1998 Plan.
Purpose
The purpose of the 1998 Plan is to provide incentives to attract,
retain and motivate eligible persons whose present and potential contributions
are important to the success of the Company, by offering them an opportunity to
participate in the Company's future performance through awards of Options,
Restricted Stock and Stock Bonuses.
Administration
The 1998 Plan shall be administered by the Compensation Committee of
the Board (the "Committee" or the "Board".) Subject to the terms of the 1998
Plan, the Committee determines the persons who are to receive Awards, the number
of shares subject to each Award and the terms and conditions of such Awards. The
Committee also has the authority to construe and interpret any of the provisions
of the 1998 Plan, any Award agreement and any other agreement or document
executed pursuant to the 1998 Plan.
Shares Subject to the 1998 Plan
The stock subject to Awards under the 1998 Plan consists of the
Company's authorized but unissued Common Stock. The total number of shares
reserved and available for grant and issuance pursuant to the 1998 Plan will be
1,000,000 shares plus (a) any authorized shares not issued or subject to
outstanding grants under the 1988 Plan; (b) shares that are subject to issuance
upon exercise of an option granted under the 1988 Plan but cease to be subject
to such option for any reason other than exercise of such option; and (c) shares
that were issued under the 1988 Plan which are repurchased by the Company at the
original issue price or forfeited. Shares subject to an Option granted under the
1998 Plan that expire or terminate for any reason without being exercised or
shares subject to an Award granted under the 1998 Plan that are forfeited or are
repurchased by the Company at the original issue price or are subject to an
Award granted under the 1998 Plan that otherwise terminates without shares being
issued, will again become available for grant and issuance pursuant to Awards
under the 1998 Plan. This number of shares is subject to proportional adjustment
to reflect stock splits, stock dividends and other similar events.
Eligibility
Employees, officers, directors, consultants, independent contractors
and advisors of the Company (and of any subsidiaries and affiliates) will be
eligible to receive Awards under the 1998 Plan (the "Participants"). No person
will be eligible to receive more than 200,000 shares in any calendar year under
the 1998 Plan, other than new employees of the Company (including new employees
who are also officers and directors of the Company), who are eligible to receive
up to a maximum of 1,000,000 shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under the 1998
Plan. The closing price of the Company's Common Stock on the Nasdaq National
Market was $20.875 per share on May 21, 1998.
Stock Options
The 1998 Plan permits the granting of Options that are intended to
qualify either as Incentive Stock Options ("ISOs") or Nonqualified Stock Options
("NQSOs"). ISOs may be granted only to employees (including officers and
directors who are also employees) of the Company or any parent or subsidiary of
the Company. The exercise price for each ISO share must be no less than 100% of
the "fair market value" (as defined in the 1998 Plan) of a share of Common Stock
at the time of grant. The exercise price of an ISO granted to a 10% shareholder
must be no less than 110% of the fair market value of a share of Common Stock at
the time of grant. The exercise price for each NQSO share must be no less than
85% of the fair market value of a share of Common Stock at the time of grant.
Options granted under the 1998 Plan will have a term of up to ten years, except
for ISOs granted to 10% shareholders, which will have a term of up to five
years.
The exercise price of Options granted under the 1998 Plan may be paid
as approved by the Committee at the time of grant: (1) in cash (by check); (2)
by cancellation of indebtedness of the Company to the Participant; (3) by
surrender of shares of the Company's Common Stock owned by the Participant for
at least six months and having a fair market value on the date of surrender
equal to the aggregate exercise price of the Option or that were obtained by the
Participant in the open market; (4) by tender of a full recourse promissory
note; (5) by waiver of compensation due to or accrued by the Participant for
services rendered; (6) by a "same-day sale" commitment from
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the Participant and a National Association of Securities Dealers, Inc. ("NASD")
broker; (7) by a "margin" commitment from the Participant and an NASD broker; or
(8) by any combination of the foregoing.
Restricted Stock Awards
The Committee may grant Participants Restricted Stock Awards to
purchase stock under the 1998 Plan, under such terms, conditions and
restrictions as the Committee may determine. These restrictions may be based
upon completion of a specified number of years of service with the Company or
upon completion of performance goals as determined by the Committee on the date
of the Award. The purchase price of shares sold pursuant to a Restricted Stock
Award will be determined by the Committee on the date of the Award (and in the
case of an Award granted to a 10% shareholder, the purchase price shall be 100%
of fair market value) and can be paid for in any of the forms of consideration
listed in "Stock Options" above, as are approved by the Committee at the time of
grant.
Stock Bonus Awards
The Committee may grant Stock Bonus Awards under the 1998 Plan, with
such terms, conditions and restrictions as the Committee may determine. A Stock
Bonus Award may be awarded upon satisfaction of such performance goals as
determined by the Committee at the date of the Award.
Mergers, Consolidations, Change of Control
In the event of a merger, consolidation, dissolution or liquidation of
the Company, the sale of substantially all of the assets of the Company or any
other similar corporate transaction, the successor corporation may assume,
convert or replace any or all Awards outstanding under the 1998 Plan or
substitute equivalent awards or provide substantially similar consideration to
Participants as was provided to shareholders of the Company (after taking into
account the existing provisions of the Awards). In the event that the successor
corporation does not assume, convert, replace or substitute Awards, the vesting
of such Awards will accelerate and the Options will become exercisable in full
prior to the consummation of such event at such times and on such conditions as
the Committee determines, and if such Options are not exercised before the
consummation of the corporate transaction, they will terminate in accordance
with the provisions of the 1998 Plan. The successor corporation may also issue,
in place of outstanding shares of the Company held by the Participant,
substantially similar shares or other property subject to repurchase
restrictions no less favorable to the Participant.
Amendment of the 1998 Plan
The Board may at any time terminate or amend the 1998 Plan, including
amending any form of Award agreement or instrument to be executed pursuant to
the 1998 Plan. However, the Board may not amend the 1998 Plan in any manner that
requires shareholder approval pursuant to the Code or the regulations
promulgated thereunder.
Term of the 1998 Plan
Unless terminated earlier as provided in the 1998 Plan, the 1998 Plan
will expire in March 2008, ten years after the date the Board adopted the 1998
Plan.
Federal Income Tax Information
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT OF THE
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND PARTICIPANTS UNDER THE 1998
PLAN. FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON HIS OR HER INDIVIDUAL
CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN AND IS ENCOURAGED TO SEEK THE ADVICE OF
A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN THE
1998 PLAN.
Incentive Stock Options. A Participant will recognize no income upon
grant of an ISO and incur no tax on its exercise (unless the Participant is
subject to the alternative minimum tax ("AMT") as described below). If the
Participant holds shares acquired upon exercise of an ISO (the "ISO Shares") for
more than one year after the date the Option was exercised and for more than two
years after the date the Option was granted, the Participant generally will
realize capital gain or loss (rather than ordinary income or loss) upon
disposition of the ISO Shares. This gain or loss will be equal to the difference
between the amount realized upon such disposition and the amount paid for the
ISO Shares.
If the Participant disposes of ISO Shares prior to the expiration of
either required holding period (a "disqualifying disposition"), the gain
realized upon such disposition, up to the difference between the fair market
value of the ISO Shares on the date of exercise (or, if less, the amount
realized on a sale of such shares) and the option exercise price, will be
treated as ordinary income. Any additional gain will be capital gain, taxed at a
rate that depends upon the amount of time the ISO Shares were held by the
Participant.
- 5 -
Alternative Minimum Tax. The difference between the fair market value
of the ISO Shares on the date of exercise and the exercise price is an
adjustment to income for purposes of AMT. The AMT (imposed to the extent it
exceeds the taxpayer's regular tax) is 26% of an individual taxpayer's
alternative minimum taxable income (28% in the case of alternative minimum
taxable income in excess of $175,000). A maximum 20% AMT rate applies to the
portion of alternative minimum taxable income that would otherwise be taxable as
net capital gain. Alternative minimum taxable income is determined by adjusting
regular taxable income for certain items, increasing that income by certain tax
preference items (including the difference between the fair market value of the
ISO Shares on the date of exercise and the exercise price), and reducing this
amount by the applicable exemption amount ($45,000 in case of a joint return,
subject to reduction under certain circumstances). If a disqualifying
disposition of the ISO Shares occurs in the same calendar year as exercise of
the ISO, there is no AMT adjustment with respect to those ISO Shares. Also, upon
a sale of ISO Shares that is not a disqualifying disposition, alternative
minimum taxable income is reduced in the year of sale by the excess of the fair
market value of the ISO Shares at exercise over the amount paid for the ISO
Shares.
Nonqualified Stock Options. A Participant will not recognize any
taxable income at the time an NQSO is granted. However, upon exercise of an
NQSO, the Participant must include in income as compensation an amount equal to
the difference between the fair market value of the shares on the date of
exercise and the Participant's exercise price. The included amount must be
treated as ordinary income by the Participant and may be subject to withholding
by the Company (either by payment in cash or withholding out of the
Participant's salary). Upon resale of the shares by the Participant, any
subsequent appreciation or depreciation in the value of the shares will be
treated as capital gain or loss.
Restricted Stock and Stock Bonus Awards. Restricted stock and stock
bonus awards will generally be subject to tax at the time of receipt, unless
there are restrictions that enable the Participant to defer tax. At the time the
tax is incurred, the tax treatment will be similar to that discussed above for
NQSOs.
Maximum Tax Rates. The maximum tax rate applicable to ordinary income
is 39.6%. Long-term capital gain is taxed at a maximum rate of 20% and mid-term
capital gain is taxed at a maximum rate of 28%. To receive long-term capital
gain treatment, the stock must be held for more than eighteen months, and to
receive mid-term capital gain treatment, the stock must be held for more than
one year but not more than eighteen months. Capital gains may be offset by
capital losses and up to $3,000 of capital losses may be offset annually against
ordinary income.
Tax Treatment of the Company. The Company generally will be entitled to
a deduction in connection with the exercise of an NQSO by a Participant or the
receipt of Restricted Stock or Stock Bonus Awards by a Participant to the extent
that the Participant recognizes ordinary income, provided that the Company
timely reports such income to the Internal Revenue Service. The Company will be
entitled to a deduction in connection with the disposition of ISO Shares only to
the extent that the Participant recognizes ordinary income on a disqualifying
disposition of the ISO Shares.
ERISA
The 1998 Plan is not subject to any of the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") and is not qualified under
Section 401(a) of the Code.
New Plan Benefits
The amounts of future Option grants under the 1998 Plan are not
determinable because, under the terms of the 1998 Plan, such grants are made in
the discretion of the Committee. Future Option exercise prices are not
determinable because they are based upon fair market value of the Company's
Common Stock on the date of grant.
Vote Required
Approval of the 1998 Plan requires the affirmative vote of the majority
of shares of Common Stock present in person or represented by proxy at the
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ADOPTION OF THE
1998 EQUITY INCENTIVE PLAN.
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PROPOSAL NO. 3 - APPROVAL OF AN AMENDMENT TO
THE 1994 DIRECTORS STOCK OPTION PLAN
The shareholders are being asked to approve an amendment to the 1994
Directors Stock Option Plan (the "Directors Plan") to eliminate the provision
which limits the maximum number of shares that may be issued to any one Director
to 40,000 shares.
The Board believes that removal of this provision of the Directors Plan
is in the best interests of the Company because of the continuing need to
provide equity participation to attract and retain quality outside directors.
The Directors Plan plays an important role in the Company's efforts to attract
and retain outside directors of outstanding ability.
The Board approved the proposed amendment on March 30, 1998, subject to
shareholder approval. Approval of the Amendment to the Directors Plan requires
the affirmative vote of the majority of shares of Common Stock present in person
or represented by proxy at the Meeting.
Below is a summary of the principal provisions of the Directors Plan,
assuming shareholder approval of the amendment. The summary is not necessarily
complete, and reference is made to the full text of the Directors Plan.
Directors Plan History
The Directors Plan was adopted by the Board in March 1994 and approved
by the shareholders in July 1994. The purpose of the Directors Plan is to
enhance the Company's ability through the use of equity incentives to attract
and retain highly qualified outside directors.
Stock Subject to Options
The stock subject to options under the Directors Plan consists of
shares of the Company's authorized but unissued Common Stock. The aggregate
number of shares that may be issued pursuant to the Directors Plan is 400,000
shares of Common Stock, subject to proportional adjustment to reflect stock
splits, stock dividends and other similar events. In the event that any
outstanding option under the Directors Plan expires or is terminated for any
reason, the shares of Common Stock allocable to the unexercised portion of such
option will again be available for the grant of options under the Directors
Plan.
Administration
The Directors Plan is administered by the Board. The interpretation by
the Board of any of the provisions of the Directors Plan or any option granted
under the Directors Plan will be final and conclusive.
Eligibility
Under the Directors Plan, the Company automatically grants options to
each director of the Company who is not an employee of the Company (or of any
parent, subsidiary or affiliate of the Company) (the "Outside Directors"). Each
Outside Director is automatically granted an option to purchase 15,000 shares of
Common Stock on the date the Outside Director first becomes a member of the
Board (an "Initial Grant"). In addition, each Outside Director is automatically
granted an option to purchase 5,000 shares of Common Stock on the anniversary of
his or her Initial Grant, so long as he or she continuously remains a director
of the Company (a "Succeeding Grant").
As of February 28, 1998, four persons were eligible to receive options
pursuant to the Directors Plan and the Company's current non-employee directors
as a group had been granted options to purchase an aggregate of 205,000 shares
under the Directors Plan. At that date, options to purchase 5,000 shares had
been issued upon exercise of options and 195,000 shares were available for
future grants pursuant to the Directors Plan. The closing price of the Company's
Common Stock on the Nasdaq National Market was $20.875 per share on May 21,
1998.
Terms of Option Grants
Options granted pursuant to the Directors Plan are intended to be
NQSOs. Each Initial Grant and Succeeding Grant will have a term of ten years and
become exercisable at the rate of 2.08% per month, so long as the Outside
Director continuously remains a director of the Company. The option exercise
price will be the "fair market value" (as defined in the Directors Plan) of the
Common Stock as of the date of the grant. The option
- 7 -
exercise price will be payable in cash (by check) and in a number of other forms
of consideration, including fully paid shares of Common Stock owned by the
Outside Director for more than six months, by waiver of compensation due or
accrued to the Outside Director for services rendered, through a "same day
sale," through a "margin commitment," or through any combination of the
foregoing.
Mergers, Consolidations, Change of Control
In the event of a merger, consolidation, dissolution or liquidation of
the Company, the sale of substantially all of the assets of the Company or any
other similar corporate transaction, the vesting of all options granted pursuant
to the Directors Plan will accelerate and such options will become exercisable
in full before the consummation of such event at such times and on such
conditions as the Board determines.
Amendment of the Directors Plan
The Board may terminate or amend the Directors Plan; provided, however,
that the Board may not, without shareholder approval, increase the total number
of shares of Common Stock available for issuance under the Directors Plan or
change the class of persons eligible to receive options. In any case, no
amendment of the Directors Plan may adversely affect any then outstanding
options or any unexercised portions thereof without the written consent of the
optionee.
Term of the Directors Plan
Unless terminated earlier as provided in the Directors Plan, options
may be granted pursuant to the Directors Plan from time to time up until March
2004, ten years after the date the Board adopted the Directors Plan.
Federal Income Tax Information
For the federal tax implications to the Outside Directors and the
Company for options granted under the Directors Plan, see the discussion of the
tax implications of NQSOs in "Proposal No. 2 - Approval of the Adoption of the
1998 Equity Incentive Plan - Federal Income Tax Information" above.
ERISA
The Directors Plan is not subject to any of the provisions of ERISA nor
is it qualified under Section 401(a) of the Code.
New Plan Benefits
Only Outside Directors of the Company are eligible to participate in
the Directors Plan. The grant of options under the Directors Plan is not
discretionary. Under the Directors Plan, each outside director will
automatically be granted an option to purchase 5,000 shares of the Company's
Common Stock on the anniversary of such Outside Director's previous grants under
the Directors Plan. Any outside director who first joins the Board before the
next annual meeting will automatically be granted an option to purchase 15,000
shares of the Company's Common Stock on the date of his or her first appointment
to the Board. The exercise prices of these options are not determinable because
they are equal to fair market value of the Company's Common Stock on the date of
grant.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO THE
1994 DIRECTORS STOCK OPTION PLAN
- 8 -
PROPOSAL NO. 4 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Company has selected Coopers & Lybrand L.L.P. as its principal
independent accountants to perform the audit of the Company's financial
statements for the current fiscal year, and the shareholders are being asked to
ratify this selection. Representatives of Coopers & Lybrand L.L.P. will be
present at the Meeting, will be given an opportunity to make a statement at the
Meeting if they desire to do so and will be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RATIFICATION OF THE SELECTION OF COOPERS & LYBRAND L.L.P.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of May 21, 1998,
with respect to the beneficial ownership of the Company's Common Stock by (i)
each shareholder known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock, (ii) each director and nominee, (iii) each
executive officer named in the Summary Compensation Table below and (iv) all
officers and directors as a group.
Name of Amount and Nature of
Beneficial Owner Beneficial Ownership (1) Percent of Class
- ---------------- ------------------------ ----------------
Narendra K. and Vinita Gupta (2)(3) 4,770,813 20.3%
Franklin Advisors, Inc. (4) 2,494,990 10.6%
Nevis Capital Management (5) 2,301,799 9.8%
Thomas Kailath (3)(6) 824,663 3.5%
Karen D. Auerbach (3) 254,040 1.1%
David P. St. Charles (3) 194,533 *
Joseph Addiego (3) 84,136 *
John C. Bolger (3) 45,250 *
Richard C. Murphy (3) 35,938 *
William C. Smith (3) 5,000 *
Janice E. Waterman (3) 3,450 *
Michael A. Brochu (3) 938 *
All officers and directors as a group
(13 persons) (4) 6,361,850 27.1%
<FN>
- ----------------------------------
* Less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws.
(2) Represents (i) 185,540 shares of Common Stock held of record by Dr. and
Mrs. Gupta, (ii) 3,531,660 shares held in The Narendra and Vinita Gupta
Living Trust, (iii) 1,000,000 shares held of record by them, together with
a third party, as trustees for their children, as to which they disclaim
beneficial ownership, (iv) 7,800 shares held by Dr. Gupta as custodian for
his daughter under the Uniform Gifts to Minors Act, as to which he
disclaims beneficial ownership and (v) 42,813 shares subject to options
held by Mrs. Gupta that are exercisable within 60 days of May 21, 1998. The
address of Dr. and Mrs. Gupta is c/o Integrated Systems, Inc., 201 Moffett
Park Drive, Sunnyvale, CA, 94089.
(3) Includes 42,813 shares for Mrs. Gupta, 42,813 shares for Dr. Kailath,
12,500 shares for Ms. Auerbach, 192,000 shares for Mr. St. Charles, 53,063
shares for Mr. Addiego, 41,250 shares for Mr. Bolger, 30,938 shares for Mr.
Murphy, 5,000 shares for Mr. Smith, 3,188 shares for Ms. Waterman, 938
shares for Mr. Brochu, and 531,982 shares for all directors and officers as
a group that are subject to options and are exercisable within 60 days of
May 21, 1998.
(4) The address of this shareholder is Franklin Advisors, Inc., 901 Mariners
Island Blvd., San Mateo, CA , 94404. As of January 30, 1998, Franklin
Advisors, Inc. ("Franklin") reported on Schedule 13G filed with the SEC
that it beneficially owned 2,529,540 shares of the Company's Common Stock.
Franklin has since orally informed the Company that, as of May 21, 1998, it
owned 2,494,990 shares of the Company's Common Stock.
(5) The address of this shareholder is Nevis Capital Management, Inc., 1119 St.
Paul Street, Baltimore, Maryland, 21202. As of April 28, 1998, Nevis
Capital Management ("Nevis") reported on Schedule 13G filed with the SEC
that it beneficially owned 2,354,499 shares of the Company's Common Stock.
Nevis has since orally informed the Company that, as of May 21, 1998, it
owned 2,301,799 shares of the Company's Common Stock.
(6) Represents (i) 381,850 shares of Common Stock held of record by Dr. Kailath
and his wife as trustees of a revocable trust, (ii) 400,000 shares held of
record by them, together with a third party, as trustees for their three
children, and as custodians for their son under the Uniform Gifts to Minors
Act and (iii) 42,813 shares subject to options held by Dr. Kailath that are
exercisable within 60 days of May 21, 1998.
</FN>
- 9 -
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid
to the Company's Chief Executive Officer, Chairman of the Board, and the
Company's four other most highly compensated executive officers who were serving
as executive officers at the end of fiscal year 1998, for services rendered in
all capacities to the Company and its subsidiaries during each of fiscal years
1996, 1997 and 1998. This information includes the dollar values of base
salaries and bonus awards, the number of stock options granted and certain other
compensation, if any, whether paid or deferred. The Company does not grant stock
appreciation rights ("SARs") and has no long-term compensation benefits other
than options.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
--------------------------- -----------
Securities All Other
Underlying Compensation
Name and Salary (1) Bonus (2) Options (3) (4)
Principal Position Year ($) ($) (#) ($)
- ------------------- ---- ---------- --------- ----------- -----------
David P. St. Charles FY98 $250,000 -- 160,000 $ 1,154
President and CEO FY97 $257,462 -- 100,000 $ 2,113
FY96 $209,056 $ 90,000 60,000 $ 1,397
Narendra K. Gupta FY98 $ 71,155 -- -- $ 1,692
Chairman and Secretary FY97 $181,742 -- -- $ 2,510
FY96 $174,434 $ 65,000 -- $ 2,357
Joseph Addiego(5) FY98 $266,470 -- 135,000 $ 2,623
Vice President, FY97 $274,303 -- 40,000 $ 2,177
Marketing FY96 $249,222 $ 15,000 20,000 $ 2,211
William C. Smith FY98 $175,000 $ 50,000 80,000 $ 2,423
Vice President, FY97 (6) $ 23,558 -- 80,000 $ 202
Finance and CFO FY96 -- -- -- --
Karen D. Auerbach FY98 (7) $180,000 $ 15,000 50,000 $ 2,423
Vice President & General Manager FY97 -- -- -- --
Design Automation Solutions FY96 -- -- -- --
Janice E. Waterman FY98 $159,807 $ 27,000 51,000 $ 2,577
Vice President, FY97 $160,817 -- 20,000 $ 1,919
Human Resources and Operations FY96 $ 72,692 $ 11,667 15,000 $ 1,038
<FN>
- ----------------------------------
(1) Includes commissions and deferrals for 401(k) and Section 125 Plans.
(2) Represents bonuses earned for services rendered during the fiscal year
listed, but does not include bonuses paid during the fiscal year listed for
services rendered during a prior fiscal year.
(3) Options issued prior to fiscal year 1997 reflect a 2-for-1 stock split of
the Company effective April 5, 1996.
(4) Represents employer matching contributions to 401(k) Plan accounts.
(5) For fiscal year 1996, and from May 1, 1996 through May 31, 1996, Mr.
Addiego served as Vice President, North American Sales.
(6) Amount listed is for a partial fiscal year from the time Mr. Smith became
an executive officer of the Company in January 1997 through the end of the
fiscal year.
(7) Ms. Auerbach was appointed Vice President and General Manager, Design
Automation Solutions of the Company in May 1997.
</FN>
- 10 -
The following table sets forth further information regarding individual
grants of options for the Company's Common Stock during fiscal year 1998 to each
of the executive officers named in the Summary Compensation Table above. In
accordance with the rules of the SEC, the table sets forth the hypothetical
gains or "option spreads" that would exist for the options at the end of their
respective ten-year terms based on assumed annualized rates of compound stock
price appreciation of 5% and 10% from the dates the options were granted to the
end of the respective option terms. Actual gains, if any, on option exercises
are dependent on the future performance of the Company's Common Stock and
overall market conditions. There can be no assurance that the potential
realizable values shown in this table will be achieved.
OPTION GRANTS IN FISCAL YEAR 1998
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants For Option Term
----------------------------------------------------- ----------------------------
Number % of
of Total
Securities Options
Underlying Granted Exercise
Options in or Base Expira-
Granted Fiscal Price tion 5% 10%
Name (1) (#) 1998 $/Share Date ($) (3) ($) (3)
- -------------------- --------- -------- -------- --------- ------------ -----------
David P. St. Charles 60,000 2.6797 10.750 4/13/07 $ 405,800 $1,027,800
100,000(2) 4.4662 10.250 4/16/07 $ 645,000 $1,634,000
Narendra K. Gupta -- -- -- -- -- --
Joseph Addiego 25,000 1.1165 10.750 4/13/07 $ 169,000 $ 428.250
60,000(2) 2.6797 8.750 4/17/07 $ 330,000 $ 837,000
50,000 2.2331 15.375 2/6/08 $ 483,250 $1,225,250
William C. Smith 80,000(2) 3.5730 10.250 4/16/07 $ 516,000 $1,307,200
Karen D. Auerbach 40,000 1.7865 10.750 4/13/07 $ 270,400 $ 685,200
10,000 0.4466 19.875 9/14/07 $ 124,950 $ 316,750
Janice E. Waterman 10,000 0.4466 10.750 4/13/07 $ 67,400 $ 171,300
41,000(2) 1.8311 8.750 4/17/07 $ 225,500 $ 571,950
<FN>
- ----------------------------------
(1) The options shown in the table were granted pursuant to the Company's 1988
Stock Option Plan. They were granted at fair market value and will expire
ten years from the date of grant, subject to earlier termination upon
termination of the optionee's employment. Options generally become
exercisable over a period of four years, at a rate of 25% on the first
anniversary date after the date of grant, then 1/48th of the shares at the
end of each month thereafter.
(2) Represents Options that were canceled and regranted in April 1997. In April
1997, the Company offered employees the right to cancel certain outstanding
stock Options at original exercise prices and receive new Options with a
new exercise price. The new exercise prices range from $8.75 to $10.50 per
share, based on the closing price of the Common Stock on the date
individual employees agreed to cancel their Options. Options to purchase a
total of 1,222,632 shares were issued in April 1997. Vesting under the new
Options commenced on the date the individual employees agreed to cancel
their original Options, and occurs over a four year period. The exercise
prices and expiration dates shown above reflect the exercise prices and
expiration dates of the new grants.
(3) The 5% and 10% assumed rates of annual compound stock price appreciation
are mandated by the rules of the SEC and do not represent the Company's
estimate or projection of future Common Stock prices.
</FN>
- 11 -
The following table sets forth certain information concerning the
exercise of stock Options during fiscal year 1998 by each of the executive
officers named in the Summary Compensation Table above and the number and value
at February 28, 1998 of unexercised Options held by them:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FEBRUARY 28, 1998 OPTION VALUES
Number of Value of
Securities Underlying Unexercised In-the
Unexercised Options Money Options
at 2/28/98 at 2/28/98 (2)
---------------------- ----------------------
Shares
Acquired Value
on Realized Exer- Unexer- Exer- Unexer-
Name Exercise ($) (1) cisable cisable cisable cisable
- --------------------- -------- ------- ------- ------- ------- -------
David P. St. Charles -- -- 148,833 196,667 $1,524,298 $2,726,589
Narendra K. Gupta -- -- -- -- -- --
Joseph Addiego 25,484 $ 159,557 21,000 99,000 $ 243,802 $ 802,325
William C. Smith -- -- -- 80,000 -- $ 544,960
Karen D. Auerbach -- -- -- 50,000 -- $ 252,480
Janice E. Waterman -- -- -- 51,000 -- $ 403,912
<FN>
- ----------------------------------
(1) "Value Realized" represents the fair market value of the shares of Common
Stock underlying the Option on the date of exercise less the aggregate
exercise price of the Option.
(2) These values have not been, and may never be, realized. These values are
based on the positive spread between the respective exercise prices of
outstanding Options and the closing price of the Company's Common Stock on
February 27, 1998, the last day of trading for fiscal year 1998.
</FN>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board makes all decisions involving
the compensation of executive officers of the Company. During fiscal year 1998,
the Compensation Committee consisted of the following non-employee directors:
John C. Bolger, Dr. Thomas Kailath and Richard C. Murphy.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Through the entire fiscal year 1998, the Compensation Committee of the
Board was comprised of three non-management directors of the Company, John C.
Bolger, Thomas Kailath, and Richard C. Murphy. David P. St. Charles, President
and Chief Executive Officer, evaluated the performance of all executive officers
and recommended salary adjustments which were reviewed and approved by the
Compensation Committee. Performance evaluations for individual executive
officers are based on predetermined individual goals. For the Company's Chief
Executive Officer and Chairman of the Board, these goals are set by the
Compensation Committee, and for all other officers, these goals are recommended
by the Chief Executive Officer and reviewed and approved by the Compensation
Committee. Mr. St. Charles and Dr. Gupta did not participate in any discussions
regarding recommended salary adjustments for themselves.
The Compensation Committee is responsible for setting and administering
the policies governing annual compensation of the executive officers and the
Chairman of the Board of the Company. These policies are based upon the
philosophy that the Company's long-term success in its marketplace is best
achieved through recruitment and retention of the best people in the industry.
The Compensation Committee applies this philosophy in determining compensation
for Company executive officers in three areas: salary, bonuses and stock
options. The Compensation Committee believes that the compensation of the Chief
Executive Officer, the Chairman of the Board and the Company's other executive
officers should be greatly influenced by the Company's performance. Consistent
with this philosophy, a designated portion of the compensation of each executive
is contingent upon corporate performance and adjusted where appropriate, based
on an executive's performance against personal performance objectives. Each
executive officer's performance for the last fiscal year and objectives for the
- 12 -
subsequent year are reviewed, together with the executive's responsibility level
and the Company's fiscal performance versus objectives and potential performance
targets for the subsequent year. The Compensation Committee administers the
Company's equity plans, including the 1988 Stock Option Plan and the 1990
Employee Stock Purchase Plan.
Salary
The Company strives to offer salaries to its executive officers that
are competitive in its industry for similar positions requiring similar
qualifications. In determining executive officers salaries, the Compensation
Committee considers information provided by the Vice President, Human Resources
and Operations, whose recommendations are based upon salary surveys specific to
the Company's industry, size and geographic location. Such surveys are prepared
by an independent organization using information provided from over 300
companies. These surveys summarize information from companies that closely match
the Company in terms of such things as product or industry, geography and
revenue levels. To this end, the Compensation Committee attempted to compare the
compensation of the Company's executive officers with the compensation practices
of the survey companies to determine base salary, target bonuses and target
total cash compensation. In preparing the performance graph for this Proxy
Statement, the Company used the Hambrecht & Quist Technology Index as its
published line of business index. The compensation practices of most of the
companies in the Hambrecht & Quist Technology Index were not reviewed in detail
by the Company when the Compensation Committee reviewed the compensation
information discussed above because such companies were determined not to be
directly competitive with the Company for executive talent. In addition to their
base salaries, the Company's executive officers, including the Chief Executive
Officer and Chairman of the Board, are each eligible to receive a cash bonus and
are entitled to participate in the 1988 Stock Option Plan. The bonus for the
Chief Executive Officer, Chairman of the Board and for other executives is based
primarily on Company performance.
The foregoing information was presented to the Compensation Committee
in March 1997. The Compensation Committee reviewed the recommendations and
performance and market data outlined above and established a base salary level
to be effective March 1, 1997 for each executive officer, including the Chief
Executive Officer and Chairman of the Board. In addition to considering the
results of the performance evaluations and information concerning competitive
salaries, the Compensation Committee and Chief Executive Officer place primary
weight on the financial condition of the Company in considering salary
adjustments.
Bonuses
The Company seeks to provide additional incentives and rewards to
executives who make contributions of outstanding value to the Company. For this
reason, the Compensation Committee administers a bonus plan, which can comprise
a substantial portion of the total compensation of executive officers when
earned and paid.
The Compensation Committee determines annually the total amount of cash
bonuses available for executive officers. Awards under the plan are contingent
upon the performance of the Company as a whole, based upon the Company's
attaining certain revenue and operating profit goals set by the Board annually
in consultation with the Chief Executive Officer. The target amounts of bonuses
available to each executive officer are set annually by the Compensation
Committee in its discretion with regard to the Chief Executive Officer and
Chairman of the Board and by the Chief Executive Officer, subject to review and
approval by the Compensation Committee, with regard to executive officers other
than himself. In all cases, the relative target amounts for individual officers
are based upon the total dollars available for bonuses, and historical and
expected future contributions by the individual executive officer. In fiscal
1998, the objectives used by the Company as the basis for incentive compensation
were based primarily on Company performance. Executive officers earn a
percentage of the target amounts under the bonus plan relating to the
achievement of the performance goals under the plan by the Company, as
determined by the Committee annually in its discretion. Awards are weighted so
that proportionately higher awards are received when the Company's performance
exceeds targets and proportionately smaller or no awards are made when the
Company does not meet targets.
Stock Options
The Compensation Committee believes that employee equity ownership
provides significant additional motivation to executive officers to maximize
value for the Company's shareholders, and therefore recommends to the Board
periodic grants of stock options under the Company's 1988 Stock Option Plan.
Stock options are granted by the Compensation Committee in its discretion at the
prevailing market price and will have value only if the Company's stock price
increases over the exercise price. Therefore, the Compensation Committee
believes that stock options serve to align the interest of executive officers
closely with other shareholders because of the direct benefit executive officers
receive through improved stock performance.
The Compensation Committee makes option grants in its discretion after
consideration of recommendations from Mr. St. Charles and other members of the
Board. Recommendations for options are based upon relative positions and
responsibilities of executive officers, historical and expected contributions of
each executive officer to the Company, and previous option grants to such
executive officers. Options are recommended with a goal of providing equity
compensation for executive officers competitive with that of executive officers
of similar rank in other companies in the Company's industry, geographic
location and size. Stock options typically have been granted to executive
officers when the executive first joins the Company, in connection with a
significant
- 13 -
change in responsibilities, and, occasionally, to achieve equity within a peer
group. The Committee in its discretion may, however, grant additional stock
options to executives for other reasons. The number of shares subject to each
stock option granted is based on anticipated future contribution and ability to
impact corporate results, past performance or consistency within the executive's
peer group. In fiscal 1998, the Committee considered these factors, as well as
the number of options held by such executive officers as of the date of grant
that remained unvested. Option grants for fiscal year 1998 are set forth in the
table above entitled "Option Grants in Fiscal Year 1998".
In April 1997, the Compensation Committee approved an option repricing
program. All employees, including executive officers, were eligible to
participate under the repricing program. All eligible executive officers with
options that had exercise prices greater than closing price on the Nasdaq
National Market on the date of the repricing, had the option to exchange such
options on a one-for-one basis. Options to purchase an aggregate of 1,222,632
shares of Common Stock were repriced, with new exercise prices ranging from
$8.75 to $10.50 per share, based on the closing price of the Common Stock on the
Nasdaq National Market on the date individual employees agreed to cancel their
original outstanding options. Of these repriced options, 451,000 were held by
executive officers of the Company. The vesting schedule of the new options was
adjusted to begin on the date individual employees agreed to cancel their
original outstanding options, with any prior vesting being forfeited.
The following table sets out certain information regarding information regarding
the repricing of options held by any executive officer of the Company during the
last ten fiscal years.
OPTION REPRICING TABLE
Length Of
Original
Number Of Option Term
Securities Exercise Remaining
Underlying Market Price Price At At Date Of
Options Of Stock At Time Of New Repricing Or
Repriced Or Repricing Or Repricing Or Exercise Amendment
Name and Position Date Amended (#) Amendment ($) Amendment ($) Price ($) (Years)
----------------- ---- ----------- ------------- ------------- --------- -------
David P. St. Charles 4/16/97 75,000 $ 10.2500 $24.0000 $10.2500 8.99
President and CEO 4/16/97 25,000 $ 10.2500 $24.0000 $10.2500 8.99
Narendra K. Gupta -- -- -- -- -- --
Chairman and Secretary
Joseph Addiego 4/17/97 20,000 $ 8.7500 $14.6250 $ 8.7500 8.39
Vice President, Marketing 4/17/97 40,000 $ 8.7500 $24.0000 $ 8.7500 8.99
1/25/93 30,000 $ 2.8750 $ 5.0000 $ 2.8750 3.85
1/25/93 40,000 $ 2.8750 $ 4.5000 $ 2.8750 3.89
William C. Smith 4/16/97 80,000 $ 10.2500 $20.2500 $10.2500 9.66
Vice President, Finance and CFO
Karen D. Auerbach -- -- -- -- -- --
Vice President & Genral Manager
Design Automation Solutions
Other Current Executive Officers:
David Stepner 4/21/97 25,000 $ 10.5000 $24.0000 $10.5000 8.99
Vice President, Research & Development
Former Executive Officers:
Gregory S. Olson 4/17/97 100,000 $ 8.7500 $26.5000 $ 8.7500 9.26
Vice President, Marketing
Andrew J. Pease 4/17/97 35,000 $ 8.7500 $26.5000 $ 8.7500 9.19
Vice President, North American Sales
Tony Tolani 4/17/97 10,000 $ 8.7500 $24.0000 $ 8.7500 8.99
Vice President, Far East Operations
Fred E. Tubb 4/16/97 5,000 $ 10.2500 $24.0000 $10.2500 8.99
Vice President, Applied Solutions Dept 4/16/97 15,000 $ 10.2500 $18.2500 $10.2500 9.58
Robert M. Dressler 1/25/93 30,000 $ 2.8750 $ 7.2500 $ 2.8750 4.07
Vice President, Advanced Systems Group 1/25/93 10,000 $ 2.8750 $ 5.5650 $ 2.8750 5.11
Andrew R. Mills 1/25/93 15,000 $ 2.8750 $ 5.2500 $ 2.8750 3.85
Vice President, Design Automation Group
- 14 -
Fiscal 1998 Chief Executive Officer Compensation
In March 1997, the Committee established a base salary for Mr. St.
Charles for fiscal year 1998. This base salary represented a decrease over Mr.
St. Charles' fiscal year 1997 base salary. The Compensation Committee also
established a target bonus for Mr. St. Charles under the fiscal year 1998 bonus
plan. The fiscal year 1997 base salary level and target bonus were based upon a
number of factors, including (a) the Compensation Committee's assessment of the
fiscal year 1997 performance of the Company and Mr. St. Charles, (b) fiscal year
1998 Company performance objectives and individual performance objectives and
responsibilities for Mr. St. Charles established in March 1997, and (c) the
market compensation data for companies in the same industry and geographic
location and similar in size to the Company in terms of revenue. These
objectives included satisfactorily managing the Company's overall corporate
business plan, such as meeting the Company's profitability projections and the
Company's sales targets, and strengthening the Company's financial position.
In fiscal year 1998, the Compensation Committee granted Mr. St. Charles
a new stock option to purchase 160,000 shares. The number of shares granted was
based on Mr. St. Charles' position, fiscal year 1997 performance and expected
performance in fiscal year 1998 and beyond.
The Compensation Committee has concluded that Mr. St. Charles'
performance in fiscal year 1998 warrants the compensation for fiscal year 1998
as reflected in the Summary Compensation Table.
Compliance with Section 162(m) of the Internal Revenue Code of 1986.
The Company intends to comply with the requirements of Section 162(m)
of the Internal Revenue Code of 1986 for 1998. The Company does not expect cash
compensation for 1998 to be in excess of $1,000,000 or consequently affected by
the requirements of Section 162(m).
COMPENSATION COMMITTEE
John C. Bolger
Thomas Kailath
Richard Murphy
-15-
COMPANY STOCK PRICE PERFORMANCE GRAPH
The stock price performance graph below shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or under the Securities Exchange Act of 1934, as amended, except to the
extent the Company specifically incorporates this information by reference, and
shall not otherwise be deemed soliciting material or filed under such Acts.
The graph below compares the cumulative total shareholder return of the
Common Stock of the Company from March 1, 1993 to February 28, 1998 with the
cumulative total return of the Nasdaq Composite Index and the Hambrecht & Quist
Technology Index over the same period (assuming the investment of $100 in the
Company's Common Stock and in each of the other indices on March 1, 1993, and
reinvestment of all dividends).
The comparisons in the graph below are based on historical data and are
not intended to forecast the possible future performance of the Company's Common
Stock.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
Cumulative Total Return
-----------------------------------------------------------------------------------------------------------
2/28/93 8/30/93 2/28/94 8/31/94 2/28/95 8/31/95 2/28/96 8/31/96 2/28/97 8/31/97 2/28/98
-----------------------------------------------------------------------------------------------------------
NASDAQ Composite Index 100 111 117 114 118 152 165 210 195 236 264
H&Q Technology Index 100 103 118 120 137 193 205 221 269 352 368
Integrated Systems, Inc. 100 135 185 200 331 450 723 1023 700 465 525
CERTAIN TRANSACTIONS
Since March 1, 1997, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
was or is to be party in which the amount involved exceeds $60,000 and in which
any director, executive officer or holder of more than 5% of the Company's
Common Stock had or will have a direct or indirect material interest other than
(i) compensation arrangements, which are described under "Proposal No, 1 -
Election of Directors - Directors Compensation" and "Executive Compensation" and
(ii) the transaction described below.
During fiscal year 1998, Digital Link Corporation purchased products
and services totaling approximately $80,000 from the Company. These transactions
were made on terms substantially similar to those the Company offers to other
customers. Dr. Gupta, the Chairman of the Board of Directors and Secretary of
the Company, served as a member of the Board of Directors of Digital Link
Corporation. Mrs. Gupta, who is a director of the Company and the spouse Dr.
Gupta, is the Chairperson of the Board of Directors of Digital Link Corporation.
Dr. and Mrs. Gupta are more than 10% shareholders of both Digital Link
Corporation and the Company.
-16-
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock, to file with the SEC initial reports of beneficial
ownership and reports of changes in beneficial ownership of Common Stock of the
Company. Officers, directors and greater than 10% shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations from the executive officers and directors of
the Company, the Company believes that all Section 16(a) filing requirements
were complied with during fiscal year 1998, except as follows: David St.
Charles, President and Chief Executive Officer, filed late one report covering
five transactions.
SHAREHOLDER PROPOSALS
Shareholder proposals for inclusion in the Company's Proxy Statement
and form of proxy relating to the Company's 1999 Annual Meeting of Shareholders
must be received by February 16, 1999.
OTHER BUSINESS
The Board does not presently intend to bring any other business before
the Meeting and, so far as is known to the Board, no matters are to be brought
before the Meeting except as specified in the Notice of the Meeting. As to any
business that may properly come before the Meeting, however, it is intended that
proxies in the form accompanying this Proxy Statement will be voted in respect
thereof in accordance with the judgment of the persons voting such proxies.
By Order of the Board of Directors
/s/ NARENDRA K. GUPTA
Narendra K. Gupta
Chairman of the Board
================================================================================
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND
RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
================================================================================
-17-
APPENDIX A
INTEGRATED SYSTEMS, INC.
1998 EQUITY INCENTIVE PLAN
As Adopted March 30, 1998
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and
18, the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 1,000,000 Shares plus (a) any authorized shares
not issued or subject to outstanding grants under the Company's 1988 Stock
Option Plan the ("Prior Plan") on the Effective Date (as defined in Section 19
below); (b) shares that are subject to issuance upon exercise of an option
granted under the Prior Plan but cease to be subject to such option for any
reason other than exercise of such option; and (c) shares that were issued under
the Prior Plan which are repurchased by the Company at the original issue price
or forfeited. Subject to Sections 2.2 and 18, Shares that are subject to: (x)
issuance upon exercise of an Option but cease to be subject to such Option for
any reason other than exercise of such Option; (y) an Award granted hereunder
but are forfeited or are repurchased by the Company at the original issue price;
and (z) an Award that otherwise terminates without Shares being issued, will
again be available for grant and issuance in connection with future Awards under
this Plan. At all times the Company shall reserve and keep available a
sufficient number of Shares as shall be required to satisfy the requirements of
all outstanding Options granted under this Plan and all other outstanding but
unvested Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
outstanding shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the stockholders of the
Company and compliance with applicable securities laws; provided, however, that
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be
granted only to employees (including officers and directors who are also
employees) of the Company or of a Parent or Subsidiary of the Company. All other
Awards may be granted to employees, officers, directors, consultants,
independent contractors and advisors of the Company or any Parent or Subsidiary
of the Company; provided such consultants, contractors and advisors render bona
fide services not in connection with the offer and sale of securities in a
capital-raising transaction. No person will be eligible to receive more than
200,000 Shares in any calendar year under this Plan pursuant to the grant of
Awards hereunder, other than new employees of the Company or of a Parent or
Subsidiary of the Company (including new employees who are also officers and
directors of the Company or any Parent or Subsidiary of the Company), who are
eligible to receive up to a maximum of 1,000,000 Shares in the calendar year in
which they commence their employment. A person may be granted more than one
Award under this Plan.
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be administered by the
Committee or by the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan. Without
limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject
to Awards;
(f) determine whether Awards will be granted singly, in
combination with, in tandem with, in replacement of, or as
alternatives to, other Awards under this Plan or any other
incentive or compensation plan of the Company or any Parent or
Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Any determination made by the
Committee with respect to any Award will be made in its sole discretion at the
time of grant of the Award or, unless in contravention of any express term of
this Plan or Award, at any later time, and such determination will be final and
binding on the Company and on all persons having an interest in any Award under
this Plan. The Committee may delegate to one or more officers of the Company the
authority to grant an Award under this Plan to Participants who are not Insiders
of the Company.
5. OPTIONS. The Committee may grant Options to eligible persons
and will determine whether such Options will be Incentive Stock Options within
the meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the
number of Shares subject to the Option, the Exercise Price of the Option, the
period during which the Option may be exercised, and all other terms and
conditions of the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("Stock Option Agreement"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the
times or upon the events
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Integrated Systems, Inc.
1998 Equity Incentive Plan
determined by the Committee as set forth in the Stock Option Agreement governing
such Option; provided, however, that no Option will be exercisable after the
expiration of ten (10) years from the date the Option is granted; and provided
further that no ISO granted to a person who directly or by attribution owns more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of any Parent or Subsidiary of the Company ("Ten Percent
Stockholder") will be exercisable after the expiration of five (5) years from
the date the ISO is granted. The Committee also may provide for Options to
become exercisable at one time or from time to time, periodically or otherwise,
in such number of Shares or percentage of Shares as the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 Method of Exercise. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"Exercise Agreement") in a form approved by the Committee (which need not be the
same for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 Termination. Notwithstanding the exercise periods set
forth in the Stock Option Agreement, exercise of an Option will always be
subject to the following:
(a) If the Participant is Terminated for any reason except death
or Disability, then the Participant may exercise such
Participant's Options only to the extent that such Options
would have been exercisable upon the Termination Date no later
than three (3) months after the Termination Date (or such
shorter or longer time period not exceeding five (5) years as
may be determined by the Committee, with any exercise beyond
three (3) months after the Termination Date deemed to be an
NQSO), but in any event, no later than the expiration date of
the Options.
(b) If the Participant is Terminated because of Participant's
death or Disability (or the Participant dies within three (3)
months after a Termination other than for Cause or because of
Participant's Disability), then Participant's Options may be
exercised only to the extent that such Options would have been
exercisable by Participant on the Termination Date and must be
exercised by Participant (or Participant's legal
representative or authorized assignee) no later than twelve
(12) months after the Termination Date (or such shorter or
longer time period not exceeding five (5) years as may be
determined by the Committee, with any such exercise beyond (a)
three (3) months after the Termination Date when the
Termination is for any reason other than the Participant's
death or Disability, or (b) twelve (12) months after the
Termination Date when the Termination is for Participant's
death or Disability, deemed to be an NQSO), but in any event
no later than the expiration date of the Options.
(c) Notwithstanding the provisions in paragraph 5.6(a) above, if a
Participant is terminated for Cause, neither the Participant,
the Participant's estate nor such other person who may then
hold the Option shall be entitled to exercise any Option with
respect to any Shares whatsoever, after termination of
service, whether or not after termination of service the
Participant may receive payment from the Company or Subsidiary
for vacation pay, for
- -3-
Integrated Systems, Inc.
1998 Equity Incentive Plan
services rendered prior to termination, for services rendered
for the day on which termination occurs, for salary in lieu of
notice, or for any other benefits. In making such
determination, the Board shall give the Participant an
opportunity to present to the Board evidence on his behalf.
For the purpose of this paragraph, termination of service
shall be deemed to occur on the date when the Company
dispatches notice or advice to the Participant that his
service is terminated.
5.7 Limitations on Exercise. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 Limitations on ISO. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISO are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company, Parent
or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value
of Shares on the date of grant with respect to which ISO are exercisable for the
first time by a Participant during any calendar year exceeds $100,000, then the
Options for the first $100,000 worth of Shares to become exercisable in such
calendar year will be ISO and the Options for the amount in excess of $100,000
that become exercisable in that calendar year will be NQSOs. In the event that
the Code or the regulations promulgated thereunder are amended after the
Effective Date of this Plan to provide for a different limit on the Fair Market
Value of Shares permitted to be subject to ISO, such different limit will be
automatically incorporated herein and will apply to any Options granted after
the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not, without
the written consent of a Participant, impair any of such Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered will be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; provided, however, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.4 of
this Plan for Options granted on the date the action is taken to reduce the
Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision
in this Plan, no term of this Plan relating to ISO will be interpreted, amended
or altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "Purchase Price"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("Restricted Stock Purchase Agreement") that will be in such form
(which need not be the same for each Participant) as the Committee will from
time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The offer of Restricted Stock will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If such
person does not execute and deliver the Restricted Stock Purchase Agreement
along with full payment for the Shares to the Company within thirty (30) days,
then the offer will terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant
to a Restricted Stock
- -4-
Integrated Systems, Inc.
1998 Equity Incentive Plan
Award will be determined by the Committee on the date the Restricted Stock Award
is granted, except in the case of a sale to a Ten Percent Stockholder, in which
case the Purchase Price will be 100% of the Fair Market Value. Payment of the
Purchase Price may be made in accordance with Section 8 of this Plan.
6.3 Terms of Restricted Stock Awards. Restricted Stock Awards
shall be subject to such restrictions as the Committee may impose. These
restrictions may be based upon completion of a specified number of years of
service with the Company or upon completion of the performance goals as set out
in advance in the Participant's individual Restricted Stock Purchase Agreement.
Restricted Stock Awards may vary from Participant to Participant and between
groups of Participants. Prior to the grant of a Restricted Stock Award, the
Committee shall: (a) determine the nature, length and starting date of any
Performance Period for the Restricted Stock Award; (b) select from among the
Performance Factors to be used to measure performance goals, if any; and (c)
determine the number of Shares that may be awarded to the Participant. Prior to
the payment of any Restricted Stock Award, the Committee shall determine the
extent to which such Restricted Stock Award has been earned. Performance Periods
may overlap and Participants may participate simultaneously with respect to
Restricted Stock Awards that are subject to different Performance Periods and
having different performance goals and other criteria.
6.4 Termination During Performance Period. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee will determine otherwise.
7. STOCK BONUSES.
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of
Shares (which may consist of Restricted Stock) for services rendered to the
Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded
for past services already rendered to the Company, or any Parent or Subsidiary
of the Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that
will be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "Performance Stock Bonus
Agreement") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 Terms of Stock Bonuses. The Committee will determine the
number of Shares to be awarded to the Participant. If the Stock Bonus is being
earned upon the satisfaction of performance goals pursuant to a Performance
Stock Bonus Agreement, then the Committee will: (a) determine the nature, length
and starting date of any Performance Period for each Stock Bonus; (b) select
from among the Performance Factors to be used to measure the performance, if
any; and (c) determine the number of Shares that may be awarded to the
Participant. Prior to the payment of any Stock Bonus, the Committee shall
determine the extent to which such Stock Bonuses have been earned. Performance
Periods may overlap and Participants may participate simultaneously with respect
to Stock Bonuses that are subject to different Performance Periods and different
performance goals and other criteria. The number of Shares may be fixed or may
vary in accordance with such performance goals and criteria as may be determined
by the Committee. The Committee may adjust the performance goals applicable to
the Stock Bonuses to take into account changes in law and accounting or tax
rules and to make such adjustments as the Committee deems necessary or
appropriate to reflect the impact of extraordinary or unusual items, events or
circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may
be paid currently or on a deferred basis with such interest or dividend
equivalent, if any, as the Committee may determine. Payment may be made in the
form of cash or whole Shares or a combination thereof, either in a lump sum
payment or in
- -5-
Integrated Systems, Inc.
1998 Equity Incentive Plan
installments, all as the Committee will determine.
8. PAYMENT FOR SHARE PURCHASES.
8.1 Payment. Payment for Shares purchased pursuant to this
Plan may be made in cash (by check) or, where expressly approved for the
Participant by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid
for within the meaning of SEC Rule 144 (and, if such shares
were purchased from the Company by use of a promissory note,
such note has been fully paid with respect to such shares); or
(2) were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms
as may be approved by the Committee and bearing interest at a
rate sufficient to avoid imputation of income under Sections
483 and 1274 of the Code; provided, however, that Participants
who are not employees or directors of the Company will not be
entitled to purchase Shares with a promissory note unless the
note is adequately secured by collateral other than the
Shares;
(d) by waiver of compensation due or accrued to the Participant
for services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the
Participant and a broker-dealer that is a member of
the National Association of Securities Dealers (an
"NASD Dealer") whereby the Participant irrevocably
elects to exercise the Option and to sell a portion
of the Shares so purchased to pay for the Exercise
Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the
Exercise Price directly to the Company; or
(2) through a "margin" commitment from the Participant
and a NASD Dealer whereby the Participant irrevocably
elects to exercise the Option and to pledge the
Shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer
in the amount of the Exercise Price, and whereby the
NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant
pay for Shares purchased under this Plan by authorizing a guarantee by the
Company of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
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Integrated Systems, Inc.
1998 Equity Incentive Plan
9.2 Stock Withholding. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 Voting and Dividends. No Participant will have any of the
rights of a stockholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a stockholder and have all the rights of a stockholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 12.
10.2 Financial Statements. The Company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company will not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any
interest therein, will not be transferable or assignable by Participant, and may
not be made subject to execution, attachment or similar process, otherwise than
by will or by the laws of descent and distribution or as determined by the
Committee and set forth in the Award Agreement with respect to Awards that are
not ISOs. During the lifetime of the Participant an Award will be exercisable
only by the Participant, and any elections with respect to an Award may be made
only by the Participant unless otherwise determined by the Committee and set
forth in the Award Agreement with respect to Awards that are not ISOs.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee,
the Company may reserve to itself and/or its assignee(s) in the Award Agreement
a right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be.
13. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or
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Integrated Systems, Inc.
1998 Equity Incentive Plan
terminated, and the Committee may cause a legend or legends referencing such
restrictions to be placed on the certificates. Any Participant who is permitted
to execute a promissory note as partial or full consideration for the purchase
of Shares under this Plan will be required to pledge and deposit with the
Company all or part of the Shares so purchased as collateral to secure the
payment of Participant's obligation to the Company under the promissory note;
provided, however, that the Committee may require or accept other or additional
forms of collateral to secure the payment of such obligation and, in any event,
the Company will have full recourse against the Participant under the promissory
note notwithstanding any pledge of the Participant's Shares or other collateral.
In connection with any pledge of the Shares, Participant will be required to
execute and deliver a written pledge agreement in such form as the Committee
will from time to time approve. The Shares purchased with the promissory note
may be released from the pledge on a pro rata basis as the promissory note is
paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time
or from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will
not be effective unless such Award is in compliance with all applicable federal
and state securities laws, rules and regulations of any governmental body, and
the requirements of any stock exchange or automated quotation system upon which
the Shares may then be listed or quoted, as they are in effect on the date of
grant of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award
granted under this Plan will confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent or Subsidiary of the Company or limit in any way
the right of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
18.1 Assumption or Replacement of Awards by Successor. In the
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the stockholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction, any or all outstanding Awards may be assumed, converted or
replaced by the successor corporation (if any), which assumption, conversion or
replacement will be binding on all Participants. In the alternative, the
successor corporation may substitute equivalent Awards or provide substantially
similar consideration to Participants as was provided to stockholders (after
taking into account the existing provisions of the Awards). In the event such
successor or acquiring corporation (if any) does not
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Integrated Systems, Inc.
1998 Equity Incentive Plan
assume, convert, replace or substitute Awards, as provided above, pursuant to a
transaction described in this Section 18.1, then notwithstanding any other
provision in this Plan to the contrary, the vesting of such Awards will
accelerate and the Options will become exercisable in full prior to the
consummation of such event at such times and on such conditions as the Committee
determines, and if such Options are not exercised prior to the consummation of
the corporate transaction, they shall terminate in accordance with the
provisions of this Plan. The successor corporation may also issue, in place of
outstanding Shares of the Company held by the Participant, substantially similar
shares or other property subject to repurchase restrictions no less favorable to
the Participant.
The Committee may, in its sole discretion, provide that the
vesting of any or all Awards granted pursuant to this Plan will accelerate even
if Options would otherwise be assumed, converted, replaced or substituted for.
If the Committee exercises such discretion with respect to Options, such Options
will become exercisable in full prior to the consummation of such event at such
time and on such conditions as the Committee determines, and if such Options are
not exercised prior to the consummation of the corporate transaction, they shall
terminate at such time as determined by the Committee.
18.2 Other Treatment of Awards. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, or sale of assets.
18.3 Assumption of Awards by the Company. The Company, from
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other company
or otherwise, by either; (a) granting an Award under this Plan in substitution
of such other company's award; or (b) assuming such award as if it had been
granted under this Plan if the terms of such assumed award could be applied to
an Award granted under this Plan. Such substitution or assumption will be
permissible if the holder of the substituted or assumed award would have been
eligible to be granted an Award under this Plan if the other company had applied
the rules of this Plan to such grant. In the event the Company assumes an award
granted by another company, the terms and conditions of such award will remain
unchanged (except that the exercise price and the number and nature of Shares
issuable upon exercise of any such option will be adjusted appropriately
pursuant to Section 424(a) of the Code). In the event the Company elects to
grant a new Option rather than assuming an existing option, such new Option may
be granted with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become
effective upon the expiration date of the Prior Plan (the "Effective Date").
This Plan shall be approved by the stockholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon the
Effective Date, the Committee may grant Awards pursuant to this Plan; provided,
however, that: (a) no Option may be exercised prior to initial stockholder
approval of this Plan; (b) no Option granted pursuant to an increase in the
number of Shares subject to this Plan approved by the Board will be exercised
prior to the time such increase has been approved by the stockholders of the
Company; and (c) in the event that stockholder approval of such increase is not
obtained within the time period provided herein, all Awards granted pursuant to
such increase will be canceled, any Shares issued pursuant to any Award granted
pursuant to such increase will be canceled, and any purchase of Shares pursuant
to such increase will be rescinded.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as
provided herein, this Plan will terminate ten (10) years from the date this Plan
is adopted by the Board or, if earlier, the date of stockholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
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Integrated Systems, Inc.
1998 Equity Incentive Plan
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; provided, however, that the Board will not, without the approval
of the stockholders of the Company, amend this Plan in any manner that requires
such stockholder approval.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan
by the Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will
have the following meanings:
"Award" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the
signed written agreement between the Company and the Participant setting forth
the terms and conditions of the Award.
"Board" means the Board of Directors of the Company.
"Cause" means the commission of an act of theft, embezzlement,
fraud, dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board.
"Company" means Integrated Systems, Inc. or any successor
corporation.
"Disability" means a disability, whether temporary or
permanent, partial or total, as determined by the Committee.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exercise Price" means the price at which a holder of an
Option may purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a
share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then listed on
a national securities exchange, its closing price on the date
of determination on the principal national securities exchange
on which the Common Stock is listed or admitted to trading as
reported in The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not quoted on
the Nasdaq National Market nor listed or admitted to trading
on a national securities exchange, the average of the
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Integrated Systems, Inc.
1998 Equity Incentive Plan
closing bid and asked prices on the date of determination as
reported in The Wall Street Journal;
(d) in the case of an Award made on the Effective Date, the price
per share at which shares of the Company's Common Stock are
initially offered for sale to the public by the Company's
underwriters in the initial public offering of the Company's
Common Stock pursuant to a registration statement filed with
the SEC under the Securities Act; or
(d) if none of the foregoing is applicable, by the Committee in
good faith.
"Insider" means an officer or director of the Company or any
other person whose transactions in the Company's Common Stock are subject to
Section 16 of the Exchange Act.
"Option" means an award of an option to purchase Shares
pursuant to Section 5.
"Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"Participant" means a person who receives an Award under this
Plan.
"Performance Factors" means the factors selected by the
Committee from among the following measures to determine whether the performance
goals established by the Committee and applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or
earnings before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total shareholder return and/or total shareholder return
growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual confidential business objectives.
"Performance Period" means the period of service determined by
the Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
- -11-
Integrated Systems, Inc.
1998 Equity Incentive Plan
"Plan" means this Integrated Systems, Inc. 1998 Equity
Incentive Plan, as amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved
for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of
Shares, pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "Termination Date").
"Unvested Shares" means "Unvested Shares" as defined in the
Award Agreement.
"Vested Shares" means "Vested Shares" as defined in the Award
Agreement.
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APPENDIX B
[INTEGRATED SYSTEMS LOGO]
Integrated Systems, Inc.
1994 Directors Stock Option Plan
As Adopted March 23, 1994
1. Purpose. This Stock Option Plan (this "Plan") is established to
provide equity incentives for nonemployee members of the Board of Directors of
Integrated Systems, Inc. (the "Company") who are described in Section 6.1 below,
by granting such persons options to purchase shares of stock of the Company.
2. Adoption and Shareholder Approval. This Plan shall become effective
on the date (the "Effective Date") that it is adopted by the Board of Directors
(the "Board") of the Company. This Plan shall be approved by the shareholders of
the Company, consistent with applicable laws, within twelve months after the
date that it is adopted by the Board. After adoption of this Plan by the Board,
options ("Options") may be granted under this Plan provided that, in the event
that shareholder approval is not obtained within the time period provided
herein, this Plan, and all Options granted hereunder, shall terminate. No Option
that is issued as a result of any increase in the number of shares authorized to
be issued under this Plan shall be exercised prior to the time such increase has
been approved by the shareholders of the Company and all such Options granted
pursuant to such increase shall similarly terminate if such shareholder approval
is not obtained. So long as the Company is subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") the Company
will comply with the requirements of Rule 16b-3 with respect to shareholder
approval.
3. Types of Options and Shares. Options granted under this Plan shall
be nonqualified stock options ("NQSOs"). The shares of stock that may be
purchased upon exercise of Options granted under this Plan (the "Shares") are
shares of the Common Stock of the Company.
4. Number of Shares. The maximum number of Shares that may be issued
pursuant to Options granted under this Plan is 200,000 Shares, subject to
adjustment as provided in this Plan. If any Option is terminated for any reason
without being exercised in whole or in part, the Shares thereby released from
such Option shall be available for purchase under other Options subsequently
granted under this Plan. At all times during the term of this Plan, the Company
shall reserve and keep available such number of Shares as shall be required to
satisfy the requirements of outstanding Options under this Plan.
5. Administration. This Plan shall be administered by the Board or by a
committee of not less than two members of the Board appointed to administer this
Plan (the "Committee"). As used in this Plan, references to the Committee shall
mean either such Committee or the Board if no committee has been established.
The interpretation by the Committee of any of the provisions of this Plan or any
Option granted under this Plan shall be final and binding upon the Company and
all persons having an interest in any Option or any Shares purchased pursuant to
an Option.
6. Eligibility and Award Formula.
6.1 Eligibility. Options may be granted only to directors of the
Company who are not employees of the Company or any Parent, Subsidiary or
Affiliate of the Company, as those terms are defined in Section 18 below (each
an "Optionee").
6.2 Initial Grant. Each Optionee who is a member of the Board on
the Effective Date or becomes a member of the Board for the first time after the
Effective Date and who has previously not been granted a stock option as a
director, will automatically be granted an Option for 15,000 shares (the
"Initial Grant") on the latter of the Effective Date or the date such Optionee
first joins the Board. No other member of the Board will receive an Initial
Grant.
6.3 Succeeding Grants. If, after the Effective Date, on each
anniversary date of joining the Board, the Optionee is still a member of the
Board, the Optionee will again automatically be granted an Option for 5,000
Shares.
7. Terms and Conditions of Options. Subject to the following and to
Section 6 above:
7.1 Form of Option Grant. Each Option granted under this Plan
shall be evidenced by a written Stock Option Grant ("Grant") in such form (which
need not be the same for each Optionee) as the Committee shall from time to time
approve, which Grant shall comply with and be subject to the terms and
conditions of this Plan.
7.2 Vesting. The date of automatic grant of an Option is
referred to in this Plan as the respective "Start Date" for each such Option.
Each Option granted under the Plan will vest as to 2.0833% of the Shares each
calendar month, so long as the Optionee continuously remains a director of the
Company.
7.3 Exercise Price. The exercise price of an Option shall be the
Fair Market Value (as defined in Section 18.4) of the Shares, at the time that
the Option is granted.
7.4 Termination of Option. Except as provided below in this
Section, each Option shall expire ten years after the Start Date (the
"Expiration Date"). The Option shall cease to vest if Optionee ceases to be a
member of the Board. The date on which Optionee ceases to be a member of the
Board shall be referred to as the "Termination Date." An Option may be exercised
after the Termination Date only as set forth below:
(a) Termination Generally. If Optionee ceases to be a
member of the Board for any reason except death or disability, each Option, to
the extent (and only to the extent) that it would have been exercisable by
Optionee on the Termination Date, may be exercised by Optionee within six (6)
months after the Termination Date, but in no event later than the Expiration
Date.
(b) Death or Disability. If Optionee ceases to be a member
of the Board because of the death of Optionee or the disability of Optionee
within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended, each Option, to the extent (and only to the extent) that it would have
been exercisable by Optionee on the Termination Date, may be exercised by
Optionee (or Optionee's legal representative) within twelve (12) months after
the Termination Date, but in no event later than the Expiration Date.
8. Exercise of Options.
8.1 Notice. Options may be exercised only by delivery to the
Company of an exercise agreement in a form approved by the Committee, stating
the number of Shares being purchased, the restrictions imposed on the Shares and
such representations and agreements regarding the Optionee's investment intent
and access to information as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased.
8.2 Payment. Payment for the Shares may be made (a) in cash or
by check; (b) by surrender of shares of Common Stock of the Company that have
been owned by Optionee for more than six (6) months (and which have been paid
for within the meaning of SEC Rule 144 and, if such shares were purchased from
the Company by use of a promissory note, such note has been fully paid with
respect to such shares) or were obtained by the Optionee in the open public
market, having a Fair Market Value equal to the exercise price of the Option;
(c) by waiver of compensation due or accrued to Optionee for services rendered;
(d) provided that a public market for the Company's stock exists, through a
"same day sale" commitment from the Optionee and a broker-dealer that is a
-2-
member of the National Association of Securities Dealers (a "NASD Dealer")
whereby the Optionee irrevocably elects to exercise the Option and to sell a
portion of the Shares so purchased to pay for the exercise price and whereby the
NASD Dealer irrevocably commits upon receipt of such Shares to forward the
exercise price directly to the Company; (e) provided that a public market for
the Company's stock exists, through a "margin" commitment from the Optionee and
a NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and
to pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the exercise price directly to the Company; or (f) by any combination of
the foregoing.
8.3 Withholding Taxes. Prior to issuance of the Shares upon
exercise of an Option, the Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if applicable.
8.4 Limitations on Exercise. Notwithstanding the exercise
periods set forth in the Grant, exercise of an Option shall always be subject to
the following limitations:
(a) An Option shall not be exercisable until such time as
the Plan or, in the case of Options granted pursuant to an amendment to the
number of shares that may be issued pursuant to the Plan, the amendment has been
approved by the shareholders of the Company in accordance with Section 16
hereof.
(b) An Option shall not be exercisable unless such
exercise is in compliance with the 1933 Securities Act, as amended, and all
applicable state securities laws, as they are in effect on the date of exercise.
(c) The Committee may specify a reasonable minimum number
of Shares that may be purchased on any exercise of an Option, provided that such
minimum number will not prevent the Optionee from exercising the full number of
Shares as to which the Option is then exercisable.
9. Nontransferability of Options. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or by the Optionee's
guardian or legal representative, unless otherwise permitted by the Committee.
No Option may be sold, pledged, assigned, hypothecated, transferred or disposed
of in any manner other than by will or by the laws of descent and distribution.
10. Privileges of Stock Ownership. No Optionee shall have any of the
rights of a shareholder with respect to any Shares subject to an Option until
the Option has been validly exercised. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the date
of exercise, except as provided in this Plan. The Company shall provide to each
Optionee a copy of the annual financial statements of the Company, at such time
after the close of each fiscal year of the Company as they are released by the
Company to its shareholders.
11. Adjustment of Option Shares. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration,
the number of Shares available under this Plan and the number of Shares subject
to outstanding Options and the exercise price per share of such Options shall be
proportionately adjusted, subject to any required action by the Board or
shareholders of the Company and compliance with applicable securities laws;
provided, however, that no certificate or scrip representing fractional shares
shall be issued upon exercise of any Option and any resulting fractions of a
Share shall be ignored.
12. No Obligation to Employ. Nothing in this Plan or any Option granted
under this Plan shall confer on any Optionee any right to continue as a director
of the Company.
13. Compliance With Laws. The grant of Options and the issuance of
Shares upon exercise of any Options shall be subject to and conditioned upon
compliance with all applicable requirements of law, including without limitation
compliance with the 1933 Securities Act, any required approval by the
Commissioner of Corporations of the State of California, compliance with all
other applicable state securities laws and compliance with the requirements of
any stock exchange or national market system on which the Shares may be listed.
The
-3-
Company shall be under no obligation to register the Shares with the Securities
and Exchange Commission or to effect compliance with the registration or
qualification requirement of any state securities laws, stock exchange or
national market system.
l4. Restrictions on Shares. The Company may reserve to itself or its
assignee(s) in the Grant, a right to repurchase any or all unvested shares held
by an Optionee upon the Optionee's termination of service with the Company for
any reason at the Optionee's original exercise price.
15. Assumption of Options by Successors. In the event of a dissolution
or liquidation of the Company, a merger in which the Company is not the
surviving corporation, the sale of substantially all of the assets of the
Company, or any other transaction which qualifies as a "corporate transaction"
under Section 424 of the Revenue Code wherein the Shareholders of the Company
give up all of their equity interest in the Company, the vesting of all options
granted pursuant to the Plan will accelerate and the options will become
exercisable in full prior to the consummation of such event at such times and on
such conditions as the Committee determines.
16. Amendment or Termination of Plan. The Committee may at any time
terminate or amend this Plan but not the terms of any outstanding option;
provided, however, that the Committee shall not, without the approval of the
shareholders of the Company, increase the total number of Shares available under
this Plan (except by operation of the provisions of Sections 4 and 11 above) or
change the class of persons eligible to receive Options. Further, the provisions
in Sections 6 and 7 of this Plan shall not be amended more than once every six
(6) months, other than to comport with changes in the Internal Revenue Code of
1986, as amended, the Employee Retirement Income Security Act or the rules
thereunder. In any case, no amendment of this Plan may adversely affect any then
outstanding Options or any unexercised portions thereof without the written
consent of the Optionee.
17. Term of Plan. Options may be granted pursuant to this Plan from
time to time within a period of ten (10) years from the Effective Date.
18. Certain Definitions. As used in this Plan, the following terms
shall have the following meanings:
18.1 "Parent" means any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if, at the time of the
granting of the Option, each of such corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
18.2 "Subsidiary" means any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the time
of granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
18.3 "Affiliate" means any corporation that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, another corporation, where "control" (including
the terms "controlled by" and "under common control with") means the possession,
direct or indirect, of the power to cause the direction of the management and
policies of the corporation, whether through the ownership of voting securities,
by contract or otherwise.
18.4 "Fair Market Value" shall be the closing price for the
common stock of the Company on the last trading day prior to the date of
determination as quoted on the Nasdaq National Market and reported in The Wall
Street Journal.
-4-
APPENDIX C
[GRAPHIC OMITTED]
PROXY INTEGRATED SYSTEMS, INC. PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 15, 1998
The undersigned hereby appoints Narendra K. Gupta and William C. Smith,
or either of them, as proxies and attorneys in fact, each with full power of
substitution, to represent the undersigned at the Annual Meeting of Shareholders
of Integrated Systems, Inc. (the "Company") to be held at the Company, 201
Moffett Park Drive, Sunnyvale, CA 94089 on July 15, 1998 at 2:00 p.m., and any
adjournments or postponements thereof, and to vote the number of shares the
undersigned would be entitled to vote if personally present at the meeting.
(Continued, and to be signed on the other side)
[X] Please mark
your votes
as this
WITHHOLD
FOR FOR ALL
1. ELECTION OF DIRECTORS:
NOMINEES: John C. Bolger, [ ] [ ]
Michael A. Brochu,
Narendra K. Gupta, Vinita Gupta, Thomas Kailath,
Richard C. Murphy, David P. St. Charles
INSTRUCTION: To withhold authority to vote for
any individual nominee, write that nominee's name
in the space provided below.
-------------------------------------------------
FOR AGAINST ABSTAIN
2. To approve the adoption of the 1998 Equity Incentive [ ] [ ] [ ]
Plan.
3. To approve the amendment to the 1994 Directors Stock [ ] [ ] [ ]
Option Plan.
4. To ratify the selection of Coopers & Lybrand LLP as [ ] [ ] [ ]
the Company's independent public accountants.
MANAGEMENT RECOMMENDS A VOTE FOR ALL THE NOMINEES FOR
DIRECTOR LISTED ABOVE AND A VOTE FOR PROPOSALS 2, 3 AND 4.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE
VOTED FOR ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR
PROPOSALS 2, 3 AND 4 AS MORE SPECIFICALLY DESCRIBED IN THE
PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED,
THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH. In their
discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting or
any adjournment or postponement thereof to the extent
authorized by Rule 14a-4(c) promulgated by the Securities
and Exchange Commission.
Signature(s) ______________________________________ Dated _______________, 1998
Sign exactly as your name(s) appear(s) on your stock certificate. If shares of
stock stand of record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above Proxy. If shares of stock are held of record by a
corporation, the Proxy should be executed by the President or Vice President and
the Secretary or Assistant Secretary. Executors or administrators or other
fiduciaries who execute the above Proxy for a deceased Shareholder should give
their full title. Please date the Proxy.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN
AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK MAY BE
REPRESENTED AT THE MEETING.