<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
MICROWARE SYSTEMS CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
MICROWARE SYSTEMS CORPORATION
------------------
1500 NW 118TH STREET
DES MOINES, IOWA 50325
July 23, 1998
Notice of Annual Shareholders Meeting
You are hereby notified that the Annual Meeting of Shareholders of Microware
Systems Corporation (the "Company") will be held at the West Des Moines
Marriott, 1250 74th Street, West Des Moines, Iowa, at 10:00 a.m. local time, on
Tuesday, September 8, 1998, for the following purposes:
1. To elect two Class III Directors to hold office until the 2001 Annual
Meeting.
2. To consider a proposal to amend the Company's 1995 Stock Option Plan to
authorize the issuance of an additional 350,000 shares under the plan.
3. To consider a proposal to ratify the selection of KPMG Peat Marwick LLP
as independent public accountants of the Company for the fiscal year
ending March 31, 1999.
4. To transact such other business as may properly come before the Meeting
or any adjournment thereof.
The Board of Directors has fixed the close of business on July 7, 1998 as
the record date for the determination of shareholders entitled to notice of and
to vote at the Meeting.
You are urged to attend the Meeting in person. Whether or not you expect to
be present in person at the Meeting, please date, sign and return the enclosed
proxy in the envelope provided.
By Order of the Board of Directors
KENT R. KELDERMAN
SECRETARY
<PAGE>
MICROWARE SYSTEMS CORPORATION
1500 NW 118TH STREET
DES MOINES, IOWA 50325
------------------------
1998 ANNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 8, 1998
---------------------
PROXY STATEMENT
GENERAL
This Proxy Statement and the accompanying proxy are furnished to
shareholders of Microware Systems Corporation (the "Company") in connection with
the solicitation of proxies by the Company's Board of Directors for use at the
1998 Annual Meeting of Shareholders (the "Meeting") to be held at the West Des
Moines Marriott, 1250 74th Street, West Des Moines, Iowa, at 10:00 a.m. local
time, on Tuesday, September 8, 1998, for the purposes set forth in the
accompanying Notice of Meeting. This Proxy Statement, the form of proxy included
herewith and the Company's Annual Report to Shareholders for the fiscal year
ended March 31, 1998, are expected to be mailed to shareholders on or about July
24, 1998.
Shareholders of record at the close of business on July 7, 1998 are entitled
to notice of and to vote at the Meeting. On such date there were outstanding
14,584,692 shares of Common Stock, no par value (the "Common Stock"). The
presence, in person or by proxy, of the holders of a majority of the shares of
Common Stock outstanding and entitled to vote at the Meeting is necessary to
constitute a quorum. In deciding all questions, each holder of Common Stock
shall be entitled to one vote, in person or by proxy, for each share held on the
record date.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the election inspector appointed for the Meeting and will determine whether or
not a quorum is present. Neither the Company's Articles of Incorporation,
By-laws nor Iowa law determines the treatment and effect of abstentions and
broker non-votes. The election inspectors will treat abstentions as shares that
are present and entitled to vote but as not voted for purposes of determining
the approval of any matter submitted to the shareholders for a vote. If a broker
indicates on the proxy that it does not have discretionary authority as to
certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
Properly executed proxies will be voted in the manner directed by the
shareholders. If no direction is made, such proxies will be voted FOR the
election of the two nominees named under the caption "Election of Directors" as
set forth therein as Directors of the Company, FOR the amendment of the 1995
Stock Option Plan and FOR the ratification of the selection of KPMG Peat Marwick
LLP as the Company's independent public accountants. Any proxy may be revoked by
the shareholder at any time prior to the voting thereof by notice in writing to
the Secretary of the Company, either prior to the Meeting (at the above address)
or at the Meeting if the shareholder attends in person. A later dated proxy will
revoke a prior dated proxy. As of the date of this Proxy Statement, the Board of
Directors knows of no other business which will be presented for consideration
at the Meeting. If other proper matters are presented to the Meeting, however,
it is the intention of the proxy holders named in the enclosed form of proxy to
take such actions as shall be in accordance with their best judgment.
The information contained in this Proxy Statement relating to the
occupations and security holdings of Directors and officers of the Company and
their transactions with the Company is based upon information received from each
individual as of July 7, 1998.
<PAGE>
HOLDINGS OF SHAREHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth, as of July 7, 1998, the name, address and
holdings of each person (including any "group" as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934) known by the Company to be the beneficial
owner of more than five percent of the Company's Common Stock, and the amount of
Common Stock beneficially owned by each of the Directors and named executive
officers of the Company and by all Directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OWNERSHIP OF
NAME OF BENEFICIAL OWNER (1) CLASS
- -------------------------------------------------------------------------------- ---------------------- -----------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Kenneth B. Kaplan............................................................... 4,698,107(2) 32.2
M. Denis Connaghan.............................................................. 40,000(3) *
Kent R. Kelderman............................................................... 23,135(3) *
Rebecca Duhaime................................................................. --
Shigehiro Ishibashi............................................................. --
Martin Allen.................................................................... 10,750(3) *
Stephen Bashada................................................................. --
Derek South..................................................................... 18,750(3) *
Arthur Don...................................................................... 30,100(3) *
James A. Gordon................................................................. 748,639(3) 5.1
Daniel P. Howell................................................................ 748,639(5) 5.1
Dennis E. Young................................................................. 12,000(3) *
Robert L. Growney............................................................... 2,358,720(6)(7) 15.3
All executive officers and directors as a group 8,695,740
(13 persons)(2)(3)(4)(5)(6)(7)................................................. 55.9
OTHER FIVE PERCENT SHAREHOLDERS
Lawrence A. Crane............................................................... 1,254,592 8.8
1500 N.W. 118th Street, Des Moines, IA 50325
Motorola, Inc. (6)(7)........................................................... 2,358,720 15.3
1303 East Algonquin Road
Schaumburg, Illinois 60196
Edgewater Private Equity Fund, L.P. (4)......................................... 748,639 5.1
666 Locust Street
Des Moines, Iowa 50309
Mesirow Capital Partners VI (5)................................................. 748,639 5.1
350 North Clark Street
Chicago, Illinois 60610
</TABLE>
- ------------------------
* Less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated in the footnotes to this table, the Company
believes the persons named in this table have sole voting and investment
power with respect to all shares of Common Stock reflected in this table.
(2) Includes 7,600 shares held by Mr. Kaplan as custodian for minor children.
(3) Comprises options which are currently exercisable or which are deemed
currently exercisable, and in the case of Mr. Kelderman and Mr. Don includes
1,135 and 100 shares, respectively, directly owned.
2
<PAGE>
(4) Mr. Gordon is President of Gordon Management, Inc., which is General Partner
of Edgewater Private Equity Fund, L.P., the direct beneficial owner of such
shares.
(5) Mr. Howell is Senior Managing Director of Mesirow Private Equity
Investments, Inc., an affiliate of the corporate general partner of Mesirow
Capital Partners VI, which is the direct beneficial owner of such shares.
(6) Mr. Growney is President and Chief Operating Officer of Motorola, Inc.
("Motorola"). Motorola is the direct beneficial owner of such shares. Mr.
Growney disclaims beneficial ownership of such shares.
(7) Includes 832,488 warrants deemed currently exercisable at an exercise price
of $10.81 per share. Of such warrants, 277,496 became exercisable on August
1, 1996 and expire July 31, 1998. An additional 277,496 of such warrants
became exercisable on August 1, 1997. The remaining 277,496 warrants will
become exercisable on August 1, 1998.
ELECTION OF DIRECTORS
Two Directors are to be elected by a plurality of the shareholder votes cast
at the Meeting, to serve until the 2001 Annual Meeting of Shareholders and until
their successors shall be elected and shall qualify. The Class III Directors,
Arthur Don and Dennis E. Young, are nominees at this Meeting. The Class I
Directors, Kenneth B. Kaplan and Daniel P. Howell, are scheduled to serve until
the 1999 Annual Meeting. The Class II Directors, M. Denis Connaghan, James A.
Gordon and Robert L. Growney are scheduled to serve as Directors until the 2000
Annual Meeting. The Articles of Incorporation provide that three directors will
serve in each of the three classes. Effective December 1, 1997, Lawrence A.
Crane resigned as a director of the Company. Consequently, there are now only
two directors in Class III. There are also only two directors in Class I. The
Board is currently considering potential nominees for these vacancies.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
DURING THE PAST FIVE YEARS DIRECTOR OF
NAME AGE AND OTHER PUBLIC DIRECTORSHIPS COMPANY SINCE
- ------------------- --- ---------------------------------------------------------------------- -----------------
<S> <C> <C> <C>
Arthur Don 44 Mr. Don has been a partner in the law firm of D'Ancona & Pflaum, 1994
Chicago, Illinois, counsel to the Company, since 1985.
Dennis E. Young 55 Mr. Young has been Senior Vice President, Chief Financial Officer and 1994
Treasurer and a director of Norwest Financial Inc., a financial
services firm headquartered in Des Moines, Iowa, since 1984.
</TABLE>
THE ENCLOSED PROXIES CANNOT BE VOTED FOR A GREATER NUMBER OF PERSONS THAN
TWO, THE NUMBER OF NOMINEES NAMED IN THIS PROXY STATEMENT.
The Board of Directors knows of no reason why either of the foregoing
nominees will be unavailable to serve, but, in the event of any such
unavailability, the proxies received will be voted for such substitute nominees
as the Board of Directors may recommend. Information about the Directors whose
terms of office will continue after the Annual Meeting is set forth in the
following paragraphs:
NOMINEES WHOSE TERMS EXPIRE IN 1999
Kenneth B. Kaplan Director since 1977
Mr. Kaplan has been Chairman of the Board of Directors, President and Chief
Executive Officer of the Company since it was founded in 1977. Mr. Kaplan was
one of the principal designers of the OS-9 real time operating system. Mr.
Kaplan is a trustee of Drake University and Buena Vista University.
3
<PAGE>
Daniel P. Howell Director since 1994
Mr. Howell is Senior Managing Director of Mesirow Private Equity
Investments, Inc., an affiliate of the corporate general partner of Mesirow
Capital Partners VI, a venture capital partnership. Mr. Howell also is currently
a director of IMNET Systems, Inc. Mr. Howell was elected a Director of the
Company as a designee of the former holders of Series A Preferred Stock.
NOMINEES WHOSE TERMS EXPIRE IN 2000
M. Denis Connaghan Director since 1997
Mr. Connaghan joined the Company in May 1997 as Executive Vice President and
Chief Operating Officer, and was appointed as a Director effective as of the
July 14, 1997 meeting of the Board to fill a vacant Class II seat. Prior to
joining the Company, from 1994 through 1996, Mr. Connaghan was Chief Executive
Officer of Delphi Information Systems, Inc. ("Delphi"), a provider of
information systems to the distribution segment of property and casualty
insurance based in Rolling Meadows, Illinois. Mr. Connaghan currently serves as
a director of Delphi. From 1991 to 1994, Mr. Connaghan served as a vice
president of IBAX Healthcare Systems of Longwood, Florida, a joint venture of
IBM Corporation and Baxter International providing computerized solutions for
healthcare providers. Prior to 1991, Mr. Connaghan held various executive
positions with Pansophic Systems, Inc., of Lisle, Illinois. Mr. Connaghan
attended the New South Wales Institute of Technology and holds an MBA from the
University of Chicago.
James A. Gordon Director since 1994
Mr. Gordon was elected a Director of the Company as a designee of the former
holders of Series A Preferred Stock. Mr. Gordon currently is President of Gordon
Management, Inc., an investment management company based in Des Moines, Iowa,
which was founded in 1992. Gordon Management, Inc. serves as the General Partner
of Edgewater Private Equity Fund, L.P. and Edgewater Private Equity Fund II,
L.P., venture capital partnerships. From 1971 to 1992, Mr. Gordon was the
President of Gordon Wholesalers, Inc. a grocery and tobacco wholesaler. Mr.
Gordon is a director of IMNET Systems, Inc., Advanced Photonix, Inc. and
HealthDesk Corp.
Robert L. Growney Director since 1995
Mr. Growney was elected a Director as the designee of Motorola pursuant to
the Stock and Warrant Purchase Agreement between the Company and Motorola dated
July 31, 1995. Mr. Growney has been President and Chief Operating Officer of
Motorola since January 1997 and a director of Motorola since February 1997. Mr.
Growney formerly served as Executive Vice President of Motorola and President of
its Messaging, Information and Media Sector from January 1994 to December 1996,
as Executive Vice President and General Manager of Motorola's Paging and
Wireless Data Group from September 1992 to January 1994, and as Senior Vice
President and General Manager of Motorola's Paging and Telepoint Systems Group
from January 1991 to September 1992.
DIRECTOR COMMITTEES
The Board of Directors has established an Executive Committee, an Audit
Committee, a Compensation Committee and a Strategy Committee.
The Executive Committee is empowered to act with all authority granted to
the Board of Directors between meetings, except with respect to those matters
required by Iowa law or by the Company's By-laws to be subject to the power and
authority of the full Board of Directors. Messrs. Kaplan (Chair) and Gordon
currently serve on the Executive Committee. During the 1998 fiscal year, the
Executive Committee held three meetings and acted by unanimous consent on one
occasion.
4
<PAGE>
The functions of the Audit Committee are to recommend annually to the Board
of Directors the appointment of the independent public accountants of the
Company, to discuss and review the scope and the fees of the prospective annual
audit and to review the results thereof with the Company's independent public
accountants, to review and approve non-audit services of the independent public
accountants, to review compliance with existing major accounting and financial
policies of the Company, to review the adequacy of the financial organization of
the Company, and to review management's procedures and policies relative to the
adequacy of the Company's internal accounting controls. Messrs. Young (Chair),
Gordon and Howell currently serve on the Audit Committee. During the 1998 fiscal
year, the Audit Committee held one meeting.
The functions of the Compensation Committee are to review and approve annual
salaries and bonuses for all executive officers, to review, approve and
recommend to the Board of Directors the terms and conditions of all employee
benefit plans or changes thereto and to administer the Company's various stock
option plans. Messrs. Howell (Chair) and Gordon currently serve on the
Compensation Committee. During the 1998 fiscal year, the Compensation Committee
held two meetings and acted by unanimous consent on five occasions.
The Strategy Committee was created in September 1995. The function of the
Strategy Committee is to assist the Company in connection with strategic
planning. Messrs. Growney (Chair), Don and Kaplan currently serve on the
Strategy Committee. The Strategy Committee and held one meeting during the
fiscal year ended March 31, 1998.
The Board of Directors held six meetings during the fiscal year ended March
31, 1998. All of the Directors attended at least seventy-five percent of
applicable Board and Committee meetings.
The Company does not have a nominating committee. Nominations of individuals
for election to the Board of Directors of the Company must be received by the
Secretary of the Company no later than 60 days prior to a regularly scheduled
annual meeting of shareholders or within ten days after receipt of notice of an
annual meeting which is held at any other time.
DIRECTORS' COMPENSATION
Non-employee Directors are paid $1,000 for attendance at each committee or
Board of Directors meeting attended in person, up to an amount not to exceed
$5,000 per Director per year. All Directors are reimbursed for travel expenses
incurred in attending meetings of the Board of Directors. Certain Directors are
also eligible to receive grants of stock options.
5
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation awarded, earned
or paid by the Company for its fiscal years ended March 31, 1996, 1997 and 1998
to the Company's Chief Executive Officer and all executive officers of the
Company who were serving as such at March 31, 1998 and whose total annual salary
and bonus for such years exceeded $100,000 during such year.
------------------------
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION ($)
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION ($)
- ----------------------------------------------------------------- --------- ----------- ----------------
<S> <C> <C> <C> <C>
Kenneth B. Kaplan................................................ 1998 185,000 -- 6,593 (2)
Chairman, President 1997 184,615 -- 7,809 (2)
and Chief Executive Officer 1996 165,000 50,000 5,011 (2)
M. Denis Connaghan (3)........................................... 1998 174,000 9,000 90,600 (4)
Executive Vice President
and Chief Operating Officer
Martin Allen (5)................................................. 1998 131,776 32,944 --
Managing Director European Operations
Kent R. Kelderman (6)............................................ 1998 100,000 7,500 5,159 (2)
Executive Vice President, Secretary 1997 77,000 -- 1,770 (2)
Treasurer and Chief Financial Officer
Derek South (7).................................................. 1998 86,000 35,000 --
Executive Vice President of Sales
Vinay Goel (8)................................................... 1998 110,000 -- 5,984 (2)
Executive Vice President 1997 110,000 -- 762 (2)
</TABLE>
- ------------------------
(1) Includes bonus and/or sales commissions earned in respective fiscal years.
(2) Other compensation includes 401(k) plan matching contributions along with
personal tax preparation services.
(3) Mr. Connaghan joined the Company on May 19, 1997.
(4) Represents relocation expenses.
(5) Mr. Allen became an executive officer for reporting purposes on February 17,
1998.
(6) Mr. Kelderman became an executive officer for reporting purposes in
September 1996.
(7) Mr. South joined the Company on August 20, 1997.
(8) Mr. Goel joined the Company in April 1996 and was elected Executive Vice
President in September 1996. Mr. Goel resigned from the Company on March 31,
1998.
STOCK OPTION PLANS
1995 PLAN. The Company's 1995 Stock Option Plan (the "1995 Plan") is
construed, interpreted and administered by the Compensation Committee. The
Compensation Committee has the discretion to determine the individuals to whom
options are granted, the number of shares subject to the options, the exercise
price of the options (which in the case of Non-Statutory Options (as defined
below) may be below fair market value of the Common Stock on the date of grant),
the period over which the options become exercisable, the term of the options
(including the period after termination of employment during which an
6
<PAGE>
option may be exercised) and certain other provisions relating to the options.
Under the 1995 Plan, the Compensation Committee may grant options to purchase up
to 1,720,000 shares of Common Stock to management, employees and directors of
the Company. The 1995 Plan limits the grants to any reporting executive officer
to 200,000 option shares in any fiscal year. Shares of Common Stock underlying
options that expire unexercised will be available for future option grants under
the 1995 Plan. The number of shares available for grant of options under the
1995 Plan and the number of shares included in each outstanding option are
subject to adjustment upon recapitalizations, stock splits or other similar
events that cause changes in the Common Stock. The Company must retain
sufficient authorized but unissued shares of Common Stock to assure itself of
its ability to perform its obligations under the 1995 Plan.
The 1995 Plan provides for the grant of incentive stock options ("Incentive
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-statutory stock options that do not
qualify as incentive stock options under Section 422 of the Code ("Non-Statutory
Options"). The exercise price of each Incentive Option must be at least equal to
the fair market value of the Common Stock on the date the Incentive Option is
granted. The exercise price of Non-Statutory Options may be less than the fair
market value of the Common Stock on the date the Non-Statutory Option is
granted. If an Incentive Option is granted to an employee who then owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any parent or subsidiary corporation of the Company, the
exercise price of the Incentive Option must be at least equal to 110% of the
fair market value of the Common Stock on the date the Incentive Option is
granted.
Generally, for federal income tax purposes, Non-Statutory Options will not
result in any taxable income to the optionee at the time of grant. The optionee
will generally realize ordinary income, however, at the time of exercise of the
option, in an amount measured by the excess of the fair market value of the
optioned shares at the time of exercise over the option price, regardless of
whether the option price is paid in cash or shares. Where ordinary income is
recognized in connection with the exercise of an option, the Company will be
entitled to a deduction in the amount of ordinary income so recognized,
provided, among other things, that the Company complied with applicable tax
withholding requirements. No income is recognized for federal income tax
purposes when an Incentive Option is exercised and no deduction is available to
the Company. Incentive Options will be taxed as Non-Statutory Options if shares
purchased upon exercise of the Incentive Option are sold within one year after
the exercise or within two years after the date the Incentive Option is granted.
The maximum term of options granted under the 1995 Plan generally will be 10
years, but with respect to an Incentive Option granted to an employee who then
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, the maximum term of the option will be five
years. Subject to that limitation, the Committee has discretion to decide the
period over which options may be vested and exercised. In addition, the
Committee may specify that an option will terminate prior to the end of its
stated term upon termination of employment (which includes for this purpose
termination of a consulting relationship in the case of a consultant),
disability or death. Options which contain vesting schedules ordinarily will
become fully exercisable in the event of disability or death. Options are not
transferable, except by will or pursuant to the laws of descent and
distribution, and are exercisable only by the option holder during his lifetime
or, in the event of disability or death, by the option holder's guardian or
legal representative. Option agreements issued under the 1995 Plan may (but need
not) provide that the vesting of options will be accelerated upon a "Change in
Control" of the Company. A Change in Control is deemed to have occurred if (a) a
person (as such term is used in Section 13(d) of the Securities Exchange Act of
1934 (the "Exchange Act")) becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, in one or more
transactions, of shares of Common Stock representing 50% or more of the total
number of votes that may be cast by all shareholders of the Company voting as a
single class, without the approval or consent of the Board of Directors, (b)
there is a consolidation or
7
<PAGE>
merger of the Company in which the Company is not the surviving corporation or
(c) a plan or proposal for the liquidation or dissolution of the Company is
adopted.
The following table sets forth the number of stock options granted under the
1995 Plan described above as of July 7, 1998 (net of canceled and expired
options). As option grants under the 1995 Plan are discretionary, except as
described, the Company cannot presently determine the total number of such
options to be granted to any particular executive officer, executive officers as
a group, non-employee Directors, and non-executive employees as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING OPTIONS
NAME AND POSITION GRANTED
- ---------------------------------------------------------------------- ------------------------------------------
<S> <C>
Kenneth B. Kaplan..................................................... None
M. Denis Connaghan.................................................... 266,000
Martin Allen.......................................................... 32,000
Kent R. Kelderman..................................................... 82,000
Derek South........................................................... 85,000
Vinay Goel............................................................ 50,000
Executive Officers as a Group......................................... 750,000
Non-employee Directors as a group (including nominees)................ 56,000
Other recipients of five percent or more of such options.............. None
Non-executive Employees as a group.................................... 855,370
</TABLE>
1989, 1991 AND 1992 STOCK OPTION PLANS. The Company has established 1989,
1991 and 1992 stock option plans pursuant to which it has granted options to
certain employees to purchase shares of Common Stock. As of July 7, 1998, the
1989, 1991 and 1992 plans had outstanding options for 236,500, 168,510 and
203,500 shares of Common Stock, respectively, at exercise prices of $.50,
$0.9375 and $1.3125 per share, respectively. All options granted under these
plans are Non-Statutory Options and the Company's authority to issue additional
options under these plans has terminated. Options granted under the 1989, 1991
and 1992 plans expire 10 years from their date of grant and are exercisable in
accordance with the terms of individual stock option agreements.
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following tables provide certain specified information concerning
options granted to, exercised by and held at March 31, 1998 under the 1989, 1991
and 1992 and 1995 stock option plans to each named executive officer of the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SHARES GRANTED TO FOR
UNDERLYING EMPLOYEES EXERCISE OF OPTION TERMS
OPTIONS IN FISCAL BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR ($ PER SHARE) DATE 5% ($) 10% ($)
- ------------------------------------- ----------- ------------- --------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth B. Kaplan.................... 0 N/A N/A N/A N/A N/A
M. Denis Connaghan................... 200,000 20.4 6.625 5/19/07 833,285 2,111,709
Martin Allen......................... 5,000 0.5 6.250 5/2/07 19,653 49,804
Martin Allen......................... 5,000 0.5 7.00 7/10/07 22,011 55,781
Kent R. Kelderman.................... 50,000 5.1 7.00 7/10/07 220,113 557,810
Kent R. Kelderman.................... 20,000 2.0 10.00 5/2/07 3,612 124,218
Derek South.......................... 75,000 7.7 6.00 8/20/07 283,003 717,184
Vinay Goel........................... 0 N/A N/A N/A N/A N/A
</TABLE>
8
<PAGE>
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT
SHARES MARCH 31, 1998 (#) MARCH 31, 1998 ($)(*)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- --------------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth B. Kaplan........... 0 N/A 0 0 N/A N/A
M. Denis Connaghan.......... 0 N/A 0 200,000 N/A 0
Martin Allen................ 0 N/A 6,000 16,000 10,500 21,000
Kent R. Kelderman........... 0 N/A 6,000 76,000 10,500 21,000
Derek South................. 0 N/A 0 75,000 N/A 0
Vinay Goel.................. 0 N/A 5,000 0 0 N/A
</TABLE>
- ------------------------
(*) Calculated on the basis of the fair market value of the underlying
securities as of March 31, 1998 of $4.88 per share, minus the aggregate
exercise price.
No compensation intended to serve as an incentive for performance to occur
over a period longer than one fiscal year was paid or accrued pursuant to a
long-term incentive plan during the last fiscal year to any of the persons named
in the Summary Compensation Table. The Company does not have employment
contracts with any of the persons named in the Summary Compensation Table or any
defined benefit or actuarial plan under which benefits are determined primarily
by final compensation or average final compensation and years of service.
In May 1997, the Company offered all recipients of stock option grants made
in October 1996 the right to cancel those outstanding (and non-vested) options
at the original exercise price of $15.50 per share and receive new options dated
May 1997 with a new price and revised vesting. The new exercise prices are
$10.00 per share for employees who were serving as executive officers at the
time of the original grant and $6.25 for all other employees. While the original
grants had a vesting schedule of 25% on each anniversary of October 14, 1996,
the new grants have vesting of 10%, 20%, 30%, and 40% on each anniversary of May
2, 1997. Vesting of all grants accelerates in the event of a change in control
of the Company. The new grants all have an expiration date of May 2, 2007.
The following table includes information concerning the repricing of options
held by Mr. Kelderman since April 1996, the date of the Company's initial public
offering of securities.
OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
SECURITIES LENGTH OF
UNDERLYING ORIGINAL OPTION
NUMBER OF MARKET PRICE OF EXERCISE PRICE TERM REMAINING
OPTIONS/SARS STOCK AT TIME OF AT TIME OF AT DATE OF
REPRICED OR REPRICING OR REPRICING OR NEW EXERCISE REPRICING OR
NAME DATE AMENDED (#) AMENDMENT ($) AMENDMENT ($) PRICE ($) AMENDMENT
- ----------------------- --------- ------------- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kent R. Kelderman 4/16/98 20,000 5.25 10.00 5.25 10 yrs.
</TABLE>
PROFIT SHARING PLAN
Effective April 1, 1994, the Company established a 401(k) contributory
profit sharing plan for substantially all full-time employees. Under the
contributory plan, the Company provides matching cash contributions based on
qualified employee contributions, as well as certain other contributions.
Contributions to the contributory plan for the fiscal year ended March 31, 1998
were $175,000.
9
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was formed in May 1994, and the members currently
are Messrs. Howell (Chairman) and Gordon. Affiliates of Messrs. Howell and
Gordon each hold more than 5% of the Common Stock. See "Holdings of
Shareholders, Directors and Executive Officers." Neither of the members of the
Compensation Committee is eligible to receive options under the Company's
existing stock option plans.
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act 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 Securities and Exchange Commission (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 upon 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 all Section 16(a) filing requirements were
complied with during fiscal 1998.
CERTAIN TRANSACTIONS
During the fiscal year ended March 31, 1998, Microware received total
revenues of $1,430,000 under various license and service agreements with
Motorola, which holds 1,526,232 shares of Common Stock of the Company and
warrants to purchase an additional 1,803,728 shares. The Company also routinely
purchases various hardware products from Motorola used in product development.
The Company believes that all transactions discussed or disclosed above have
been, and the Company's Board of Directors has adopted a policy stating that any
future transactions with the Company's officers, Directors, affiliates or
controlling shareholders will be, on terms which are considered to be no less
favorable to the Company than those obtainable in arm's length transactions with
unaffiliated third parties.
10
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
shareholder return on the Company's Common Stock during the period from the
Company's initial public offering on April 2, 1996 through March 31, 1998, with
the cumulative total return on the Nasdaq Composite Index and the Nasdaq
Computer & Data Processing Index over the same period.
The graph below assumes the investment of $100 in the Company's Common Stock
and in each of the other indexes on April 2, 1996, with reinvestment of all
dividends.
COMPARISON OF TOTAL RETURN AMONG MICROWARE SYSTEMS CORPORATION,
THE NASDAQ COMPOSITE INDEX AND NASDAQ COMPUTER & DATA PROCESSING INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MICROWARE NASDAQ NASDAQ
<S> <C> <C> <C>
Systems Composite Computer & Data
Corporation Index Processing Index
2-Apr-96 100 100 100
31-Mar-97 63.75 109.62 108.02
31-Mar-98 48.75 166.49 188.99
</TABLE>
11
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This Report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating this Proxy Statement into
any filing under the Securities Act of 1933 or under the Securities Exchange Act
of 1934, except to the extent that the Company specifically incorporates the
information contained herein by reference, and shall not otherwise be deemed
filed under those Acts.
The Compensation Committee of the Board of Directors of the Company is
composed of two non-employee Directors, Daniel P. Howell (Chair) and James A.
Gordon. The Compensation Committee is responsible for setting and administering
the policies that govern the compensation of the Company's executive officers.
These policies are based on the premise that the shareholders' interests are
best served by recruiting and retaining the most talented people in the
industry. The Compensation Committee looks to provide competitive compensation
packages that enable the Company to attract key executives, to integrate
compensation with the Company's business objectives and to tie an individual
executive's compensation with overall Company performance. The Compensation
Committee also approves and recommends to the Board of Directors the terms and
conditions of all employee benefit plans or changes thereto and administers the
Company's stock option plans.
The Company's compensation package consists of three basic components: base
salary, cash bonuses and stock-based incentive compensation.
BASE SALARY
The base salary paid to the Company's executive officers is established to
be in line with other software companies deemed by the Compensation Committee to
be of similar size and prospects (the "peer group"), while taking into account
the experience and contribution of individual members of management. The
Compensation Committees also takes into consideration in setting salaries for
existing management the anticipated salary requirements of prospective members
of the Company's management team. Individual salary increases during the 1998
fiscal year were based on the performance of the Company and of each individual
executive, as observed and recommended by the Company's Chief Executive Officer,
and on observed salary levels within the peer group. Salary adjustments for the
Company's Chief Executive Officer and other executive officers are subject to
the review and approval of the full Board of Directors, based upon the
recommendation of the Compensation Committee.
CASH BONUSES
The Company believes it is important to provide additional cash incentives
to executives who make extraordinary contributions to the Company. In
determining the amount to be paid as bonuses to various executives during the
1997 fiscal year, the Committee considered the performance of the Company in
reaching its revenue and profitability goals, the strategic accomplishments of
respective executives critical to the long-term success of the Company, and the
recommendations of the Chief Executive Officer.
LONG TERM INCENTIVES
The Company provides long-term compensation to its employees through its
stock option plans, which plans have been approved by the Company's
shareholders. The Company adopted formal incentive stock plans in 1989, 1991,
1992 and 1995. Under the existing plans, options granted by the Company have
generally had a life of 10 years. In fiscal 1998, the Compensation Committee
granted options to the following executive officers under the 1995 Plan: Mr.
Connaghan (200,000 shares), Mr. Allen (10,000 shares), Mr. Kelderman (70,000
shares), Mr. South (75,000 shares), Mr. Bashada (75,000 shares), Ms. Duhaime
(75,000 shares) and Mr. Ishibashi (25,000 shares). In addition, subsequent to
the end of the 1998 fiscal year, on April 15, 1998 the Compensation Committee
granted the following options: Mr. Connaghan (66,000 shares), Mr. Allen (10,000
shares), Mr. South (10,000 shares), Mr. Bashada (25,000 shares), Ms. Duhaime
(25,000 shares) and Mr. Ishibashi (10,000 shares). All such options were
12
<PAGE>
granted at exercise prices ranging from $5.13 to $10.00 per share, vesting at a
rate of 20 or 25 percent on each yearly anniversary following the date of grant.
The Compensation Committee makes option grants after consideration of
recommendations made by the Company's Chief Executive Officer. Recommendations
for option amounts are based upon relative positions and responsibilities of
various officers. The Compensation Committee believes that the long-term nature
of the options encourages officers to remain with the Company in order to
realize the options' underlying economic value. Also, the Compensation Committee
feels it is appropriate to grant options to newly hired officers in order to
help them embrace the Company's goal of increasing shareholder value.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The annual salary and bonus of the Company's Chief Executive Officer are
determined in consultation with Mr. Kaplan. In fiscal 1998, Mr. Kaplan received
a salary of $185,000 and no cash bonus. These amounts reflect the Committee's
philosophy as described above.
The Compensation Committee regularly evaluates its policies with respect to
executive compensation. The Compensation Committee believes that a combination
of salary, bonus, and stock options provides a mix of short-and long-term
rewards necessary to attract, motivate and retain an excellent management team.
OPTION REPRICING
During the 1998 fiscal year, the Compensation Committee approved the
repricing of certain options, including options to Kent R. Kelderman who was an
executive officer of the Company at such time. The decision to reprice the
options was made in order to ensure that such options remained as an effective
incentive to the performance of the grantees. All such options were repriced at
the market price on the effective date of the repricing.
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 the 1999 fiscal year. The Company does not
expect cash compensation for the 1999 fiscal year to be in excess of $1,000,000
or consequently affected by the requirements of Section 162(m).
The Compensation Committee
Daniel P. Howell, Chair
James A. Gordon
13
<PAGE>
PROPOSAL TO AMEND THE 1995 STOCK OPTION PLAN
The Board of Directors recommends that the shareholders approve a proposal
to amend the 1995 Plan to increase the number of shares that can be issued under
the 1995 Plan. Currently, an aggregate of 1,720,000 shares of Common Stock are
authorized for issuance pursuant to the 1995 Plan, as amended, of which 58,630
were available for new grants as of July 7, 1998. The proposed amendment would
increase the total number of shares authorized for issuance by 350,000 to an
aggregate of 2,070,000. The proposed amendment would not alter the federal
income tax consequences of grants under the 1995 Plan, as discussed in the
description of the 1995 Plan in the section on Executive Compensation which
appears earlier in this Proxy Statement.
REASONS FOR THE AMENDMENTS
The Board of Directors believes the 1995 Plan has been an effective tool in
attracting and retaining new executive and employee talent, and in further
aligning the interests of executives, employees, and others with the interests
of the Company's shareholders. Since its adoption, a total of 1,661,370 options
(net of cancellations) have been granted under the 1995 Plan. The Board of
Directors believes that an increase in the aggregate number of authorized shares
is necessary to allow the continued viability of the 1995 Plan.
TEXT OF THE PROPOSED AMENDMENT
The proposed amendment would amend Section 2 of the 1995 Plan as amended as
follows:
The phrase "2,070,000 (determined as of July 7, 1998)" is
substituted for the phrase "1,720,000 (determined as of July 14,
1997)" where it appears in Section 2 of the Plan.
VOTE REQUIRED FOR APPROVAL
The vote required for approval of the amendments to the 1995 Plan is an
affirmative vote by the holders of a majority of the shares of the Company's
Common Stock present, or represented and entitled to vote, at the Meeting at
which the holders of a majority of the outstanding shares of Common Stock of the
Company are present in person or represented by proxy.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THE PROPOSAL TO
AMEND THE 1995 STOCK OPTION PLAN.
------------------------
PROPOSAL TO RATIFY SELECTION OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The firm of KPMG Peat Marwick LLP has audited the books and records of the
Company since 1984 and the Board of Directors desires to continue the services
of this firm for the current fiscal year ending March 31, 1999. Accordingly, the
Board of Directors will recommend at the Meeting that the shareholders ratify
the appointment of the firm of KPMG Peat Marwick LLP to audit the accounts of
the Company for the current fiscal year. Representatives of that firm are
expected to be present at the Meeting with the opportunity to make a statement
if they desire to do so and are expected to be available to respond to
appropriate questions.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF RATIFICATION OF THE
SELECTION OF KPMG PEAT MARWICK LLP.
------------------------
14
<PAGE>
MISCELLANEOUS
The Company's 1998 Annual Report to Shareholders is being mailed to
shareholders contemporaneously with this Proxy Statement.
COST OF SOLICITATION
All expenses incurred in the solicitation of proxies will be borne by the
Company. In addition to the use of the mails, proxies may be solicited on behalf
of the Company by directors, officers and employees of the Company or by
telephone or telecopy. The Company will reimburse brokers and others holding
Common Stock as nominees for their expenses in sending proxy material to the
beneficial owners of such Common Stock and obtaining their proxies.
PROPOSALS OF SECURITY HOLDERS
Pursuant to the By-laws of the Company, proposals of security holders
intended to be presented at the 1999 Annual Meeting must be received by the
Company for inclusion in the Company's Proxy Statement and form of proxy
relating to that meeting no later than March 25, 1999.
By order of the Board of Directors
KENT R. KELDERMAN
Date: July 23, 1998 SECRETARY
15
<PAGE>
MICROWARE SYSTEMS CORPORATION
1500 NW 118TH STREET
DES MOINES, IOWA 50325
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Kenneth B. Kaplan and M. Denis Connaghan,
and each of them, with full power of substitution, attorneys and proxies to
represent the undersigned at the 1998 Annual Meeting of Shareholders of
Microware Systems Corporation (the "Company") to be held at the West Des Moines
Marriott, 1250 74th Street, West Des Moines, Iowa, at 10:00 a.m. local time, on
Tuesday, September 8, 1998, or at any adjournment thereof, with all power which
the undersigned would possess if personally present, and to vote all shares of
stock of the Company which the undersigned may be entitled to vote at said
Meeting as follows:
<TABLE>
<C> <C> <C> <C>
1. ELECTION OF DIRECTORS
/ / FOR THE NOMINEES LISTED BELOW (UNLESS NAME OF NOMINEE / / WITHHOLD AUTHORITY
IS CROSSED OUT)
Arthur Don Dennis E. Young
2. PROPOSAL TO AMEND THE COMPANY'S 1995 STOCK OPTION PLAN / / FOR / / AGAINST / / ABSTAIN
3. PROPOSAL TO RATIFY THE SELECTION OF KPMG PEAT MARWICK LLP AS / / FOR / / AGAINST / / ABSTAIN
INDEPENDENT PUBLIC ACCOUNTANTS
4. IN THEIR DISCRETION, ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING (which the Board of
Directors does not know of as of July 23, 1998).
Management recommends your vote FOR all proposals.
</TABLE>
THIS PROXY IS CONTINUED ON THE REVERSE SIDE. PLEASE SIGN ON THE REVERSE
SIDE AND RETURN PROMPTLY.
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF BOTH NOMINEES FOR DIRECTOR, FOR THE AMENDMENT OF
THE COMPANY'S 1995 STOCK OPTION PLAN AND FOR THE RATIFICATION OF THE SELECTION
OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS, AND WILL CONFER THE AUTHORITY
IN PARAGRAPH 4.
Receipt is hereby acknowledged of the Notice of the Meeting and Proxy
Statement dated July 23, 1998, as well as a copy of the 1998 Annual Report to
Shareholders.
Dated: -------------------------------, 1998
-------------------------------------
-------------------------------------
(Signature(s) of stockholder(s))
When signing as attorney, executor,
administrator, trustee or guardian,
please give title. Each joint owner
is requested to sign. If a
corporation or partnership, please
sign by an authorized officer or
partner. Please sign in the same
manner as your certificate(s) is
(are) registered.
PLEASE COMPLETE, DATE, SIGN AND
RETURN THIS PROXY IN THE ENVELOPE
PROVIDED.
<PAGE>
MICROWARE SYSTEMS CORPORATION
1995 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Stock Option Plan (the "Plan") is to
enable Microware Systems Corporation (the "Company") to attract and retain
people of initiative and ability as employees, advisors and directors and to
provide additional incentives to these individuals. Reference hereinafter to
"employee" shall also include advisors and non-employee directors. Reference to
"employment" shall also include service as an advisor or member of the board of
directors of the Company.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below
and in Paragraph 7, the shares to be offered under the Plan shall consist of
Common Stock of the Company ("Shares"). The total number of Shares that may be
issued under the Plan shall not exceed 2,070,000 (determined as of July 7, 1998)
Shares. If an option right granted under the Plan expires, terminates or is
canceled, the unissued Shares subject to such option shall again be available
under the Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective as of April 1,
1995. However, no option granted under the Plan shall become exercisable
until the Plan is approved by the affirmative vote of the holders of a
majority of the Common Stock of the Company represented at a shareholders'
meeting at which a quorum is present; any awards under the Plan prior to
such approval shall be conditioned on and subject to such approval.
Subject to this limitation, options may be granted under the Plan at any
time after the Effective Date and before termination of the Plan.
(b) DURATION. The Board of Directors may at any time suspend or
terminate the Plan. Unless previously terminated by the Board, this Plan
shall terminate on March 31, 2005. The rights and obligations under any
option granted while the Plan is in effect shall not be altered or impaired
by suspension or termination of the Plan, except by the consent of the
person to whom the option was granted.
4. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"), who,
during the one-year period prior to the time of exercising discretion in
administering the Plan (but only after the Company first registers its Common
Stock under the Exchange Act) and during the one-year period after exercising
such discretion (but only after the Company first registers its Common Stock
under the Exchange Act), have not received awards under the Plan. The Committee
shall determine and designate from time to time the employees to whom awards
shall be made, the amount of the awards and the other terms and conditions of
the awards, except that only the Board of Directors
1
<PAGE>
may amend or terminate the Plan as provided in Paragraphs 3 and 10. Subject
to the provisions of the Plan, the Committee may from time to time adopt and
amend rules and regulations relating to administration of the Plan, advance
the lapse of any waiting period, accelerate any exercise date, waive or
modify any restriction applicable to Shares (except those restrictions
imposed by law) and make all other determination in the judgment of the
Committee necessary or desirable for the administration of the Plan. The
interpretation and construction of the provisions of the Plan and related
agreements by the Committee shall be final and conclusive. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any related agreement in the manner and to the extent it shall
deem expedient to carry the Plan into effect, and it shall be the sole and
final judge of such expediency.
5. ELIGIBILITY. Any awards may be made to employees of the Company,
including advisors and directors of the Company; provided, however, no member of
the Committee shall be eligible for selection as a person to whom awards may be
made. The Committee shall select the employees to whom awards shall be made.
The Committee shall specify the action taken with respect to each employee to
whom an award is made under the Plan. At the discretion of the Committee, an
employee may be given an election to surrender an award in exchange for the
grant of a new award.
The number of Shares underlying options granted in a fiscal year to each
executive officer whose compensation is subject to reporting on the Company's
annual proxy statement (an "Executive Officer") shall not exceed 200,000 shares
for any fiscal year during which he or she becomes or serves as an Executive
Officer.
6. OPTION GRANT.
(a) GRANT. The Committee has the authority and discretion to grant
options under the Plan. With respect to each option grant, the Committee
shall determine the number of Shares subject to the option, the option
price, the period of the option, and the time or times at which the option
may be exercised. In addition, the Committee may provide for any further
restrictions or provisions in the option agreement which it deems
appropriate. Options shall be either incentive Stock Options or
Nonstatutory Stock Options. Incentive Stock Options shall meet all of the
requirements of this Paragraph 6. Nonstatutory Options shall meet the
requirements of Subparagraphs (c) through (g) of this Paragraph 6.
(b) INCENTIVE STOCK OPTION. Incentive Stock Options ("ISOs") shall
be subject to the following terms and conditions. (For the purposes of
this Subparagraph 6(b), references to "employee" shall not include advisors
or non-employee directors; only common law employees may receive ISOs.)
2
<PAGE>
(i) ISOs may be granted under the Plan to an employee
possessing more than 10% percent, directly or by attribution, of the
total combined voting power of all classes of stock of the Company
only if the option price is at least 110% of the fair market value of
the Shares subject to the option on the date it is granted, as
described in Subparagraph 6(b)(iii), and the option by its terms is
not exercisable after the expiration of five years from the date it is
granted.
(ii) Subject to Subparagraphs 6(b)(i) and 6(c), ISOs granted
under the Plan shall continue in effect for the period fixed by the
Committee, except that no ISO shall be exercisable after the
expiration of ten years from the date it is granted.
(iii) The option price per shall be determined by the
Committee at the time of grant. Subject to Subparagraph 6(b)(i), the
option price shall not be less than 100% of the fair market value of
the Shares covered by the ISO at the date the option is granted. The
fair market value shall be determined by the Committee, or procedures
established by the Committee.
(iv) No ISO shall be granted on or after the tenth anniversary
of the Effective Date of the Plan.
(c) EXERCISE OF OPTIONS. Except as provided in Subparagraph 6(f),
no option granted under the Plan may be exercised unless at the time of
such exercise the optionee is employed by the Company and shall have
been so employed continuously since the date such option was granted.
Absence on leave or on account of illness or disability under rules
established by the Committee shall not, however, be deemed an
interruption of employment for this purpose. Except as provided in
Subparagraphs 6(f), 6(h) and 6(i), and Paragraphs 7 and 8, options
granted under the Plan may be exercised from time to time over the
period stated in each option in such amounts and at such times as shall
be prescribed by the Committee, provided that options shall not be
exercised for fractional shares. Unless otherwise determined by the
Committee, if the optionee does not exercise an option in any one year
with respect to the full number of Shares to which the optionee is
entitled in that year, the optionee's rights shall be cumulative and the
optionee may purchase those Shares in any subsequent year during the
term of the option.
(d) NONTRANSFERABILITY. Each stock option granted under the Plan
by its terms shall be nonassignable and nontransferable by the optionee,
either voluntarily or by operation of law, except by will or by the laws
of descent and distribution of the state or country of the optionee's
domicile at the time of death, and each option by its terms shall be
exercisable during the optionee's lifetime only by the optionee.
3
<PAGE>
(e) VESTING. Options granted under the Plan shall vest according
to such schedule as the Committee may prescribe at the time of grant,
which may include full and immediate vesting. Reference to "option" in
this Plan means all vested and non-vested options.
(f) TERMINATION OF EMPLOYMENT OR DEATH.
WITH RESPECT TO ISOs.
(i) Subject to Subparagraphs 6(h) and 6(i), if the
employment of an employee is terminated, any then outstanding stock
option held by the employee shall be exercisable, in accordance
with the provision of the stock option agreement, by such employee
at any time prior to the expiration date of such stock option or
within three months after the date of termination of employment,
whichever is the shorter period.
(ii) Subject to Subparagraph 6(i), and notwithstanding the
provisions of (f)(i), if the employee's employment is terminated
because of a disability described in Section 422(c)(6) of the
Internal Revenue Code ("Disability"), any then outstanding stock
option held by the employee shall be exercisable, in accordance
with the stock option agreement, by such employee at any time prior
to the expiration of such option agreement or within one year after
the date of termination of employment, whichever is the shorter
period. Whether an optionee has a Disability shall be determined
in each case, in its discretion, by the Committee, and any such
determination by the Committee shall be final and binding.
(iii) Notwithstanding the provisions of (f)(i), if the
employee dies, any then outstanding stock option held by such
employee on the date of death shall be exercisable, in accordance
with the provisions of the stock option agreement, by the duly
appointed representative of the employee's estate at any time prior
to the expiration of such option agreement or within one year after
the date of death, whichever is the shorter period.
If a termination under (f)(d) or (iii) occurs, any unvested
portion of the option held by the employee shall become vested,
provided that the aggregate value of Shares with respect to which
any ISO first becomes exercisable in the calendar year of the
termination of employment does not exceed $100,000. If the value
of Shares that become fully vested under an ISO exceed $100,000,
the excess shall be treated as stock subject to a Nonstatutory
Stock Option. For purposes of the $100,000 limitation, the fair
market value of the Shares on the date the ISO was granted shall be
used in determining the value of the Shares.
WITH RESPECT TO NONSTATUTORY OPTIONS:
4
<PAGE>
The Committee may specify in the option agreement what
restrictions will apply in the event of termination of employment.
For all options issued hereunder, to the extent that the option
of any deceased optionee or any optionee whose employment terminates
is not exercised within the applicable period, all further rights to
purchase Shares pursuant to such option shall cease and terminate.
(g) PURCHASE OF SHARES. Unless the Committee determines otherwise,
Shares may be acquired pursuant to an option granted under the Plan only
upon receipt by the Company of notice in writing from the optionee of the
optionee's intention to exercise, specifying the number of Shares as to
which the optionee desires to exercise the option and the date on which the
optionee desires to complete the transaction, and if required in order to
comply with the Securities Act of 1933, as amended, containing a
representation that it is the optionee's present intention to acquire the
Shares for investment and not with a view toward distribution. Unless the
Committee determines otherwise, on or before the date specified for
completion of the purchase of Shares pursuant to an option, the optionee
must have paid the Company the full purchase price of such shares in cash.
No Shares shall be issued until full payment therefor has been made. If
the Company is required to withhold on account of any of any present or
future tax imposed as a result of an exercise, the Company shall so notify
the optionee and the optionee shall be required to pay all such withholding
in cash as a condition to the receipt of shares. The Shares shall contain
any restrictions required by the option agreement unless the Committee
determines otherwise.
(h) TERMINATION FOR CAUSE. For all options issued hereunder, if
the Company terminates the employment of an optionee for cause, all
outstanding stock options held by the optionee at the time of such
termination shall automatically terminate unless the Committee notifies the
optionee that the options will not terminate. A termination "for cause"
shall be defined under each written option agreement. Whether and when a
termination of employment is a termination "for cause" shall be determined
in each case, in its discretion, by the Committee, and any such
determination by the Committee shall be final and binding.
(i) VIOLATION OF OTHER AGREEMENT. For all options issued
hereunder, if an optionee violates any confidentiality, non-solicitation or
non-competition agreement with the Company, all outstanding stock options
held by the optionee at the time of such violation shall automatically
terminate unless the Committee notifies the optionee that the options will
not terminate. Whether and when any such agreement is violated shall be
determined in each case, in its discretion, by the Committee, and any such
determination by the Committee shall be final and binding.
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7. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of Common
Stock of the Company are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any reorganization, merger,
consolidation, plan of exchange, recapitalization, reclassification, stock
split, combination of shares or dividend payable in shares, appropriate
adjustment shall be made by the Committee in the number and kind of shares
available for awards under the Plan, provided that this Paragraph 7 shall not
apply with respect to transactions referred to in Paragraph 8. In addition, the
Committee shall make appropriate adjustment in the number and kind of shares as
to which outstanding options, or portions thereof then unexercised, shall be
exercisable, to the optionee's proportionate interest is maintained as before
the occurrence of such event. The Committee may also require that any
securities issued in respect of or exchange for Shares issued hereunder that are
subject to restrictions be subject to restrictions. Notwith-standing the
foregoing, the Committee shall have no obligation to effect any adjustment that
would or might result in the issuance of fractional shares, and any fractional
shares resulting from any adjustment may be disregarded or provided for in any
manner determined by the Committee. Any such adjustments made by the Committee
shall be conclusive.
8. SPECIAL ACCELERATION IN CERTAIN EVENTS.
(a) SPECIAL ACCELERATION. Notwithstanding any other provisions of
the Plan, option agreements issued under the Plan may (but need not)
provide for a special acceleration ("Special Acceleration") of options
outstanding under such agreement with the effect set forth in Subparagraph
8(b) at any time when the shareholders of the Company approve one of the
following ("Approved Transactions"):
(i) Any consolidation, merger, plan of exchange, or
transaction involving the Company ("Merger") in which the Company is
not the continuing or surviving corporation or pursuant to which the
Common Stock of the Company would be converted into cash, securities
or other property, other than a Merger involving the Company in which
the holders of the Common Stock of the Company immediately prior to
the Merger have the same proportionate ownership of common stock of
the giving corporation after the Merger; or
(ii) Any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Company or the adoption of any
plan or proposal for the liquidation or dissolution of the Company.
In addition, option agreements issued under the Plan may (but need
not) provide for a Special Acceleration in the event a "person", within the
meaning of Section 13(d) of the Exchange Act, becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
in one or more transactions, of shares of Common
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Stock of the Company representing 50% or more of the total number of votes
that may be cast by all stockholders of the Company voting as a single
class, without the approval or consent of the Board of Directors.
(b) EFFECT ON OUTSTANDING OPTIONS. Except as provided below in
this Subparagraph 8(b), upon a Special Acceleration pursuant to
Subparagraph 8(a), all options then outstanding under the Plan and subject
to such acceleration shall immediately become exercisable in full during
the remainder of their terms; provided, the Committee may, in its sole
discretion, provide a 30-day period prior to an Approved Transaction during
which such optionees shall have the right to exercise options, in whole or
in part, without any limitation on exercisability, and upon the expiration
of such 30-day period all such unexercised options shall immediately
terminate.
9. CORPORATE MERGERS, ACQUISITIONS, ETC. The Committee may also grant
options under the Plan having terms, conditions and provisions that vary from
those specified in this Plan, provided that any such awards are granted in
substitution for, or in connection with the assumption of, existing options,
issued by another corporation and assumed or otherwise agreed to be provided for
by the Company pursuant to or by reason of a transaction involving a corporate
merger, consolidation, plan of exchange, acquisition of property or stock,
separation, reorganization or liquidation to which the Company is a party.
10. AMENDMENT OF PLAN. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in Subparagraphs 6(f), 6(g), 6(h) or 6(i), or
Paragraphs 7 and 8, however, no change is an award already granted shall be made
without the written consent of the holder of such award.
11. APPROVALS. The obligations of the Company under the Plan are subject
to the approval of state and federal authorities or agencies with jurisdiction
in the matter. The Company will use its best efforts to take steps required by
state and federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange or trading
system on which this Company's shares may then be listed or admitted for
trading, in connection with grants under the Plan. The foregoing
notwithstanding, the Company shall not be obligated to issue or deliver Common
Stock under the Plan if such issuance or delivery would violate applicable state
or federal securities laws.
12. EMPLOYMENT RIGHTS. Nothing in the Plan or any award pursuant to the
Plan shall confer upon any employee any right to continued service with the
Company or shall interfere in any way with the right of the Company to terminate
such employee's service at anytime, for any reason, with or without cause, or to
increase or decrease such employee's compensation or benefits.
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13. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Shares until the date
of issue to the recipient of a stock certificate for such shares. Except as
otherwise provided in the Plan, no adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificate is issued.
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