SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (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 Section 240.14a-11(c) or Section 240.14a-12
PSW Technologies, Inc.
(Name of Registrant as Specified in Its Charter)
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: .........................................................
(4) Date Filed: ...........................................................
<PAGE>
6300 Bridgepoint Parkway, Building 3, Suite 200
Austin, Texas 78730
April 23, 1998
Dear Stockholder:
You are cordially invited to attend the 1998 annual meeting of
stockholders of PSW Technologies, Inc., which will be held at the Renaissance
Austin Hotel, 9721 Arboretum Blvd., Austin, Texas on Wednesday, May 20, 1998 at
9:00 a.m. (Central Time).
Details of the business to be conducted at the annual meeting are given
in the attached Notice of Annual Meeting of Stockholders and Proxy Statement.
After careful consideration, the Company's Board of Directors has
unanimously approved the proposals set forth in the Proxy Statement and
recommends that you vote for each such proposal.
In order for us to have an efficient meeting, please sign, date and
return the enclosed proxy promptly in the accompanying reply envelope. If you
are able to attend the annual meeting and wish to change your proxy vote, you
may do so simply by voting in person at the annual meeting.
We look forward to seeing you at the annual meeting.
Sincerely,
/s/ W. Frank King
W. FRANK KING, Ph.D.
President and Chief Executive Officer
YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to
complete, sign and date the enclosed proxy as promptly as possible and return it
in the enclosed envelope. No postage need be affixed if mailed in the United
States.
<PAGE>
PSW TECHNOLOGIES, INC.
6300 Bridgepoint Parkway, Building 3, Suite 200
Austin, Texas 78730
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 20, 1998
The 1998 annual meeting of stockholders of PSW Technologies, Inc. (the
"Company") will be held at the Renaissance Austin Hotel, 9721 Arboretum Blvd.,
Austin, Texas on Wednesday, May 20, 1998 at 9:00 a.m. (Central Time) for the
following purposes:
1. To elect seven directors to serve until the Annual
Stockholders' Meeting in 1999, or in each case until their
respective successors have been elected and qualified;
2. To approve an amendment to the Company's 1996 Stock
Option/Stock Issuance Plan (the "Plan") to increase the number
of shares of Common Stock authorized to be issued by 1,000,000
shares resulting in 2,715,000 shares available for issuance
under the Plan;
3. To ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending
December 31, 1998; and
4. To act upon such other business as may properly come before
the meeting or any adjournments thereof.
Only stockholders of record at the close of business on April 6, 1998
are entitled to notice of and to vote at the meeting. A list of stockholders
entitled to vote at the meeting will be available for inspection at the offices
of the Company. Whether or not you plan to attend the meeting in person, please
sign, date and return the enclosed proxy card in the reply envelope provided. If
you attend the meeting and vote by ballot, your proxy will be revoked
automatically and only your vote at the meeting will be counted. The prompt
return of your proxy card will assist us in preparing for the meeting.
By Order of the Board of Directors,
/s/ Patrick D. Motola
PATRICK D. MOTOLA
Secretary
<PAGE>
PSW TECHNOLOGIES, INC.
6300 Bridgepoint Parkway, Building 3, Suite 200
Austin, Texas 78730
PROXY STATEMENT
These proxy materials and the enclosed proxy card are being mailed in
connection with the solicitation of proxies by the Board of Directors of PSW
Technologies, Inc., a Delaware corporation (the "Company"), for the 1998 Annual
Meeting of Stockholders to be held on Wednesday, May 20, 1998 at 9:00 a.m.
(Central Time), and at any adjournment or postponement thereof (the "Annual
Meeting") at the Renaissance Austin Hotel, 9721 Arboretum Blvd., Austin, Texas.
These proxy materials were first mailed to stockholders of record beginning on
approximately April 23, 1998.
Any stockholder executing a proxy pursuant to this solicitation may
revoke it at any time prior to its exercise by delivering written notice of such
revocation to the Secretary of the Company before the Annual Meeting or by
properly executing and delivering a proxy bearing a later date. Any stockholder
present at the Annual Meeting who elects to vote his or her shares in person may
also revoke proxies. The cost of soliciting proxies will be paid by the Company
and may include reimbursement paid to brokerage firms and others for their
expense in forwarding solicitation materials as well as the expense of
preparing, assembling, photocopying and mailing this Proxy Statement.
Solicitation will be made primarily through the use of the mail, however,
regular employees of the Company may, without additional remuneration, solicit
proxies personally by telephone or telegram.
The Company's annual report to stockholders for the year ended December
31, 1997 (the "Annual Report") has been mailed concurrently with the mailing of
the notice of the Annual Meeting and this Proxy Statement to all stockholders
entitled to notice of, and to vote at, the Annual Meeting. The Annual Report is
not incorporated into this Proxy Statement and is not considered
proxy-soliciting material.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Stockholders. Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION
The Company has fixed April 6, 1998 as the record date for determining
those stockholders who are entitled to notice of, and to vote at, the Annual
Meeting. At the close of business on the record date, the Company had 9,018,125
outstanding shares of Common Stock, par value $0.01 per share (the "Common
Stock"). Each stockholder is entitled to one vote for each share of Common Stock
held by such stockholder as of the record date. If a stockholder on the proxy
has specified a choice as to the matters coming before the Annual Meeting, the
shares will be voted accordingly. If no choice is specified on the returned
proxy, the shares will be voted in favor of the approval of the proposals
described in the Notice of Annual Meeting and in this Proxy Statement.
Abstentions and broker non-votes (i.e., the submission of a proxy by a broker or
nominee specifically indicating the lack of discretionary authority to vote on
the matter) are counted for purposes of determining the presence or absence of a
quorum for the transaction of business. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes, whereas broker non-votes will not be
counted for purposes of determining whether or not a proposal has been approved.
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Vote Required
A Board of seven directors is to be elected at the Annual Meeting to
hold office until their term has expired at the 1999 Annual Meeting or until
their successors are duly elected and qualified. In accordance with the
Company's bylaws, nominees for election as directors receiving the greatest
number of votes will be elected to the Board of Directors.
Unless otherwise instructed, the persons named in the accompanying
proxy card will vote the proxies received by them for each of the Company's
nominees named below, each of whom is presently a director of the Company. If
any nominee of the Company is unable or declines to serve as a director at the
time of the Annual Meeting, the proxies will be voted for any nominee who is
designated by the present Board of Directors to fill the vacancy. It is not
expected that any nominee will be unable or will decline to serve as a director.
The Company's Board of Directors unanimously recommends a vote "FOR"
the nominees listed herein, and proxies executed and returned will be so voted
unless contrary instructions are indicated thereon.
Nominee Age Position
W. Frank King, Ph.D ........... 58 President, Chief Executive Officer and
Director
Wade E. Saadi (1) ............. 48 Chairman of the Board
Edward C. Ateyeh, Jr. (1) ..... 45 Director
Thomas A. Herring (2) ......... 47 Director
Kevin B. Kurtzman (2) ......... 50 Director
Michael J. Maples (1) ......... 55 Director
Jonathan D. Wallace, Esq. (2) . 43 General Counsel and Director
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Dr. King has served as President, Chief Executive Officer and a
Director of PSW since October 1, 1996. From 1992 to October 1, 1996, Dr. King
served as President of the Company. From 1988 to 1992, Dr. King was Senior Vice
President of the Software Business group of Lotus, a software publishing
company. Prior to joining Lotus, Dr. King was with IBM, a technology company,
for 19 years, where his last position was Vice President of Development for the
Personal Computing Division. Dr. King earned a doctorate in electrical
engineering from Princeton University, a master's degree in electrical
engineering from Stanford University, and a bachelor's degree in electrical
engineering from the University of Florida. He serves on the boards of directors
of Excalibur Technologies Corporation, SystemSoft, Auspex Systems Inc. and
Natural Microsystems, Inc.
Mr. Saadi has served on the Board of Directors of PSW since October 1,
1996. He is the founder of Pencom Systems Incorporated, a privately held New
York corporation ("Pencom") and has served as its President and Chief Executive
Officer since its inception in 1973. In 1996, Mr. Saadi won the Technology
Entrepreneur of the Year Award(R) in New York City. Mr. Saadi is a governor of
the Board of the Collectors Club and a regional vice president of the United
States Philatelic Classics Society. Mr. Saadi attended the Polytechnic Institute
of Brooklyn where he majored in chemical engineering.
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Mr. Ateyeh has served on the Board of Directors of PSW since October 1,
1996. He is presently the Executive Vice President of Pencom, where he has been
employed since 1977. Mr. Ateyeh served as President of Pencom's software
division from 1989 to 1992. He also founded Collective Technologies, Pencom's
system administration division, in 1994 and serves as its President. Mr. Ateyeh
earned a bachelor of science degree from the University of Notre Dame. Mr.
Ateyeh received the UniForum Pioneers of UNIX Award and chaired the UNIX EXPO
Advisory Board and Conference Committee from 1984 to 1990. He is presently a
member of the IT Conference Board, IEEE, Usenix and UniForum.
Mr. Herring has served on the Board of Directors of PSW since January
1997. He is presently serving as Senior Vice President of Compuware Corp. which
recently acquired Numega Technologies, Inc. From May 1996 to December 1997, Mr.
Herring had served as Chief Executive Officer of Numega Technologies, Inc., a
developer of automatic error detection and advanced Windows debugging tools.
From July 1995 to May 1996, Mr. Herring was Vice President of Corporate
Marketing of Sybase, Inc., a software company. Prior thereto, he served as Vice
President of Worldwide Marketing and Business Development for Powersoft
Corporation, a developer of client/server development tools, from June 1990 to
July 1995. Mr. Herring earned a bachelor's degree in marketing and a master's
degree in statistics, economics and mathematics from Texas Technical University.
Mr. Herring was selected as the 1995 Software Industry Sales and Marketing
Executive of the Year by Upside Magazine. He serves on the Steering Committee on
Information Management of the Graduate School of Business of the University of
Texas at Austin, and on the Board of directors of Wayfarer Communications, an
Internet software company.
Mr. Kurtzman has served on the Board of Directors of PSW since December
1996. He is presently the Chief Financial Officer of Pencom, where he recently
began in July, 1997. Prior thereto, Mr. Kurtzman had been with Margolin, Winer &
Evens LLP, a certified public accounting firm, since 1972 and was a Partner and
a member of its executive committee and an Audit and Business Advisory Partner.
Mr. Kurtzman is a former officer and director of CPA Associates International.
Mr. Kurtzman received a bachelor's degree in accounting from Queens College of
the City University of New York.
Mr. Maples has served on the Board of Directors of PSW since December
1996. Mr. Maples held several positions with Microsoft, a technology company,
from April 1988 through July 1995, where his last position was Executive Vice
President of Worldwide Products. Prior thereto, Mr. Maples held various
positions with IBM over the course of 23 years, the last of which was Director
of Software Strategy. Mr. Maples earned a master's degree from Oklahoma City
University and a bachelor's degree in electrical engineering from the University
of Oklahoma. Mr. Maples sits on the Board of Directors of Lexmark International
Inc., a global printer manufacturer, and J.D.Edwards and Company, a software
company.
Mr. Wallace has served as PSW's General Counsel and as a member of its
Board of Directors since October 1, 1996. He has served as Pencom's Vice
President of Operations and legal counsel from February 1990 to the present.
Prior thereto, he was engaged in the private practice of law for 10 years,
specializing in computer-related legal matters. Mr. Wallace earned a bachelor's
degree from Columbia University and graduated from Harvard Law School.
Board Meetings and Committees
At each annual stockholder meeting the directors are elected to serve
from the time of their election and qualification until the next Annual Meeting
of Stockholders following their election or until a successor has been duly
elected and qualified. There are no family relationships among any of the
directors and executive officers of the Company.
The Company's Board of Directors met six (6) times during the year
ended December 31, 1997, and acted a number of times by written consent. Each of
the directors nominated for reelection attended at least 75% of the aggregate of
(i) the total meetings of the Board and (ii) the total number of meetings held
by all committees of the Board on which they served.
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<PAGE>
The Compensation Committee of the Board of Directors determines the
salaries and incentive compensation of the officers of the Company and provides
recommendations for the salaries and incentive compensation of the other
employees and the consultants of the Company. The Compensation Committee also
administers various incentive compensation, stock and benefit plans. The
Compensation Committee had two (2) meetings in 1997.
The Audit Committee of the Board of Directors reviews, acts on and
reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of the Company's auditors, the scope
of the annual audits, fees to be paid to the auditors, the performance of the
Company's independent auditors and the accounting practices of the Company. The
Audit Committee had four (4) meetings in 1997.
The Company does not have a standing Nominating Committee or any other
committee performing similar functions. Such matters are considered at meetings
of the full Board of Directors. In addition, the Board of Directors may from
time to time establish certain other committees to facilitate the management of
the Company.
Director Compensation
By action of the Company's Board of Directors, Board members who are
not employees of the Company or Pencom are paid $3,750 per calendar quarter,
which may be in the form of cash or, at the discretion of each eligible
director, may be applied to the acquisition of an option to purchase Common
Stock pursuant to the Director Fee Option Grant Program in effect under the
Company's 1996 Stock Option/Stock Issuance Plan. In addition, the nonemployee
Board members are eligible to receive periodic option grants under the Automatic
Option Grant Program in effect for them under that Plan. Each individual who
first becomes a nonemployee Board member after June 15, 1997 will automatically
receive, at the time of such initial election or appointment, a stock option
grant for 16,000 shares of Common Stock. In addition, on the date of each Annual
Stockholders Meeting, each individual who is re-elected as a nonemployee Board
member is eligible to receive an option grant for 4,000 shares of Common Stock,
provided such individual has served on the Board for at least six months. Each
such option grant will have an exercise price equal to the fair market value of
the option shares on the grant date and will have a maximum term of ten years,
subject to earlier termination upon the optionee's cessation of Board service.
Nonemployee Board members are members of the Board of Directors who are not
employees of the Company.
PROPOSAL 2
APPROVAL OF AMENDMENT TO
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's stockholders are being asked to approve an amendment to
the 1996 Stock Option/Stock Issuance Plan (the "Plan") to increase the number of
shares of Common Stock available for issuance under the Plan from 1,715,000
shares to 2,715,000 shares . The Plan became effective upon its adoption by the
Board and approval by the Company's stockholders on October 1, 1996. The
proposed amendment to the Plan was adopted by the Board on March 31, 1998,
subject to stockholder approval at the Annual Meeting.
The Board believes the share increase is necessary to assure that the
Company continues to have a sufficient reserve of Common Stock available under
the Plan to attract and retain the services of key individuals essential to the
Company's long-term success.
The following is a summary of the principal features of the Plan. The
summary, however, does not purport to be a complete description of all the
provisions of the Plan. Any stockholder of the Company who wishes to obtain a
copy of the actual plan document may do so upon written request to the Corporate
Secretary at the Company's principal executive offices in Austin, Texas.
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<PAGE>
Share Reserve
A total of 2,715,000 shares of Common Stock (including the share
increase subject to stockholder approval under this proposal) have been reserved
for issuance over the ten-year term of the Plan. In no event may any one
participant in the Plan be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances for more than 750,000 shares per
calendar year beginning with the 1997 calendar year.
In the event any change is made to the outstanding shares of Common
Stock by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in corporate structure
effected without the Company's receipt of consideration, appropriate adjustments
will be made to the securities issuable (in the aggregate and to each
participant) under the Plan and to the securities and exercise price under each
outstanding option.
Eligibility
Officers and other employees of the Company and its parent or
subsidiaries (whether now existing or subsequently established), nonemployee
members of the Board or the Board of Directors of its parent or subsidiaries and
consultants and independent advisors of the Company or its parent and
subsidiaries will be eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs described below. Nonemployee members of the Board
will also be eligible to participate in the Automatic Option Grant Program and
the Director Fee Option Grant Program described below.
As of December 31, 1997, six executive officers, 455 other employees
and six directors who are not executive officers or employees were eligible to
participate in the Plan.
Valuation
The fair market value per share of Common Stock on any relevant date
under the Plan will be the closing price per share on that date on the Nasdaq
National Market. On December 31, 1997, the closing selling price per share was
$14.50.
Equity Incentive Programs
The Plan contains four separate equity incentive programs: (i) a
Discretionary Option Grant Program; (ii) a Stock Issuance Program; (iii) an
Automatic Option Grant Program; and (iv) a Director Fee Option Grant Program.
The principal features of these programs are described below. The Compensation
Committee of the Company's Board of Directors administers (other than the
Automatic Option Grant Program and the Director Fee Option Grant Program, which
are self-executing) the Plan. This committee (the "Plan Administrator") has
complete discretion (subject to the provisions of the Plan) to authorize option
grants and direct stock issuances under the Plan. However, all grants under the
Automatic Option Grant Program and the Director Fee Option Grant Program are
made in strict compliance with the provisions of that program, and no
administrative discretion may be exercised by the Plan Administrator with
respect to the grants made thereunder.
Discretionary Option Grant Program
Options may be granted under the Discretionary Option Grant Program at
an exercise price per share of not less than 100% of the fair market value per
share of Common Stock on the option grant date unless otherwise determined by
the Plan Administrator. No option will have a term in excess of ten years.
Upon cessation of service, the optionee will have a limited period of
time in which to exercise any outstanding option to the extent such option is
exercisable for vested shares. The Plan Administrator will have complete
discretion to extend the period following the optionee's cessation of service
during which his or her outstanding options may be exercised and/or to permit
the options to be exercised with respect to one or more installments consisting
of shares that were unvested upon termination but that would have vested if the
optionee's service had continued. Such discretion may be exercised at any time
while the options remain outstanding, whether before or after the optionee's
actual cessation of service.
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<PAGE>
In addition, the Plan Administrator is authorized to issue two types of
stock appreciation rights in connection with option grants made under the
Discretionary Option Grant Program.
Tandem stock appreciation rights provide the holders with the
right to surrender their options for an appreciation distribution from
the Company equal in amount to the excess of (i) the fair market value
of the vested shares of Common Stock subject to the surrendered option
over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may, at the discretion of the Plan
Administrator, be made in cash or in shares of Common Stock.
Limited stock appreciation rights may be granted to officers
of the Company as part of their option grants. Any option with such a
limited stock appreciation right may be surrendered to the Company upon
the successful completion of a hostile take-over of the Company. In
return for the surrendered option, the officer will be entitled to a
cash distribution from the Company in an amount per surrendered option
share equal to the excess of (i) the take-over price per share over
(ii) the exercise price payable for such share.
The Plan Administrator will have the authority to effect the
cancellation of outstanding options under the Discretionary Option Grant Program
which have exercise prices in excess of the then current market price of Common
Stock and to issue replacement options with an exercise price based on the
market price of Common Stock at the time of the new grant.
Stock Issuance Program
Shares may be sold under the Stock Issuance Program at a price per
share of not less than 100% of fair market value per share of Common Stock
unless otherwise determined by the Plan Administrator. Shares are payable in
cash or through a promissory note payable to the Company and may also be issued
solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or
subject to a vesting schedule tied to the performance of service or the
attainment of performance goals. The Plan Administrator will, however, have the
discretionary authority at any time to accelerate the vesting of any unvested
shares.
Automatic Option Grant Program
Under the Automatic Option Grant Program, each individual who first
becomes a nonemployee Board member after June 5, 1997 will automatically be
granted an option for 16,000 shares of Common Stock. In addition, on the date of
each annual stockholders' meeting beginning with the Annual Meeting, each
individual who continues to serve as a nonemployee Board member after such
meeting will automatically be granted, on the date of that meeting, an option to
purchase 4,000 shares of Common Stock, provided such individual has served as a
nonemployee Board member for at least six (6) months.
Each option will have an exercise price per share equal to 100% of the
fair market value per share of Common Stock on the option grant date and a
maximum term of ten years measured from the option grant date.
Each option will be immediately exercisable for all the option shares,
but any purchased shares will be subject to repurchase by the Company, at the
exercise price paid per share, upon the optionee's cessation of Board service.
Each initial 16,000 option grant will vest (and the Company's repurchase rights
will lapse) in four (4) equal annual installments over the optionee's period of
Board service, with the first such installment to vest one (1) year from the
option grant date. Each additional 4,000 share grant will vest upon the
Optionee's completion of one year of Board service measured from the grant date.
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The shares subject to each automatic option grant will immediately vest
upon the optionee's death or permanent disability while serving as a Board
member or an acquisition of the Company by merger or asset sale or a hostile
change in control of the Company (whether by successful tender offer for more
than 50% of the outstanding voting stock or by proxy contest for the election of
Board members). In addition, upon the successful completion of a hostile
take-over, each automatic option grant may be surrendered to the Company for a
cash distribution per surrendered option share in an amount equal to the excess
of (i) the take-over price per share over (ii) the exercise price payable for
such share.
Director Fee Option Grant Program
Under the Director Fee Option Grant Program, each nonemployee Board
member may elect to apply all or a portion of any annual retainer fee otherwise
payable in cash to the acquisition of an option. The option grant will
automatically be made on the first trading day in January for the year for which
the election is to be in effect. The option will have an exercise price per
share equal to the fair market value of the option shares on the grant date, and
the number of shares subject to the option will be such that the value of the
option (as determined by using the Black-Scholes option valuation model) shall
be equal to the amount of the retainer fee applied to the program. The option
will become exercisable for 50% of the option shares upon completion of 6 months
of service during the calendar year of the option grant and with respect to the
balance of the shares in a series of 6 successive equal monthly installments
upon the optionee's completion of each additional month of Board service during
the calendar year of the option grant. The option will be subject to full and
immediate vesting upon certain changes in the ownership or control of the
Company.
General Provisions
Acceleration
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation will
automatically accelerate in full, and all unvested shares under the Stock
Issuance Program will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have the discretionary
authority to provide for automatic acceleration of outstanding options under the
Discretionary Grant Program and the automatic vesting of outstanding shares
under the Stock Issuance Program either at the time of a change in control or
upon the subsequent involuntary termination of the individual's service.
The acceleration of vesting in the event of a change in the ownership
or control of the Company may be viewed as an anti-takeover provision and may
have the effect of discouraging a merger proposal, a takeover attempt or other
effort to gain control of the Company.
Financial Assistance
The Plan Administrator may permit one or more participants to pay the
exercise price of outstanding options or the purchase price of shares under the
Plan by delivering a promissory note payable in installments. The Plan
Administrator will determine the terms of any such promissory note. However, the
maximum amount of financing provided any participant may not exceed the cash
consideration payable for the issued shares plus all applicable taxes incurred
in connection with the acquisition of the shares. Any such promissory note may
be subject to forgiveness in whole or in part, at the discretion of the Plan
Administrator, over the participant's period of service.
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Special Tax Election
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of Common Stock
in payment of such tax liability.
Amendment and Termination
The Board may amend or modify the Plan in any or all respects
whatsoever subject to any required stockholder approval. The Board may terminate
the Plan at any time, and the Plan will in all events terminate on October 1,
2006.
Stock Awards
The table below shows, as to each of the Company's executive officers
named in the Summary Compensation Table and the various indicated individuals
and groups, the number of shares of Common Stock subject to options granted
between October 1, 1996 and December 31, 1997 under the Plan together with the
weighted average exercise price payable per share.
<TABLE>
<CAPTION>
Number of Weighted
Option Average
Name Shares Exercise Price
<S> ................................................................................................. <C> <C>
W. Frank King, Ph.D., ............................................................................... 212,308 $ 3.90
President and Chief Executive Officer
Patrick D. Motola, .................................................................................. 188,847 $ 3.07
Senior Vice President of Operations,
Chief Financial Officer and Secretary
Brian E. Baisley, ................................................................................... 116,540 $ 5.66
Senior Vice President of Client Services
William C. Cason, ................................................................................... 116,540 $ 5.66
Senior Vice President of Business Development
Chief Technology Officer
Dennis P Thompson,.................................................................................... 41,539 $ 5.73
Senior Vice President of Sales and Marketing
All current executive officers as a group ........................................................... 695,159 $ 4.38
(Six persons)
Thomas A. Herring.................................................................................... 30,806 $ 9.10
Director Nominee
Michael J. Maples, .................................................................................. 30,806 $ 7.92
Director Nominee
Wade E Saadi,........................................................................................ _ $ _
Director Nominee
Edward C. Ateyeh, Jr ................................................................................ _ $ _
Director Nominee
Kevin B. Kurtzman, .................................................................................. 21,538 $ 6.26
Director Nominee
Jonathan D. Wallace, Esq., ......................................................................... _ $ _
Director Nominee
All current directors who are not executive officers as
a group (Six persons) .............................................................................. 83,150 $ 7.93
All employees and consultants, including current .................................................... 1,387,998 $ 4.81
officers who are not executive officers as a group
(454 persons)
</TABLE>
8
<PAGE>
Federal Income Tax Consequences
Option Grants
Options granted under the Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), or non-statutory options which are not intended
to meet such requirements. The Federal income tax treatment for the two types of
options differs as follows:
Incentive Options. The optionee recognizes no taxable income at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. However, the amount by which the fair market value
(at the time of exercise) of the purchased shares exceeds the exercise price
paid for those shares will be included in the optionee's alternative minimum
taxable income at the time of exercise. The optionee will recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed
of. For Federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale
or other disposition is made after the optionee has held the shares for more
than two years after the option grant date and more than one year after the
exercise date. If either of these two holding periods is not satisfied, then a
disqualifying disposition will result. If the optionee makes a disqualifying
disposition of the purchased shares, then the Company will be entitled to an
income tax deduction, for the taxable year in which such disposition occurs,
equal to the excess of (i) the fair market value of such shares on the option
exercise date over (ii) the exercise price paid for the shares. In no other
instance will the Company be allowed a deduction with respect to the optionee's
disposition of the purchased shares.
Non-Statutory Options. An optionee upon the grant of a non-statutory
option recognizes no taxable income. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares. Further, the optionee will be
required to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Code to include as
ordinary income in the year of exercise of the option an amount equal to the
excess of (i) the fair market value of the purchased shares on the exercise date
over (ii) the exercise price paid for such shares. If the Section 83(b) election
is made, the optionee will not recognize any additional income as and when the
repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee.
Stock Appreciation Rights
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
the appreciation distribution for the taxable year in which the ordinary income
is recognized by the optionee.
9
<PAGE>
Direct Stock Issuance
The tax principles applicable to direct stock issuances under the Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
Accounting Treatment
Option grants or stock issuances with exercise or issue prices less
than the fair market value of the shares on the grant or issue date will result
in a compensation expense to the Company's earnings equal to the difference
between the exercise or issue price and the fair market value of the shares on
the grant or issue date. Such expense will be accruable by the Company over the
period that the option shares or issued shares are to vest. Option grants or
stock issuances at 100% of fair market value will not result in any charge to
the Company's earnings. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully diluted basis. Under the Financial Accounting Standards Board
No. 123, footnote disclosure will be required as to the impact the outstanding
options under the Plan would have upon the Company's reported earnings were
those options appropriately valued as compensation expense.
Should one or more optionees be granted stock appreciation rights that
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to the
Company's earnings.
Stockholder Approval
The affirmative vote of a majority of the outstanding voting shares of
the Company present or represented and entitled to vote at the Annual Meeting is
required for approval of the amendment to the Plan. The Plan will terminate once
the balance of the share reserve as last approved by the stockholders has been
issued pursuant to outstanding option grants and stock issuances under the Plan.
The Board of Directors recommends that the stockholders vote "FOR" the
approval of the amendment to the Plan, and proxies executed and returned will be
so voted unless contrary instructions are indicated thereon. The Board believes
that it is in the best interests of the Company to continue to have a
comprehensive equity incentive program for the Company which will provide a
meaningful opportunity for officers, employees and nonemployee Board members to
acquire a substantial proprietary interest in the enterprise and thereby
encourage such individuals to remain in the Company's service and more closely
align their interests with those of the stockholders.
New Plan Benefits
As of April 23, 1998, no options have been granted, and no direct stock
issuances have been made, on the basis of the 1,000,000 share increase which
forms part of this Proposal No. 2. At the 1998 Annual Meeting, each individual
who will continue to serve as a nonemployee Board member will be eligible to
receive an option grant under the Automatic Option Grant Program to purchase
4,000 shares of Common Stock at an exercise price per share equal to the fair
market value per share of Common Stock on the grant date.
PROPOSAL 3
APPROVAL OF SELECTION OF INDEPENDENT AUDITORS
The Company is asking the stockholders to ratify the selection of Ernst
& Young LLP as the Company's independent auditors for the year ending December
31, 1998. In the event that the stockholders fail to ratify the appointment, the
Board of Directors will reconsider its selection. Even if the selection is
ratified, the Board of Directors, in its discretion, may direct the appointment
of a different independent accounting firm at any time during the year if the
Board of Directors believes that such change would be in the Company's and the
stockholders' best interests.
10
<PAGE>
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting to respond to your questions and will have the opportunity to
make a statement if they desire to do so.
The affirmative vote of a majority of the outstanding voting shares of
the Company present or represented and entitled to vote at the Annual Meeting is
required to ratify the selection of Ernst & Young LLP.
The Board of Directors unanimously recommends a vote "FOR" the
ratification and approval of the selection of Ernst & Young LLP as the Company's
independent auditors, and proxies executed and returned will be so voted unless
contrary instructions are indicated thereon.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 2, 1998 by (i) each person
who is known by the Company to own beneficially more than five percent of the
Company's Common Stock; (ii) each of the Company's directors; (iii) each of the
Company's officer's named in the Summary Compensation Table below; and (iv) all
current executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address Of Beneficial Percent of
of Beneficial Owner Ownership (1) Class
<S> ........................................... <C> <C>
Wade E. Saadi (2) ............................. 1,680,390 18.6%
c/o Pencom Systems Incorporated,
40 Fulton Street
New York, New York 10038
Edgar G. Saadi (2) ............................ 1,680,390 18.6
c/o Pencom Systems Incorporated,
40 Fulton Street
New York, New York 10038
Edward C. Ateyeh, Jr. (2) ..................... 1,680,390 18.6
c/o Pencom Systems Incorporated,
40 Fulton Street
New York, New York 10038
W. Frank King, Ph.D. (3) ...................... 633,846 7.0
c/o PSW Technologies, Inc.,
6300 Bridgepoint Parkway,
Building 3, Suite 200,
Austin, Texas 78730
Jonathan D. Wallace, Esq. (4) ................. 143,463 1.6
Patrick D. Motola (5) ......................... 129,980 1.4
Brian E. Baisley (6) .......................... 39,541 *
William C. Cason (7) .......................... 51,850 *
Dennis P. Thompson (8) ........................ 12,968 *
Michael J. Maples (9) ......................... 15,006 *
Kevin B. Kurtzman (10) ........................ 5,384 *
Thomas A. Herring (11) ........................ 8,628 *
All directors and executive officers as a group
(thirteen persons) (13) .................. 6,081,836 63.8%
</TABLE>
11
<PAGE>
* Indicates less than 1%
(1) Beneficial ownership is calculated in accordance with the rules of the
Securities and Exchange Commission in accordance with Rule 13d-3(d)(i).
In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of Common Stock subject
to options held by that person that are currently exercisable or become
exercisable within 60 days following March 2, 1998 are deemed
outstanding. However, such shares are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Unless otherwise indicated in the footnotes to this table, the persons
and entities named in this table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(2) Includes 65,005 shares issuable upon exercise of warrants held by each
of Messrs. Wade E. Saadi, Edgar G. Saadi and Edward C. Ateyeh.
(3) Includes 80,000 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(4) Includes 5,001 shares issuable upon exercise of warrants that are
exercisable within the 60-day period following March 2, 1998.
(5) Includes 129,980 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(6) Includes 39,541 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(7) Includes 51,850 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(8) Includes 12,968 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(9) Includes 7,006 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(10) Includes 5,384 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(11) Includes 8,628 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(12) Includes 5,649 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 2, 1998.
(13) See notes 2-12 above.
12
<PAGE>
EXECUTIVE COMPENSATION
Executive Officers
Set forth below is certain information concerning the executive
officers of the Company:
Name Age Position Held
W. Frank King, Ph.D ......... 58 President and Chief Executive Officer
Patrick D. Motola ........... 43 Senior Vice President of Operations,
Chief Financial Officer and Secretary
William C. Cason ............ 49 Senior Vice President of Business
Development and Chief Technology Officer
Brian E. Baisley ............ 55 Senior Vice President of Client Services
Dennis P. Thompson .......... 42 Senior Vice President of Sales and Marketing
Keith D. Thatcher ........... 40 Vice President of Finance and Treasurer
Certain biographical information concerning Dr. King is set forth
under "PROPOSAL 1 - Election of Directors."
Mr. Motola has served as the Senior Vice President of Operations, Chief
Financial Officer and Secretary of PSW since October 1, 1996. From May 1993 to
October 1, 1996, Mr. Motola served as Vice President and General Manager of the
Company. From January 1992 to May 1993, Mr. Motola served as Vice President of
Marketing at Software Publishing Corp., a PC software company. Prior thereto,
Mr. Motola was Vice President of Business Development at Metaphor Computer
Systems, a software and systems company, from April 1989 to December 1991. Mr.
Motola also held various positions at IBM from 1976 to 1989 within the Personal
Systems and Workstation Divisions, including System Manager of OS/2 Extended
Edition and AIX Development Manager in the original RISC/UNIX system project.
Mr. Motola earned a master's degree in management science from Stanford
University, a master's degree in computer science from the University of Texas
at Austin, and a bachelor's degree in electrical engineering and computer
science from the University of California at Berkeley.
Mr. Cason has served as a Senior Vice President of PSW since October 1,
1996. He is currently the Senior Vice President of Business Development and
Chief Technology Officer of PSW since the organizational change in August 1997.
From October 1996 to August 1997, Mr. Cason served as the Senior Vice President
of Business Systems Services. From October 1994 to October 1996, Mr. Cason was a
Vice President and from September 1993 to October 1994, he was Director of
Transaction Systems, of the Company. From May 1986 to September 1993, he served
at Soft Switch Inc., an electronic mail software product company, with roles
including Vice President of UNIX Development, Vice President of Business
Development and Vice President of Operations. Prior thereto, Mr. Cason was at
IBM's Development Lab in Austin, Texas for nine years. Mr. Cason earned a
bachelor's degree in electrical engineering from the University of Texas at
Austin and has completed post-graduate coursework toward a master's degree in
electrical engineering.
Mr. Baisley has served as the Senior Vice President of Client Services
of PSW since the organizational change in August 1997. Mr. Baisley previously
served as the Senior Vice President of Software Technology Services of PSW since
October 1, 1996. From October 1994 to October 1996, Mr. Baisley was a Vice
President, and from October 1993 to October 1994, he was Director of Technical
Support Services, of the Company. From 1963 to September 1993, Mr. Baisley held
a variety of positions with IBM, including Senior Manager of the IBM National
Technical Support Center in Dallas, Texas. While at IBM, Mr. Baisley was also
involved in providing consulting services to software companies that were
migrating products to IBM systems.
13
<PAGE>
Mr. Thompson has served as the Senior Vice President of Sales and
Marketing since the organizational change in August 1997. Mr. Thompson
previously served as the Vice President of Sales and Marketing of PSW since May
1997. From October 1996 to May 1997, he was Vice President, Software Technology
Sales and Marketing. From September 1994 to October 1996, he was a Business
Development Manager for the Company. From 1988 to 1994, Mr. Thompson was the
Director of Field Sales at Revelation Technologies, Inc., a software development
company that publishes application development tools. Prior thereto, Mr.
Thompson served as a consultant to the petroleum industry in the use of personal
computers for the exploration and production of oil and gas. Mr. Thompson earned
a bachelor's degree in communications from Bethany College.
Mr. Thatcher has served as the Vice President of Finance and Treasurer
of PSW since October 1, 1996. From October 1994 to June 1996, Mr. Thatcher was
Chief Financial Officer, Secretary and Treasurer of Tanisys Technology, Inc., a
technology start-up company involved in developing commercial applications for
capacitive touch technology. Prior thereto, Mr. Thatcher served as Vice
President and Treasurer for Kinetic Concepts, Inc., a medical services and
products company, from 1987 to 1994. From 1985 to 1987, Mr. Thatcher was
employed by Peat Marwick Main & Co. as an audit manager. Mr. Thatcher earned a
bachelor's degree in accountancy from Northern Arizona University.
Summary Compensation Information
The following table provides certain summary information concerning the
compensation earned, by the Company's Chief Executive Officer and each of the
four other most highly compensated executive officers of the Company whose
salary and bonus for the 1997 year was in excess of $100,000, for services
rendered in all capacities to the Company for the years ended December 31, 1996
and 1997. The listed individuals shall be hereafter referred to as the "Named
Executive Officers".
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------- ------------
Name and Principal Position Other Annual
Year Salary($) Bonus($) Compensation($) Stock Options(#)
<S> <C> <C> <C> <C> <C>
Dr. W. Frank King 1997 357,155 _ _ _
Chief Executive Officer(1).............................. 1996 310,071 363,226 654,907 212,308
Patrick D. Motola 1997 171,746 47,393 _ 55,000
Chief Financial Officer................................. 1996 161,630 40,000 _ 133,848
Brian E. Baisley 1997 153,438 47,393 _ 55,000
Senior Vice President of Client Services................ 1996 134,500 30,000 _ 61,540
William C. Cason 1997 153,438 47,393 _ 55,000
Senior Vice President of Business Development........... 1996 134,500 30,000 _ 61,540
Dennis P. Thompson 1997 125,000 137,744 _ 20,000
Senior Vice President of Sales and Marketing............ 1996 82,390 139,632 _ 21,539
</TABLE>
(1) Dr. King's bonus consists of an amount paid to him pursuant to his
employment agreement with Pencom dated October 19, 1992. Dr. King's
other annual compensation consists of the forgiveness of a promissory
note, including interest thereon, from Dr. King to Pencom.
14
<PAGE>
Stock Option Information
The following table sets forth certain information regarding option
grants made pursuant to the Company's 1996 Stock Option/Stock Issuance Plan
during 1997 to each of the Named Executive Officers.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
Percentage Potential Realizable Value at
Number of of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted Exercise for Option Term(2)
Options to Employees Price Expiration -------------------------------
Name Granted (#) in 1997(1) ($/Sh) Date 5%($) 10%($)
---- ----------- ---------- ---------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Patrick D. Motola... 25,000 5.2% 9.00 3/17/07 141,501 358,592
30,000 6.2% 11.625 7/10/07 219,327 555,818
Brian E. Baisley.... 25,000 5.2% 9.00 3/17/07 141,501 358,592
30,000 6.2% 11.625 7/10/07 219,327 555,818
William C. Cason.... 25,000 5.2% 9.00 3/17/07 141,501 358,592
30,000 6.2% 11.625 7/10/07 219,327 555,818
Dennis P. Thompson 20,000 4.1% 9.00 6/04/07 113,201 286,874
</TABLE>
(1) Based on an aggregate of 484,610 options granted to employees in fiscal
1997, including options granted to the Named Executive Officers.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options at the end of the 10-year option term. The assumed
5% and 10% rates of stock appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate of the future market price of the Common Stock. These amounts
do not take into account any other appreciation in the price of the
Common Stock from the date of grant to the current date.
No options were exercised by the Named Executive Officers in 1997. The
following table sets forth for each of the Named Executive Officers certain
information concerning the value of unexercised options at the end of 1997:
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options in-the-Money Options
at December 31, 1997 (#) at December 31, 1997(1)($)
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Dr. W. Frank King 80,000 132,308 848,000 1,402,465
Patrick D. Motola 100,568 88,279 1,454,213 704,964
Brian E. Baisley 40,000 76,540 555,015 474,909
William C. Cason 40,001 76,539 555,029 474,895
Dennis P. Thompson 8,461 33,078 107,039 257,122
</TABLE>
(1) Based on an estimated fair value of the Company's Common Stock at
December 31, 1997 ($14.50 per share)less the exercise price payable for
such shares.
15
<PAGE>
Employment Contracts and Change of Control Arrangements
The Company has entered into an employment agreement with Dr. W. Frank
King dated October 1, 1996 (the "King Agreement"). Pursuant to the King
Agreement, the Company agreed to pay Dr. King an annual base salary of $348,000
and to provide customary fringe benefits. In addition, the Company agreed to
issue to Dr. King options under the Plan to purchase an aggregate of 212,308
shares of Common Stock at $3.90 per share. 80,000 of such options vested on
December 31, 1997. The remaining 132,308 of such options vest on December 31,
2002, subject to partial or full acceleration of vesting on December 31, 1998
based upon the Company's 1998 performance measured against certain specified
financial goals. The King Agreement terminates on September 30, 1998.
The Company has entered into employment agreements with no defined
termination dates with each of Messrs. Motola, Baisley, Cason and Thompson dated
July 1, 1993, October 19, 1993, September 27, 1993 and September 15, 1994,
respectively (the "Executive Agreements"). Pursuant to the Executive Agreements,
the Company agreed to pay Messrs. Motola, Baisley, Cason and Thompson annual
base salaries of $140,000, $60,000, $120,000 and $20,000, respectively, and to
provide customary fringe benefits. In addition, the Company has adopted a Senior
Vice President Bonus Plan pursuant to which it has granted to each of Messrs.
Motola, Baisley and Cason options to purchase 25,000 shares of the Company's
Common Stock at a purchase price equal to the fair market value of such shares
on the date of grant. Upon achievement of certain specified pre-tax profit
levels, the vesting of these options will be partially or fully accelerated and
the participants in the plan will be entitled to receive certain additional cash
bonus payments.
The Company has entered into written agreements with its officers
whereby in the event of the officer's involuntary termination within 18 months
following an acquisition of the Company or change in control of the Company's
Board of Directors, any unvested options assumed or replaced in connection with
the acquisition or otherwise outstanding will automatically accelerate so that
the option shall become immediately exercisable.
The Executive Agreements contain provisions which, among others,
prohibit the employee from disclosing or otherwise using certain confidential
information, assign to the Company inventions or ideas conceived by the employee
during his employment, prohibit solicitation by the employee of clients and
other employees of the Company and prohibit the employee from accepting any
opportunity (whether by contract or full-time employment) with the Company's
clients. Pursuant to the terms of the Executive Agreements, either party may
terminate the employment relationship without cause upon two weeks' prior
written notice to the other party. The Company may terminate the employment
relationship in its sole discretion without cause, effective immediately, upon
payment of two weeks' salary to the employee or immediately for cause upon
written notice.
The Compensation Committee as Plan Administrator of the Plan will have
the authority to provide for the accelerated vesting of outstanding options held
by the Chief Executive Officer and any other executive officer or the shares of
Common Stock subject to direct issuances held by such individual, in connection
with certain changes in control of the Company or the subsequent termination of
the officer's employment following the change in control event.
Key-Person Life Insurance
The Company does not maintain key-person life insurance policies on the
lives of any of its executive officers.
Compensation Committee Interlocks and Insider Participation
Executive compensation decisions are made by the Compensation
Committee of the Board of Directors which consists of Messrs. Saadi, Ateyeh and
Maples. None of these individuals was an officer or employee of the Company at
any time during the 1997 fiscal year or at any other time. During 1997, no
current executive officer of the Company served as a member of the Board of
Directors or compensation committee of any other entity that has or has had one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
16
<PAGE>
Compensation Committee Report on Executive Compensation
It is the duty of the Compensation Committee to review and determine
the salaries and incentive compensation of the officers of the Company,
including the President and Chief Executive Officer, and provide recommendations
for the salaries and incentive compensation of the other employees and the
consultants of the Company. The Compensation Committee also administers various
incentive compensation, stock and benefit plans.
The Compensation Committee believes that the compensation programs for
the Company's executive officers should reflect the Company's performance and
the value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The market for system integration and software development services is
very competitive, and the Company's success depends upon its ability to attract
and retain qualified executives through the competitive compensation packages it
offers to such individuals.
General Compensation Policy. The Compensation Committee's policy is to
provide the Company's executive officers with compensation opportunities which
are based upon their personal performance, the financial performance of the
Company and their contribution to that performance and which are competitive
enough to attract and retain highly skilled individuals. Each executive
officer's compensation package is comprised of three elements: (i) base salary
that is competitive with the market and reflects individual performance, (ii)
annual variable performance awards payable in cash or stock options and tied to
the Company's achievement of annual financial performance goals and (iii)
long-term stock based incentive awards designed to strengthen the mutuality of
interests between the executive officers and the Company's stockholders. As an
officer's level of responsibility increases, a greater proportion of his or her
total compensation will be dependent upon the Company's financial performance
and stock price appreciation rather than base salary.
Compensation decisions were made by the Compensation Committee. The
principal factors that were taken into account in establishing each executive
officer's compensation package for 1997 are described below. However, the
Compensation Committee may in its discretion apply entirely different factors,
such as different measures of financial performance, for future fiscal years.
Base Salary. The base salary for each officer reflects the salary
levels for comparable positions in similar companies, such as systems
integrators and software companies, as well as the individual's personal
performance and internal alignment considerations. The relative weight given to
each factor varies with each individual in the sole discretion of the
Compensation Committee. Each executive officer's base salary is subject to
minimums set forth in their respective employment agreements and is adjusted
each year on the basis of (i) the Compensation Committee's evaluation of the
officer's personal performance for the year and (ii) the competitive marketplace
for persons in comparable positions. The Company's performance and profitability
may also be a factor in determining the base salaries of executive officers.
Annual Incentives. The Company maintains a cash incentive and stock
option bonus program to reward executive officers and other key employees for
attaining defined performance targets. For most executive officers and other key
employees, bonuses are based primarily on Company-wide performance targets. For
some management personnel, Company-wide performance is a factor, however
significant weight is also given to individual performance and performance of an
operating group within the Company. Upon achievement of a performance target, an
employee is entitled to a cash payment and a portion of the shares available
under the option grants made pursuant to this program accelerate and become
immediately exercisable.
In setting performance targets, the Company considered its historical
performance and underlying business model, and external as well as internal
expectations related to 1997 revenue and operating profits. The financial
factors were derived directly from the Company's 1997 operating plan.
17
<PAGE>
Long Term Incentives. Generally, stock option grants for the Company's
executive officers are reviewed twice annually by the Compensation Committee.
Each grant is designed to maintain a significant unvested position to provide
incentives to create stockholder value and allows the officer to acquire shares
of the Company's Common Stock at a fixed price per share (the fair value on the
grant date) over a specified period of time (up to ten years). Options are
immediately exercisable, but option shares that are purchased subject to vesting
restrictions are repurchasable by the Company at the exercise price if the
officer's employment is terminated prior to the vesting date.
The size of the option grant to each executive officer, including the
Chief Executive Officer, is set by the Compensation Committee at a level that is
intended to create a meaningful opportunity for stock ownership based upon the
individual's current position with the Company, the individual's personal
performance in recent periods and his or her potential for future responsibility
and promotion over the option term. The relevant weight given to each of these
factors varies from individual to individual. The Compensation Committee has
established certain guidelines with respect to the option grants made to the
executive officers, but has the flexibility to make adjustments to those
guidelines at its discretion.
CEO Compensation. In setting the total compensation payable to Mr.
King, the Company's President and Chief Executive Officer, for the 1997 fiscal
year, the Compensation Committee sought to make that compensation competitive
with the chief executive officers of other comparable companies, while at the
same time assuring that a significant percentage of compensation was incentive
based, primarily tied to Company performance and stock price appreciation.
The Compensation Committee sets Mr. King's base salary with the
objective of maintaining his base salary at a competitive level when compared
with the base salary levels in effect for similarly situated chief executive
officers.
The incentive-based components of Mr. King's compensation are comprised
of stock option grants. The Compensation Committee considers Mr. King's current
stock ownership and outstanding options as factors in determining incentive
bonus or option awards for a particular year. In connection with the spin-off of
the Company, on October 2, 1996, Mr. King was granted options to purchase 80,000
shares that vested on December 31, 1997 and options to purchase 132,308 shares
that vest on October 2, 2002. If certain 1998 performance goals are met, some or
all of the options to purchase 132,308 shares vest immediately. Mr. King
received no cash bonus or option grants during fiscal 1997 because of these
earlier option grants.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code disallows a tax deduction to publicly held companies
for compensation paid to certain of their executive officers, to the extent that
such compensation exceeds $1 million per covered officer in any fiscal year. The
limitation applies only to the compensation which is not considered to be
performance-based. Non-performance based compensation paid to the Company's
executive officers for 1997 did not exceed the $1 million limit per officer, and
the Compensation Committee does not anticipate that the non-performance based
compensation to be paid to the Company's executive officers for 1998 will exceed
that limit. The Plan has been structured so that any compensation deemed paid in
connection with the exercise of option grants made under the Plan with an
exercise price equal to the fair market value of the option shares on the grant
date will qualify as performance-based compensation which will not be subject to
the $1 million limitation. Because it is unlikely that the cash compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1 million limit, the Compensation Committee has decided at
this time not to take any action to limit or restructure the elements of cash
compensation payable to the Company's executive officers. The Compensation
Committee will reconsider this decision should the individual cash compensation
of any executive officer ever approach the $1 million level.
18
<PAGE>
It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align the Company's performance and the interests of the Company's
stockholders through the use of competitive and equitable executive compensation
in a balanced and reasonable manner, for both the short and long-term.
Submitted by the Compensation Committee of the Company's Board of Directors:
Wade E. Saadi, Chairman
Edward C. Ateyeh, Jr.
Michael J. Maples
19
<PAGE>
Stock Performance Graph
The graph below depicts the Company's stock price as an index assuming
$100 invested on June 5, 1997 (the date of the Company's initial public
offering), along with the composite prices of companies listed in the S & P
Software & Services Companies Index and Nasdaq Stock Market (U.S. Companies)
Index. This information has been provided to the Company by the Standard &
Poor's Computers Index and the Nasdaq Stock Market. The comparisons in the graph
are required by regulations of the Securities Exchange Commission and are not
intended to forecast or to be indicative of the possible future performance of
the Common Stock.
<TABLE>
<CAPTION>
Research Data Group, Inc. Total Return - Data Summary
PSWT Cumulative Total Return
--------------------------------
6/05/97 12/31/97
<S> <C> <C>
PSW TECHNOLOGIES, INC. 100 161
NASDAQ STOCK MARKET (U.S.) 100 113
S & P COMPUTERS (SOFTWARE & SERVICES) 100 104
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, which might incorporate future filings made by
the Company under those statutes, the preceding Report on Executive Compensation
and the Stock Performance Graph will not be incorporated by reference into any
of those prior filings, nor will such report or graph be incorporated by
reference into any future filings made by the Company under those acts.
20
<PAGE>
Certain Transactions with Management
Pencom Relationship
Contractual Arrangements. In April 1997, Pencom advanced $235,000 and
$100,000 to Dr. W. Frank King and Jonathan D. Wallace, respectively. The advance
to Mr. Wallace, evidenced by a promissory note bearing interest at a rate of
8.5% per annum, is due upon demand. Dr. King repaid his advance in April 1998.
The Company and Pencom entered into an Accounts Receivable Agreement
dated October 1, 1996 whereby Pencom transferred a 26.67% interest in the
proceeds of certain accounts receivable to the Company in connection with the
Spin-Off.
The Company and Pencom entered into a letter agreement whereby Pencom
agreed to provide certain accounting, personnel and legal services to PSW from
October 1, 1996 to April 30, 1997 for a fee of $7,000 per month.
The Company and Pencom entered into a Recruiting Services Agreement
dated January 20, 1997 whereby Pencom provides certain recruiting services to
the Company (the "Recruiting Agreement"). The total fee payable by the Company
to Pencom under the Recruiting Agreement for the placement of a candidate ranges
from 17% to 25% of the candidate's first year's compensation based upon the
position level of the candidate and the number of successful hires for which a
fee has been paid to Pencom in 1997. The Company believes that such fee
arrangement is in accordance with industry standards. Although the Recruiting
Agreement has lapsed, the parties continue to operate under the agreement which
is expected to be renewed under similar terms.
On October 31, 1996, the Company entered into a lease for its office
space in Austin, Texas, with Investors Life Insurance Company of North America,
which lease was guaranteed by Pencom. This guarantee was released on September
18, 1997. This lease provided for annual rent of approximately $717,000 in 1997.
The Company entered into an agreement with Pencom effective as of
January 31, 1997 whereby the Company guaranteed obligations of Tivoli Systems,
Inc., a Texas corporation and wholly-owned subsidiary of IBM ("Tivoli") under
Pencom's sublease agreement with Tivoli. Such sublease agreement expires on
September 30, 2000 and provided for annual rent of approximately $333,000 in
1997.
Registration Rights Agreement
The Company has entered into an agreement with each of its existing
stockholders and the warrantholders pursuant to which such stockholders and
warrantholders were granted certain registration rights.
Employment Agreements
The Company has entered into employment agreements with all of its
executive officers. See "Employment Contracts and Change of Control Agreements".
21
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership of Common Stock and Company securities with
the Securities and Exchange Commission and the Nasdaq Stock Market. Officers,
directors and greater than 10% beneficial owners are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely upon a review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to the Company or written representations from
certain reporting persons that no Forms 5 were required, the following
individuals inadvertently filed late a Form 4 for a single transaction: Keith D.
Thatcher, Patrick D. Motola, Michael J. Maples and Thomas A. Herring. In
addition, Edward C. Ateyeh, Jr. inadvertently filed late with respect to one
holding which was omitted from his Form 3 initial statement of beneficial
ownership when he first became a Section 16 reporting individual. The Company
believes that, during 1997, all other applicable Section 16(a) reporting
requirements were complied with.
STOCKHOLDER PROPOSALS
Under the present rules of the Securities and Exchange Commission and the
Bylaws of the Company, the deadline for stockholders to submit proposals to be
considered for inclusion in the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders is December 21, 1998. Such proposals may be included in
next year's Proxy Statement if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission and the procedure set
forth in the Bylaws of the Company.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF ITS
ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS, SCHEDULES AND
LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO THE ATTENTION OF CHIEF FINANCIAL
OFFICER, AT THE COMPANY'S EXECUTIVE OFFICES LOCATED AT 6300 BRIDGEPOINT PARKWAY,
BUILDING 3, SUITE 200, AUSTIN, TEXAS 78730.
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for
action at the Annual Meeting other than the matters set forth in this Proxy
Statement. Should any other matter requiring a vote of the stockholders arise,
the persons named as proxies on the enclosed proxy card will vote the shares
represented thereby in accordance with their best judgment in the interest of
the Company. Discretionary authority with respect to such other matters is
granted by the execution of the enclosed proxy card.
By Order of the Board of Directors,
/s/ Patrick D. Motola
PATRICK D. MOTOLA
Secretary
April 23, 1998
22
<PAGE>
PSW TECHNOLOGIES, INC.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
(as amended by Amendment No. 1)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Option/Stock Issuance Plan is intended to
promote the interests of PSW Technologies, Inc., a Delaware corporation, by
providing eligible persons with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into four separate equity programs:
(i) the Discretionary Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock,
(ii) the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock directly,
either through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary),
(iii) the Automatic Option Grant Program under which Eligible Directors
shall automatically receive option grants at periodic intervals to purchase
shares of Common Stock, and
(iv) the Director Fee Option Grant Program under which non-employee Board
members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special option grant.
B. The provisions of Articles One and Six shall apply to all equity programs
under the Plan and shall accordingly govern the interests of all persons under
the Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12(g) Registration Date, the
Discretionary Option Grant and Stock Issuance Programs shall be administered by
the Board.
B. Beginning with the Section 12(g) Registration Date, the
Primary Committee shall have sole and exclusive authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders. Administration of the Discretionary Option Grant and Stock Issuance
Programs with respect to all other persons eligible to participate in those
programs may, at the Board's discretion, be vested in the Primary Committee or a
Secondary Committee, or the Board may retain the power to administer those
programs with respect to all such persons.
C. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs and
to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant or Stock Issuance Program under its jurisdiction or
any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director
Fee Option Grant Programs shall be self-executing in accordance with the terms
of those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to option grants made under those programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant and
Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors of any
Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide services to
the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority (subject to the provisions of
the Plan) to determine, (i) with respect to the option grants under the
Discretionary Option Grant Program, which eligible persons are to receive option
grants, the time or times when such option grants are to be made, the number of
shares to be covered by each such grant, the status of the granted option as
either an Incentive Option or a Non-Statutory Option, the time or times at which
each option is to become exercisable, the vesting schedule (if any) applicable
to the option shares and the maximum term for which the option is to remain
outstanding and (ii) with respect to stock issuances under the Stock Issuance
Program, which eligible persons are to receive stock issuances, the time or
times when such issuances are to be made, the number of shares to be issued to
each Participant, the vesting schedule (if any) applicable to the issued shares
and the consideration to be paid for such shares.
C. The Plan Administrator shall have the absolute discretion either to grant
options in accordance with the Discretionary Option Grant Program or to effect
stock issuances in accordance with the Stock Issuance Program.
D. The individuals eligible to participate in the Automatic Option Grant Program
shall be limited to (i) those individuals who are serving as non-employee Board
members on the Underwriting Date, (ii) those individuals who first become
non-employee Board members on or after the Underwriting Date, whether through
appointment by the Board or election by the Corporation's stockholders, and
(iii) those individuals who are to continue to serve as non-employee Board
members after one or more Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an initial option grant under the Automatic Option Grant Program on the
Underwriting Date or (if later) at the time he or she first becomes a
non-employee Board member, but such individual shall be eligible to receive
periodic option grants under the Automatic Option Grant Program upon his or her
continued service as a non-employee Board member after one or more Annual
Stockholders Meetings.
E. All non-employee Board members shall be eligible to participate in the
Director Fee Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the Corporation on the open market. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 2,715,000
shares. This maximum share reserve reflects the 11,250 for 1 stock split
expected to be effected by the Corporation prior to December 31, 1996.
B. No one person participating in the Plan may receive
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 750,000 shares of Common Stock per calendar year
beginning with the 1997 calendar year. This limit reflects the 11,250 for 1
stock split expected to be effected by the Corporation prior to December 31,
1996.
C. Shares of Common Stock subject to outstanding options shall
be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant provisions of
Article Two. Unvested shares issued under the Plan and subsequently repurchased
by the Corporation at the original issue price paid per share pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.
D. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the number and/or class of securities for which
any one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances per calendar year, (iii) the number and/or
class of securities for which automatic option grants are to be made
subsequently per Eligible Director under the Automatic Option Grant Program and
(iv) the number and/or class of securities and the exercise price per share in
effect under each outstanding option in order to prevent the dilution or
enlargement of benefits thereunder. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall not be less than one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date unless otherwise determined by the Plan Administrator.
2. The exercise price shall become immediately due upon exercise of the option
and shall, subject to the provisions of Section I of Article Six and the
documents evidencing the option, be payable in cash or check made payable to the
Corporation. Should the Common Stock be registered under Section 12(g) of the
1934 Act at the time the option is exercised, then the exercise price may also
be paid as follows:
(i) in shares of Common Stock held for the requisite period necessary to
avoid a charge to the Corporation's earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested shares, through a
special sale and remittance procedure pursuant to which the Optionee shall
concurrently provide irrevocable written instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at such time
or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any options held
by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's cessation of
Service for any reason shall remain exercisable for such period of time
thereafter as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option, but no such option shall be exercisable after
the expiration of the option term. If such period is not specified in the
documents evidencing the option, then the option shall remain exercisable for a
period of ninety (90) days following the Optionee's cessation of Service.
(ii) Any option exercisable in whole or in part by the Optionee at the time
of death may be exercised subsequently by the personal representative of the
Optionee's estate or by the person or persons to whom the option is transferred
pursuant to the Optionee's will or in accordance with the laws of descent and
distribution.
(iii) During the applicable post-Service exercise period, the option may
not be exercised in the aggregate for more than the number of vested shares for
which the option is exercisable on the date of the Optionee's cessation of
Service. Upon the expiration of the applicable exercise period or (if earlier)
upon the expiration of the option term, the option shall terminate and cease to
be outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's cessation
of Service, terminate and cease to be outstanding to the extent the option is
not otherwise at that time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for Misconduct, then all
outstanding options held by the Optionee shall terminate immediately and cease
to be outstanding.
2. The Plan Administrator shall have the discretion, exercisable either at the
time an option is granted or at any time while the option remains outstanding,
to:
(i)extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the
period otherwise in effect for that option to such greater period of
time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii)permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of
vested shares of Common Stock for which such option is exercisable at
the time of the Optionee's cessation of Service but also with respect
to one or more additional installments in which the Optionee would have
vested under the option had the Optionee continued in Service.
D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. First Refusal Rights. Until such time as the Common Stock
is first registered under Section 12(g) of the 1934 Act, the Corporation shall
have the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator set forth in the document
evidencing such right.
G. Limited Transferability of Options. During the lifetime of
the Optionee, Incentive Options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, a
Non-Statutory Option may, in connection with the Optionee's estate plan, be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established exclusively
for the benefit of one or more such family members. The assigned portion may
only be exercised by the person or persons who acquire a proprietary interest in
the option pursuant to the assignment. The terms applicable to the assigned
portion shall be the same as those in effect for the option immediately prior to
such assignment and shall be set forth in such documents issued to the assignee
as the Plan Administrator may deem appropriate.
H. Market Lock-Up. In connection with any underwritten public
offering by the Corporation of its equity securities pursuant to an effective
registration statement filed under the Securities Act of 1933, including the
Corporation's initial public offering, the Optionee may not sell, make any short
sale of, loan, hypothecate, pledge, grant any option for the purchase of, or
otherwise dispose or transfer for value or otherwise agree to engage in any of
the foregoing transactions with respect to, any shares of Common Stock acquired
upon exercise of an option granted under the Plan without the prior written
consent of the Corporation or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be requested by
the Corporation or such underwriters. The Optionee shall be required to execute
such agreements as the Corporation or the underwriters request in connection
with the Market Stand-Off.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A.Eligibility. Incentive Options may only be granted to Employees.
B.Exercise Price. The exercise price per share shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is granted
is a 10% Stockholder, then the exercise price per share shall not be less than
one hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date, and the option term shall not exceed five (5)
years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) or to be replaced with a comparable option to purchase shares of the
capital stock of the successor corporation (or parent thereof), (ii) such option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to such option or (iii) the acceleration of
such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant. The determination of option comparability under
clause (i) above shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Notwithstanding Section III.A. and Section III.B. of this
Article Two, the Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction, whether
or not those options are to be assumed or replaced (or those repurchase rights
are to be assigned) in the Corporate Transaction. The Plan Administrator shall
also have the discretion to grant options which do not accelerate whether or not
such options are assumed (and to provide for repurchase rights that do not
terminate whether or not such rights are assigned) in connection with a
Corporate Transaction.
D. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction, (ii) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same and (iii) the maximum number of securities
and/or class of securities for which any one person may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances under the Plan.
F. The Plan Administrator shall have the discretion,
exercisable at the time the option is granted or at any time while the option
remains outstanding, to provide for the automatic acceleration of any options
which are assumed or replaced in a Corporate Transaction and do not otherwise
accelerate at that time (and the termination of any of the Corporation's
outstanding repurchase rights which do not otherwise terminate at the time of
the Corporate Transaction) in the event the Optionee's Service should
subsequently terminate by reason of an Involuntary Termination within eighteen
(18) months following the effective date of such Corporate Transaction. Any
options so accelerated shall remain exercisable for fully-vested shares until
the earlier of (i) the expiration of the option term or (ii) the expiration of
the one (1)-year period measured from the effective date of the Involuntary
Termination.
G. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to (i) provide for the automatic acceleration of one
or more outstanding options (and the automatic termination of one or more
outstanding repurchase rights with the immediate vesting of the shares of Common
Stock subject to those rights) upon the occurrence of a Change in Control or
(ii) condition any such option acceleration (and the termination of any
outstanding repurchase rights) upon the subsequent Involuntary Termination of
the Optionee's Service within a specified period (not to exceed eighteen (18)
months) following the effective date of such Change in Control. Any options
accelerated in connection with a Change in Control shall remain fully
exercisable until the expiration or sooner termination of the option term.
H. The portion of any Incentive Option accelerated in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Non-Statutory Option under the Federal tax laws.
I. The grant of options under the Discretionary Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Discretionary
Option Grant Program and to grant in substitution new options covering the same
or different number of shares of Common Stock but with an exercise price per
share based on the Fair Market Value per share of Common Stock on the new grant
date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority
to grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise
of tandem stock appreciation rights:
(i)One or more Optionees may be granted the right, exercisable upon such
terms as the Plan Administrator may establish, to elect between the exercise of
the underlying option for shares of Common Stock and the surrender of that
option in exchange for a distribution from the Corporation in an amount equal to
the excess of (a) the Fair Market Value (on the option surrender date) of the
number of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (b) the aggregate
exercise price payable for such shares.
(ii) No such option surrender shall be effective unless it is approved by
the Plan Administrator. If the surrender is so approved, then the distribution
to which the Optionee shall be entitled may be made in shares of Common Stock
valued at Fair Market Value on the option surrender date, in cash, or partly in
shares and partly in cash, as the Plan Administrator shall in its sole
discretion deem appropriate.
(iii) If the surrender of an option is rejected by the Plan Administrator,
then the Optionee shall retain whatever rights the Optionee had under the
surrendered option (or surrendered portion thereof) on the option surrender date
and may exercise such rights at any time prior to the later of (a) five (5)
business days after the receipt of the rejection notice or (b) the last day on
which the option is otherwise exercisable in accordance with the terms of the
documents evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of limited stock
appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each such individual
holding one or more options with such a limited stock appreciation right shall
have the unconditional right (exercisable for a thirty (30)-day period following
such Hostile Take-Over) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of Common Stock.
In return for the surrendered option, the Optionee shall receive a cash
distribution from the Corporation in an amount equal to the excess of (a) the
Take-Over Price of the shares of Common Stock which are at the time vested under
each surrendered option (or surrendered portion thereof) over (b) the aggregate
exercise price payable for such shares. Such cash distribution shall be paid
within five (5) days following the option surrender date.
(iii) Neither the approval of the Plan Administrator nor the consent of the
Board shall be required in connection with such option surrender and cash
distribution.
(iv) The balance of the option (if any) shall continue in full force and
effect in accordance with the documents evidencing such option.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall not be less than one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the issuance date
unless otherwise determined by the Plan Administrator.
2. Subject to the provisions of Section I of Article Six, shares of Common
Stock may be issued under the Stock Issuance Program for any of the following
items of consideration which the Plan Administrator may deem appropriate in each
individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance Program may, in
the discretion of the Plan Administrator, be fully and immediately vested upon
issuance or may vest in one or more installments over the Participant's period
of Service or upon attainment of specified performance objectives.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect to any
shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding one or
more unvested shares of Common Stock issued under the Stock Issuance Program or
should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further stockholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant's purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights
under the Stock Issuance Program shall terminate automatically, and all the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, in the event of any Corporate Transaction, except to the extent (i)
those repurchase rights are assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
B. Notwithstanding Section II.A. of this Article Three, the
Plan Administrator shall have the discretionary authority, exercisable either at
the time the unvested shares are issued or any time while the Corporation's
repurchase rights remain outstanding under the Stock Issuance Program, to
provide that those rights shall automatically terminate in whole or in part, and
the shares of Common Stock subject to those terminated rights shall immediately
vest, in the event of a Corporate Transaction, whether or not those repurchase
rights are to be assigned to the successor corporation (or its parent) in
connection with such Corporate Transaction. The Plan Administrator shall also
have the discretion to provide for repurchase rights with terms different from
those in effect under this Section II in connection with a Corporate
Transaction.
C. The Plan Administrator shall have the discretion,
exercisable either at the time the unvested shares are issued or at any time
while the Corporation's repurchase rights remain outstanding, to provide that
any repurchase rights that are assigned in the Corporate Transaction shall
automatically terminate, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event the Participant's
Service should subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of such Corporate
Transaction.
D. The Plan Administrator shall have the discretion,
exercisable either at the time the unvested shares are issued or at any time
while the Corporation's repurchase right remains outstanding, to (i) provide for
the automatic termination of one or more outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those rights upon the
occurrence of a Change in Control or (ii) condition any such accelerated vesting
upon the subsequent Involuntary Termination of the Participant's Service within
a specified period (not to exceed eighteen (18) months) following the effective
date of such Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
IV. MARKET LOCK-UP
In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the Securities Act of 1933, including the Corporation's
initial public offering, the Optionee may not sell, make any short sale of,
loan, hypothecate, pledge, grant any option for the purchase of, or otherwise
dispose or transfer for value or otherwise agree to engage in any of the
foregoing transactions with respect to, any shares of Common Stock acquired
under the Plan without the prior written consent of the Corporation or its
underwriters. Such restriction (the "Market Stand-Off") shall be in effect for
such period of time from and after the effective date of the final prospectus
for the offering as may be requested by the Corporation or such underwriters.
The Optionee shall be required to execute such agreements as the Corporation or
the underwriters request in connection with the Market Stand-Off.
<PAGE>
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified below:
1. Each individual serving as a non-employee Board member on the
Underwriting Date shall automatically be granted at that time a Non-Statutory
Option to purchase 16,250*/ shares of Common Stock, provided that individual has
not previously been in the prior employ of the Corporation or any Parent or
Subsidiary.
2. Each individual who is first elected or appointed as a non-employee
Board member on or after the Underwriting Date shall automatically be granted,
on the date of such initial election or appointment, a Non-Statutory Option to
purchase 16,250*/ shares of Common Stock, provided such individual has not
previously been in the employ of the corporation (or any Parent or Subsidiary).
3. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, shall automatically be granted a Non-Statutory Option to purchase an
additional 6,500*/ shares of Common Stock, provided such individual has served
as a non-employee Board member for at least six (6) months. There shall be no
limit on the number of such 6,500*/-share option grants any one Eligible
Director may receive over his or her period of Board service.
B. Exercise Price.
1. The exercise price per share shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
- ------------------------
*/ The share numbers have been adjusted to reflect the 11,250 for 1 stock split
expected to be effected by the Corporation prior to December 31, 1996.
C. Option Term. Each option shall have a term of ten (10) years measured from
the option grant date.
D. Exercise and Vesting of Options. Each option shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each initial grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) successive
equal annual installments over the Optionee's period of continued service as a
Board member, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant date.
Each annual grant shall vest, and the Corporation's repurchase right shall
lapse, upon the Optionee's completion of one (1) year of Board service measured
from the option grant date.
E. Effect of Termination of Board Service. The following
provisions shall govern the exercise of any options held by the Optionee at the
time the Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following the date
of such cessation of Board service in which to exercise each such
option.
(ii) During the twelve (12)-month exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of
those shares as fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the
twelve (12)-month exercise period or (if earlier) upon the expiration
of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's
cessation of Board service for any reason other than death or Permanent
Disability, terminate and cease to be outstanding to the extent the
option is not otherwise at that time exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Change in Control, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Each such option shall remain exercisable
for such fully-vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee
shall have a thirty (30)-day period in which to surrender to the Corporation
each of his or her outstanding automatic option grants. The Optionee shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock at
the time subject to each surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate exercise
price payable for such shares. Such cash distribution shall be paid within five
(5) days following the surrender of the option to the Corporation. No approval
or consent of the Board or any Plan Administrator shall be required in
connection with such option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
<PAGE>
ARTICLE FIVE
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
Each non-employee Board member may elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board to the acquisition of a special option grant under this
Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and conditions
specified below.
A. Exercise Price.
1. The exercise price per share shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall become immediately due upon exercise of the
option and shall be payable in one or more of the alternative forms authorized
under the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common
Stock subject to the option shall be such that the value of the option (as
determined on the date of the option grant using the Black-Scholes valuation
model) shall be equal to the amount of the retainer fee subject to the election.
C. Exercise and Term of Options. The option shall become
exercisable for fifty percent (50%) of the option shares upon the Optionee's
completion of six (6) months of Board service in the calendar year for which his
or her election under this Director Fee Option Grant Program is in effect, and
the balance of the option shares shall become exercisable in a series of six (6)
successive equal monthly installments upon the Optionee's completion of each
additional month of Board service during that calendar year. Each option shall
have a maximum term of ten (10) years measured from the option grant date.
D. Termination of Board Service. Should the Optionee cease
Board service for any reason (other than death or Permanent Disability) while
holding one or more options under this Director Fee Option Grant Program, then
each such option shall remain exercisable, for any or all of the shares for
which the option is exercisable at the time of such cessation of Board service,
until the earlier of (i) the expiration of the ten (10)-year option term or (ii)
the expiration of the three (3)-year period measured from the date of such
cessation of Board service. However, each option held by the Optionee under this
Director Fee Option Grant Program at the time of his or her cessation of Board
service shall immediately terminate and cease to remain outstanding with respect
to any and all shares of Common Stock for which the option is not otherwise at
that time exercisable.
E. Death or Permanent Disability. Should the Optionee's
service as a Board member cease by reason of death or Permanent Disability, then
each option held by such Optionee under this Director Fee Option Grant Program
shall immediately become exercisable for all the shares of Common Stock at the
time subject to that option, and the option may be exercised for any or all of
those shares as fully-vested shares until the earlier of (i) the expiration of
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but
while holding one or more options under this Director Fee Option Grant Program,
then each such option may be exercised, for any or all of the shares for which
the option is exercisable at the time of the Optionee's cessation of Board
service (less any shares subsequently purchased by Optionee prior to death), by
the personal representative of the Optionee's estate or by the person or persons
to whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution. Such right of exercise
shall lapse, and the option shall terminate, upon the earlier of (i) the
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the
Optionee remains a Board member, each outstanding option held by such Optionee
under this Director Fee Option Grant Program shall automatically accelerate so
that each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable with respect to the total number
of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
Each such outstanding option shall be assumed by the successor corporation (or
parent thereof) in the Corporate Transaction and shall remain exercisable for
the fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall immediately become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earlier or (i) the expiration
of the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.
C. Upon the occurrence of a Hostile Take-Over, the Optionee
shall have a thirty (30)-day period in which to surrender to the Corporation
each of his or her outstanding option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.
D. The grant of options under the Director Fee Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director
Fee Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
<PAGE>
ARTICLE SIX
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee or
Participant to pay the option exercise price under the Discretionary Option
Grant Program or the purchase price for shares issued under the Stock Issuance
Program by delivering a full-recourse, interest bearing promissory note payable
in one or more installments. The terms of any such promissory note (including
the interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In all events, the maximum credit
available to the Optionee or Participant may not exceed the sum of (i) the
aggregate option exercise price or purchase price payable for the purchased
shares plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
B. The Plan Administrator may, in its discretion, determine
that one or more such promissory notes shall be subject to forgiveness by the
Corporation in whole or in part upon such terms as the Plan Administrator may
deem appropriate.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of options or upon the issuance or vesting of such
shares under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any
or all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options granted or the shares issued under the
Automatic Option Grant or Director Fee Option Grant Program) with the right to
use shares of Common Stock in satisfaction of all or part of the Taxes incurred
by such holders in connection with the exercise of their options or the vesting
of their shares. Such right may be provided to any such holder in either or both
of the following formats:
(i)Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the
exercise of such Non-Statutory Option or the vesting of such shares, a
portion of those shares with an aggregate Fair Market Value equal to
the percentage of the Taxes (not to exceed one hundred percent (100%))
designated by the holder.
(ii)Stock Delivery: The election to deliver to the Corporation,
at the time the Non-Statutory Option is exercised or the shares vest,
one or more shares of Common Stock previously acquired by such holder
(other than in connection with the option exercise or share vesting
triggering the Taxes) with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%))
designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on the Plan Effective Date.
Options may be granted under the Discretionary Option Grant and Automatic Option
Grant Programs at any time on or after the Plan Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall terminate upon the earliest of (i) October
1, 2006, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such Plan
termination, all outstanding options and unvested stock issuances shall continue
to have force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect any rights and obligations with
respect to options, stock appreciation rights or unvested stock issuances at the
time outstanding under the Plan unless the Optionee or the Participant consents
to such amendment or modification. In addition, amendments to the Plan shall be
subject to approval of the Corporation's stockholders to the extent required by
applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program and shares of Common Stock may be
issued under the Stock Issuance Program that are in each instance in excess of
the number of shares then available for issuance under the Plan, provided any
excess shares actually issued under those programs are held in escrow until
there is obtained stockholder approval of an amendment sufficiently increasing
the number of shares of Common Stock available for issuance under the Plan. If
such stockholder approval is not obtained within twelve (12) months after the
date the first such excess grants or issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option
or stock appreciation right under the Plan and the issuance of any shares of
Common Stock (i) upon the exercise of any option or stock appreciation right or
(ii) under the Stock Issuance Program shall be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options and stock appreciation rights
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued
or delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws and all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
<PAGE>
A-6.
APPENDIX
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
B. Board shall mean the Corporation's Board of Directors.
C. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders,
which the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
E. Common Stock shall mean the Corporation's common stock.
F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
G. Corporation shall mean PSW Technologies, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of PSW Technologies, Inc. which shall by appropriate
action adopt the Plan.
H. Discretionary Option Grant Program shall mean the discretionary
option grant program in effect under the Plan.
I. Director Fee Option Grant Program shall mean the special stock
option grant in effect for non-employee Board members under Article Five of the
Plan.
J. Eligible Director shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
K. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the
Plan Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
N. Hostile Take-Over shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal
or discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her level of responsibility, (B) a reduction
in his or her level of compensation (including base salary, fringe
benefits and participation in corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under
the Discretionary Option Grant, Automatic Option Grant or Director Fee Option
Grant Program.
U. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for the purposes of the Automatic Option
Grant and Director Fee Option Grant Programs, Permanent Disability or
Permanently Disabled shall mean the inability of the non-employee Board member
to perform his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1996 Stock Option/Stock
Issuance Plan, as set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean October 2, 1996, the date on which
the Plan was adopted by the Board.
AA. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
BB. Secondary Committee shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
CC. Section 12(g) Registration Date shall mean the date on
which the Common Stock is first registered under Section 12(g) of the 1934 Act.
DD. Section 16 Insider shall mean an officer or director of
the Corporation subject to the short-swing profit liabilities of Section 16 of
the 1934 Act.
EE. Service shall mean the performance of services to the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
FF. Stock Exchange shall mean either the American Stock Exchange
or the New York Stock Exchange.
GG. Stock Issuance Agreement shall mean the agreement entered
into by the Corporation and the Participant at the time of issuance of shares
of Common Stock under the Stock Issuance Program.
HH. Stock Issuance Program shall mean the stock issuance program
in effect under the Plan.
II. Subsidiary shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
JJ. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
KK. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
LL. 10% Stockholder shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Corporation (or
any Parent or Subsidiary).
MM. Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
NN. Underwriting Date shall mean the date on which the Underwriting
Agreement is executed and the initial public offering price of the Common Stock
is established.
