SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Amendment No. ______________)
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/ / Preliminary proxy statement
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Rule 14a-6(e)(2))
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
Integrated Systems, Inc.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Integrated Systems, Inc.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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<PAGE>
[GRAPHIC OMITTED]
INTEGRATED SYSTEMS, INC.
201 Moffett Park Drive
Sunnyvale, California 94089
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Integrated Systems, Inc. (the "Company") will be held at the Company, 201
Moffett Park Drive, Sunnyvale, California, 94089 on July 17, 1996 at 2:00 p.m.
for the following purposes:
1. To elect six directors of the Company to serve until the next Annual
Meeting of Shareholders and until their respective successors have been
elected and qualified or until such directors' earlier resignation or
removal. The Company's Board of Directors has nominated the following
candidates: Narendra K. Gupta, John C. Bolger, Vinita Gupta, Thomas
Kailath, Richard C. Murphy and David P. St. Charles.
2. To ratify the selection of Coopers & Lybrand L.L.P. as independent
accountants for the Company for the current fiscal year.
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on May 20, 1996
are entitled to notice of and to vote at the meeting and any adjournments or
postponements thereof.
By Order of the Board of Directors
/s/ Narendra K. Gupta
------------------------------------
Narendra K. Gupta
Chairman of the Board
Sunnyvale, California
June 14, 1996
================================================================================
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN
IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
================================================================================
<PAGE>
[GRAPHIC OMITTED]
INTEGRATED SYSTEMS, INC.
201 Moffett Park Drive
Sunnyvale, California 94089
PROXY STATEMENT
June 14, 1996
The accompanying proxy is solicited on behalf of the Board of Directors
of Integrated Systems, Inc., a California corporation (the "Company"), for use
at the Annual Meeting of Shareholders of the Company to be held at the Company,
201 Moffett Park Drive, Sunnyvale, California, 94089 on July 17, 1996 at 2:00
p.m. (the "Meeting"). Only holders of record of the Company's Common Stock at
the close of business on May 20, 1996 will be entitled to vote at the Meeting.
At the close of business on that date, the Company had 22,103,512 shares of
Common Stock outstanding and entitled to vote. Shares will be deemed to be
represented at the meeting both where a shareholder specifically abstains from
voting and where a broker or other nominee holding shares for beneficial owners
is able to vote on certain matters at the Meeting pursuant to discretionary
authority or instruction from beneficial owners but with respect to other
matters may not have received instructions from the beneficial owner and may not
exercise voting power ("broker non-votes"). A majority, or 11,051,757 of these
shares, represented in person or by proxy, will constitute a quorum for the
transaction of business. This Proxy Statement and accompanying proxy will first
be mailed to shareholders on or about June 14, 1996.
VOTING RIGHTS; SOLICITATION AND REVOCABILITY OF PROXIES
Holders of Common Stock are entitled to one vote for each share held as
of the above record date. Any person signing a proxy in the form accompanying
this Proxy Statement has the power to revoke it prior to the Meeting or at the
Meeting prior to the vote pursuant to the proxy. A proxy may be revoked by a
writing delivered to the Secretary of the Company stating that the proxy is
revoked, by a subsequent proxy that is signed by the person who signed the
earlier proxy and is presented at the Meeting or by attendance at the Meeting
and voting in person. Please note, however, that if a shareholder's shares are
held of record by a broker, bank or other nominee, and that shareholder wishes
to vote at the Meeting, the shareholder must bring to the Meeting a letter from
the broker, bank or other nominee confirming that shareholder's beneficial
ownership of the shares.
The expenses of soliciting proxies in the form accompanying this Proxy
Statement will be paid by the Company. Following the original mailing of the
proxies and other soliciting materials, the Company will request brokers,
custodians, nominees and other record holders to forward copies of the proxy and
other soliciting materials to persons for whom they hold shares of Common Stock
and to request authority for the exercise of proxies. In such cases, the
Company, upon the request of the record holders, will reimburse such holders for
their reasonable expenses.
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<PAGE>
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
At the Meeting, shareholders will elect directors to hold office until
the next Annual Meeting of Shareholders and until their respective successors
have been elected and qualified or until such directors' earlier resignation or
removal. The size of the Company's Board of Directors (the "Board") is currently
set at six members. Shares represented by the accompanying proxy will be voted
for the election of the six nominees recommended by the Board unless the proxy
is marked in such a manner as to withhold authority so to vote. If any nominee
for any reason is unable to serve or for good cause will not serve, the proxies
may be voted for such substitute nominee as the proxy holder may determine. The
Company is not aware of any nominee who will be unable to or for good cause will
not serve as a director. Directors are elected by a plurality of the shares
voting, in person or by proxy, at the Annual Meeting. The six nominees receiving
the highest number of affirmative votes of the shares entitled to be voted for
them will be elected. Votes withheld, abstentions and broker non-votes shall
have no legal effect.
Directors/Nominees
The names of the nominees, and certain information about them
(including their respective terms of service), are set forth below:
Director
Name of Nominee Age Principal Occupation Since
- --------------- --- -------------------- --------
Narendra K. Gupta 47 Chairman of the Board and 1980
Secretary of the Company
David P. St. Charles 47 President and Chief Executive Officer 1993
of the Company
John C. Bolger (1)(2) 49 Private Investor 1993
Vinita Gupta (1) 45 Chairperson of the Board and 1980
Chief Executive Officer,
Digital Link Corporation
Thomas Kailath (1) 60 Professor of Engineering, 1980
Stanford University
Richard C. Murphy (2) 51 Business Consultant 1994
- ----------------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
All nominees were reelected at the Company's Annual Meeting of
Shareholders held on July 18, 1995.
Dr. Gupta is a founder of the Company and has been a director of the
Company since its formation in 1980. He has been the Chairman of the Board of
the Company since March 1993 and Secretary since September 1989. Dr. Gupta was
Chief Executive Officer from 1988 to May 1994 and President from the Company's
formation in 1980 to May 1994. He was elected a Fellow of the Institute of
Electrical and Electronic Engineers ("IEEE") in November 1991. Dr. Gupta is
currently also a director of Digital Link Corporation, a data communications and
wide-area networking equipment manufacturer, and Simulation Sciences, Inc., a
developer of chemical simulation software. Dr. Gupta holds an M.S. in
engineering from the California Institute of Technology and a Ph.D. degree in
Engineering from Stanford University. He is Vinita Gupta's husband.
Mr. St. Charles joined the Company in August 1993 and was appointed
President and Chief Executive Officer of the Company in May 1994. He has been a
director since he joined the Company in August 1993. From April 1990 until
August 1993, Mr. St. Charles served as President and a director of Wind River
Systems, Inc., a real-time software company. Mr. St. Charles holds a B.A. in
Liberal Arts and an M.A. in International Economics from Carleton University and
an M.S. from the Sloan School of Management at the Massachusetts Institute of
Technology.
Mr. Bolger has been a director of the Company since July 1993. He
served as Vice President, Finance and Administration, and Secretary of Cisco
Systems, Inc., a networking software company, from 1989 until his retirement in
1992. Mr. Bolger is currently also a director of Integrated Device Technology,
Inc., a semiconductor manufacturer, McAffee Associates, a software company,
TCSI, a communication software company, and Sanmina
-2-
<PAGE>
Corporation, a backplane and contract assembly manufacturer. He holds a B.A. in
English Literature from the University of Massachusetts and an M.B.A. from
Harvard University.
Mrs. Gupta has been a director of the Company since its formation in
1980. Since May 1985, she has been Chairperson and Chief Executive Officer of
Digital Link Corporation, a datacommunications and wide-area networking
equipment manufacturer. Mrs. Gupta holds an M.S. degree in Electrical
Engineering from the University of California, Los Angeles. She is Narendra K.
Gupta's spouse.
Dr. Kailath is a founder of the Company and has been a director of the
Company since its formation in 1980. He served as Vice Chairman of the Board of
Directors from January 1990 to March 1993 and Chairman of the Board of Directors
from April 1980 to January 1990. He is currently the Hitachi America Professor
of Engineering at Stanford University, where he has been on the faculty since
January 1963. Dr. Kailath is a member of the National Academy of Engineering,
the American Academy of Arts and Sciences and a Fellow of the IEEE. Dr. Kailath
holds M.S. and Sc.D., both in Electrical Engineering from the Massachusetts
Institute of Technology.
Mr. Murphy has been a director of the Company since December 1994. He
is a self-employed business consultant. Mr. Murphy is currently also a director
of Objectivity, Inc., an object database software company, Ashlar, Inc., a
personal computer professional engineering software company and iXOS Software
Inc., a distributor of image management software. He holds a B.S. in Mechanical
Engineering from the University of Illinois and an M.B.A. from Northwestern
University.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION
OF EACH OF THE NOMINEES LISTED ABOVE.
Board of Directors' Meetings and Committees
The Board met nine times and acted by unanimous written consent once
during the year ended February 28, 1996. All directors attended every meeting of
the Board and of the committees of the Board on which he or she served.
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or a
committee performing a similar function.
Mr. Bolger and Mr. Murphy are currently the members of the Audit
Committee. The Audit Committee met once during fiscal 1996. The Audit Committee
meets with the Company's independent accountants to review the adequacy of the
Company's internal control systems and financial reporting procedures, reviews
the general scope of the Company's annual audit and the fees charged by the
independent accountants and reviews and monitors the performance of non-audit
services by the Company's independent accountants.
Mr. Bolger, Mrs. Gupta and Dr. Kailath are currently the members of the
Company's Compensation Committee. The Compensation Committee met six times and
acted by unanimous written consent once during fiscal 1996. The Compensation
Committee administers the Company's 1988 Stock Option Plan and 1990 Employee
Stock Purchase Plan and determines salaries and other compensation for officers
and employees.
The Company paid Mr. Bolger, Mrs. Gupta, Dr. Kailath and Mr. Murphy
$17,500 each in directors' fees for activities performed on behalf of the
Company during fiscal 1996.
In March 1994 the Board adopted the 1994 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 400,000 shares of the Company's
Common Stock for issuance thereunder. The shareholders approved the adoption of
the Directors Plan in July 1994. The Directors Plan provides for the automatic
grant of a nonqualified stock option to purchase 15,000 shares of the Company's
Common Stock to each nonemployee director who was serving on the Board at the
time of the Board's adoption of the Directors Plan or who becomes a member of
the Board for the first time after the effective date of the Directors Plan. In
addition, the Directors Plan provides for automatic annual grants of
nonqualified options to purchase 5,000 shares of the Company's Common Stock to
each nonemployee director on the anniversary of such director joining the Board,
as long as the optionee remains a member of the Board. In accordance with the
Directors Plan, the following options were granted during fiscal 1996: John C.
Bolger was granted an option to purchase 10,000 shares of Common Stock at an
exercise price of $15.00 per share, Vinita Gupta and Thomas Kailath were each
granted an option to purchase 10,000 shares of Common Stock at an exercise price
of $11.1250 per share, Richard C. Murphy was granted an option to purchase
10,000 shares of Common Stock at an exercise price of $18.3750 per share. As of
May 20, 1996, options to purchase 150,000 shares had been granted, no options
had been exercised and 250,000 shares were available for future grants pursuant
to the Directors Plan. These option grant and exercise price numbers reflect a
two-for-one stock split of the Company's Common Stock, which occurred in April
1996.
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<PAGE>
PROPOSAL NO. 2 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Company has selected Coopers & Lybrand L.L.P. as its principal
independent accountants to perform the audit of the Company's financial
statements for the current fiscal year, and the shareholders are being asked to
ratify this selection. Coopers & Lybrand L.L.P. has audited the Company's
financial statements for the past ten fiscal years. Representatives of Coopers &
Lybrand L.L.P. will be present at the Meeting, will be given an opportunity to
make a statement at the Meeting if they desire to do so and will be available to
respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RATIFICATION OF THE SELECTION OF COOPERS & LYBRAND L.L.P.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
The following table sets forth certain information, as of May 20, 1996,
with respect to the beneficial ownership of the Company's Common Stock by (i)
each shareholder known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock, (ii) each director and nominee, (iii) each
executive officer named in the Summary Compensation Table below and (iv) all
officers and directors as a group.
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership (1) Percent of Class
------------------- ------------------------ ----------------
<S> <C> <C>
Narendra K. and Vinita Gupta (2)(3)(4) 4,748,312 21.5%
Nevis Capital Management (5) 1,944,600 8.8%
Thomas Kailath (4)(6) 820,312 3.7%
Robert M. Dressler (4) 64,025 *
David P. St. Charles (4) 32,270 *
John C. Bolger (4) 19,500 *
Richard C. Murphy (4) 13,333 *
Tony Tolani (4) 12,666 *
Joseph Addiego (4) 11,004 *
All officers and directors as a group (13 persons) (4) 5,799,032 26.2%
<FN>
- ----------------------------------
* Less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws.
(2) The address of this shareholder is c/o Integrated Systems, Inc., 201
Moffett Park Drive, Sunnyvale, CA, 94089.
(3) Represents (i) 3,720,200 shares of Common Stock held of record by Dr.
and Mrs. Gupta, (ii) 1,000,000 shares held of record by them, together
with a third party, as trustees for their children, as to which they
disclaim beneficial ownership, (iii) 7,800 shares held by Dr. Gupta as
custodian for his daughter under the Uniform Gifts to Minors Act, as to
which he disclaims beneficial ownership and (iv) 20,312 shares subject
to options held by Mrs. Gupta that are exercisable within 60 days of
May 20, 1996.
(4) Includes 20,312 shares for Mrs. Gupta, 20,312 shares for Dr. Kailath,
62,833 shares for Dr. Dressler, 31,750 shares for Mr. St. Charles,
15,500 shares for Mr. Bolger, 13,333 shares for Mr. Murphy, 12,666
shares for Dr. Tolani, 7,984 shares for Mr. Addiego and 255,690 shares
for all directors and officers as a group that are subject to options
and are exercisable within 60 days after May 20, 1996.
(5) The address of this shareholder is Nevis Capital Management, Inc., 1119
St. Paul Street, Baltimore, Maryland, 21202. As of January 3, 1996,
Nevis Capital Management ("Nevis") reported on Schedule 13G filed with
the SEC that it beneficially owned 1,890,600 shares (reflects a
two-for-one stock split of the Company's Common Stock effective April
5, 1996) of the Company's Common Stock. Nevis has since orally informed
the Company that, as of May 20, 1996, it owned 1,944,600 shares of the
Company's Common Stock.
(6) Represents (i) 409,000 shares of Common Stock held of record by Dr.
Kailath and his wife as trustees of a revocable trust, (ii) 362,000
shares held of record by them, together with a third party, as trustees
for their three children, (iii) 29,000 shares held by Dr. Kailath as
custodian for his son under the Uniform Gifts to Minors Act and (iv)
20,312 shares subject to options held by Dr. Kailath that are
exercisable within 60 days of May 20, 1996.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid
to the Company's Chief Executive Officer and the Company's four most highly
compensated executive officers, other than the Chief Executive Officer, who were
serving as executive officers at the end of fiscal 1996, for services rendered
in all capacities to the Company and its subsidiaries during each of fiscal
1994, 1995 and 1996. This information includes the dollar values of base
salaries and bonus awards, the number of stock options granted and certain other
compensation, if any, whether paid or deferred. The Company does not grant stock
appreciation rights ("SARs") and has no long-term compensation benefits other
than options.
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------- -------------
Securities All Other
Underlying Compensa-
Name and Salary (1) Bonus (2) Options (3) tion (4)
Principal Position Year ($) ($) (#) ($)
- ------------------ ---- ---------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
David P. St. Charles FY96 $209,056 $90,000 60,000 $1,397
President and CEO FY95 $184,631 $58,586 50,000 $2,353
FY94 $87,506 $59,784 400,000 --
Narendra K. Gupta FY96 $174,434 $65,000 -- $2,357
Chairman and Secretary FY95 $159,438 $40,278 -- $2,356
FY94 $144,633 $39,856 -- $2,383
Joseph Addiego FY96 $249,222 $15,000 20,000 $2,211
Vice President, FY95 $214,504 $10,000 30,000 $2,395
North American Sales FY94 $170,274 $10,000 60,000 $1,860
Tony Tolani FY96 $207,341 $10,000 -- $1,327
Vice President, FY95(5) $28,307 15,000 40,000 $431
Far East Operations FY94 -- -- -- --
Robert Dressler FY96 $134,628 $34,000 -- $2,333
Vice President, FY95 $124,816 $25,631 20,000 $2,374
Advanced Systems Group FY94 $119,708 $23,914 30,000 $2,313
<FN>
(1) Includes commissions and deferrals for 401(k) and Section 125 Plans.
(2) Represents bonuses earned for services rendered during the fiscal year
listed, but does not include bonuses paid during the fiscal year listed
for services rendered during a prior fiscal year.
(3) Reflects a 2-for-1 stock split of the Company effective April 5, 1996.
(4) Represents employer matching contributions to 401(k) Plan accounts.
(5) Amounts listed are for a partial fiscal year from the time Dr. Tolani
became an executive officer of the Company on December 12, 1994 through
the end of the fiscal year.
</FN>
</TABLE>
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<PAGE>
The following table sets forth further information regarding individual grants
of options for the Company's Common Stock during fiscal 1996 to each of the
executive officers named in the Summary Compensation Table above. All such
grants were made pursuant to the Company's 1988 Stock Option Plan. In accordance
with the rules of the SEC, the table sets forth the hypothetical gains or
"option spreads" that would exist for the options at the end of their respective
ten-year terms based on assumed annualized rates of compound stock price
appreciation of 5% and 10% from the dates the options were granted to the end of
the respective option terms. Actual gains, if any, on option exercises are
dependent on the future performance of the Company's Common Stock and overall
market conditions. There can be no assurance that the potential realizable
values shown in this table will be achieved.
OPTION GRANTS IN FISCAL 1996
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants (1) For Option Term (3)
------------------------------------- ----------------------
Number % of
of Total
Securities Options
Underlying Granted Exercise
Options in or Base Expira-
Granted Fiscal Price tion
Name (2) (#) 1996 $/Share Date 5% ($) 10% ($)
- -------------------- ------------- ------ -------- -------- -------- --------
David P. St. Charles 60,000 7.1235 $10.8750 3/31/05 $410,354 $1,039,917
Narendra K. Gupta -- -- -- -- -- --
Joseph Addiego 20,000 2.3745 $14.6250 9/5/05 $183,952 $466,170
Tony Tolani -- -- -- -- -- --
Robert M. Dressler -- -- -- -- -- --
(1) Reflects a two-for-one stock split of the Company's Common Stock, which
was effective on April 5, 1996.
(2) Stock options are granted with an exercise price equal to the fair
market value of the Company's Common Stock on the date of grant. Under
the 1988 Plan, options are permitted to be exercised for up to ten
years, except that an ISO granted to a 10% shareholder of the Company
can only be exercised for five years. Options generally become
exercisable over a period of five years, at a rate of 20% on the first
anniversary date after the date of grant and then 1/60th of the shares
granted at the end of each month thereafter.
(3) The 5% and 10% assumed rates of annual compound stock price
appreciation are mandated by the rules of the SEC and do not represent
the Company's estimate or projection of future Common Stock prices.
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<PAGE>
<TABLE>
The following table sets forth certain information concerning the exercise of
stock options during fiscal 1996 by each of the executive officers named in the
Summary Compensation Table above and the number and value at February 29, 1996
of unexercised options held by said individuals:
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND FEBRUARY 29, 1996 OPTION VALUES
<CAPTION>
Number of Value of
Securities Underlying Unexercised In-the-
Unexercised Options Money Options
at 2/29/96 (#) at 2/29/96 ($)
--------------------- -------------------
Shares
Acquired Value
on Realized Exer- Unexer- Exer- Unexer-
Name Exercise(1) ($) cisable cisable cisable cisable
- -------------------- ---------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David P. St. Charles 80,000 $640,625 175,833 204,166 $3,440,625 $3,549,375
Narendra K. Gupta -- -- -- -- -- --
Joseph Addiego 67,916 $727,802 36,484 80,000 $717,454 $1,300,688
Tony Tolani -- -- 9,333 30,667 $148,167 $468,833
Robert M. Dressler -- -- 58,667 31,333 $1,184,739 $570,885
<FN>
(1) Reflects a two-for-one stock split of the Company's Common Stock, which
was effective on April 5, 1996.
</FN>
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board makes all decisions involving
the compensation of executive officers of the Company. During fiscal 1996, the
Compensation Committee consisted of (1) John C. Bolger, (2) Vinita Gupta, Dr.
Narendra K. Gupta's spouse, and (3) Dr. Thomas Kailath.
During fiscal 1996, Dr. Gupta, who served as Chairman of the Board and
Secretary of the Company during fiscal 1996, served as a member of the Board of
Directors of Digital Link Corporation, of which Mrs. Gupta serves as Chairperson
of the Board and Chief Executive Officer.
From March 1, 1995 through May 20, 1996, there were transactions
totaling $77,000 in sales of products and services between Digital Link
Corporation, of which Vinita Gupta is Chairperson and Chief Executive Officer,
and the Company. Mrs. Gupta has been a director of the Company since its
formation in 1980. She is Dr. Narendra K. Gupta's spouse. Dr. Gupta is a member
of the Board of Directors of Digital Link Corporation. Dr. and Mrs. Gupta are
greater than 10 percent shareholders of both Digital Link Corporation and the
Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee Report on Executive Compensation shall not
be deemed to be incorporated by reference by any general statement incorporating
by reference this Proxy Statement into any filing under the Securities Act of
1933 or under the Securities Exchange Act of 1934, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
-7-
<PAGE>
Through the entire fiscal year 1996, the Compensation Committee of the
Board was comprised of three non-management directors of the Company, John
Bolger, Vinita Gupta and Thomas Kailath. Mr. David P. St. Charles, President and
Chief Executive Officer evaluated the performance of all executive officers and
recommended salary adjustments which were reviewed and approved by the
Compensation Committee. Performance evaluations for individual executive
officers are based on predetermined individual goals. For the Company's Chief
Executive Officer and Chairman of the Board, these goals are set by the
Compensation Committee, and for all other officers, these goals are recommended
by the Chief Executive Officer and reviewed and approved by the Compensation
Committee. Mr. St. Charles and Dr. Gupta did not participate in any discussions
regarding recommended salary adjustments for themselves.
The Compensation Committee is responsible for setting and administering
the policies governing annual compensation of the executive officers and the
Chairman of the Board of the Company. These policies are based upon the
philosophy that the Company's long-term success in its marketplace is best
achieved through recruitment and retention of the best people in the industry.
The Compensation Committee applies this philosophy in determining compensation
for Company executive officers in three areas: salary, bonuses and stock
options. The Compensation Committee believes that the compensation of the Chief
Executive Officer, the Chairman of the Board and the Company's other executive
officers should be greatly influenced by the Company's performance. Consistent
with this philosophy, a designated portion of the compensation of each executive
is contingent upon corporate performance and adjusted where appropriate, based
on an executive's performance against personal performance objectives. Each
executive officer's performance for the last fiscal year and objectives for the
subsequent year are reviewed, together with the executive's responsibility level
and the Company's fiscal performance versus objectives and potential performance
targets for the subsequent year. The Compensation Committee administers the
Company's equity plans, including the 1988 Stock Option Plan and the 1990
Employee Stock Purchase Plan.
Salary
The Company strives to offer salaries to its executive officers that
are competitive in its industry for similar positions requiring similar
qualifications. In determining executive officers salaries, the Compensation
Committee considers information provided by the Vice President, Human Resources
and Operations, whose recommendations are based upon salary surveys specific to
the Company's industry, size and geographic location. Such surveys are prepared
by an independent organization using information provided from over 300
companies. These surveys summarize information from companies that closely match
the Company in terms of such things as product or industry, geography and
revenue levels. To this end, the Compensation Committee attempted to compare the
compensation of the Company's executive officers with the compensation practices
of the survey companies to determine base salary, target bonuses and target
total cash compensation. In preparing the performance graph for this Proxy
Statement, the Company used the Hambrecht & Quist Technology Index as its
published line of business index. The compensation practices of most of the
companies in the Hambrecht & Quist Technology Index were not reviewed in detail
by the Company when the Compensation Committee reviewed the compensation
information discussed above because such companies were determined not to be
directly competitive with the Company for executive talent. In addition to their
base salaries, the Company's executive officers, including the Chief Executive
Officer and Chairman of the Board, are each eligible to receive a cash bonus and
are entitled to participate in the 1988 Stock Option Plan. The bonus for the
Chief Executive Officer, Chairman of the Board and for other executives is based
primarily on Company performance.
The foregoing information was presented to the Compensation Committee
in March 1996. The Compensation Committee reviewed the recommendations and
performance and market data outlined above and established a base salary level
to be effective March 1, 1996 for each executive officer, including the Chief
Executive Officer and Chairman of the Board. In addition to considering the
results of the performance evaluations and information concerning competitive
salaries, the Compensation Committee and Chief Executive Officer place primary
weight on the financial condition of the Company in considering salary
adjustments.
Bonuses
The Company seeks to provide additional incentives and rewards to
executives who make contributions of outstanding value to the Company. For this
reason, the Compensation Committee administers a bonus plan, which can comprise
a substantial portion of the total compensation of executive officers when
earned and paid.
The Compensation Committee determines annually the total amount of cash
bonuses available for executive officers. Awards under the plan are contingent
upon the performance of the Company as a whole, based upon the Company's
attaining certain revenue and operating profit goals set by the Board annually
in consultation with the Chief Executive Officer. The target amounts of bonuses
available to each executive officer are set annually by the Compensation
Committee in its discretion with regard to the Chief Executive Officer and
Chairman of the Board and by the Chief Executive Officer, subject to review and
approval by the Compensation Committee, with regard to executive officers other
than himself. In all cases, the relative target amounts for individual officers
are
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<PAGE>
based upon the total dollars available for bonuses, and historical and expected
future contributions by the individual executive officer. In fiscal 1996, the
objectives used by the Company as the basis for incentive compensation were
based primarily on Company performance. Executive officers earn a percentage of
the target amounts under the bonus plan relating to the achievement of the
performance goals under the plan by the Company, as determined by the Committee
annually in its discretion. Awards are weighted so that proportionately higher
awards are received when the Company's performance exceeds targets and
proportionately smaller or no awards are made when the Company does not meet
targets.
Stock Options
The Compensation Committee believes that employee equity ownership
provides significant additional motivation to executive officers to maximize
value for the Company's shareholders, and therefore recommends to the Board
periodic grants of stock options under the Company's 1988 Stock Option Plan.
Stock options are granted by the Compensation Committee in its discretion at the
prevailing market price and will have value only if the Company's stock price
increases over the exercise price. Therefore, the Compensation Committee
believes that stock options serve to align the interest of executive officers
closely with other shareholders because of the direct benefit executive officers
receive through improved stock performance.
The Compensation Committee makes option grants in its discretion after
consideration of recommendations from Mr. St. Charles and other members of the
Board. Recommendations for options are based upon relative positions and
responsibilities of executive officers, historical and expected contributions of
each executive officer to the Company, and previous option grants to such
executive officers. Options are recommended with a goal of providing equity
compensation for executive officers competitive with that of executive officers
of similar rank in other companies in the Company's industry, geographic
location and size. Stock options typically have been granted to executive
officers when the executive first joins the Company, in connection with a
significant change in responsibilities, and, occasionally, to achieve equity
within a peer group. The Committee in its discretion may, however, grant
additional stock options to executives for other reasons. The number of shares
subject to each stock option granted is based on anticipated future contribution
and ability to impact corporate results, past performance or consistency within
the executive's peer group. In fiscal 1996, the Committee considered these
factors, as well as the number of options held by such executive officers as of
the date of grant that remained unvested. Option grants for fiscal 1996 are set
forth in the table above entitled "Option Grants in Fiscal 1996".
Fiscal 1996 Chief Executive Officer Compensation
In March 1995, the Committee established a base salary for Mr. St.
Charles for fiscal 1996. This base salary represented an increase over Mr. St.
Charles' fiscal 1995 base salary. The Compensation Committee also established a
target bonus for Mr. St. Charles under the fiscal 1996 bonus plan. The fiscal
1996 base salary level and target bonus were based upon a number of factors,
including (a) the Compensation Committee's assessment of the fiscal 1995
performance of the Company and Mr. St. Charles, (b) fiscal 1996 Company
performance objectives and individual performance objectives and
responsibilities for Mr. St. Charles established in March 1995, and (c) the
market compensation data for companies in the same industry and geographic
location and similar in size to the Company in terms of revenue. These
objectives included satisfactorily managing the Company's overall corporate
business plan, such as meeting the Company's profitability projections and the
Company's sales targets, and strengthening the Company's financial position.
In fiscal 1996, the Compensation Committee granted Mr. St. Charles a
new stock option to purchase 60,000 shares. The number of shares granted was
based on Mr. St. Charles' position, fiscal 1995 performance and expected
performance in fiscal 1996 and beyond.
The Compensation Committee has concluded that Mr. St. Charles'
performance in fiscal 1996 warrants the compensation for fiscal 1996 as
reflected in the Summary Compensation Table.
Compliance with Section 162(m) of the Internal Revenue Code of 1986.
The Company intends to comply with the requirements of Section 162(m)
of the Internal Revenue Code of 1986 for 1996. The Company does not expect cash
compensation for 1996 to be in excess of $1,000,000 or consequently affected by
the requirements of Section 162(m).
COMPENSATION COMMITTEE
John C. Bolger
Vinita Gupta
Thomas Kailath
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<PAGE>
COMPANY STOCK PRICE PERFORMANCE GRAPH
The stock price performance graph below shall not be deemed
incorporated by reference to any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933, as
amended, or under the Securities Exchange Act of 1934, as amended, except to the
extent the Company specifically incorporates this information by reference, and
shall not otherwise be deemed soliciting material or filed under such Acts.
The graph below compares the cumulative total shareholder return of the
Common Stock of the Company from March 1, 1991 to February 28, 1996.
Federal regulation requires that each company's proxy statement
relating to the annual election of directors include a line graph comparing
cumulative total shareholder return on the Company's Common Stock with the
cumulative total return of (1) a broad equity market stock index and (2) a
published industry or line-of-business index (assuming the investment of $100 in
the Company's Common Stock and in each of the other indices on March 1, 1991,
and reinvestment of all dividends). The Board has approved the use of the Nasdaq
Composite Index and the Hambrecht & Quist Technology Index for these
requirements. The performance comparison appears below.
The Board and the Compensation Committee recognize that the market
price of the Company's Common Stock is influenced by many factors, only one of
which is Company performance. The Common Stock price performance shown on the
graph is not necessarily indicative of future price performance.
Total Returns with Dividends Reinvested from 3/1/91-2/28/96
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
Cumulative Total Return
----------------------------------------------------
3/1/91 8/31/91 2/28/92 8/31/92 2/28/93 8/31/93
NASDAQ Composit Index 100 116 140 124 148 164
H&Q Technology Index 100 107 130 112 131 135
Integrated Systems, Inc. 100 95 81 51 47 64
Cumulative Total Return
----------------------------------------------------
2/28/94 8/31/94 2/28/95 8/31/95 2/28/96
NASDAQ Composit Index 173 168 175 225 244
H&Q Technology Index 155 157 179 252 268
Integrated Systems, Inc. 87 95 156 213 342
CERTAIN TRANSACTIONS
From March 1, 1995 to the present, there have been no transactions
involving more than $60,000 between the Company and any executive officer,
director, 5% beneficial owner of the Company's Common Stock or member of the
immediate family of any of the foregoing persons, in which one of the foregoing
individuals or entities had a material interest, except as indicated below:
Those transactions described in this Proxy Statement under the Section
titled "Compensation Committee Interlocks and Insider Participation."
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<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock, to file with the SEC initial reports of beneficial
ownership and reports of changes in beneficial ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during fiscal 1996 all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% shareholders were
complied with except as follows: Dr. Robert Dressler, Vice President, Advanced
Systems Group, filed late one report covering one transaction relating to a sale
of 674 shares.
SHAREHOLDER PROPOSALS
Shareholder proposals for inclusion in the Company's Proxy Statement
and form of proxy relating to the Company's 1997 Annual Meeting of Shareholders
must be received by February 15, 1997.
OTHER BUSINESS
The Board does not presently intend to bring any other business before
the Meeting and, so far as is known to the Board, no matters are to be brought
before the Meeting except as specified in the notice of the Meeting. As to any
business that may properly come before the Meeting, however, it is intended that
proxies in the form accompanying this Proxy Statement will be voted in respect
thereof in accordance with the judgment of the persons voting such proxies.
By Order of the Board of Directors
/s/ Narendra K. Gupta
-----------------------------------
Narendra K. Gupta
Chairman of the Board
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ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN AND
DATE THE ACCOMPANYING PROXY AND RETURN IT IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. THANK YOU FOR
YOUR PROMPT ATTENTION TO THIS MATTER.
================================================================================
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