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 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)
Payment of filing fee (Check the appropriate box):
/X/ No fee required.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
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(2) Aggregate number of securities to which transactions applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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[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 15, 1997 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 consider and vote upon a proposal to amend the 1988 Stock Option
Plan to increase the number of shares reserved for issuance thereunder
by 1,000,000 to a total of 7,000,000 shares.
3. To ratify the selection of Coopers & Lybrand L.L.P. as independent
accountants for the Company for the current fiscal year.
4. 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 23, 1997
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 16, 1997
================================================================================
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 16, 1997
The accompanying proxy is solicited on behalf of the Board of Directors
of Integrated Systems, Inc., a California corporation (the "Company"), for use
at the Annual Meeting of Shareholders of the Company to be held at the Company,
201 Moffett Park Drive, Sunnyvale, California, 94089 on July 15, 1997 at 2:00
p.m. (the "Meeting"). Only holders of record of the Company's Common Stock at
the close of business on May 23, 1997 will be entitled to vote at the Meeting.
At the close of business on that date, the Company had 23,145,870 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 11,572,936 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 19, 1997.
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 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 have no legal
effect.
<TABLE>
Directors/Nominees
The names of the nominees, and certain information about them
(including their respective terms of service), are set forth below:
<CAPTION>
Director
Name of Nominee Age Principal Occupation Since
- --------------- --- -------------------- -----
<S> <C> <C> <C>
Narendra K. Gupta 48 Chairman of the Board and 1980
Secretary of the Company
David P. St. Charles 48 President and Chief Executive Officer 1993
of the Company
John C. Bolger (1) (2) 50 Retired Chief Financial Officer 1993
Cisco Systems, Inc.
Vinita Gupta 46 Chairperson of the Board 1980
Digital Link Corporation
Thomas Kailath (1) 61 Professor of Engineering, 1980
Stanford University
Richard C. Murphy (1) (2) 52 Director 1994
<FN>
- ----------------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
</TABLE>
All nominees were reelected at the Company's Annual Meeting of
Shareholders held on July 17, 1996.
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. degree from
the California Institute of Technology and a Ph.D. degree from Stanford
University. He is Vinita Gupta's husband.
Mr. St. Charles joined the Company in August 1993 and was appointed
President and Chief Executive Officer of the Company in May 1994. He has been a
director since he joined the Company in August 1993. From April 1990 until
August 1993, Mr. St. Charles served as President and a director of Wind River
Systems, Inc., a real-time software company. Mr. St. Charles holds a B.A. in
Liberal Arts and 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, McAfee 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 of Digital Link Corporation. In
addition, from May 1985 to September 1996, Mrs. Gupta served as President and
Chief Executive Officer of Digital Link Corporation. 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. degrees 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 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 five times and acted by unanimous written consent once
during the year ended February 28, 1997. All directors attended every meeting of
the Board and of the committees of the Board either in person or by phone on
which he or she served.
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or a
committee performing a similar function.
Mr. Bolger and Mr. Murphy are currently the members of the Audit
Committee. The Audit Committee met once during fiscal 1997. The Audit Committee
meets with the Company's independent accountants to review the adequacy of the
Company's internal control systems and financial reporting procedures, reviews
the general scope of the Company's annual audit and the fees charged by the
independent accountants and reviews and monitors the performance of non-audit
services by the Company's independent accountants.
Mr. Bolger, Mr. Murphy and Dr. Kailath are currently the members of the
Company's Compensation Committee. The Compensation Committee met six times and
acted by unanimous written consent once during fiscal 1997. The Compensation
Committee administers the Company's Stock Option Plans and 1990 Employee Stock
Purchase Plan and determines salaries and other compensation for officers and
employees.
The Company paid Mr. Bolger, Mrs. Gupta, Dr. Kailath and Mr. Murphy
$16,000 each in directors' fees during fiscal 1997.
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 1997: John C.
Bolger was granted an option to purchase 5,000 shares of Common Stock at an
exercise price of $28.25 per share, Vinita Gupta and Thomas Kailath were each
granted an option to purchase 5,000 shares of Common Stock at an exercise price
of $22.75 per share, and Richard C. Murphy was granted an option to purchase
5,000 shares of Common Stock at an exercise price of $20.75 per share. As of May
23, 1997, options to purchase 170,000 shares had been granted, 5,000 shares had
been issued upon exercise of options and 230,000 shares were available for
future grants pursuant to the Directors Plan.
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<PAGE>
PROPOSAL NO. 2 - APPROVAL OF AN AMENDMENT TO
1988 STOCK OPTION PLAN
Shareholders are being asked to approve an amendment to the Company's
1988 Stock Option Plan (the "1988 Plan") to increase the number of shares of
Common Stock reserved for issuance thereunder from 6,000,000 to 7,000,000
shares. The Board believes that amendment of the 1988 Plan to increase the
number of shares of Common Stock available for issuance pursuant to options
granted under the 1988 Plan is in the best interests of the Company. The
granting of options under the 1988 Plan plays an important role in the Company's
efforts to attract and retain employees of outstanding ability. The Board
believes that an increase of 1,000,000 shares in the reserves available for
issuance pursuant to options granted under the 1988 Plan is necessary to ensure
that the Company can continue to attract and retain outstanding employees and
executive officers as needed.
The Board approved the proposal amendment described above on March 28,
1997. Shareholder approval of the amendment requires the affirmative vote of a
majority of the shares of Common Stock present in person or represented by proxy
and entitled to vote at the meeting. Abstentions have the effect of a negative
vote, but broker non-votes do not affect the calculation.
Below is a summary of the principal provisions of the 1988 Plan as
proposed to be amended.
1988 Plan History
The 1988 Plan, which originally covered 2,000,000 shares of Common
Stock, was adopted by the Board and approved by the shareholders in September
1988. Amendments increasing the number of shares of Common Stock reserved for
issuance under the 1988 Plan were adopted by the Board in January 1992
(2,000,000 shares) and March 1994 (2,000,000 shares), and approved by the
shareholders in July 1992 and July 1994, respectively. In addition, the 1988
Plan was amended in 1994 to limit the number of shares of Common Stock issuable
to any optionee under the 1988 Plan, as amended, to 500,000 shares.
In 1997, to respond to the substantial increase in competitive attempts
to recruit employees essential to the success of the Company, the Compensation
Committee elected to reprice options. Competition for skilled engineers and
other key employees is intense and the use of significant options for retention
and motivation of such personnel is pervasive in the high technology industries.
The Compensation Committee believes that options are a critical component of the
compensation offered by the Company to promote long-term retention of key
employees, motivate high levels of performance and recognize employee
contributions to the success of the Company. The market price of the Company's
Common Stock decreased substantially from a high of $41.25 in September 1996 to
$8.75 in April 1997. In light of this substantial decline in the market price,
the Compensation Committee believed that the large numbers of outstanding stock
options with an exercise price in excess of the actual market price were no
longer an effective tool to encourage employee retention or to motivate high
levels of performance. As a result, in April 1997, the Compensation Committee
approved an option repricing program.
All employees, including executive officers, were eligible to
participate under the repricing program. All eligible optionees with options
that were granted under the Company's option plans, whether vested or unvested,
and that had exercise prices greater than the closing price on the Nasdaq
National Market on the date of the repricing, had the option to exchange such
options on a one-for-one basis. Options to purchase an aggregate of 1,222,632
shares of Common Stock were repriced, with new exercise prices ranging from
$8.75 to $10.50 per share, based on the closing price of the Common Stock on the
Nasdaq National Market on the date individual employees agreed to cancel their
original outstanding options. The vesting schedule of the new options was
adjusted to begin on the date individual employees agreed to cancel their
original outstanding options, with any prior vesting being forfeited.
As of May 23, 1997, options to purchase 2,910,430 shares are
outstanding and options for 470,256 shares are available for future grants under
the 1988 Plan. The amendment to the 1988 Plan will enable the Company to attract
senior executives to the Company as needed.
Administration
The 1988 Plan is administered by a Committee of the Board (the
"Committee") consisting of at lease three members of the Board who are
"disinterested persons" as that term is defined in the 1988 Plan, and, if there
are three or more "outside directors" as that term is defined pursuant to
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
each of the members of the Committee must also be an "outside director".
Subject to the terms of the 1988 Plan, the Committee determines the
persons who are to receive options, the number of shares subject to each option
and the terms and conditions of such options. The Committee also has the
authority to construe and interpret any of the provisions of the 1988 Plan of
any options granted thereunder.
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<PAGE>
Eligibility
The 1988 Plan provides that the options may be granted only to such
employees, officers, and directors and consultants of the Company or any parent,
subsidiary of affiliate of the Company (as such terms are defined in the 1988
Plan) as the Committee may determine (including directors who are also employees
or consultants) provided that only employees of the Company or a parent or
subsidiary of the Company may receive incentive stock options ("ISO's"). No
optionee is eligible to receive more than 500,000 shares under the 1988 Plan, as
amended. From the inception of the 1988 Plan in September 1988 to May 23, 1997,
options to purchase an aggregate of 5,529,744 shares (net of 3,349,012 shares
canceled) of the Company's Common Stock were granted under the 1988 Plan. Of
these, options to purchase a total of 1,558,000 shares were granted to each
executive officer named in the Summary Compensation Table, as follows: David St.
Charles, 770,000 shares, Naren Gupta, zero shares, Tony Tolani, 60,000 shares,
Joseph Addiego, 407,000 shares, Gregory Olson, 200,000 shares, and Andrew Pease,
70,000 shares. During the same period, options to purchase an aggregate of
2,109,000 shares of Common Stock were granted to all current executive officers
of the Company as a group (14 persons). No options were granted to current
directors or nominees for election as a director who are not executive officers
as a group (4 persons) or to associates of any such executive officers,
directors or nominees. As of May 23, 1997, approximately 521 persons were
eligible to receive options under the 1988 Plan, the cumulative number of shares
issued upon exercise of options since inception of the 1988 Plan was 2,619,314
and 2,910,430 shares were subject to outstanding options. As of that date,
470,256 shares were available for future option grants. The fair market value of
the Company's Common Stock on May 23, 1997 was $12.25 per share.
Stock
The stock subject to options under the 1988 Plan consists of the
Company's authorized but unissued Common Stock. The aggregate number of shares
issued under options pursuant to the 1988 Plan may not exceed 6,000,000
(7,000,000 if Proposal No. 2 is approved by the Company's shareholders). In the
event that any outstanding option under the 1988 Plan for any reason expires or
is terminated, the shares of Common Stock allocable to the unexercised portion
of such option may again be made subject to an option under the 1988 Plan.
Terms of Options
Subject to the terms and conditions of the 1988 Plan, the Committee, in
its discretion, determines for each option whether the option is to be an ISO or
a nonqualified stock option ("NQSO"), the number of shares for which the option
will be granted, the exercise price of the option, the periods during which the
option may be exercised, and other terms and conditions. Each option is
evidenced by an option grant in such form as the Committee approves and is
subject to the following conditions:
Option Price. The option exercise price may not be less than the fair
market value of the shares of Common Stock on the date of grant, provided
however that the option exercise price of an ISO granted to a 10% shareholder
may not be less than 110% of the fair market value of the shares of Common Stock
on the date of grant.
Form of Payment. The option exercise price is typically payable in cash
or by check. In addition, the option exercise price may also be payable in
shares of fully paid Common Stock of the Company that have been owned by an
optionee for more than six months, by promissory note, through a "same day sale"
or by a combination of the foregoing that the Committee may authorize.
Terms of Options and Vesting. 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
that were granted under the 1988 Plan prior to May 11, 1993 generally become
exercisable annually over a period of five years, at a rate of 20% on each
anniversary date after the date of grant. Options that were granted under the
1988 Plan between May 11, 1993 and December 12, 1996 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. Options that were granted under the 1988
Plan on or after December 13, 1996 generally become exercisable over a period of
four years, at a rate of 25% on the first anniversary date after the date of
grant and then 1/48th of the shares granted at the end of each month thereafter.
Termination of Employment. If an optionee ceases to be employed by the
Company, the optionee typically has three months (or twelve months in the case
of the employee's death or disability) to exercise any options exercisable on
the date employment ends.
Recapitalization. The number of shares subject to any option will be
adjusted in the event of a stock dividend, stock split, reverse stock split or
similar change relating to the Company's Common Stock. In the event of a
dissolution or certain types of acquisitions of the Company, if the options are
not assumed or substituted by a successor corporation, they will accelerate and
become exercisable in full prior to their termination.
Other Provisions. The option grant and exercise agreements authorized
under the 1988 Plan, which may be different for each option, may contain such
other provisions as the Committee deems advisable.
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<PAGE>
Term of the Plan
Options may be granted pursuant to the 1988 Plan from time to time
until September 1998, which is ten years after the date the 1988 Plan was
originally adopted by the board.
Federal Income Tax Information
THE FOLLOWING IS A GENERAL SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES TO THE
COMPANY AND PARTICIPANTS UNDER THE 1988 PLAN. THE FEDERAL TAX LAWS MAY CHANGE
AND THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPANT WILL
DEPEND UPON HIS OT HER INDIVIDUAL CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN AND
IS ENCOURAGED TO SEEK THE ADVICE OF A QUALIFIED TAX ADVISOR REGARDING THE TAX
CONSEQUENCES OF PARTICIPATION IN THE 1988 PLAN.
Incentive Stock Options. A Participant will recognize no income upon
grant of an ISO and incur no tax on its exercise (unless the Participant is
subject to the alternative minimum tax) (the "AMT"). If the Participant holds
shares acquired upon exercise of an ISO (the "ISO shares") for more than one
year after the date the option was exercised and for more than two years after
the date the option was granted, the Participant generally will realize
long-term capital gain or loss (rather than ordinary income or loss) upon
disposition of the ISO shares. This gain or loss will be equal to the difference
between the amount realized upon such disposition and the amount paid for the
ISO Shares.
If the Participant disposes of the ISO Shares prior to the expiration
of either required holding period (a "disqualifying disposition"), the gain
realized upon such disposition, up to the difference between the fair market
value of the ISO Shares on the date of exercise (or, if less, the amount
realized on a sale of such shares) and the option exercise price, will be
treated as ordinary income. Any additional gain will be long-term or short-term
capital gain, depending upon the amount of time the ISO Shares were held by the
Participant.
Alternative Minimum Tax. The difference between the fair market value
of the ISO shares on the date of exercise and the exercise rice is an adjustment
to income for purposes of the AMT. The AMT (imposed to the extent it exceeds the
taxpayer's regular tax) is 26% of an individual taxpayer's alternative minimum
taxable income (28% in the case of alternative minimum taxable income in excess
of $175,000). Alternative minimum taxable income is determined by adjusting
regular taxable income for certain items, increasing that income by certain tax
preference items (including the difference between the fair market value of the
ISO Shares on the date of exercise and the exercise price) and reducing this
amount by the applicable exemption amount ($45,000 in case of a joint return,
subject to reduction under certain circumstances). If a disqualifying
disposition of the ISO Shares occurs in the same calendar year as exercise of
the ISO, there is no AMT adjustment with respect to those ISO Shares. Also, upon
a sale of ISO Shares that is not a disqualifying disposition, alternative
minimum taxable income is reduced in the year of sale by the excess of the fair
market value of the ISO Shares at exercise over the amount paid for the ISO
Shares.
Nonqualified Stock Options. A Participant will not recognize any
taxable income at the time a NQSO is granted. However, upon exercise of a NQSO,
the Participant must include in income as compensation as amount equal to the
difference between the fair market value of the shares on the date of exercise
and the Participant's exercise price. The included amount must be treated as
ordinary income by the Participant and may be subject to withholding by the
Company (either by payment in cash or withholding out of the Participant's
salary). Upon resale of the shares by the Participant, any subsequent
appreciation on depreciation in the value of the shares will be treated as
capital gain or loss.
Omnibus Budget Reconciliation Act of 1993. The Omnibus Budget
Reconciliation Act of 1993 provides that the maximum tax rate applicable to
ordinary income is 39.6%. Long-term capital gain will be taxed at a maximum of
28%. For this purpose, in order to receive long-term capital gain treatment, the
shares must be held for more than one year. Capital gains may be offset by
capital losses and up to $3,000 of capital losses may be offset annually against
ordinary income.
Tax Treatment of the Company. The Company generally will be entitled to
a deduction in connection with the exercise of a NQSO by a participant to the
extent that the Participant recognizes ordinary income and the Company withholds
tax. The Company will be entitled to a deduction in connection with the
disposition of ISO Shares only to the extent that the Participant recognizes
ordinary income on a disqualifying disposition of the ISO Shares.
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<PAGE>
ERISA
The 1988 Plan is not subject to any of the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"), and is not qualified under
Section 401(a) of the Code.
New Plan Benefits
The amounts of future option grants under the 1988 Plan are not
determinable because, under the terms of the 1988 Plan, such grants are made in
the discretion of the Committee, Future option exercise prices are not
determinable because they are based upon the fair market value of the Company's
Common Stock on the date of grant.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE 1988 STOCK OPTION PLAN.
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<PAGE>
PROPOSAL NO. 3 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Company has selected Coopers & Lybrand L.L.P. as its principal
independent accountants to perform the audit of the Company's financial
statements for the current fiscal year, and the shareholders are being asked to
ratify this selection. Representatives of Coopers & Lybrand L.L.P. will be
present at the Meeting, will be given an opportunity to make a statement at the
Meeting if they desire to do so and will be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RATIFICATION OF THE SELECTION OF COOPERS & LYBRAND L.L.P.
<TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of May 23, 1997,
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) 4,759,875 20.6%
Nevis Capital Management (5) 2,201,900 9.5%
Thomas Kailath (4)(6) 833,725 3.6%
David P. St. Charles (4) 130,195 *
John C. Bolger (4) 33,750 *
Richard C. Murphy (4) 24,062 *
Tony Tolani (4) (7) 22,646 *
Joseph Addiego (4) 15,362 *
Gregory Olson (4) (7) 0 *
Andrew Pease (4) (7) 0 *
All officers and directors as a group (14 persons) (4) 5,909,907 25.5%
<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) 31,875 shares subject
to options held by Mrs. Gupta that are exercisable within 60 days of
May 23, 1997.
(4) Includes 31,875 shares for Mrs. Gupta, 31,875 shares for Dr. Kailath,
128,750 shares for Mr. St. Charles, 29,750 shares for Mr. Bolger,
20,667 shares for Mr. Tolani, 19,062 shares for Mr. Murphy, 10,500
shares for Mr. Addiego, and 361,130 shares for all directors and
officers as a group that are subject to options and are exercisable
within 60 days after May 23, 1997.
(5) The address of this shareholder is Nevis Capital Management, Inc., 1119
St. Paul Street, Baltimore, Maryland, 21202. As of February 12, 1997,
Nevis Capital Management ("Nevis") reported on Schedule 13G filed with
the SEC that it beneficially owned 2,112,800 shares of the Company's
Common Stock. Nevis has since orally informed the Company that, as of
May 23, 1997, it owned 2,201,900 shares of the Company's Common Stock.
(6) Represents (i) 407,850 shares of Common Stock held of record by Dr.
Kailath and his wife as trustees of a revocable trust, (ii) 394,000
shares held of record by them, together with a third party, as trustees
for their three children, and as custodians for their son under the
Uniform Gifts to Minors Act and (iii) 31,875 shares subject to options
held by Dr. Kailath that are exercisable within 60 days of May 23,
1997.
(7) Tony Tolani, Gregory Olson, and Andrew Pease are no longer executive
officers of the Company.
</FN>
</TABLE>
-8-
<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 other most
highly compensated executive officers who were serving as executive officers at
the end of fiscal 1997, as well as one former executive officer, for services
rendered in all capacities to the Company and its subsidiaries during each of
fiscal 1995, 1996 and 1997. 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.
<CAPTION>
SUMMARY COMPENSATION TABLE
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 St. Charles FY97 $257,462 -- 100,000 $2,113
President and CEO FY96 $209,056 $90,000 60,000 $1,397
FY95 $184,631 $58,586 50,000 $2,353
Narendra K. Gupta FY97 $181,742 -- -- $2,510
Chairman and Secretary FY96 $174,434 $65,000 -- $2,357
FY95 $159,438 $40,278 -- $2,356
Tony Tolani FY97 $288,387 -- 10,000 $1,942
Vice President, FY96 $207,341 $10,000 -- $1,327
Far East Operations FY95 (5) $28,307 $15,000 40,000 $431
Joseph Addiego (6) FY97 $274,303 -- 40,000 $2,177
President, FY96 $249,222 $15,000 20,000 $2,211
TakeFive Software, GmbH FY95 $214,504 $10,000 30,000 $2,395
Gregory Olson FY97 (7) $192,750 -- 100,000 $956
Vice President,
Marketing
Andrew Pease FY97 (8) $175,689 -- 35,000 $1,997
Vice President,
North American Sales
<FN>
- ----------------------------------
(1) Includes commissions and deferrals for 401(k) and Section 125 Plans.
(2) Represents bonuses earned for services rendered during the fiscal year
listed, but does not include bonuses paid during the fiscal year listed
for services rendered during a prior fiscal year.
(3) Options issued prior to fiscal 1997 reflect a 2-for-1 stock split of
the Company effective April 5, 1996.
(4) Represents employer matching contributions to 401(k) Plan accounts.
(5) Amounts listed are for a partial fiscal year from the time Mr. Tolani
became an executive officer of the Company on December 12, 1994 through
the end of the fiscal year. Mr. Tolani is no longer with the Company.
(6) For fiscal 1995, fiscal 1996, and from March 1, 1996 through May 31,
1996, Mr. Addiego served as Vice President, North American Sales.
-9-
<PAGE>
(7) Amounts listed are for July 1996 when Mr. Olson became an executive
officer of the Company, through the end of the fiscal year. Mr. Olson
is no longer with the Company.
(8) Amounts listed are for June 1996 when Mr. Pease became an executive
officer of the Company, through the end of the fiscal year. Mr. Pease
in no longer with the Company.
</FN>
</TABLE>
<TABLE>
The following table sets forth further information regarding individual grants
of options for the Company's Common Stock during fiscal 1997 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.
<CAPTION>
OPTION GRANTS IN FISCAL 1997
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants For Option Term
-------------------------------------------------------- ------------------------------
Number % of
of Total
Securities Options
Underlying Granted Exercise
Options in or Base Expira-
Granted Fiscal Price tion 5% 10%
Name (1) (#) 1997 $/Share (2) Date (2) ($) (3) ($) (3)
- --------------------- -------------- ------------ --------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David St. Charles 100,000 9.6820 10.250 4/16/07 $645,000 $1,634,000
Narendra K. Gupta -- -- -- -- -- --
Tony Tolani 10,000 0.9682 8.750 4/17/07 $55,000 $139,500
Joseph Addiego 40,000 3.8730 8.750 4/17/07 $220,000 $558,000
Gregory Olson 100,000 9.6820 8.750 4/17/07 $550,000 $845,000
Andrew Pease 35,000 3.3889 8.750 4/17/07 $192,500 $448,250
<FN>
- ----------------------------------
(1) Stock options are granted with an exercise price equal to the fair
market value of the Company's Common Stock on the date of the 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 four years, at a rate of 25% on the first
anniversary date after the date of grant, then 1/48th of the shares at
the end of each month thereafter.
(2) In April 1997, the Company offered employees the right to cancel
certain outstanding stock options at original exercise prices and
receive new options with a new exercise price. The new exercise prices
range from $8.75 to $10.50 per share, based on the closing price of the
Common Stock on the date individual employees agreed to cancel their
options. Options to purchase a total of 1,222,632 shares were issued in
April 1997. Vesting under the new options commenced on the date the
individual employees agreed to cancel their original options, and
occurs over a four year period. All of the options shown above were
canceled and regranted in April 1997. The exercise prices and
expiration dates shown above reflect the exercise prices and expiration
dates of the new grants.
(3) The 5% and 10% assumed rates of annual compound stock price
appreciation are mandated by the rules of the SEC and do not represent
the Company's estimate or projection of future Common Stock prices.
</FN>
</TABLE>
-10-
<PAGE>
<TABLE>
The following table sets forth certain information concerning the exercise of
stock options during fiscal 1997 by each of the executive officers named in the
Summary Compensation Table above and the number and value at February 28, 1997
of unexercised options held by said individuals:
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND FEBRUARY 28, 1997 OPTION VALUES
Number of Value of
Securities Underlying Unexercised In-the
Unexercised Options Money Options
at 2/28/97 at 2/28/97 (2)
---------------------------- ----------------------------
Shares
Acquired Value
on Realized Exer- Unexer- Exer- Unexer-
Name Exercise ($) (1) cisable cisable cisable cisable
- --------------------- -------------- --------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David St. Charles 194,500 $4,300,254 89,333 196,167 $1,524,298 $2,726,589
Narendra K. Gupta -- -- -- -- -- --
Tony Tolani -- -- 17,333 32,667 $257,829 $474,672
Joseph Addiego 36,000 $723,187 34,151 86,333 $610,642 $1,291,516
Gregory Olson -- -- -- 100,000 -- $1,375,000
Andrew Pease -- -- 35,000 -- $481,250
<FN>
- ----------------------------------
(1) "Value Realized" represents the fair market value of the shares of
Common Stock underlying the option on the date of exercise less the
aggregate price of the option.
(2) These values have not been, and may never be, realized. These values
are based on the positive spread between the respective exercise prices
of outstanding options (as repriced in April 1997) and the closing
price of the Company's Common Stock on February 28, 1997, the last day
of trading for fiscal 1997.
</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 1997, the
Compensation Committee consisted of the following non-employee directors: John
C. Bolger, Dr. Thomas Kailath and Richard C. Murphy.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
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.
Through the entire fiscal year 1997, the Compensation Committee of the
Board was comprised of three non-management directors of the Company, John
Bolger, Thomas Kailath, and Richard Murphy. 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.
-11-
<PAGE>
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 1997. The Compensation Committee reviewed the recommendations and
performance and market data outlined above and established a base salary level
to be effective March 1, 1997 for each executive officer, including the Chief
Executive Officer and Chairman of the Board. In addition to considering the
results of the performance evaluations and information concerning competitive
salaries, the Compensation Committee and Chief Executive Officer place primary
weight on the financial condition of the Company in considering salary
adjustments.
Bonuses
The Company seeks to provide additional incentives and rewards to
executives who make contributions of outstanding value to the Company. For this
reason, the Compensation Committee administers a bonus plan, which can comprise
a substantial portion of the total compensation of executive officers when
earned and paid.
The Compensation Committee determines annually the total amount of cash
bonuses available for executive officers. Awards under the plan are contingent
upon the performance of the Company as a whole, based upon the Company's
attaining certain revenue and operating profit goals set by the Board annually
in consultation with the Chief Executive Officer. The target amounts of bonuses
available to each executive officer are set annually by the Compensation
Committee in its discretion with regard to the Chief Executive Officer and
Chairman of the Board and by the Chief Executive Officer, subject to review and
approval by the Compensation Committee, with regard to executive officers other
than himself. In all cases, the relative target amounts for individual officers
are based upon the total dollars available for bonuses, and historical and
expected future contributions by the individual executive officer. In fiscal
1997, 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.
-12-
<PAGE>
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 1997, 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 1997 are set
forth in the table above entitled "Option Grants in Fiscal 1997".
In April 1997, the Compensation Committee approved an option repricing
program. All employees, including executive officers, were eligible to
participate under the repricing program. All eligible executive officers with
options that had exercise prices greater than closing price on the Nasdaq
National Market on the date of the repricing, had the option to exchange such
options on a one-for-one basis. Options to purchase an aggregate of 1,222,632
shares of Common Stock were repriced, with new exercise prices ranging from
$8.75 to $10.50 per share, based on the closing price of the Common Stock on the
Nasdaq National Market on the date individual employees agreed to cancel their
original outstanding options. Of these repriced options, 451,000 were held by
executive officers of the Company. The vesting schedule of the new options was
adjusted to begin on the date individual employees agreed to cancel their
original outstanding options, with any prior vesting being forfeited.
Fiscal 1997 Chief Executive Officer Compensation
In March 1996, the Committee established a base salary for Mr. St.
Charles for fiscal 1997. This base salary represented an increase over Mr. St.
Charles' fiscal 1996 base salary. The Compensation Committee also established a
target bonus for Mr. St. Charles under the fiscal 1997 bonus plan. The fiscal
1997 base salary level and target bonus were based upon a number of factors,
including (a) the Compensation Committee's assessment of the fiscal 1996
performance of the Company and Mr. St. Charles, (b) fiscal 1997 Company
performance objectives and individual performance objectives and
responsibilities for Mr. St. Charles established in March 1996, 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 1997, the Compensation Committee granted Mr. St. Charles a
new stock option to purchase 100,000 shares. The number of shares granted was
based on Mr. St. Charles' position, fiscal 1996 performance and expected
performance in fiscal 1997 and beyond.
The Compensation Committee has concluded that Mr. St. Charles'
performance in fiscal 1997 warrants the compensation for fiscal 1997 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 1997. The Company does not expect cash
compensation for 1997 to be in excess of $1,000,000 or consequently affected by
the requirements of Section 162(m).
COMPENSATION COMMITTEE
John C. Bolger
Thomas Kailath
Richard Murphy
-13-
<PAGE>
COMPANY STOCK PRICE PERFORMANCE GRAPH
The stock price performance graph below shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or under the Securities Exchange Act of 1934, as amended, except to the
extent the Company specifically incorporates this information by reference, and
shall not otherwise be deemed soliciting material or filed under such Acts.
The graph below compares the cumulative total shareholder return of the
Common Stock of the Company from March 1, 1992 to February 28, 1997 with the
cumulative total return of the Nasdaq Composite Index and the Hambrecht & Quist
Technology Index over the same period (assuming the investment of $100 in the
Company's Common Stock and in each of the other indices on March 1, 1992, and
reinvestment of all dividends).
The comparisons in the graph below are based on historical data and are
not intended to forecast the possible future performance of the Company's Common
Stock.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
NASDAQ Composite Index H&Q Technology Index Integrated Systems, Inc.
2/28/92 100 100 100
8/31/92 89 86 63
2/28/93 106 101 58
8/31/93 117 104 79
2/28/94 124 119 108
8/31/94 120 121 117
2/28/95 125 138 193
8/31/95 161 194 263
2/28/96 175 207 422
8/30/96 223 223 598
2/28/97 207 271 408
CERTAIN TRANSACTIONS
Since March 1, 1996, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
was or is to be party in which the amount involved exceeds $60,000 and in which
any director, executive officer or holder of more than 5% of the Company's
Common Stock had or will have a direct or indirect material interest other than
(i) compensation arrangements, which are described under "Proposal No, 1 -
Election of Directors - Board of Directors' Meetings and Committees" and
"Executive Compensation" and (ii) the transaction described below.
During fiscal 1997, Digital Link Corporation purchased products and
services totaling approximately $350,000 from the Company. These transactions
were made on terms substantially similar to those the Company offers to other
customers. Dr. Gupta, the Chairman of the Board of Directors and Secretary of
the Company, served as a member of the Board of Directors of Digital Link
Corporation. Mrs. Gupta, who is a director of the Company and the spouse Dr.
Gupta, is the Chairperson of the Board of Directors of Digital Link Corporation.
Dr. and Mrs. Gupta are more than 10% shareholders of both Digital Link
Corporation and the Company.
-14-
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock, to file with the SEC initial reports of beneficial
ownership and reports of changes in beneficial ownership of Common Stock of the
Company. Officers, directors and greater than 10% shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations from the executive officers and directors of
the Company, the Company believes that all Section 16(a) filing requirements
were complied with during fiscal 1997, except as follows: David St. Charles,
President and Chief Executive Officer, filed late one report covering five
transactions.
SHAREHOLDER PROPOSALS
Shareholder proposals for inclusion in the Company's Proxy Statement
and form of proxy relating to the Company's 1998 Annual Meeting of Shareholders
must be received by February 20, 1998.
OTHER BUSINESS
The Board does not presently intend to bring any other business before
the Meeting and, so far as is known to the Board, no matters are to be brought
before the Meeting except as specified in the Notice of the Meeting. As to any
business that may properly come before the Meeting, however, it is intended that
proxies in the form accompanying this Proxy Statement will be voted in respect
thereof in accordance with the judgment of the persons voting such proxies.
By Order of the Board of Directors
/s/ Narendra K. Gupta
Narendra K. Gupta
Chairman of the Board
================================================================================
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN
AND DATE THE ACCOMPANYING PROXY AND
RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
================================================================================
-15-
<PAGE>
INTEGRATED SYSTEMS, INC.
1988 Stock Option Plan
As Adopted September 26, 1988
As Amended through March 28, 1997
1. PURPOSE. This Stock Option Plan ("Plan") is established to provide
incentive for selected persons to promote the financial success and progress of
Integrated Systems, Inc. (the "Company") by granting such persons options to
purchase shares of common stock of the Company.
2. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall be approved by
the shareholders of the Company, in any manner permitted by applicable corporate
law, within twelve (12) months before or after the date this Plan is adopted by
the Board of Directors of the Company (the "Board") and after the date of
certain amendments to the Plan. In addition, no later than twelve (12) months
after the Company becomes subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") the Company will comply with the
requirements of Rule 16b-3 with respect to shareholder approval.
3. TYPES OF OPTIONS AND SHARES. Options granted under this Plan (the
"Options") may be either (a) incentive stock options ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986 (the "Code"), or (b)
nonqualified stock options ("NQSOs"), as designated at the time of grant. The
shares of stock that may be purchased upon exercise of Options granted under
this Plan (the "Shares") are shares of the common stock of the Company.
4. NUMBER OF SHARES. The maximum number of Shares that may be issued
pursuant to Options granted under this Plan is Seven Million (7,000,000) Shares,
subject to adjustment as provided in this Plan. If any Option is terminated for
any reason without being exercised in whole or in part, the Shares thereby
released from such Option shall be available for purchase under other Options
subsequently granted under this Plan. At all times during the term of this Plan,
the Company shall reserve and keep available such number of Shares as shall be
required to satisfy the requirements of outstanding Options under this Plan.
5. ADMINISTRATION. This Plan may be administered by the Board or a
Committee appointed by the Board (the "Committee"). If, at the time the Company
registers under the Exchange Act, a majority of the Board is not comprised of
Disinterested Persons, the Board shall appoint a Committee consisting of not
less than three persons (who need not be members of the Board), each of whom is
a "Disinterested Person" (as defined in Section 6(b)(iv) of the Plan) and an
"Outside Director" (as defined in Section 6(b)(vi) of the Plan) or qualifies
under transition rules as an Outside Director. As used in this Plan, references
to the "Committee" shall mean either such Committee or the Board if no Committee
has been established. After registration of the Company under the Exchange Act,
Board members who are not Disinterested Persons may not vote on any matters
affecting the administration of this Plan or on the grant of any Options
pursuant to this Plan to any officer or director of the Company or other person
(in each case, an "Insider") whose transactions in the Company's common stock
are subject to Section 16(b) of the Exchange Act, but any such member may be
counted for determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to Options or administration of this
Plan and may vote on the grant of any Options pursuant to this Plan other than
to Insiders. The interpretation by the Committee of any of the provisions of
this Plan or any Option granted under this Plan shall be final and binding upon
the Company and all persons having an interest in any Option or any Shares
purchased pursuant to an Option. The Committee may delegate the authority to
officers of the Company to grant Options under this Plan to Optionees who are
not Insiders of the Company. No Optionee shall be eligible to receive more than
500,000 Shares at any time during the term of this Plan pursuant to the grant of
Options hereunder.
A-1
<PAGE>
6. ELIGIBILITY. Options may be granted only to such employees,
officers, directors and consultants of the Company or any Parent, Subsidiary or
Affiliate of the Company (as defined below) as the Committee shall select from
time to time in its sole discretion ("Optionees"), provided that only employees
of the Company or a Parent or Subsidiary of the Company shall be eligible to
receive ISOs. An Optionee may be granted more than one Option under this Plan.
(a) Assumption of Options. The Company may, from time to time,
assume outstanding options granted by another company, whether in connection
with an acquisition of such other company or otherwise, by either (i) granting
an option under this Plan in replacement of the option assumed by the Company,
or (ii) treating the assumed option as if it had been granted under this Plan if
the terms of such assumed option could be applied to an option granted under
this Plan. Such assumption shall be permissible if the holder of the assumed
option would have been eligible to be granted an option hereunder if the other
Company had applied the rules of this Plan to such grant.
(b) Definitions. As used in the Plan, the following terms
shall have the following meanings:
(i) "Parent" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company if, at the
time of the granting of the Option, each of such corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
(ii) "Subsidiary" means any corporation (other than
the Company) in an unbroken chain of corporations beginning with the Company if,
at the time of granting of the Option, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
(iii) "Affiliate" means any corporation that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with another corporation, where
"control" (including the terms "controlled by" and "under common control with")
means the possession, direct or indirect, of the power to cause the direction of
the management and policies of the corporation, whether through the ownership of
voting securities, by contract or otherwise.
(iv) "Disinterested Person" shall have the meaning
set forth in Rule 16b-3(d)(3) as promulgated by the Securities and Exchange
Commission ("SEC") under Section 16(b) of the Exchange Act, as such rule is
amended from time to time and as interpreted by the SEC.
(v) "Fair Market Value" shall mean the fair market
value of the Shares as determined by the Committee from time to time in good
faith. If a public market exists for the Shares, the Fair Market Value shall be
the average of the last reported bid and asked prices for Common Stock of the
Company on the last trading day prior to the date of determination or, in the
event the Common Stock of the Company is listed on a stock exchange or the
Nasdaq National Market, the Fair Market Value shall be the closing price on such
exchange or quotation system on the last trading day prior to the date of
determination.
(vi) "Outside Director" shall mean any director who
is not (i) a current employee of the Company or any Parent, Subsidiary or
Affiliate of the Company, (ii) a former employee of the Company or any Parent,
Subsidiary or Affiliate of the Company who is receiving compensation for prior
services (other than benefits under a tax-qualified pension plan), (iii) a
current or former officer of the Company or any Parent, Subsidiary or Affiliate
of the Company or (iv) currently receiving compensation for personal services in
any capacity, other than as a director, from the Company or any Parent,
Subsidiary or Affiliate of the Company; provided, however, that at such time as
the term "Outside Director", as used in Section 162(m) of the Code, is
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defined in the regulations promulgated under Section 162(m), "Outside Director"
shall have the meaning set forth in such regulations, as amended from time to
time and as interpreted by the Internal Revenue Service.
7. TERMS AND CONDITIONS OF OPTIONS. The Committee shall determine
whether each Option is to be an ISO or an NQSO, the number of Shares for which
the Option shall be granted, the exercise price of the Option, the periods
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following terms and conditions:
(a) Form of Option Grant. Each Option granted under this Plan
shall be evidenced by a written Stock Option Grant ("Grant") in such form (which
need not be the same for each Optionee) as the Committee shall from time to time
approve, which Grant shall comply with and be subject to the terms and
conditions of this Plan.
(b) Exercise Price. The exercise price of an Option shall be
not less than the Fair Market Value of the Shares, at the time that the Option
is granted. The exercise price of any Option granted to a person owning 10% or
more of the total combined voting power of all classes of stock of the Company
or any Parent or Subsidiary of the Company ("Ten Percent Shareholder") shall not
be less than 110% of the Fair Market Value of the Shares at the time of the
grant, as determined by the Committee in good faith.
(c) Exercise Period. Options shall be exercisable within the
times or upon the events determined by the Committee as set forth in the option
grant; provided, however, that no Option shall be exercisable after the
expiration of ten years from the date the option is granted, and provided
further that no Option granted to a Ten Percent Shareholder shall be exercisable
after the expiration of five years from the date the Option is granted.
(d) Limitations on ISOs. The aggregate Fair Market Value
(determined as of the time an Option is granted) of stock with respect to which
ISOs are exercisable for the first time by an Optionee during the calendar year
(under this Plan or under any other incentive stock option plan of the Company
or any Parent or Subsidiary of the Company) shall not exceed $100,000. If the
Fair Market Value of stock with respect to which ISOs are first exercised
exceeds $100,000, the Options for the first $100,000 worth of stock shall be
ISOs and options for the amount in excess of $100,000 shall be NQSOs.
(e) Date of Grant. The date of grant of an Option shall be the
date on which the Committee makes the determination to grant such Option unless
otherwise specified by the Committee. The Grant representing the Option shall be
delivered to the Optionee within a reasonable time after the granting of the
Option.
(f) Assumed Options. In the event the Company assumes an
option granted by another company, the terms and conditions of such option shall
remain unchanged (except the exercise price and the number and nature of shares
issuable upon exercise, which will be adjusted appropriately pursuant to Section
425(c) of the Code). In the event the Company elects to grant a new option
rather than assuming an existing option (as specified in Section 6(a), such new
option need not be granted at Fair Market Value on the date of grant and may
instead be granted with a similarly adjusted exercise price.
8. EXERCISE OF OPTIONS.
(a) Notice. Options may be exercised only by delivery to the
Company of a written notice and exercise agreement in a form approved by the
Committee, stating the number of Shares being purchased, the restrictions
imposed on the Shares and such representations and agreements regarding the
Optionee's investment intent and access to information as may be required by the
Company to comply with applicable securities laws together with payment in full
of the exercise price for the number of Shares being purchased.
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(b) Payment. Payment for the Shares may be made (i) in cash
(by check); (ii) by surrender of shares of common stock of the Company that have
been owned by Optionee for more than six (6) months (and which have been paid
for within the meaning of SEC Rule 144 and, if such shares were purchased from
the Company by use of a promissory note, such note has been fully paid with
respect to such shares) or were obtained by the Optionee in the open public
market, having a Fair Market Value equal to the exercise price of the Option;
(iii) where permitted by applicable law and approved by the Committee in its
sole discretion, by tender of a full recourse promissory note having such terms
as may be approved by the Committee; (iv) provided that a public market for the
Company's stock exists, through a "same day sale" commitment from the Optionee
and a broker-dealer that is a member of the National Association of Securities
Dealers (a "NASD Dealer") whereby the Optionee irrevocably elects to exercise
the Option and to sell a portion of the Shares so purchased to pay for the
exercise price and whereby the NASD Dealer irrevocably commits upon receipt of
such Shares to forward the exercise price directly to the Company; or (v) by any
combination of the foregoing where approved by the Committee in its sole
discretion. Optionees who are not employees or directors of the Company shall
not be entitled to purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares.
(c) Withholding Taxes. Prior to issuance of the Shares upon
exercise of an Option, the Optionee shall pay or make adequate provision for any
federal or state withholding obligations of the Company, if applicable.
(d) Limitations on Exercise. Notwithstanding the exercise
periods set forth in the Grant, exercise of an Option shall always be subject to
the following limitations:
(i) If an Optionee ceases to be employed by the
Company or any Parent, Subsidiary or Affiliate of the Company for any reason
except death or disability, the Optionee may exercise such Optionee's Options to
the extent (and only to the extent) that it would have been exercisable upon the
date of termination, within three (3) months after the date of termination (or
such shorter time period as may be specified in the Grant), provided that, if
Optionee is an Insider and the Company is subject to Section 16(b) of the
Exchange Act, the Optionee's Option will be exercisable for a period of time
sufficient to allow such Optionee from having a matching purchase and sale under
Section 16(b), with any extension beyond three (3) months from termination of
employment in the case of an Option constituting an ISO being deemed to be as an
NQSO, and provided further that in no event may an Option be exercisable later
than the expiration date of the Option.
(ii) If an Optionee's employment with the Company or
any Parent, Subsidiary or Affiliate of the Company is terminated because of the
death of the Optionee or disability of Optionee within the meaning of Section
22(e)(3) of the Code, such Optionee's Options may be exercised to the extent
(and only to the extent) that it would have been exercisable by the Optionee on
the date of termination, by the Optionee (or the Optionee's legal
representative) within twelve (12) months after the date of termination (or such
shorter time period as may be specified in the Grant), but in any event no later
than the expiration date of the Options.
(iii) The Committee shall have discretion to
determine whether the Optionee has ceased to be employed by the Company or any
Parent, Subsidiary or Affiliate of the Company and the effective date on which
such employment terminated.
(iv) In the case of an Optionee who is a director,
independent consultant, contractor or advisor, the Committee will have the
discretion to determine whether the Optionee is "employed by the Company or any
Parent, Subsidiary or Affiliate of the Company" pursuant to the foregoing
Sections.
(v) An Option shall not be exercisable unless such
exercise is in compliance with the Securities Act of 1933, as amended, and all
applicable state securities laws, as they are in effect on the date of exercise.
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(vi) The Committee may specify a reasonable minimum
number of Shares that may be purchased on any exercise of an Option, provided
that such minimum number will not prevent the Optionee from exercising the full
number of Shares as to which the Option is then exercisable.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee. No Option may be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of descent and distribution.
10. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the
rights of a shareholder with respect to any Shares subject to an Option until
the Option has been validly exercised. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the date
of exercise, except as provided in this Plan. The Company shall provide to each
Optionee a copy of the annual financial statements of the Company, at such time
after the close of each fiscal year of the Company as they are released by the
Company to its shareholders.
11. ADJUSTMENT OF OPTIONS SHARES. In the event that the number of
outstanding shares of common stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration,
the number of Shares available under this Plan and the number of Shares subject
to outstanding Options and the exercise price per share of such Options shall be
proportionately adjusted, subject to any required action by the Board or
shareholders of the Company and compliance with applicable securities; provided,
however, that no certificate or scrip representing fractional shares shall be
issued upon exercise of any Option and any resulting fractions of a Share shall
be ignored.
12. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Option granted
under this Plan shall confer on any Optionee any right to continue in the employ
of the Company or any Parent, Subsidiary or Affiliate of the Company or limit in
any way the right of the Company or any Parent, Subsidiary or Affiliate of the
Company to terminate the Optionee's employment at any time, with or without
cause.
13. COMPLIANCE WITH LAWS. The grant of Options and the issuance of
Shares upon exercise of any Options shall be subject to and conditioned upon
compliance with all applicable requirements of law, including without limitation
compliance with the Securities Act of 1933, as amended, any required approval by
the Commissioner of Corporations of the State of California, compliance with all
other applicable state securities laws and compliance with the requirements of
any stock exchange on which the Shares may be listed. The Company shall be under
no obligation to register the Shares with the SEC or to effect compliance with
the registration or qualification requirements of any state securities laws or
stock exchange.
14. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself or its assignee(s) in the Grant (a) a right of
first refusal to purchase any Shares that an Optionee (or a subsequent
transferee) may propose to transfer to a third party and (b) a right to
repurchase all Shares held by an Optionee upon the Optionee's termination of
employment or service with the Company or its Parent, Subsidiary or Affiliate of
the Company for any reason within a specified time as determined by the
Committee at the time of grant at (i) the Optionee's original purchase price
(provided that the right to repurchase at such price shall lapse at the rate of
at least 20% per year from the date of grant), (ii) the Fair Market Value of
such Shares as determined by the Committee in good faith or (iii) a price
determined by a formula or other provision set forth in the Grant.
15. ASSUMPTION OF OPTIONS BY SUCCESSORS. In the event of a dissolution
or liquidation of the Company, a merger in which the Company is not the
surviving corporation, or the sale of substantially all of the assets of the
Company, any or all outstanding Options shall, notwithstanding any contrary
terms of the Grant, accelerate and become exercisable in full at least ten days
prior to (and shall expire on) the consummation of such dissolution,
liquidation, merger or sale of stock or sale of assets on such conditions as the
Committee shall determine unless the successor corporation assumes the
outstanding Options or substitutes
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substantially equivalent options. The aggregate Fair Market Value (determined at
the time an Option is granted) of stock with respect to ISOs which first become
exercisable in the year of such dissolution, liquidation, merger, sale of stock
or sale of assets cannot exceed $100,000. Any remaining accelerated ISOs shall
be NQSOs.
16. AMENDMENT OR TERMINATION OF PLAN. The Committee may at any time
terminate or amend this Plan in any respect (including, but not limited to, any
form of Grant, agreement or instrument to be executed pursuant to this Plan);
provided, however, that the Committee shall not, without the approval of the
holders of a majority of the outstanding voting shares of the Company, amend
this Plan in any manner that requires such shareholder approval pursuant to the
Code or the regulations promulgated thereunder as such provisions apply to
incentive stock option plans or pursuant to the Exchange Act or Rule 16b-3 (or
its successor) promulgated thereunder.
17. TERM OF PLAN. Options may be granted pursuant to this Plan from
time to time within a period of ten years from the date this Plan is adopted by
the Board.
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APPENDIX B
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INTEGRATED SYSTEMS LOGO
PROXY
PROXY
INTEGRATED SYSTEMS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 15, 1997
The undersigned hereby appoints Narendra K. Gupta and William C. Smith, or
either of them, as proxies and attorneys in fact, each with full power of
substitution, to represent the undersigned at the Annual Meeting of Shareholders
of Integrated Systems, Inc. (the "Company") to be held at the Company, 201
Moffett Park Drive, Sunnyvale, CA, 94089 on July 15, 1997 at 2:00 p.m., and any
adjournments or postponements thereof, and to vote the number of shares the
undersigned would be entitled to vote if personally present at the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3 AS MORE SPECIFICALLY
DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS
PROXY WILL BE VOTED IN ACCORDANCE THEREWITH. In their discretion, the proxies
are authorized to vote upon such other business as may properly come before the
meeting or any adjournment thereof to the extent authorized by Rule 14a-4(c)
promulgated by the Securities and Exchange Commission.
(Continued, and to be signed on the other side)
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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[X] Please mark
your votes
as this
MANAGEMENT RECOMMENDS A VOTE FOR ALL THE
NOMINEES FOR DIRECTOR LISTED BELOW AND A
VOTE FOR PROPOSALS 2 AND 3.
WITHHOLD
PROPOSAL 1: To elect directors to hold FOR* FOR ALL FOR AGAINST ABSTAIN
office until the next Annual Meeting of [ ] [ ] PROPOSAL 2. To approve the amendment to [ ] [ ] [ ]
Shareholders and until their successors the 1988 Stock Option Plan.
are elected.
PROPOSAL 3: To ratify the selection of
Nominees: Narendra K. Gupta, John C. Coopers & Lybrand as the Company's [ ] [ ] [ ]
Bolger, Vinita Gupta, Thomas Kailath, independent public accountants.
Richard C. Murphy and David P. St.
Charles
To withhold authority to vote for any
nominee(s), write such nominee(s)'
name(s) below.
- ----------------------------------------
Sign exactly as name(s) appears on your stock certificate. If shares
I PLAN TO ATTEND THE MEETING [ ] of stock stand of record in the names of two or more persons or in the
name of husband and wife, whether as joint tenants or otherwise, both
or all of such persons should sign the above Proxy. If shares of stock
are held of record by a corporation, the Proxy should be executed by
the President or Vice President and the Secretary or Assistant
Secretary. Executors or administrators or other fiduciaries who
execute the above Proxy for a deceased Shareholder should give their
full title. Please date the Proxy.
Signature(s) ___________________________________________________________________________________ Date __________________
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN AND PROMPTLY MAIL THIS PROXY IN THE RETURN
ENVELOPE SO THAT YOUR STOCK MAY BE REPRESENTED AT THE MEETING.
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</TABLE>
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