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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 the Party other than the Registrant |_|
Check the appropriate box:
[X] Preliminary Proxy Statement |_| Confidential, for Use of the
[ ] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
INTEGRATED SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)
----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction 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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[INTEGRATED SYSTEMS LOGO]
To Our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders
of Integrated Systems, Inc. to be held at ISI's headquarters located at 201
Moffett Park Drive, Sunnyvale, California, on Tuesday, August 3, 1999, at 2:00
p.m., local time.
The matters expected to be acted upon at the meeting are described in
detail in the accompanying Notice of Annual Meeting of Shareholders and Proxy
Statement.
It is important that you use this opportunity to take part in the
affairs of your Company by voting on the business to come before this meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE BEFORE THE MEETING. Returning the Proxy does not deprive you of your
right to attend the meeting and to vote your shares in person.
We look forward to seeing you at the meeting.
Sincerely,
Narendra K. Gupta
CHAIRMAN OF THE BOARD
<PAGE>
[INTEGRATED SYSTEMS LOGO]
INTEGRATED SYSTEMS, INC.
201 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Integrated Systems, Inc. will be held at ISI's headquarters located at 201
Moffett Park Drive, Sunnyvale, California, on Tuesday, August 3, 1999, at 2:00
p.m., local time, for the following purposes:
1. To elect seven directors, each to serve until the next Annual Meeting
of Shareholders and until his successor has been elected and qualified
or until his earlier resignation or removal. The Board of Directors
intends to present the following nominees for election as directors:
Charles M. Boesenberg Vinita Gupta
John C. Bolger Thomas Kailath
Michael A. Brochu Richard C. Murphy
Narendra K. Gupta
2. To approve an amendment to the 1998 Equity Incentive Plan to increase
the number of shares of common stock reserved for issuance from
1,000,000 to 2,000,000 shares.
3. To approve the 1999 Employee Stock Purchase Plan, under which 800,000
shares of common stock will be reserved for issuance.
4. To approve an amendment to the Bylaws to change the number of
authorized directors to a range of five to nine.
5. To ratify the selection of PricewaterhouseCoopers LLP as the
independent accountants for fiscal year 2000.
6. To transact such other business as may properly come before the meeting
or any adjournment or postponement of the meeting.
The foregoing items of business are more fully described in the Proxy
Statement that accompanies this Notice.
Only shareholders of record at the close of business on June 7, 1999 are
entitled to notice of and to vote at the meeting or any adjournment or
postponement of the meeting.
By Order of the Board of Directors
Narendra K. Gupta
Chairman of the Board
Sunnyvale, California
June 28, 1999
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WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
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<PAGE>
[INTEGRATED SYSTEMS LOGO]
INTEGRATED SYSTEMS, INC.
201 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
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PROXY STATEMENT
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June 28, 1999
The accompanying proxy is solicited on behalf of the Board of Directors
(the "BOARD") of Integrated Systems, Inc., a California corporation, for use at
the Annual Meeting of Shareholders to be held at ISI's headquarters, located at
201 Moffett Park Drive, Sunnyvale, California, on Tuesday, August 3, 1999, at
2:00 p.m., local time. This proxy statement and the accompanying form of proxy
were first mailed to shareholders on or about June 28, 1999. An annual report
for the fiscal year ended February 28, 1999 is enclosed with this proxy
statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
Only holders of record of ISI's common stock at the close of business
on June 7, 1999 (the "RECORD Date") are entitled to vote at the meeting. A
majority of the shares outstanding on the Record Date will constitute a quorum
for the transaction of business at the meeting. At the close of business on the
Record Date, ISI had 22,764,412 shares of common stock outstanding and entitled
to vote.
Holders of ISI's common stock are entitled to one vote for each share
held as of the Record Date. Shares of common stock may not be voted
cumulatively.
If a broker, bank, custodian, nominee or other record holder of ISI's
common stock indicates on a proxy that it does not have discretionary authority
to vote certain shares on a particular matter (a "BROKER non-vote"), those
shares will not be considered present and entitled to vote with respect to that
matter, although they will be counted in determining the presence of a quorum.
Directors will be elected by a plurality of the votes of the shares of
common stock present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. The seven nominees receiving the
highest number of affirmative votes will be elected. Abstentions and broker
non-votes have no legal effect. Approval of Proposals No. 2, 3, 4 and 5 requires
the affirmative vote of the majority of shares of common stock present in person
or represented by proxy at the meeting. Abstentions have the effect of a
negative vote and broker non-votes do not affect the calculation. All votes will
be tabulated by the inspector of elections appointed for the meeting.
The proxy accompanying this proxy statement is solicited on behalf of
the Board for use at the meeting. Shareholders are requested to complete, date
and sign the accompanying proxy card and promptly return it in the enclosed
envelope. All signed, returned proxies that are not revoked will be voted in
accordance with the instructions contained therein; however, returned signed
proxies that give no instructions as to how they should be voted on a particular
proposal will be counted as votes "for" such proposal (or, in the case of the
election of directors, as a vote "for" election to the Board of all the nominees
presented by the Board).
In the event that sufficient votes in favor of the proposals are not
received by the date of the meeting, the persons named as proxies may propose
one or more adjournments of the meeting to permit further solicitations of
proxies. Any such adjournment would require the affirmative vote of the majority
of the shares present in person or represented by proxy at the meeting.
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ISI will pay the expenses of soliciting proxies for the meeting.
Following the original mailing of the proxies and other soliciting materials,
ISI will request that brokers, custodians, nominees and other record holders of
ISI's common stock forward copies of the proxy and other soliciting materials to
persons for whom they hold shares of common stock and request authority for the
exercise of proxies. In such cases, ISI, upon the request of the record holders,
will reimburse such holders for their reasonable expenses. The original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers and regular employees of ISI.
REVOCABILITY OF PROXIES
Any person signing a proxy in the form accompanying this proxy
statement has the power to revoke it before the meeting or at the meeting before
the vote pursuant to the proxy. A proxy may be revoked by a writing delivered to
ISI 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.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Board consists of seven directors, all of whom are to be elected at
the meeting. Each director will be elected to hold office until the next annual
meeting of shareholders or until a successor is duly elected and qualified or
until the director's earlier resignation or removal. Shares represented by the
accompanying proxy will be voted for the election of each of the seven nominees
named below 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. ISI is not aware of any nominee who will be unable
to or for good cause will not serve as a director.
NOMINEES
The names of the nominees, each of whom is currently a director of ISI,
and certain information about them are set forth below:
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---------------- --- -------------------- --------------
<S> <C> <C> <C>
Narendra K. Gupta 50 Chairman of the Board and Secretary of ISI 1980
Charles M. Boesenberg 50 President and Chief Executive Officer of ISI 1998
John C. Bolger (1) (2) 52 Retired Chief Financial Officer 1993
Cisco Systems, Inc.
Michael A. Brochu (2) 45 President and Chief Executive Officer 1998
Primus, Inc.
Vinita Gupta 48 President, Chief Executive Officer and 1980
Chairperson of the Board
Digital Link Corporation
Thomas Kailath (1) 63 Professor of Engineering, Stanford University 1980
Richard C. Murphy (1) (2) 54 Director and Business Consultant 1994
</TABLE>
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(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Dr. Gupta is a founder of ISI and has been a director of ISI since its
formation in 1980. He has been the Chairman of the Board of ISI since March 1993
and Secretary since September 1989. Dr. Gupta was Chief Executive Officer from
1988 to May 1994 and President from ISI's formation in 1980 to May 1994. He was
elected a Fellow of the Institute of Electrical and Electronic Engineers in
November 1991. Dr. Gupta serves on the board of Digital Link Corporation, a data
communications and wide-area networking equipment manufacturer, and three
privately-held companies. Dr. Gupta holds an M.S. in Engineering from the
California Institute of Technology and a Ph.D. in Engineering from Stanford
University. He is Vinita Gupta's husband.
Mr. Boesenberg joined ISI in December 1998 as President, Chief
Executive Officer and a director. In June 1999, he was also appointed Vice
President of Marketing. From December 1997 to December 1998 he was President and
Chief Executive Officer of Magellan Corporation, a satellite-access products
company based in Santa Clara, California. From January 1995 until it merged with
Magellan Corporation in December 1997, Mr. Boesenberg was President and Chief
Executive Officer of Ashtech, Inc., a business-to-business GPS company.
Previously, he was President, Chief Executive Officer and Chairman of Central
Point Software, Inc., President of MIPS Computer Systems, Inc., and Senior Vice
President of Apple Computer, Inc. Mr. Boesenberg holds a B.S. in
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Mechanical Engineering from Rose Hulman Institute of Technology and an M.S.
in Business Administration from Boston University.
Mr. Bolger has been a director of ISI since July 1993. He served as
Vice President, Finance and Administration, and Secretary of Cisco Systems,
Inc., a networking systems company, from 1989 until his retirement in 1992. Mr.
Bolger is also a director of Integrated Device Technology, Inc., a semiconductor
manufacturer; TCSI, a communication software company; Sanmina Corporation, a
contract assembly manufacturer; and Mission West Properties, a REIT. He holds a
B.A. in English Literature from the University of Massachusetts and an M.B.A.
from Harvard University.
Mr. Brochu has been a director of ISI since April 1998. Since November
1997, Mr. Brochu has been President and Chief Executive Officer of Primus, Inc.,
a developer of problem resolution software. Prior to joining Primus, Mr. Brochu
was President, Chief Operating Officer and Chief Financial Officer of Sierra
On-line, Inc., a software development company. Mr. Brochu was also appointed
Senior Vice President of CUC International, Inc., the parent corporation
pursuant to their acquisition of Sierra On-line, Inc. in July 1996. From 1982 to
1994, Mr. Brochu held several executive positions at Burlington Northern, Inc.,
a hazardous waste management company, as well as several of its subsidiaries.
His last position with Burlington Northern, Inc. was that of Chief Financial
Officer and Senior Vice President of Burlington Environmental, Inc. Mr. Brochu
is a graduate of the University of Texas at El Paso with B.S. degrees in
Accounting and Finance.
Mrs. Gupta has been a director of ISI since its formation in 1980. In
January 1999, she returned as President, Chief Executive Officer and Chairperson
of the Board of Digital Link Corporation, a manufacturer of data communications
equipment. She has been Chairperson of the Board since 1985 and served as
President and Chief Executive Officer between 1985 and 1996. 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 ISI and has been a director of ISI 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 ISI since December 1994. He is an
independent business consultant. Mr. Murphy was Vice President of Marketing,
Sales and Corporate Development of Informix Software, Inc., a relational
database software company, from 1983 until he retired in 1988. Mr. Murphy is
also a director of Objectivity, Inc., an object database software company;
iXOS Software Inc., a distributor of image management software; and Intermax
Solutions, Inc., an applications development software tools company. He holds
a B.S. in Mechanical Engineering from the University of Illinois and an
M.B.A. from Northwestern University.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
The Board met five times, including telephone conference meetings, and
acted by unanimous written consent once during the fiscal year ended February
28, 1999. No director attended fewer than 75% of the total number of meetings of
the Board and all committees of the Board on which such director served during
the year.
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.
The current members of the Audit Committee are Mr. Bolger, Mr.
Brochu and Mr. Murphy. The Audit Committee met twice during fiscal year 1999.
The Audit Committee meets with ISI's independent accountants to review the
adequacy of ISI's internal control systems and financial reporting
procedures; reviews the general scope of ISI's annual audit and the fees
charged by the independent accountants; reviews and monitors the performance
of non-audit services by ISI's independent accountants; reviews the fairness
of any proposed transaction between ISI and any officer, director or other
affiliate of ISI, and after such review, makes recommendations to the full
Board; and performs such further functions as may be required by any stock
exchange or over-the-counter market upon which ISI's common stock may be
listed.
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The current members of the Compensation Committee are Mr. Bolger, Mr.
Murphy and Dr. Kailath. The Compensation Committee met four times and acted by
unanimous written consent twice during fiscal year 1999. The Compensation
Committee determines compensation for officers and employees of ISI, grants
options and stock awards under ISI's employee benefit plans and reviews and
recommends adoption of and amendments to stock option and employee benefit
plans.
DIRECTOR COMPENSATION
During fiscal year 1999, ISI paid directors fees of $13,500 to Mr.
Bolger, Mrs. Gupta, Dr. Kailath and Mr. Murphy and $12,750 to Mr. Brochu.
Members of the Board who are not employees, consultants or independent
contractors of ISI, or any parent, subsidiary or affiliate of ISI, are eligible
to participate in ISI's 1994 Directors Stock Option Plan. In fiscal year 1999,
each eligible director was granted an option to purchase 5,000 shares of ISI
common stock on the anniversary of such director joining the Board, at the
following exercise prices per share: Mr. Bolger, $15.125; Mr. Brochu, $18.8438;
Mrs. Gupta, $19.312; Dr. Kailath, $19.312; and Mr. Murphy, $10.500. These
options have a term of ten years and become exercisable at the rate of 2.083% of
the shares per month, so long as the director continuously remains a director of
ISI.
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE NOMINATED DIRECTORS.
PROPOSAL NO. 2
AMENDMENT OF 1998 EQUITY INCENTIVE PLAN
Shareholders are being asked to approve an amendment to ISI's 1998
Equity Incentive Plan (the "INCENTIVE PLAN") to increase the number of shares of
common stock reserved for issuance under the Incentive Plan by 1,000,000 shares,
from 1,000,000 shares to 2,000,000 shares.
The Board believes that the increase in the number of shares reserved
for issuance under the Incentive Plan is in the best interests of ISI because of
the continuing need to provide stock options to attract and retain quality
employees and remain competitive in the industry. The granting of equity
incentives under the Incentive Plan plays an important role in ISI's efforts to
attract and retain employees of outstanding ability. Competition for skilled
engineers and other key employees is intense and the use of significant stock
options for retention and motivation of such personnel is pervasive in the high
technology industries. The Board believes that the additional reserve of shares
with respect to which equity incentives may be granted will provide ISI with
adequate flexibility to ensure that ISI can continue to meet those goals and
facilitate ISI's expansion of its employee base.
The Board approved the proposed amendment in March 1999, to be
effective upon shareholder approval. Below is a summary of the principal
provisions of the Incentive Plan, assuming shareholder approval of the
amendment. The summary is not necessarily complete, and reference is made to the
full text of the Incentive Plan.
INCENTIVE PLAN HISTORY
The Incentive Plan, covering 1,000,000 shares of common stock, was
adopted by the Board in March 1998 and approved by the shareholders in July
1998. Together with shares carried forward from ISI's 1988 Stock Option Plan, at
February 28, 1999, 2,005,332 shares were available for issuance under the
Incentive Plan. The purpose of the Incentive Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of ISI, by offering them an
opportunity to participate in ISI's future performance through awards of stock
options, restricted stock and stock bonuses.
The Incentive Plan took effect in September 1998, when ISI's 1988 Stock
Option Plan terminated by its terms. From the effective date of the Incentive
Plan to February 28, 1999, options to purchase a total of 1,011,550 shares of
ISI common stock were granted under the Incentive Plan. Of these, options were
granted to the Named Executive Officers, as follows: Charles M. Boesenberg,
700,000 shares; Joseph Addiego, 65,000 shares; and Janice Waterman, 25,000
shares. During the same period, ISI's executive officers as of February 28, 1999
as a group (7 persons) had been granted options to purchase a total of 790,000
shares and the current directors or nominees for election as a director who are
not executive officers as a group (5 persons) had been granted no options under
the
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Incentive Plan. No options were granted during the period under the Incentive
Plan to any associate of any executive officer or director of ISI, and no
other person received 5% or more of such options.
SHARES SUBJECT TO THE INCENTIVE PLAN
The stock subject to issuance under the Incentive Plan consists of
shares of ISI's authorized but unissued common stock. After taking into account
the proposed amendment, there are reserved for issuance under the Incentive Plan
a total of 2,000,000 shares of common stock plus (a) any shares not issued or
subject to outstanding options under ISI's 1988 Stock Option Plan (the "PRIOR
PLAN") on the effective date of the Incentive Plan; (b) shares that are issuable
upon exercise of an option granted under the Prior Plan but cease to be subject
to the option for any reason other than exercise of the option; and (c) shares
that were issued under the Prior Plan that are repurchased by ISI at the
original issue price or forfeited. In addition, (a) shares subject to an option
granted under the Incentive Plan that cease to be subject to the option for any
reason other than exercise of the option; (b) shares subject to an award granted
under the Incentive Plan that are forfeited or are repurchased by ISI at the
original issue price; or (c) shares subject to an award granted under the
Incentive Plan that otherwise terminates without shares being issued, will again
be available for grant and issuance under the Incentive Plan. This number of
shares is subject to proportional adjustment to reflect stock splits, stock
dividends and other similar events.
ELIGIBILITY
Employees, officers, directors, consultants, independent contractors
and advisors of ISI (and of any subsidiaries and affiliates of ISI) are
eligible to receive awards under the Incentive Plan. A participant may be
granted more than one award under the Incentive Plan. No participant is
eligible to receive more than 200,000 shares of common stock in any calendar
year under the Incentive Plan, other than new employees of ISI (including
directors and officers who are also new employees) who are eligible to
receive up to a maximum of 1,000,000 shares of common stock in the calendar
year in which they commence their employment with ISI. As of February 28,
1999, approximately 650 persons were eligible to participate in the Incentive
Plan, no shares had been issued upon exercise of options, 1,009,550 shares
were subject to outstanding options and no shares had been issued under
restricted stock or stock bonus awards. As of that date, 1,995,782 shares
were available for future grant under the Incentive Plan, after taking into
account the proposed amendment to the Incentive Plan and the shares
originally reserved for issuance under the Prior Plan that have become
available for distribution under the Incentive Plan. The closing price of
ISI's common stock on the Nasdaq National Market was $14.125 per share on
June 4, 1999, the last trading day before the Record Date.
ADMINISTRATION
The Incentive Plan is administered by the Compensation Committee of the
Board (the "COMMITTEE"). The members of the Committee are appointed by the
Board. The Committee currently consists of John C. Bolger, Richard C. Murphy and
Thomas Kailath, all of whom are "NON-EMPLOYEE DIRECTORS," as defined in Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), and "OUTSIDE DIRECTORS," as defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "CODE").
Subject to the terms of the Incentive Plan, the Committee determines
the persons who are to receive awards, the number of shares subject to each
award and the terms and conditions of awards. The Committee also has the
authority to construe and interpret any of the provisions of the Incentive Plan
or any awards granted thereunder.
STOCK OPTIONS
The Incentive Plan permits the granting of options that are intended to
qualify either as Incentive Stock Options ("ISOS") or Nonqualified Stock Options
("NQSOS"). ISOs may be granted only to employees (including officers and
directors who are also employees) of ISI or any parent or subsidiary of ISI. The
exercise price for each ISO share must be no less than 100% of the "fair market
value" (as defined in the Incentive Plan) of a share of common stock at the time
of grant. The exercise price of an ISO share granted to a 10% shareholder must
be no less than 110% of the fair market value of a share of common stock at the
time of grant. The exercise price for each NQSO share must be no less than 85%
of the fair market value of a share of common stock at the time of grant. ISI
has not granted options under the Incentive Plan at less than fair market value
and does not intend to do so in the
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foreseeable future. All options granted under the Incentive Plan have a term
of up to ten years, except for ISOs granted to 10% shareholders, which have a
term of up to five years.
The exercise price of options granted under the Incentive Plan may be
paid as approved by the Committee at the time of grant: (1) in cash (by check);
(2) by cancellation of indebtedness of ISI to the participant; (3) by surrender
of shares of ISI's common stock owned by the participant for at least six months
and having a fair market value on the date of surrender equal to the total
exercise price of the option or that were obtained by the participant in the
open market; (4) by tender of a full recourse promissory note; (5) by waiver of
compensation due to or accrued by the participant for services rendered; (6) by
a "same-day sale" commitment from the participant and a National Association of
Securities Dealers, Inc. ("NASD") broker; (7) by a "margin" commitment from the
participant and an NASD broker; or (8) by any combination of the foregoing.
RESTRICTED STOCK AWARDS
The Committee may grant restricted stock awards to purchase stock under
such terms, conditions and restrictions as the Committee may determine. These
restrictions may be based upon completion of a specified number of years of
service with ISI or upon completion of performance goals as determined by the
Committee on the date of the award. The purchase price of restricted shares sold
under the Incentive Plan will be determined by the Committee on the date of the
award (and in the case of an award granted to a 10% shareholder, the purchase
price must be 100% of fair market value) and can be paid for in any of the forms
of consideration listed in items (1) through (5) in "Stock Options" above, as
are approved by the Committee at the time of grant. ISI has not granted any
restricted stock awards under the Incentive Plan.
STOCK BONUS AWARDS
The Committee may grant stock bonus awards under the Incentive Plan,
with such terms, conditions and restrictions as the Committee may determine. A
stock bonus award may be awarded upon satisfaction of such performance goals as
determined by the Committee at the date of the award. ISI has not granted any
stock bonus awards under the Incentive Plan.
MERGERS, CONSOLIDATIONS, CHANGE OF CONTROL
In the event of a merger, consolidation, dissolution or liquidation of
ISI, the sale of substantially all of the assets of ISI or any other similar
corporate transaction, the successor corporation may assume, convert or replace
any or all awards outstanding under the Incentive Plan or substitute equivalent
awards in exchange for those granted under the Incentive Plan or provide to
participants substantially similar consideration, shares or other property as
was provided to shareholders of ISI (after taking into account the provisions of
the awards). In the event that the successor corporation does not assume,
convert, replace or substitute awards, the vesting of the awards will accelerate
and options will become exercisable in full before completion of the corporate
transaction, at the time and on the conditions as the Committee determines. If
the options are not exercised before completion of the corporate transaction,
they will terminate in accordance with the provisions of the Incentive Plan. The
successor corporation may also issue, in place of outstanding ISI shares held by
the participant, substantially similar shares or other property subject to
repurchase restrictions no less favorable to the participant.
AMENDMENT OF THE INCENTIVE PLAN
The Board may at any time terminate or amend the Incentive Plan,
including amending any form of award agreement or document to be executed under
the Incentive Plan. However, the Board may not amend the Incentive Plan in any
manner that requires shareholder approval under the Code or the regulations
promulgated under the Code.
TERM OF THE INCENTIVE PLAN
Unless terminated earlier as provided in the Incentive Plan, the
Incentive Plan will expire in March 2008, ten years after the date the Board
adopted the Incentive Plan.
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FEDERAL INCOME TAX INFORMATION
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY
STATEMENT OF THE FEDERAL INCOME TAX CONSEQUENCES TO ISI AND PARTICIPANTS UNDER
THE INCENTIVE PLAN. FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND LOCAL
TAX CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON HIS OR HER INDIVIDUAL
CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN AND IS ENCOURAGED TO SEEK THE ADVICE OF
A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN THE
INCENTIVE PLAN.
INCENTIVE STOCK OPTIONS. A participant will recognize no income upon
grant of an ISO and incur no tax on its exercise (unless the participant is
subject to the alternative minimum tax ("AMT") as described below). If the
participant holds shares acquired upon exercise of an ISO (the "ISO SHARES") for
more than one year after the date the option was exercised and for more than two
years after the date the option was granted, the participant generally will
realize capital gain or loss (rather than ordinary income or loss) upon
disposition of the ISO Shares. This gain or loss will be equal to the difference
between the amount realized upon such disposition and the amount paid for the
ISO Shares.
If the participant disposes of ISO Shares prior to the expiration of
either required holding period (a "DISQUALIFYING DISPOSITION"), the gain
realized upon such disposition, up to the difference between the fair market
value of the ISO Shares on the date of exercise (or, if less, the amount
realized on a sale of such shares) and the option exercise price, will be
treated as ordinary income. Any additional gain will be capital gain, taxed at a
rate that depends upon the amount of time the ISO Shares were held by the
participant.
ALTERNATIVE MINIMUM TAX. The difference between the fair market value
of the ISO Shares on the date of exercise and the exercise price is an
adjustment to income for purposes of AMT. The AMT (imposed to the extent it
exceeds the taxpayer's regular tax) is 26% of an individual taxpayer's
alternative minimum taxable income (28% in the case of alternative minimum
taxable income in excess of $175,000). A maximum 20% AMT rate applies to the
portion of alternative minimum taxable income that would otherwise be taxable as
net capital gain. Alternative minimum taxable income is determined by adjusting
regular taxable income for certain items, increasing that income by certain tax
preference items (including the difference between the fair market value of the
ISO Shares on the date of exercise and the exercise price), and reducing this
amount by the applicable exemption amount ($45,000 in case of a joint return,
subject to reduction under certain circumstances). If a disqualifying
disposition of the ISO Shares occurs in the same calendar year as exercise of
the ISO, there is no AMT adjustment with respect to those ISO Shares. Also, upon
a sale of ISO Shares that is not a disqualifying disposition, alternative
minimum taxable income is reduced in the year of sale by the excess of the fair
market value of the ISO Shares at exercise over the amount paid for the ISO
Shares.
NONQUALIFIED STOCK OPTIONS. A participant will not recognize any
taxable income at the time an NQSO is granted. However, upon exercise of an
NQSO, the participant must include in income as compensation an amount equal to
the difference between the fair market value of the shares on the date of
exercise and the participant's exercise price. The included amount must be
treated as ordinary income by the participant and may be subject to withholding
by ISI (either by payment in cash or withholding out of the participant's
salary). Upon resale of the shares by the participant, any subsequent
appreciation or depreciation in the value of the shares will be treated as
capital gain or loss.
RESTRICTED STOCK AND STOCK BONUS AWARDS. Restricted stock and stock
bonus awards will generally be subject to tax at the time of receipt, unless
there are restrictions that enable the participant to defer tax. At the time the
tax is incurred, the tax treatment will be similar to that discussed above for
NQSOs.
MAXIMUM TAX RATES. The maximum tax rate applicable to ordinary income
is 39.6%. Long-term capital gain is taxed at a maximum rate of 20%. To receive
long-term capital gain treatment, the stock 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.
-8-
<PAGE>
TAX TREATMENT OF ISI. ISI generally will be entitled to a deduction in
connection with the exercise of an NQSO by a participant or the receipt of
restricted stock or stock bonuses by a participant to the extent that the
participant recognizes ordinary income, provided that ISI timely reports such
income to the Internal Revenue Service. ISI will be entitled to a deduction in
connection with the disposition of ISO Shares only to the extent that the
participant recognizes ordinary income on a disqualifying disposition of the ISO
Shares.
ERISA. The Incentive 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 Incentive Plan are not
determinable because, under the terms of the Incentive 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 ISI's common
stock on the date of grant.
THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT OF THE 1998 EQUITY INCENTIVE PLAN
PROPOSAL NO. 3
APPROVAL OF 1999 EMPLOYEE STOCK PURCHASE PLAN
Shareholders are being asked to approve ISI's 1999 Employee Stock
Purchase Plan (the "STOCK PURCHASE Plan"). The Stock Purchase Plan covers a
total of 800,000 shares of common stock, plus any shares previously approved by
shareholders for issuance under ISI's current employee stock purchase plan that
remain unissued when that plan expires. The current stock purchase plan will
expire in September 1999, after the end of the current offering period. In March
1999, the Board adopted the Stock Purchase Plan to replace the existing plan.
The Board believes that it is in the best interests of ISI to continue to offer
employees the benefit of a stock purchase plan because of the need to provide
equity participation to attract and retain quality employees and remain
competitive in the industry. The Stock Purchase Plan plays an important role in
ISI's efforts to attract and retain employees of outstanding ability.
Below is a summary of the principal provisions of the Stock Purchase
Plan. The summary is not necessarily complete, and reference is made to the full
text of the Stock Purchase Plan.
STOCK PURCHASE PLAN HISTORY
The purpose of the Stock Purchase Plan is to provide employees of ISI
and its parents and subsidiaries the Board designates as eligible to participate
with a convenient means to acquire an equity interest in ISI through payroll
deductions, to enhance their sense of participation in the affairs of ISI and to
provide an incentive for continued employment. ISI intends that the Stock
Purchase Plan will qualify as an "employee stock purchase plan" under Section
423 of the Code.
SHARES SUBJECT TO THE STOCK PURCHASE PLAN
The stock subject to issuance under the Stock Purchase Plan consists of
shares of ISI's authorized but unissued common stock. The Board has reserved
800,000 shares of common stock for issuance under the Stock Purchase Plan, plus
any shares remaining unissued under ISI's current employee stock purchase plan
when it expires. The number of shares available under the Stock Purchase Plan is
subject to proportional adjustment to reflect stock splits, stock dividends and
other similar events.
ADMINISTRATION
The Stock Purchase Plan is administered by the Committee. The
interpretation or construction by the Committee of any provisions of the Stock
Purchase Plan will be final and binding on all participants.
-9-
<PAGE>
ELIGIBILITY
All employees of ISI, or any parent or subsidiary designated by the
Board, are eligible to participate in an Offering Period (as defined below)
under the Stock Purchase Plan, except the following: (a) employees who are not
employed by ISI three months before the beginning of such Offering Period; (b)
employees who are customarily employed for 20 hours or less per week; (c)
employees who are customarily employed for five months or less in a calendar
year; (d) employees who own stock or hold options to purchase stock or who, as a
result of participation in the Stock Purchase Plan, would own stock or hold
options to purchase stock, possessing 5% or more of the total combined voting
power or value of all classes of stock of ISI; and (e) independent contractors
who are reclassified as employees for any reason except for federal income and
employment tax purposes.
As of February 28, 1999, approximately 456 persons were eligible to
participate in the Stock Purchase Plan. The closing price of ISI's common stock
on the Nasdaq National Market was $14.125 per share on June 4, 1999, the last
trading day before the Record Date.
Employees participate in the Stock Purchase Plan through payroll
deductions. A participant sets the rate of payroll deductions, which may not be
less than 2% nor more than 10% of the participant's compensation, which is
defined as base salary, wages, commissions, overtime, shift premiums, bonuses
and draws against commissions, before any deductions from the participant's
salary under Sections 125 or 401(k) of the Code. No participant is permitted to
purchase shares under the Stock Purchase Plan at a rate which, when aggregated
with such employee's rights to purchase stock under all similar purchase plans
of ISI, exceeds $15,000 in fair market value determined as of the Offering Date
for each calendar year.
OFFERING PERIODS
Each offering of common stock under the Stock Purchase Plan is for a
period of 24 months (the "OFFERING PERIOD"). Offering Periods are planned to
start on April 1 and October 1 of each year and end on March 31 and September
30. The first Offering Period will begin on October 1, 1999. Each Offering
Period consists of four six-month purchase periods (individually, a "PURCHASE
PERIOD") during which payroll deductions of the participants are accumulated
under the Stock Purchase Plan. On the last day of the Purchase Period the
accumulated amounts are used to purchase shares. The Committee has the power to
change the duration of Offering Periods without shareholder approval if the
change is announced at least 15 days before the scheduled beginning of the first
Offering Period to be affected. The first business day of each Offering Period
is the "OFFERING Date" and the last business day of each Purchase Period is the
"PURCHASE DATE."
Employees may elect to participate in any Offering Period by enrolling
as provided under the terms of the Stock Purchase Plan. Once enrolled, a
participant will automatically participate in each succeeding Offering Period
unless the participant withdraws from the Offering Period or the Stock Purchase
Plan is terminated. After a participant sets his or her rate of payroll
deductions for an Offering Period, that rate is effective for the remainder of
the Offering Period (and for all subsequent Offering Periods in which the
participant is automatically enrolled) unless the participant increases or
decreases the rate of deduction. No more than one change may be made during a
single Purchase Period.
PURCHASE PRICE
The purchase price of shares that may be acquired in any Offering
Period under the Stock Purchase Plan is 85% of the lesser of: (a) the fair
market value of the shares on the Offering Date; or (b) the fair market value of
the shares on the Purchase Date. The fair market value of a share of ISI's
common stock is defined as the closing price on the Nasdaq National Market on
the date before the Offering Date or Purchase Date as reported by Nasdaq.
PURCHASE OF STOCK UNDER THE STOCK PURCHASE PLAN
The number of whole shares a participant will be able to purchase in
any Purchase Period will be determined by dividing the total payroll amount
withheld from the participant during the Purchase Period under the Stock
Purchase Plan by the purchase price for each share determined as described
above. The purchase will take place automatically on the Purchase Date of such
Purchase Period.
-10-
<PAGE>
SUSPENSION OF DEDUCTIONS OR WITHDRAWAL
A participant may stop making payroll deductions during an Offering
Period. The participant may elect to keep the deductions that have accumulated
in the Stock Purchase Plan to purchase shares at the end of the current Purchase
Period, or may elect to have the accumulated deductions returned to him or her.
If the participant makes his or her election less than 15 days before such
Purchase Date, payroll deductions will continue for the remainder of that
Purchase Period. No further payroll deductions for the purchase of shares will
be made for the succeeding Offering Period unless the participant enrolls in the
new Offering Period at least 15 days before the Offering Date.
AMENDMENT OF THE STOCK PURCHASE PLAN
The Board may at any time amend, terminate or extend the term of the
Stock Purchase Plan, except that any such termination cannot affect the terms of
shares previously granted under the Stock Purchase Plan, nor may any amendment
make any change in the terms of shares previously granted which would adversely
affect the right of any participant, nor may any amendment be made without
shareholder approval if such amendment would: (a) increase the number of shares
that may be issued under the Stock Purchase Plan; or (b) change the designation
of the employees (or class of employees) eligible for participation in the Stock
Purchase Plan. The Board can amend the Stock Purchase Plan without the above
restrictions if the continuation of the Stock Purchase plan or any Offering
Period would result in financial accounting treatment different than that in
effect at the time the Stock Purchase plan was adopted.
TERM OF THE STOCK PURCHASE PLAN
The Stock Purchase Plan will continue until the earlier to occur of:
(a) termination of the Stock Purchase Plan by the Board; (b) the issuance of all
the shares of common stock reserved for issuance under the Stock Purchase Plan;
or (c) March 2009, ten years after the date the Board adopted the Stock Purchase
Plan.
FEDERAL INCOME TAX INFORMATION
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY
STATEMENT OF THE FEDERAL INCOME TAX CONSEQUENCES TO ISI AND EMPLOYEES
PARTICIPATING IN THE STOCK PURCHASE PLAN. FEDERAL TAX LAWS MAY CHANGE AND THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON
HIS OR HER INDIVIDUAL CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN AND IS ENCOURAGED
TO SEEK THE ADVICE OF A QUALIFIED TAX ADVISER REGARDING THE TAX CONSEQUENCES OF
PARTICIPATION IN THE STOCK PURCHASE PLAN.
The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Code.
TAX TREATMENT OF THE PARTICIPANT. Participants will not recognize
income for federal income tax purposes either upon enrollment in the Stock
Purchase Plan or upon the purchase of shares. All tax consequences are deferred
until a participant sells the shares, disposes of the shares by gift or dies.
If shares are held for more than one year after the date of purchase
and more than two years from the beginning of the applicable Offering Period, or
if the participant dies while owning the shares, the participant realizes
ordinary income on a sale (or a disposition by way of gift or upon death) to the
extent of the lesser of: (a) 15% of the fair market value of the shares at the
beginning of the Offering Period; or (b) the actual gain (the amount by which
the market value of the shares on the date of sale, gift or death exceeds the
purchase price). All additional gain upon the sale of shares is treated as
capital gain. If the shares are sold and the sale price is less than the
purchase price, there is no ordinary income and the participant has a capital
loss for the difference between the sale price and the purchase price.
If the shares are sold or are otherwise disposed of including by way of
gift (but not death, bequest or inheritance) (in any case, a "DISQUALIFYING
DISPOSITION") within either the one-year or the two-year holding periods
described above, the participant realizes ordinary income at the time of sale or
other disposition, taxable to the extent that the fair market value of the
shares at the date of purchase is greater than the purchase price. This excess
will constitute ordinary income (not currently subject to withholding) in the
year of the sale or other disposition even if no gain is realized on the sale or
if a gratuitous transfer is made. The difference, if any, between the
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<PAGE>
proceeds of sale and the aggregate fair market value of the shares at the
date of purchase is a capital gain or loss. The maximum tax rate applicable
to ordinary income is 39.6%. Long-term capital gain is taxed at a maximum
rate of 20%. To receive long-term capital gain treatment, the stock 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 ISI. ISI will be entitled to a deduction in connection
with the disposition of shares acquired under the Stock Purchase Plan only to
the extent that the participant recognizes ordinary income on a disqualifying
disposition of the shares. ISI will treat any transfer of record ownership of
shares as a disposition, unless it is notified to the contrary. In order to
enable ISI to learn of disqualifying dispositions and ascertain the amount of
the deductions to which it is entitled, participants are required to notify ISI
in writing of the date and terms of any disposition of shares purchased under
the Stock Purchase Plan.
ERISA. The Stock Purchase Plan is not subject to any of the provisions
of ERISA nor is it qualified under Section 401(a) of the Code.
NEW PLAN BENEFITS
The amounts of future stock purchases under the Stock Purchase Plan are
not determinable because, under the terms of the Stock Purchase Plan, purchases
are based upon elections made by participants. Future purchase prices are not
determinable because they are based upon the fair market value of ISI's common
stock.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE 1999 EMPLOYEE
STOCK PURCHASE PLAN
PROPOSAL NO. 4
AMENDMENT OF THE BYLAWS
Shareholders are being asked to approve an amendment to ISI's Bylaws to
change the number of authorized directors. The ISI Bylaws provide that the
number of directors must be at least four, but not more than seven. The Board
sets the exact number of directors within the limits set by the Bylaws. The
Board currently consists of seven directors.
The Board approved the proposed amendment in March 1999, to be
effective upon shareholder approval. The proposed amendment will increase the
size of the Board to a range of at least five, but not more than nine. The Board
will retain the authority to determine the exact number of directors within the
limits set by the Bylaws. Initially, the Board will set the exact number of
directors at seven. The Board has not identified any candidates for the Board.
The Board believes that the amendment is in the best interests of ISI because it
gives the Board greater flexibility to add directors in the future as qualified
candidates are identified. In addition, the amendment gives the Board the
flexibility to adjust the number of directors to reflect changing corporate
governance practices with respect to board composition and size as well as to
adapt the size of the Board to the changing needs of ISI.
THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENT OF THE BYLAWS
PROPOSAL NO. 5
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
ISI has selected PricewaterhouseCoopers LLP as its independent
accountants to perform the audit of ISI's financial statements for fiscal year
2000 and the shareholders are being asked to ratify such selection.
PricewaterhouseCoopers LLP has been ISI's independent accountant since the
inception of ISI. Representatives of PricewaterhouseCoopers LLP will be present
at the meeting, will have the 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 RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION
OF PRICEWATERHOUSECOOPERS LLP
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 7, 1999,
with respect to the beneficial ownership of ISI's common stock by: (a) each
shareholder known by ISI to be the beneficial owner of more than 5% of ISI's
common stock; (b) each nominee for director; (c) each Named Executive Officer;
and (d) all directors and executive officers as a group.
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 where applicable. Shares
of common stock subject to options that are currently exercisable or exercisable
within 60 days of June 7, 1999 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
AMOUNT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------ -------------------- ----------------
<S> <C> <C>
Narendra K. and Vinita Gupta (1).......................... 4,803,414 21.0%
Nevis Capital Management (2) ............................. 2,589,599 11.4%
Brown Investment Advisory (3)............................. 2,448,401 10.8%
Franklin Advisors, Inc. (4)............................... 2,205,800 9.7%
Thomas Kailath (5)........................................ 831,598 3.6%
David P. St. Charles (6).................................. 243,282 1.1%
Joseph Addiego (7)........................................ 130,189 *
Marco J. Thompson (8)..................................... 106,134 *
John C. Bolger (9)........................................ 52,936 *
Richard C. Murphy (10).................................... 44,895 *
William C. Smith (11)..................................... 31,666 *
Janice E. Waterman (12)................................... 20,937 *
Charles M. Boesenberg (13)................................ 6,000 *
Michael A. Brochu (14).................................... 5,999 *
Phillip R. Bell (15)...................................... -- *
All officers and directors as a group (14 persons) (16)... 6,232,126 27.3%
</TABLE>
- -------------------
* Less than 1%
(1) Includes 3,730,200 shares held of record by Dr. and Mrs. Gupta in The
Narendra and Vinita Gupta Living Trust. Also includes 1,000,000 shares held
of record by Dr. and Mrs. Gupta, together with a third party, as trustees
for their children, as to which they disclaim beneficial ownership; 7,800
shares held of record by Dr. Gupta as custodian for his daughter, as to
which he claims beneficial ownership; 16,666 shares subject to options held
by Dr. Gupta that are exercisable within 60 days of June 7, 1999; and
48,748 shares subject to options held by Mrs. Gupta that are exercisable
within 60 days of June 7, 1999. Dr. Gupta is the Chairman of the Board and
Secretary of ISI. Mrs. Gupta is a director of ISI. The address of Dr. and
Mrs. Gupta is 201 Moffett Park Drive, Sunnyvale, California 94089.
(2) The address of this shareholder is Nevis Capital Management, Inc., 1119 St.
Paul Street, Baltimore, Maryland 21202. Share ownership is as reported on
Schedule 13G filed February 2, 1999.
(3) The address of this shareholder is Brown Investment Advisory and Trust Co.,
19 South Street, Baltimore, Maryland 21202. Share ownership is as reported
on Schedule 13G/A filed April 13, 1999.
(4) The address of this shareholder is Franklin Advisors, Inc., 901 Mariners
Island Blvd., San Mateo, California 94404. Franklin Advisors, Inc. reported
on Schedule 13G filed with the SEC on January 28, 1999 that it
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<PAGE>
beneficially owned 2,264,550 shares of ISI common stock. Franklin has
since orally informed ISI that as of March 31, 1999, it owned 2,205,800
shares.
(5) Includes 382,850 shares held of record by Dr. Kailath and his wife as
trustees of a revocable trust and 400,000 shares held of record by them,
together with a third party, as trustees for their children and as
custodians for their son. Also includes 48,748 shares subject to options
exercisable within 60 days of June 7, 1999. Dr. Kailath is a director of
ISI.
(6) Includes 196,665 shares subject to options exercisable within 60 days of
June 7, 1999. Mr. St. Charles is the former President and Chief Executive
Officer and a former director of ISI.
(7) Includes 86,062 shares subject to options exercisable within 60 days of
June 7, 1999. Mr. Addiego is the Vice President of Worldwide Sales of ISI.
(8) Includes 41,541 shares subject to options exercisable within 60 days of
June 7, 1999. Mr. Thompson is the Chief Technology Officer of ISI.
(9) Includes 48,436 shares subject to options exercisable within 60 days of
June 7, 1999. Mr. Bolger is a director of ISI.
(10) Includes 34,895 shares subject to options exercisable within 60 days of
June 7, 1999. Mr. Murphy is a director of ISI.
(11) Represents shares subject to options exercisable within 60 days of June 7,
1999. Mr. Smith is the Vice President of Finance and Chief Financial
Officer of ISI.
(12) Represents shares subject to options exercisable within 60 days of June 7,
1999. Ms. Waterman is the Vice President of Operations of ISI.
(13) Mr. Boesenberg is the President, Chief Executive Officer and Vice President
of Marketing and a director of ISI.
(14) Includes 4,999 shares subject to options exercisable within 60 days of June
7, 1999. Mr. Brochu is a director of ISI.
(15) Mr. Bell is the former Vice President of Worldwide Sales of ISI.
(16) Includes 768,005 shares subject to options exercisable within 60 days of
June 7, 1999, including the options described in footnotes (1), (5), and
(7) through (13).
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid
for services rendered in all capacities to ISI and its subsidiaries during each
of fiscal years 1997, 1998 and 1999 to the President and Chief Executive
Officer, the four other most highly compensated executive officers who were
serving as executive officers at the end of fiscal year 1999 and the former
President and Chief Executive Officer and one other former executive officer
(together, the "NAMED EXECUTIVE OFFICERS"). This information includes the dollar
values of base salaries, bonus awards, the number of shares subject to stock
options granted and certain other compensation, if any, whether paid or
deferred. ISI does not grant stock appreciation rights and has no long-term
compensation benefits other than stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------- ------------------
SECURITIES ALL OTHER
NAME AND FISCAL UNDERLYING COMPENSA-
PRINCIPAL POSITION YEAR SALARY (1) BONUS (2) OPTIONS (3) TION (4)
- ---------------------------------------- ---------- -------------- ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Charles M. Boesenberg (5)........... 1999 $102,603 $750,000 700,000 $2,455
President, Chief Executive Officer and 1998 -- -- -- --
Vice President, Marketing 1997 -- -- -- --
Joseph Addiego...................... 1999 $233,910 $74,050 65,000 $2,685
Vice President, Worldwide Sales 1998 $266,470 -- 135,000 $2,623
1997 $274,303 -- 40,000 $2,177
William C. Smith.................... 1999 $211,035 -- 20,000 $2,245
Vice President, 1998 $175,000 $50,000 80,000 $2,423
Finance and Chief Financial Officer 1997 $23,558 -- 80,000 $202
Janice Waterman..................... 1999 $187,615 $15,000 40,000 $2,846
Vice President, Operations 1998 $159,807 $27,000 51,000 $2,577
1997 $160,817 -- 20,000 $1,919
Marco J. Thompson................... 1999 $185,282 -- 20,000 $2,476
Chief Technology Officer 1998 $263,293 $20,000 62,000 $2,631
1997 $301,353 $60,000 16,000 $1,353
David P. St. Charles (6)........... 1999 $252,460 $400,000 80,000 $529
Former President and Chief Executive 1998 $250,000 -- 160,000 $1,154
Officer 1997 $257,462 -- 100,000 $2,113
Phillip R. Bell (7)................. 1999 $240,486 $120,000 -- $2,178
Former Vice President, 1998 $33,846 $40,000 80,000 $677
Worldwide Sales 1997 -- -- -- --
</TABLE>
- -----------------
(1) Includes commissions and deferral 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.
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<PAGE>
(3) Option grants in fiscal year 1998 for the following executive officers
include options granted in exchange for outstanding options in
connection with a repricing in April 1997: Joseph Addiego, options to
purchase 60,000 shares; William C. Smith, options to purchase 80,000
shares; Janice Waterman, options to purchase 50,000 shares; Marco J.
Thompson, options to purchase 16,000 shares; and David P. St. Charles,
options to purchase 100,000 shares.
(4) Represents employer matching contributions to 401(k) plan accounts.
(5) Mr. Boesenberg joined ISI in December 1998. His annual salary is
$400,000.
(6) Mr. St. Charles became a consultant to ISI in December 1998.
(7) Mr. Bell left ISI in January 1999.
The following table sets forth further information regarding option
grants during fiscal year 1999 to each of the Named Executive Officers. In
accordance with the rules of the Commission, 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. These gains are based on assumed rates
of annual compound stock price appreciation of 5% and 10% from the date the
option was granted to the end of the option term.
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENTAGE OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED EXERCISE TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION -------
NAME GRANTED(1) YEAR 1999 PER SHARE DATE 5% 10%
- ---- ---------- ----------- -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Charles M. Boesenberg.... 700,000 37.6% $10.50 12/14/08 $4,622,400 $ 11,714,000
Joseph Addiego........... 40,000 2.2% $10.50 12/14/08 $ 264,100 $ 669,400
25,000 1.3% $ 7.75 10/15/08 $ 121,800 $ 308,800
William C. Smith......... 20,000 1.1% $21.00 3/30/08 $ 264,100 $ 669,400
Janice Waterman.......... 15,000 0.8% $21.00 3/30/08 $ 198,100 $ 502,000
25,000 1.3% $ 7.75 10/15/08 $ 121,800 $ 308,800
Marco J. Thompson........ 20,000 1.1% $21.00 3/30/08 $ 264,100 $ 669,400
David P. St. Charles..... 80,000 4.3% $21.00 3/30/08 $1,056,500 $ 2,667,500
Phillip R. Bell.......... -- -- -- -- -- --
</TABLE>
- -----------------
(1) The options shown in the table are incentive stock options (to the
extent permitted under the Code). They were granted at fair market
value and will expire ten years from the date of grant, subject to
earlier termination upon termination of the optionee's employment. The
options become exercisable over a four-year period, at a rate of 25% on
the first anniversary of the grant date and 1/48 of the shares at the
end of each full month thereafter.
(2) The 5% and 10% assumed annual compound rates of stock price
appreciation are mandated by the rules of the Commission and do not
represent ISI's estimate or projection of future common stock prices.
-16-
<PAGE>
The following table sets forth certain information concerning the exercise of
options by each of the Named Executive Officers during fiscal year 1999.
"Value Realized" represents the fair market value of the shares of common
stock underlying the option on the date of exercise less the aggregate
exercise price of the option. In addition, the table includes the number of
shares covered by both exercisable and unexercisable stock options as of
February 28, 1999. Also reported are values of "in-the-money" options. These
values, unlike the amounts set forth in the column entitled "Value Realized,"
have not been, and may never be, realized and are based on the positive
spread between the respective exercise prices of outstanding options and
$15.875 per share, which was the closing price of ISI's common stock on
February 26, 1999.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE
UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END YEAR-END
------------------------------- ------------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- -------------- ------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Boesenberg.... -- -- -- 700,000 -- $3,762,500
Joseph Addiego........... 13,000 $52,000 68,457 153,543 $ 401,153 $ 564,097
William C. Smith......... 20,000 $172,120 16,166 63,334 $ 93,746 $ 243,754
Janice Waterman.......... 12,750 $123,594 10,624 67,626 $ 71,530 $ 389,126
Marco J. Thompson........ 3,922 $58,340 28,416 53,584 $ 160,298 $ 189,452
David P. St. Charles..... 80,000 $791,250 164,166 181,334 $1,143,403 $ 533,547
Phillip R. Bell.......... -- -- 21,666 -- $ 54,165 --
</TABLE>
EMPLOYMENT AND SEVERANCE AGREEMENTS
ISI and Mr. Boesenberg are parties to a letter agreement dated November 30,
1998 governing his employment with ISI. Under the agreement, ISI agreed to
pay Mr. Boesenberg an initial base salary at an annualized rate of $400,000,
with a bonus of up to $300,000 on an annualized basis, depending upon
achievement of agreed-upon objectives. Mr. Boesenberg also received a
one-time cash bonus of $750,000, subject to refund if, within the first 12
months of his employment, Mr. Boesenberg resigns for other than good reason
or if he is terminated for cause. ISI agreed to provide benefits that ISI
provides for employees in comparable positions, and to grant an option to
purchase 700,000 shares of ISI common stock. The option was granted on
December 14, 1998 at an exercise price of $10.50 per share. The option
becomes vested over four years, at the rate of 25% of the shares on the first
anniversary of the grant date and 2.083% of the shares monthly thereafter,
for as long as Mr. Boesenberg remains employed with ISI. Upon a change of
control of ISI, the vesting period of the options will be accelerated by 24
months. If Mr. Boesenberg's employment is terminated without cause or he
resigns for good reason, then he will be entitled to severance of 12 months
base salary and options to purchase 85,000 shares will become vested
immediately. Mr. Boesenberg's employment is at-will and may be terminated by
either ISI or Mr. Boesenberg at any time.
ISI and Mr. St. Charles are parties to an agreement dated as of June 15, 1999
under which Mr. St. Charles agreed to make himself available to ISI as a
consultant for 12 months beginning December 15, 1998, in consideration of a
one time payment of his base salary of $300,000. During the period of
consultancy, Mr. St. Charles' options continue to vest and his options will
remain exercisable until December 15, 2000.
-17-
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of John C. Bolger, Richard C.
Murphy and Thomas Kailath. The members of the Compensation Committee are
independent outside directors. There is no interlocking relationship between the
Board or Compensation Committee and the board of directors or compensation
committee of any other company.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board (the "COMMITTEE") makes all
decisions involving the compensation of executive officers of ISI. During fiscal
year 1999, the Committee consisted of John C. Bolger, Richard C. Murphy and
Thomas Kailath, three independent non-employee directors, none of whom have any
interlocking relationships as defined by the Commission.
The Committee typically reviews base salary levels and target bonuses
for the Chief Executive Officer and other executive officers at or about the
beginning of each year. Mr. Boesenberg evaluated the performance of all
executive officers and recommended salary adjustments that were reviewed and
approved by the Committee. Performance evaluations for individual executive
officers are based on predetermined individual goals. For the Chief Executive
Officer and Chairman of the Board, these goals are set by the Committee, and for
all other officers, these goals are recommended by the Chief Executive Officer
and reviewed and approved by the Committee. The Chief Executive Officer and the
Chairman of the Board do not participate in any discussion regarding their
respective salary adjustments. The Committee administers ISI's incentive and
equity plans, including the Incentive Plan and the Stock Purchase Plan.
GENERAL COMPENSATION POLICY
The Committee's policy in compensating executive officers, including
the Chief Executive Officer and the Chairman of the Board, is based upon the
philosophy that ISI's long-term success in its marketplace is best achieved
through recruitment and retention of the best people in the industry. The
Committee applies this philosophy in determining compensation for executive
officers in three areas: salary, bonuses and stock options. The Committee
believes that the compensation of the Chief Executive Officer, the Chairman of
the Board and the other executive officers should relate directly to corporate
performance. Thus, ISI's compensation policy, which applies to management and
other key employees, relates a portion of each individual's total compensation
to corporate management and individual objectives and profit objectives set
forth at the beginning of the year. Consistent with this policy, a designated
portion of the compensation of each executive is contingent upon corporate
performance and, in the case of certain executive officers, adjusted based on
the individual officer's performance measured against personal objectives, as
determined by the Committee in its discretion.
ISI strives to offer salaries to its executive officers that are
competitive in its industry for similar positions requiring similar
qualifications. In determining executive officer salaries, the Committee
considers information provided by the Vice President, Human Resources and
Operations, whose recommendations are based upon salary surveys specific to
ISI's industry, size and geographic location. These surveys are prepared by an
independent organization using information provided from over 300 companies.
These surveys summarize information from companies that closely match ISI in
terms of product or industry, geography and revenue levels. The base salaries,
incentive compensation and stock option grants of the executive officers are
determined in part by the Committee after review and evaluation of these data in
connection with ISI's corporate goals. To this end, the Committee attempts to
compare the compensation of ISI's executive officers with the compensation
practices of comparable companies to determine base salary, target bonuses and
target total cash compensation. In addition to considering the results of the
performance evaluations and information concerning competitive salaries, the
Committee places primary weight on the financial condition of ISI in considering
salary adjustments.
-18-
<PAGE>
ISI seeks to provide additional incentives and rewards to executives
who make contributions of outstanding value to ISI. For this reason, the
Committee administers a bonus plan, which can comprise a substantial portion of
the total compensation of executive officers when earned and paid. The bonus for
the Chief Executive Officer, Chairman of the Board and for other executives is
based primarily on ISI's performance.
The Committee believes that employee equity ownership provides
significant additional motivation to executive officers to maximize value for
ISI's shareholders, and therefore recommends to the Board periodic grants of
stock options under the Incentive Plan. Stock options are granted by the
Committee in its discretion at the prevailing market price. Stock options
generally have value for the executive only if the price of ISI's stock
increases above the fair market value on the grant date and the executive
remains in ISI's employ for the period required for the options to vest.
Therefore, the 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.
In preparing the performance graph for this Proxy Statement, ISI used
the Hambrecht & Quist Technology Index as its published line of business index.
The compensation practices of most of the companies in the H&Q Technology Index
were not reviewed by ISI when the Committee reviewed the compensation
information described above because such companies were determined not to be
competitive with ISI for executive talent.
1999 EXECUTIVE COMPENSATION
BASE COMPENSATION. The Committee reviewed the recommendations and
performance and market data outlined above and established a base salary level
to be effective March 1, 1999 for each executive officer, including the Chief
Executive Officer and the Chairman of the Board.
INCENTIVE COMPENSATION. The Committee determines annually the total
amount of cash bonuses available for executive officers. Bonus awards are
contingent upon the performance of ISI as a whole, based upon 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 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 Committee, with regard
to executive officers other than the Chief Executive Officer. 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. The Chief Executive Officer's subjective judgment
of executives' performance (other than his own) is taken into account in
determining whether those goals have been satisfied. Executive officers earn a
percentage of the target amounts based on ISI's achievement of the performance
goals, as determined by the Committee annually in its discretion. Awards are
weighted so that proportionately higher awards are received when ISI's
performance exceeds targets and proportionately smaller or no awards are made
when ISI does not meet targets. In fiscal year 1999, the objectives used as the
basis for incentive compensation were based primarily on ISI's performance.
STOCK OPTIONS. Stock options are an essential element of ISI's
executive compensation package. The Committee believes that equity-based
compensation in the form of stock options links the interests of management and
shareholders by focusing employees and management on increasing shareholder
value. The actual value of such equity-based compensation depends entirely on
appreciation of ISI's stock. Approximately 100% of ISI's full-time employees
participate in the Incentive Plan.
The Committee makes option grants in its discretion after consideration
of recommendations from the Chief Executive Officer 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 ISI, 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 ISI's industry, geographic location and size. Stock
options typically have been granted to executive officers when the executive
first joins ISI, in connection with a significant change in responsibilities,
and, occasionally, to achieve equity within a peer group. The Committee may,
however, grant additional stock options to executives for other reasons. The
number of shares subject to each stock option granted is within the discretion
-19-
<PAGE>
of the Committee and is based on anticipated future contribution and ability
to affect corporate and/or business unit results, past performance or
consistency within the executive's peer group. In the discretion of the
Committee, executive officers may also be granted stock options to provide
greater incentives to continue their employment with ISI and to strive to
increase the value of ISI's common stock. In fiscal year 1999, the Committee
considered these factors, as well as the number of options held by executive
officers as of the date of grant that remained unvested. In fiscal year 1999,
stock options were granted to each executive officer. The stock options
generally become exercisable over a four-year period and are granted at a
price that is equal to the fair market value of ISI's common stock on the
date of grant.
For fiscal year 2000, the Committee will be considering whether to
grant future options under the Incentive Plan to executive officers based on the
factors described above, with particular attention to ISI-wide management
objectives and the executive officers' success in obtaining specific individual
financial and operational objectives established or to be established for fiscal
year 2000 and to the number of options currently held by the executive officers
that remain unvested.
CHIEF EXECUTIVE OFFICER COMPENSATION. Compensation for the Chief
Executive Officer is determined through a process similar to that discussed
above for other executive officers of ISI.
In March 1998, the Committee established a base salary for Mr. St.
Charles for fiscal year 1999. This base salary represented an increase over Mr.
St. Charles' fiscal year 1998 base salary. The Committee also established a
target bonus for Mr. St. Charles under the fiscal year 1999 bonus plan. The
fiscal year 1999 base salary level and target bonus were based upon a number of
factors, including (a) the Committee's assessment of the fiscal year 1998
performance of ISI and Mr. St. Charles, (b) fiscal year 1999 ISI performance
objectives and individual performance objectives and responsibilities for Mr.
St. Charles established in March 1998 and (c) the market compensation data for
companies in the same industry and geographic location and similar in size to
ISI in terms of revenue. These objectives included satisfactorily managing ISI's
overall corporate business plan, such as meeting ISI's profitability projections
and its sales targets, and strengthening ISI's financial position.
In fiscal 1999, the Committee granted Mr. St. Charles a new stock
option to purchase 80,000 shares. The number of shares granted was based on Mr.
St. Charles' position, fiscal year 1998 performance and expected performance in
fiscal year 1999.
As set forth in his letter agreement with ISI, Mr. Boesenberg's base
salary was established at the time he began employment with ISI at $400,000 per
year. The target bonus for the balance of fiscal year 1999 for Mr. Boesenberg
was set in his agreement at $300,000, prorated for the period from December 14,
1998 through February 28, 1999. The base salary and target bonus were based, at
the Committee's discretion, upon similar factors as described above for Mr. St.
Charles' base salary and target bonus, reduced proportionally for the period of
time in fiscal year 1999 that Mr. Boesenberg served as the Chief Executive
Officer.
Mr. Boesenberg also received a one-time cash bonus of $750,000, subject
to refund if, within the first 12 months of his employment, Mr. Boesenberg
resigns for other than good reason or if he is terminated for cause. The
Committee concluded this payment of this award was appropriate to provide a
total compensation package for Mr. Boesenberg comparable to that of his former
position.
Consistent with the terms of his letter agreement, Mr. Boesenberg was
awarded a stock option grant for 700,000 shares of ISI common stock on December
14, 1998, when he joined ISI.
COMPLIANCE WITH SECTION 162(m) OF THE INTERNAL REVENUE CODE OF 1986.
ISI intends to comply with the requirements of Section 162(m) of the Code. The
Incentive Plan is already in compliance with Section 162(m) by limiting stock
awards to named executive officers. ISI does not expect cash compensation for
1998 to be in excess of $1,000,000 or consequently affected by the requirements
of Section 162(m).
COMPENSATION COMMITTEE
JOHN C. BOLGER
RICHARD C. MURPHY
THOMAS KAILATH
-20-
<PAGE>
COMPANY STOCK PRICE PERFORMANCE
The stock price performance graph below is required by the Commission
and 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, as amended, or under the Exchange Act, except to the
extent that ISI 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 on ISI
common stock from March 1, 1994 to February 26, 1999 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 common stock of ISI
and in each of the other indices on March 1, 1994, 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 ISI's common stock.
<TABLE>
<CAPTION>
NASDAQ Com H&Q Technology Integrated Systems, Inc.
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
2/28/1994 100 100 100
- -------------------------------------------------------------------------------
8/31/1994 97 101 108
- -------------------------------------------------------------------------------
2/28/1995 101 116 179
- -------------------------------------------------------------------------------
8/31/1995 130 163 244
- -------------------------------------------------------------------------------
2/28/1996 141 174 392
- -------------------------------------------------------------------------------
8/30/1996 180 187 554
- -------------------------------------------------------------------------------
2/28/1997 167 227 379
- -------------------------------------------------------------------------------
8/29/1997 203 298 248
- -------------------------------------------------------------------------------
2/27/1998 226 311 284
- -------------------------------------------------------------------------------
8/31/1998 191 252 118
- -------------------------------------------------------------------------------
2/26/1999 292 411 265
- -------------------------------------------------------------------------------
</TABLE>
-21-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From March 1, 1998 to the present, there has not been any, and there
are no currently proposed, transactions in which the amount involved exceeds
$60,000 to which ISI or any of its subsidiaries was (or is to be) a party and in
which any executive officer, director, 5% beneficial owner of ISI's common stock
or member of the immediate family of any of the foregoing persons had (or will
have) a direct or indirect material interest, except for payments set forth
under "Election of Directors - Director Compensation" and "Executive
Compensation" above and the transactions described below.
During fiscal year 1999, Digital Link Corporation purchased products
and services totaling approximately $42,000 from ISI. In addition, Digital Link
Corporation leased office space from ISI, for total rent payments of
approximately $74,000. Dr. Gupta, the Chairman of the Board of Directors and
Secretary of ISI, served as a member of the Board of Directors of Digital Link
Corporation. Mrs. Gupta, who is a director of ISI and the spouse of 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 ISI and Digital Link
Corporation.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at ISI's 2000 Annual
Meeting of Shareholders must be received by ISI at its principal executive
offices no later than February 29, 2000 in order to be included in ISI's proxy
statement and form of proxy relating to that meeting. Proxies solicited by ISI
for its 2000 Annual Meeting of Shareholders will be voted in the discretion of
the persons voting them with respect to all proposals presented by shareholders
for consideration at such meeting after May 14, 2000.
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16 of the Exchange Act requires ISI's directors and executive
officers, and persons who own more than 10% of a registered class of ISI's
equity securities, to file initial reports of ownership and reports of changes
in ownership with the Commission. Such persons are required by regulation to
furnish ISI with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms furnished to ISI
and written representations from the executive officers and directors of ISI,
ISI believes that all Section 16(a) filing requirements were met during fiscal
year 1999.
OTHER BUSINESS
The Board does not 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 enclosed, will be voted in accordance with the judgment of
the persons voting such proxies.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE,
SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING.
-22-
<PAGE>
INTEGRATED SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
As Adopted March 24, 1999
1. ESTABLISHMENT OF PLAN. Integrated Systems, Inc., Inc. (the
"COMPANY") proposes to grant options for purchase of the Company's Common Stock
to eligible employees of the Company and its Participating Subsidiaries (as
hereinafter defined) pursuant to this Employee Stock Purchase Plan (this
"PLAN"). For purposes of this Plan, "PARENT CORPORATION" and "SUBSIDIARY" shall
have the same meanings as "parent corporation" and "subsidiary corporation" in
Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986,
as amended (the "CODE"). "PARTICIPATING SUBSIDIARIES" are Parent Corporations or
Subsidiaries that the Board of Directors of the Company (the "BOARD") designates
from time to time as corporations that shall participate in this Plan. The
Company intends this Plan to qualify as an "employee stock purchase plan" under
Section 423 of the Code (including any amendments to or replacements of such
Section), and this Plan shall be so construed. Any term not expressly defined in
this Plan but defined for purposes of Section 423 of the Code shall have the
same definition herein. A total of 800,000 shares of the Company's Common Stock
is reserved for issuance under this Plan plus any shares authorized but not yet
issued under the Company's 1990 Employee Stock Purchase Plan (the "PRIOR PLAN")
on the First Offering Date (as defined in Section 5 below). Such share numbers
shall be subject to adjustments effected in accordance with Section 14 of this
Plan.
2. PURPOSE. The purpose of this Plan is to provide eligible employees
of the Company and Participating Subsidiaries with a convenient means of
acquiring an equity interest in the Company through payroll deductions, to
enhance such employees' sense of participation in the affairs of the Company and
Participating Subsidiaries, and to provide an incentive for continued
employment.
3. ADMINISTRATION. This Plan shall be administered by the Compensation
Committee of the Board (the "COMMITTEE"). Subject to the provisions of this Plan
and the limitations of Section 423 of the Code or any successor provision in the
Code, all questions of interpretation or application of this Plan shall be
determined by the Committee and its decisions shall be final and binding upon
all participants. Members of the Committee shall receive no compensation for
their services in connection with the administration of this Plan, other than
standard fees as established from time to time by the Board for services
rendered by Board members serving on Board committees. All expenses incurred in
connection with the administration of this Plan shall be paid by the Company.
4. ELIGIBILITY. Any employee of the Company or the Participating
Subsidiaries is eligible to participate in an Offering Period (as hereinafter
defined) under this Plan except the following:
(a) employees who are not employed by the Company or a Participating
Subsidiary three (3) months before the beginning of such Offering Period;
(b) employees who are customarily employed for twenty (20) hours or
less per week;
(c) employees who are customarily employed for five (5) months or
less in a calendar year;
(d) employees who, together with any other person whose stock would
be attributed to such employee pursuant to Section 424(d) of the Code, own stock
or hold options to purchase stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Company or
any of its Participating Subsidiaries or who, as a result of being granted an
option under this Plan with respect to such Offering Period, would own stock or
hold options to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or any of
its Participating Subsidiaries; and
<PAGE>
Integrated Systems, Inc.
1999 Employee Stock Purchase Plan
As Adopted March 24, 1999
(e) individuals who provide services to the Company or any of its
Participating Subsidiaries as independent contractors who are reclassified as
common law employees for any reason except for federal income and employment tax
purposes.
5. OFFERING DATES. The offering periods of this Plan (each, an
"OFFERING PERIOD") shall be of twenty-four (24) months duration commencing on
April 1 and October 1 of each year and ending on March 31 and September 30. The
first Offering Period under the Plan shall commence on October 1, 1999 (the
"FIRST OFFERING DATE"). Each Offering Period shall consist of four (4) six month
purchase periods (individually, a "PURCHASE PERIOD") during which payroll
deductions of the participants are accumulated under this Plan. The first
business day of each Offering Period is referred to as the "OFFERING DATE". The
last business day of each Purchase Period is referred to as the "PURCHASE DATE".
The Committee shall have the power to change the duration of Offering Periods
with respect to offerings without stockholder approval if such change is
announced at least fifteen (15) days prior to the scheduled beginning of the
first Offering Period to be affected.
6. PARTICIPATION IN THIS PLAN. Eligible employees may become
participants in an Offering Period under this Plan on the first Offering Date
after satisfying the eligibility requirements by delivering a subscription
agreement to the Company's treasury department (the "TREASURY DEPARTMENT") not
later than fifteen (15) days before such Offering Date. Notwithstanding the
foregoing, the Committee may set a later time for filing the subscription
agreement authorizing payroll deductions for all eligible employees with respect
to a given Offering Period. An eligible employee who does not deliver a
subscription agreement to the Treasury Department by such date after becoming
eligible to participate in such Offering Period shall not participate in that
Offering Period or any subsequent Offering Period unless such employee enrolls
in this Plan by filing a subscription agreement with the Treasury Department not
later than fifteen (15) days preceding such subsequent Offering Date. Once an
employee becomes a participant in an Offering Period, such employee will
automatically participate in the Offering Period commencing immediately
following the last day of the prior Offering Period unless the employee
withdraws or is deemed to withdraw from this Plan or terminates further
participation in the Offering Period as set forth in Section 11 below. Such
participant is not required to file any additional subscription agreement in
order to continue participation in this Plan.
7. GRANT OF OPTION ON ENROLLMENT. Enrollment by an eligible employee in
this Plan with respect to an Offering Period will constitute the grant (as of
the Offering Date) by the Company to such employee of an option to purchase on
the Purchase Date up to that number of shares of Common Stock of the Company
determined by dividing (a) the amount accumulated in such employee's payroll
deduction account during such Purchase Period by (b) the lower of (i)
eighty-five percent (85%) of the fair market value of a share of the Company's
Common Stock on the Offering Date (but in no event less than the par value of a
share of the Company's Common Stock), or (ii) eighty-five percent (85%) of the
fair market value of a share of the Company's Common Stock on the Purchase Date
(but in no event less than the par value of a share of the Company's Common
Stock), provided, however, that the number of shares of the Company's Common
Stock subject to any option granted pursuant to this Plan shall not exceed the
lesser of (x) the maximum number of shares set by the Committee pursuant to
Section 10(c) below with respect to the applicable Purchase Date, or (y) the
maximum number of shares which may be purchased pursuant to Section 10(b) below
with respect to the applicable Purchase Date. The fair market value of a share
of the Company's Common Stock shall be determined as provided in Section 8
below.
8. PURCHASE PRICE. The purchase price per share at which a share of
Common Stock will be sold in any Offering Period shall be eighty-five percent
(85%) of the lesser of:
(A) The fair market value on the Offering Date; or
(B) The fair market value on the Purchase Date.
For purposes of this Plan, the term "FAIR MARKET VALUE" means, as
of any date, the value of a share of the Company's Common Stock determined as
follows:
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<PAGE>
Integrated Systems, Inc.
1999 Employee Stock Purchase Plan
As Adopted March 24, 1999
(a) if such Common Stock is then quoted on the Nasdaq
National Market, its closing price on the Nasdaq
National Market on the last trading date prior to the
date of determination as reported in THE WALL STREET
JOURNAL;
(b) if such Common Stock is publicly traded and is then
listed on a national securities exchange, its closing
price on the last trading date prior to the date of
determination on the principal national securities
exchange on which the Common Stock is listed or
admitted to trading as reported in THE WALL STREET
JOURNAL;
(c) if such Common Stock is publicly traded but is not
quoted on the Nasdaq National Market nor listed or
admitted to trading on a national securities exchange,
the average of the closing bid and asked prices on the
last trading date prior to the date of determination as
reported in THE WALL STREET JOURNAL; or
(d) if none of the foregoing is applicable, by the Board in
good faith.
9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE
OF SHARES.
(a) The purchase price of the shares is accumulated by regular
payroll deductions made during each Offering Period. The deductions are made as
a percentage of the participant's compensation in one percent (1%) increments
not less than two percent (2%), nor greater than ten percent (10%) or such lower
limit set by the Committee. Compensation shall mean a participant's base salary
or wages, including, commissions, overtime, shift premiums and bonuses, plus
draws against commissions, provided, however, that for purposes of determining a
participant's compensation, any election by such participant to reduce his or
her regular cash remuneration under Sections 125 or 401(k) of the Code shall be
treated as if the participant did not make such election. Payroll deductions
shall commence on the first payday of the Offering Period and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
in this Plan.
(b) A participant may increase or decrease the rate of payroll
deductions during an Offering Period by filing with the Treasury Department a
new authorization for payroll deductions, in which case the new rate shall
become effective for the next payroll period commencing more than fifteen (15)
days after the Treasury Department's receipt of the authorization and shall
continue for the remainder of the Offering Period unless changed as described
below. Such change in the rate of payroll deductions may be made at any time
during an Offering Period, but not more than one (1) change may be made
effective during any Purchase Period. A participant may increase or decrease the
rate of payroll deductions for any subsequent Offering Period by filing with the
Treasury Department a new authorization for payroll deductions not later than
fifteen (15) days before the beginning of such Offering Period.
(c) A participant may reduce his or her payroll deduction
percentage to zero during an Offering Period by filing with the Treasury
Department a request for cessation of payroll deductions. Such reduction shall
be effective beginning with the next payroll period commencing more than fifteen
(15) days after the Treasury Department's receipt of the request and no further
payroll deductions will be made for the duration of the Offering Period. Payroll
deductions credited to the participant's account prior to the effective date of
the request shall be used to purchase shares of Common Stock of the Company in
accordance with Section (e) below. A participant may not resume making payroll
deductions during the Offering Period in which he or she reduces his or her
payroll deductions to zero.
(d) All payroll deductions made for a participant are credited to
his or her account under this Plan and are deposited with the general funds of
the Company. No interest accrues on the payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose, and the Company shall not be obligated to segregate such
payroll deductions.
(e) On each Purchase Date, so long as this Plan remains in effect
and provided that the participant has not submitted a signed and completed
withdrawal form which is effective pursuant to Section 11 before that date which
notifies the Company that the participant wishes to withdraw from that Offering
Period under this Plan and
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<PAGE>
Integrated Systems, Inc.
1999 Employee Stock Purchase Plan
As Adopted March 24, 1999
have all payroll deductions accumulated in the account maintained on behalf
of the participant as of that date returned to the participant, the Company
shall apply the funds then in the participant's account to the purchase of
whole shares of Common Stock reserved under the option granted to such
participant with respect to the Offering Period to the extent that such
option is exercisable on the Purchase Date. The purchase price per share
shall be as specified in Section 8 of this Plan. Any cash remaining in a
participant's account after such purchase of shares shall be refunded to such
participant in cash, without interest; provided, however that any amount
remaining in such participant's account on a Purchase Date which is less than
the amount necessary to purchase a full share of Common Stock of the Company
shall be carried forward, without interest, into the next Purchase Period or
Offering Period, as the case may be. In the event that this Plan has been
oversubscribed, all funds not used to purchase shares on the Purchase Date
shall be returned to the participant, without interest. No Common Stock shall
be purchased on a Purchase Date on behalf of any employee whose participation
in this Plan has terminated prior to such Purchase Date.
(f) As promptly as practicable after the Purchase Date, the Company
shall issue shares for the participant's benefit representing the shares
purchased upon exercise of his or her option.
(g) During a participant's lifetime, his or her option to purchase
shares hereunder is exercisable only by him or her. The participant will have no
interest or voting right in shares covered by his or her option until such
option has been exercised.
10. LIMITATIONS ON SHARES TO BE PURCHASED.
(a) No participant shall be entitled to purchase stock under this
Plan at a rate which, when aggregated with his or her rights to purchase stock
under all other employee stock purchase plans of the Company or any Subsidiary,
exceeds $15,000 in fair market value, determined as of the Offering Date (or
such other lesser limit as may be imposed by the Code) for each calendar year in
which the employee participates in this Plan. The Company shall automatically
suspend the payroll deductions of any participant as necessary to enforce such
limit provided that when the Company automatically resumes such payroll
deductions, the Company must apply the rate in effect immediately prior to such
suspension.
(b) No more than two hundred percent (200%) of the number of
shares determined by using eighty-five percent (85%) of the fair market value of
a share of the Company's Common Stock on the Offering Date as the denominator
may be purchased by a participant on any single Purchase Date.
(c) No participant shall be entitled to purchase more than the
Maximum Share Amount (as defined below) on any single Purchase Date. Not less
than thirty (30) days prior to the commencement of any Offering Period, the
Committee may, in its sole discretion, set a maximum number of shares which may
be purchased by any employee at any single Purchase Date (hereinafter the
"MAXIMUM SHARE AMOUNT"). In no event shall the Maximum Share Amount exceed the
amounts permitted under Section 10(b) above. If a new Maximum Share Amount is
set, then all participants must be notified of such Maximum Share Amount prior
to the commencement of the next Offering Period. The Maximum Share Amount shall
continue to apply with respect to all succeeding Purchase Dates and Offering
Periods unless revised by the Committee as set forth above.
(d) If the number of shares to be purchased on a Purchase Date by
all employees participating in this Plan exceeds the number of shares then
available for issuance under this Plan, then the Company will make a pro rata
allocation of the remaining shares in as uniform a manner as shall be reasonably
practicable and as the Committee shall determine to be equitable. In such event,
the Company shall give written notice of such reduction of the number of shares
to be purchased under a participant's option to each participant affected.
(e) Any payroll deductions accumulated in a participant's account
which are not used to purchase stock due to the limitations in this Section 10
shall be returned to the participant as soon as practicable after the end of the
applicable Purchase Period, without interest.
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<PAGE>
Integrated Systems, Inc.
1999 Employee Stock Purchase Plan
As Adopted March 24, 1999
11. WITHDRAWAL.
(a) Each participant may withdraw from an Offering Period under
this Plan by signing and delivering to the Treasury Department a written notice
to that effect on a form provided for such purpose. Such withdrawal may be
elected at any time at least fifteen (15) days prior to the end of an Offering
Period.
(b) Upon withdrawal from this Plan, the accumulated payroll
deductions shall be returned to the withdrawn participant, without interest, and
his or her interest in this Plan shall terminate. In the event a participant
voluntarily elects to withdraw from this Plan, he or she may not resume his or
her participation in this Plan during the same Offering Period, but he or she
may participate in any Offering Period under this Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for payroll
deductions in the same manner as set forth in Section 6 above for initial
participation in this Plan.
(c) If the Fair Market Value on the first day of the current
Offering Period in which a participant is enrolled is higher than the Fair
Market Value on the first day of any subsequent Offering Period, the Company
will automatically enroll such participant in the subsequent Offering Period.
Any funds accumulated in a participant's account prior to the first day of such
subsequent Offering Period will be applied to the purchase of shares on the
Purchase Date immediately prior to the first day of such subsequent Offering
Period. A participant does not need to file any forms with the Company to
automatically be enrolled in the subsequent Offering Period
12. TERMINATION OF EMPLOYMENT. Termination of a participant's
employment for any reason, including retirement, death or the failure of a
participant to remain an eligible employee of the Company or of a Participating
Subsidiary, immediately terminates his or her participation in this Plan. In
such event, the payroll deductions credited to the participant's account will be
returned to him or her or, in the case of his or her death, to his or her legal
representative, without interest. For purposes of this Section 12, an employee
will not be deemed to have terminated employment or failed to remain in the
continuous employ of the Company or of a Participating Subsidiary in the case of
sick leave, military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than ninety (90) days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
13. RETURN OF PAYROLL DEDUCTIONS. In the event a participant's interest
in this Plan is terminated by withdrawal, termination of employment or
otherwise, or in the event this Plan is terminated by the Board, the Company
shall deliver to the participant all payroll deductions credited to such
participant's account. No interest shall accrue on the payroll deductions of a
participant in this Plan.
14. CAPITAL CHANGES. Subject to any required action by the stockholders
of the Company, the number of shares of Common Stock covered by each option
under this Plan which has not yet been exercised and the number of shares of
Common Stock which have been authorized for issuance under this Plan but have
not yet been placed under option (collectively, the "RESERVES"), as well as the
price per share of Common Stock covered by each option under this Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued and outstanding shares of Common Stock of the
Company resulting from a stock split or the payment of a stock dividend (but
only on the Common Stock) or any other increase or decrease in the number of
issued and outstanding shares of Common Stock effected without receipt of any
consideration by the Company; PROVIDED, HOWEVER, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the
Committee, whose determination shall be final, binding and conclusive. Except as
expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an option.
Unless otherwise provided by the Committee, the Offering Period will
terminate immediately prior to the consummation of any of the following proposed
actions: (i) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders of
the Company or their relative stock holdings and the options under this Plan are
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Integrated Systems, Inc.
1999 Employee Stock Purchase Plan
As Adopted March 24, 1999
assumed, converted or replaced by the successor corporation, which assumption
will be binding on all participants), (ii) a merger in which the Company is the
surviving corporation but after which the stockholders of the Company
immediately prior to such merger (other than any stockholder that merges, or
which owns or controls another corporation that merges, with the Company in such
merger) cease to own their shares or other equity interest in the Company, (iii)
the sale of all or substantially all of the assets of the Company; (iv) the
acquisition, sale, or transfer of more than 50% of the outstanding shares of the
Company by tender offer or similar transaction; or (v) a dissolution or
liquidation of the Company. The Committee may, in the exercise of its sole
discretion in such instances, declare that this Plan shall terminate as of a
date fixed by the Committee and give each participant the right to purchase
shares under this Plan prior to such termination.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, or in the event of the Company being consolidated with or merged into any
other corporation.
15. NONASSIGNABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under this Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 22 below) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be void and
without effect.
16. REPORTS. Individual accounts will be maintained for each
participant in this Plan. Each participant shall receive promptly after the end
of each Purchase Period a report of his or her account setting forth the total
payroll deductions accumulated, the number of shares purchased, the per share
price thereof and the remaining cash balance, if any, carried forward to the
next Purchase Period or Offering Period, as the case may be.
17. NOTICE OF DISPOSITION. Each participant shall notify the Company in
writing if the participant disposes of any of the shares purchased in any
Offering Period pursuant to this Plan if such disposition occurs within two (2)
years from the Offering Date or within one (1) year from the Purchase Date on
which such shares were purchased (the "NOTICE PERIOD"). The Company may, at any
time during the Notice Period, place a legend or legends on any certificate
representing shares acquired pursuant to this Plan requesting the Company's
transfer agent to notify the Company of any transfer of the shares. The
obligation of the participant to provide such notice shall continue regardless
of whether any such legend is placed on the certificates.
18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant
of any option hereunder shall confer any right on any employee to remain in the
employ of the Company or any Participating Subsidiary, or restrict the right of
the Company or any Participating Subsidiary to terminate such employee's
employment.
19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have
equal rights and privileges with respect to this Plan so that this Plan
qualifies as an "employee stock purchase plan" within the meaning of Code
Section 423 or any successor provision of the Code and the related regulations.
Any provision of this Plan which is inconsistent with Code Section 423 or any
successor provision of the Code shall, without further act or amendment by the
Company, the Committee or the Board, be reformed to comply with the requirements
of Code Section 423. This Section 19 shall take precedence over all other
provisions in this Plan.
20. NOTICES. All notices or other communications by a participant to
the Company under or in connection with this Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. TERM; STOCKHOLDER APPROVAL. After this Plan is adopted by the
Board, this Plan will become effective on the First Offering Date (as defined
above). This Plan shall be approved by the stockholders of the Company, in any
manner permitted by applicable corporate law, within twelve (12) months after
the date this Plan is adopted by the Board. No purchase of shares pursuant to
this Plan shall occur prior to such stockholder approval. This Plan shall
continue until the earlier to occur of (a) termination of this Plan by the Board
(which
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<PAGE>
Integrated Systems, Inc.
1999 Employee Stock Purchase Plan
As Adopted March 24, 1999
termination may be effected by the Board at any time), (b) issuance of all of
the shares of Common Stock reserved for issuance under this Plan, or (c) ten
(10) years from the adoption of this Plan by the Board.
22. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under this Plan in the event of such participant's death
subsequent to the end of an Purchase Period but prior to delivery to him of such
shares and cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under this
Plan in the event of such participant's death prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under this
Plan who is living at the time of such participant's death, the Company shall
deliver such shares or cash to the executor or administrator of the estate of
the participant, or if no such executor or administrator has been appointed (to
the knowledge of the Company), the Company, in its discretion, may deliver such
shares or cash to the spouse or to any one or more dependents or relatives of
the participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES.
Shares shall not be issued with respect to an option unless the exercise of such
option and the issuance and delivery of such shares pursuant thereto shall
comply with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act of 1933, as amended and the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or automated quotation
system upon which the shares may then be listed, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
24. APPLICABLE LAW. The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of California.
25. AMENDMENT OR TERMINATION OF THIS PLAN. The Board may at any time
amend, terminate or extend the term of this Plan, except that any such
termination cannot affect options previously granted under this Plan, nor may
any amendment make any change in an option previously granted which would
adversely affect the right of any participant, nor may any amendment be made
without approval of the stockholders of the Company obtained in accordance with
Section 21 above within twelve (12) months of the adoption of such amendment (or
earlier if required by Section 21) if such amendment would:
(a) increase the number of shares that may be issued under this
Plan; or
(b) change the designation of the employees (or class of employees)
eligible for participation in this Plan.
Notwithstanding the foregoing, the Board may make such amendments to
the Plan as the Board determines to be advisable, if the continuation of the
Plan or any Offering Period would result in financial accounting treatment for
the Plan that is different from the financial accounting treatment in effect on
the date this Plan is adopted by the Board.
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<PAGE>
INTEGRATED SYSTEMS, INC.
1998 EQUITY INCENTIVE PLAN
As Adopted March 30, 1998
As Amended March 24, 1999
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 18,
the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 2,000,000 Shares plus (a) any authorized shares
not issued or subject to outstanding grants under the Company's 1988 Stock
Option Plan the ("PRIOR PLAN") on the Effective Date (as defined in Section 19
below); (b) shares that are subject to issuance upon exercise of an option
granted under the Prior Plan but cease to be subject to such option for any
reason other than exercise of such option; and (c) shares that were issued under
the Prior Plan which are repurchased by the Company at the original issue price
or forfeited. Subject to Sections 2.2 and 18, Shares that are subject to: (x)
issuance upon exercise of an Option but cease to be subject to such Option for
any reason other than exercise of such Option; (y) an Award granted hereunder
but are forfeited or are repurchased by the Company at the original issue price;
and (z) an Award that otherwise terminates without Shares being issued, will
again be available for grant and issuance in connection with future Awards under
this Plan. At all times the Company shall reserve and keep available a
sufficient number of Shares as shall be required to satisfy the requirements of
all outstanding Options granted under this Plan and all other outstanding but
unvested Awards granted under this Plan.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the stockholders of the
Company and compliance with applicable securities laws; PROVIDED, HOWEVER, that
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be
granted only to employees (including officers and directors who are also
employees) of the Company or of a Parent or Subsidiary of the Company. All other
Awards may be granted to employees, officers, directors, consultants,
independent contractors and advisors of the Company or any Parent or Subsidiary
of the Company; PROVIDED such consultants, contractors and advisors render bona
fide services not in connection with the offer and sale of securities in a
capital-raising transaction. No person will be eligible to receive more than
200,000 Shares in any calendar year under this Plan pursuant to the grant of
Awards hereunder, other than new employees of the Company or of a Parent or
Subsidiary of the Company (including new employees who are also officers and
directors of the Company or any Parent or Subsidiary of the Company), who are
eligible to receive up to a maximum of 1,000,000 Shares in the calendar year in
which they commence their employment. A person may be granted more than one
Award under this Plan.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. This Plan will be administered by the
Committee or by the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the
<PAGE>
Integrated Systems, Inc.
1998 Equity Incentive Plan
direction of the Board, the Committee will have full power to implement and
carry out this Plan. Without limitation, the Committee will have the
authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or any other incentive or
compensation plan of the Company or any Parent or Subsidiary of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any
inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the
Committee with respect to any Award will be made in its sole discretion at the
time of grant of the Award or, unless in contravention of any express term of
this Plan or Award, at any later time, and such determination will be final and
binding on the Company and on all persons having an interest in any Award under
this Plan. The Committee may delegate to one or more officers of the Company the
authority to grant an Award under this Plan to Participants who are not Insiders
of the Company.
5. OPTIONS. The Committee may grant Options to eligible persons
and will determine whether such Options will be Incentive Stock Options within
the meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the
number of Shares subject to the Option, the Exercise Price of the Option, the
period during which the Option may be exercised, and all other terms and
conditions of the Option, subject to the following:
5.1 FORM OF OPTION GRANT. Each Option granted under this Plan
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2 DATE OF GRANT. The date of grant of an Option will be the
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
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Integrated Systems, Inc.
1998 Equity Incentive Plan
5.3 EXERCISE PERIOD. Options may be exercisable within the
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement governing such Option; PROVIDED, HOWEVER, that no Option will
be exercisable after the expiration of ten (10) years from the date the Option
is granted; and PROVIDED FURTHER that no ISO granted to a person who directly or
by attribution owns more than ten percent (10%) of the total combined voting
powerof all classes of stock of the Company or of any Parent or Subsidiary of
the Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration
of five (5) years from the date the ISO is granted. The Committee also may
provide for Options to become exercisable at one time or from time to time,
periodically or otherwise, in such number of Shares or percentage of Shares as
the Committee determines.
5.4 EXERCISE PRICE. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 METHOD OF EXERCISE. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the
same for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 TERMINATION. Notwithstanding the exercise periods set forth
in the Stock Option Agreement, exercise of an Option will always be subject to
the following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be determined by the
Committee, with any exercise beyond three (3) months after the
Termination Date deemed to be an NQSO), but in any event, no
later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than for Cause or because of
Participant's Disability), then Participant's Options may be
exercised only to the extent that such Options would have been
exercisable by Participant on the Termination Date and must be
exercised by Participant (or Participant's legal representative
or authorized assignee) no later than twelve (12) months after
the Termination Date (or such shorter or longer time period not
exceeding five (5) years as may be determined by the Committee,
with any such exercise beyond (a) three (3) months after the
Termination Date when the Termination is for any reason other
than the Participant's death or Disability, or (b) twelve (12)
months after the Termination Date when the Termination is for
Participant's death or Disability, deemed to be an NQSO), but in
any event no later than the expiration date of the Options.
(c) Notwithstanding the provisions in paragraph 5.6(a) above, if a
Participant is terminated for Cause, neither the Participant, the
Participant's estate nor such other person who may then hold the
Option shall be entitled to exercise any Option with respect to
any Shares whatsoever, after termination of service, whether or
not after termination of service the
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Integrated Systems, Inc.
1998 Equity Incentive Plan
Participant may receive payment from the Company or Subsidiary
for vacation pay, for services rendered prior to termination,
for services rendered for the day on which termination occurs,
for salary in lieu of notice, or for any other benefits. In
making such determination, the Board shall give the
Participant an opportunity to present to the Board evidence on
his behalf. For the purpose of this paragraph, termination of
service shall be deemed to occur on the date when the Company
dispatches notice or advice to the Participant that his
service is terminated.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 LIMITATIONS ON ISO. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISO are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company, Parent
or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value
of Shares on the date of grant with respect to which ISO are exercisable for the
first time by a Participant during any calendar year exceeds $100,000, then the
Options for the first $100,000 worth of Shares to become exercisable in such
calendar year will be ISO and the Options for the amount in excess of $100,000
that become exercisable in that calendar year will be NQSOs. In the event that
the Code or the regulations promulgated thereunder are amended after the
Effective Date of this Plan to provide for a different limit on the Fair Market
Value of Shares permitted to be subject to ISO, such different limit will be
automatically incorporated herein and will apply to any Options granted after
the effective date of such amendment.
5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not, without
the written consent of a Participant, impair any of such Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered will be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; PROVIDED, HOWEVER, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.4 of
this Plan for Options granted on the date the action is taken to reduce the
Exercise Price.
5.10 NO DISQUALIFICATION. Notwithstanding any other provision in
this Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "PURCHASE PRICE"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 FORM OF RESTRICTED STOCK AWARD. All purchases under a
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form
(which need not be the same for each Participant) as the Committee will from
time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The offer of Restricted Stock will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If such
person does not execute and deliver the Restricted Stock Purchase Agreement
along with full payment for the Shares to the Company within thirty (30) days,
then the offer will terminate, unless otherwise determined by the Committee.
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Integrated Systems, Inc.
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6.2 PURCHASE PRICE. The Purchase Price of Shares sold pursuant
to a Restricted Stock Award will be determined by the Committee on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Stockholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8 of
this Plan.
6.3 TERMS OF RESTRICTED STOCK AWARDS. Restricted Stock Awards
shall be subject to such restrictions as the Committee may impose. These
restrictions may be based upon completion of a specified number of years of
service with the Company or upon completion of the performance goals as set out
in advance in the Participant's individual Restricted Stock Purchase Agreement.
Restricted Stock Awards may vary from Participant to Participant and between
groups of Participants. Prior to the grant of a Restricted Stock Award, the
Committee shall: (a) determine the nature, length and starting date of any
Performance Period for the Restricted Stock Award; (b) select from among the
Performance Factors to be used to measure performance goals, if any; and (c)
determine the number of Shares that may be awarded to the Participant. Prior to
the payment of any Restricted Stock Award, the Committee shall determine the
extent to which such Restricted Stock Award has been earned. Performance Periods
may overlap and Participants may participate simultaneously with respect to
Restricted Stock Awards that are subject to different Performance Periods and
having different performance goals and other criteria.
6.4 TERMINATION DURING PERFORMANCE PERIOD. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee will determine otherwise.
7. STOCK BONUSES.
7.1 AWARDS OF STOCK BONUSES. A Stock Bonus is an award of
Shares (which may consist of Restricted Stock) for services rendered to the
Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded
for past services already rendered to the Company, or any Parent or Subsidiary
of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that
will be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS
AGREEMENT") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 TERMS OF STOCK BONUSES. The Committee will determine the
number of Shares to be awarded to the Participant. If the Stock Bonus is being
earned upon the satisfaction of performance goals pursuant to a Performance
Stock Bonus Agreement, then the Committee will: (a) determine the nature, length
and starting date of any Performance Period for each Stock Bonus; (b) select
from among the Performance Factors to be used to measure the performance, if
any; and (c) determine the number of Shares that may be awarded to the
Participant. Prior to the payment of any Stock Bonus, the Committee shall
determine the extent to which such Stock Bonuses have been earned. Performance
Periods may overlap and Participants may participate simultaneously with respect
to Stock Bonuses that are subject to different Performance Periods and different
performance goals and other criteria. The number of Shares may be fixed or may
vary in accordance with such performance goals and criteria as may be determined
by the Committee. The Committee may adjust the performance goals applicable to
the Stock Bonuses to take into account changes in law and accounting or tax
rules and to make such adjustments as the Committee deems necessary or
appropriate to reflect the impact of extraordinary or unusual items, events or
circumstances to avoid windfalls or hardships.
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Integrated Systems, Inc.
1998 Equity Incentive Plan
7.3 FORM OF PAYMENT. The earned portion of a Stock Bonus may be
paid currently or on a deferred basis with such interest or dividend equivalent,
if any, as the Committee may determine. Payment may be made in the form of cash
or whole Shares or a combination thereof, either in a lump sum payment or in
installments, all as the Committee will determine.
8. PAYMENT FOR SHARE PURCHASES.
8.1 PAYMENT. Payment for Shares purchased pursuant to this Plan
may be made in cash (by check) or, where expressly approved for the Participant
by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such
note has been fully paid with respect to such shares); or (2)
were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under Sections 483 and
1274 of the Code; PROVIDED, HOWEVER, that Participants who are
not employees or directors of the Company will not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant
and a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD DEALER")
whereby the Participant irrevocably elects to exercise the
Option and to sell a portion of the Shares so purchased to
pay for the Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward
the Exercise Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a
NASD Dealer whereby the Participant irrevocably elects to
exercise the Option and to pledge the Shares so purchased
to the NASD Dealer in a margin account as security for a
loan from the NASD Dealer in the amount of the Exercise
Price, and whereby the NASD Dealer irrevocably commits
upon receipt of such Shares to forward the Exercise Price
directly to the Company; or
(f) by any combination of the foregoing.
8.2 LOAN GUARANTEES. The Committee may help the Participant pay
for Shares purchased under this Plan by authorizing a guarantee by the Company
of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or
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Integrated Systems, Inc.
1998 Equity Incentive Plan
certificates for such Shares. Whenever, under this Plan, payments in
satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
9.2 STOCK WITHHOLDING. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 VOTING AND DIVIDENDS. No Participant will have any of the
rights of a stockholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a stockholder and have all the rights of a stockholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; PROVIDED, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; PROVIDED, FURTHER, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 12.
10.2 FINANCIAL STATEMENTS. The Company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; PROVIDED, HOWEVER, the Company will not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any
interest therein, will not be transferable or assignable by Participant, and may
not be made subject to execution, attachment or similar process, otherwise than
by will or by the laws of descent and distribution or as determined by the
Committee and set forth in the Award Agreement with respect to Awards that are
not ISOs. During the lifetime of the Participant an Award will be exercisable
only by the Participant, and any elections with respect to an Award may be made
only by the Participant unless otherwise determined by the Committee and set
forth in the Award Agreement with respect to Awards that are not ISOs.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee,
the Company may reserve to itself and/or its assignee(s) in the Award Agreement
a right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase money
indebtedness, at the Participant's Exercise Price or Purchase Price, as the case
may be.
13. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
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Integrated Systems, Inc.
1998 Equity Incentive Plan
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; PROVIDED, HOWEVER, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any
time or from time to time, authorize the Company, with the consent of the
respective Participants, to issue new Awards in exchange for the surrender and
cancellation of any or all outstanding Awards. The Committee may at any time buy
from a Participant an Award previously granted with payment in cash, Shares
(including Restricted Stock) or other consideration, based on such terms and
conditions as the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award
will not be effective unless such Award is in compliance with all applicable
federal and state securities laws, rules and regulations of any governmental
body, and the requirements of any stock exchange or automated quotation system
upon which the Shares may then be listed or quoted, as they are in effect on the
date of grant of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award
granted under this Plan will confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent or Subsidiary of the Company or limit in any way
the right of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
18.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In the
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the stockholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction, any or all
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Integrated Systems, Inc.
1998 Equity Incentive Plan
outstanding Awards may be assumed, converted or replaced by the successor
corporation (if any), which assumption, conversion or replacement will be
binding on all Participants. In the alternative, the successor corporation
may substitute equivalent Awards or provide substantially similar
consideration to Participants as was provided to stockholders (after taking
into account the existing provisions of the Awards). In the event such
successor or acquiring corporation (if any) does not assume, convert, replace
or substitute Awards, as provided above, pursuant to a transaction described
in this Section 18.1, then notwithstanding any other provision in this Plan
to the contrary, the vesting of such Awards will accelerate and the Options
will become exercisable in full prior to the consummation of such event at
such times and on such conditions as the Committee determines, and if such
Options are not exercised prior to the consummation of the corporate
transaction, they shall terminate in accordance with the provisions of this
Plan. The successor corporation may also issue, in place of outstanding
Shares of the Company held by the Participant, substantially similar shares
or other property subject to repurchase restrictions no less favorable to the
Participant.
The Committee may, in its sole discretion, provide that the
vesting of any or all Awards granted pursuant to this Plan will accelerate even
if Options would otherwise be assumed, converted, replaced or substituted for.
If the Committee exercises such discretion with respect to Options, such Options
will become exercisable in full prior to the consummation of such event at such
time and on such conditions as the Committee determines, and if such Options are
not exercised prior to the consummation of the corporate transaction, they shall
terminate at such time as determined by the Committee.
18.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of any transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, or sale of assets.
18.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other company
or otherwise, by either; (a) granting an Award under this Plan in substitution
of such other company's award; or (b) assuming such award as if it had been
granted under this Plan if the terms of such assumed award could be applied to
an Award granted under this Plan. Such substitution or assumption will be
permissible if the holder of the substituted or assumed award would have been
eligible to be granted an Award under this Plan if the other company had applied
the rules of this Plan to such grant. In the event the Company assumes an award
granted by another company, the terms and conditions of such award will remain
unchanged (except that the exercise price and the number and nature of Shares
issuable upon exercise of any such option will be adjusted appropriately
pursuant to Section 424(a) of the Code). In the event the Company elects to
grant a new Option rather than assuming an existing option, such new Option may
be granted with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become
effective upon the expiration date of the Prior Plan (the "EFFECTIVE DATE").
This Plan shall be approved by the stockholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon the
Effective Date, the Committee may grant Awards pursuant to this Plan; PROVIDED,
HOWEVER, that: (a) no Option may be exercised prior to initial stockholder
approval of this Plan; (b) no Option granted pursuant to an increase in the
number of Shares subject to this Plan approved by the Board will be exercised
prior to the time such increase has been approved by the stockholders of the
Company; and (c) in the event that stockholder approval of such increase is not
obtained within the time period provided herein, all Awards granted pursuant to
such increase will be canceled, any Shares issued pursuant to any Award granted
pursuant to such increase will be canceled, and any purchase of Shares pursuant
to such increase will be rescinded.
20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of
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Integrated Systems, Inc.
1998 Equity Incentive Plan
stockholder approval. This Plan and all agreements thereunder shall be
governed by and construed in accordance with the laws of the State of
California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; PROVIDED, HOWEVER, that the Board will not, without the approval
of the stockholders of the Company, amend this Plan in any manner that requires
such stockholder approval.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by
the Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have
the following meanings:
"AWARD" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means the commission of an act of theft, embezzlement,
fraud, dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Compensation Committee of the Board.
"COMPANY" means Integrated Systems, Inc. or any successor
corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXERCISE PRICE" means the price at which a holder of an Option
may purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share
of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the
date of determination as reported in THE WALL STREET JOURNAL;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national
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Integrated Systems, Inc.
1998 Equity Incentive Plan
securities exchange on which the Common Stock is listed or
admitted to trading as reported in THE WALL STREET JOURNAL;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the average of the closing bid and
asked prices on the date of determination as reported in THE WALL
STREET JOURNAL;
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in
the initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the SEC under the
Securities Act; or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"INSIDER" means an officer or director of the Company or any
other person whose transactions in the Company's Common Stock are subject to
Section 16 of the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant
to Section 5.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this
Plan.
"PERFORMANCE FACTORS" means the factors selected by the Committee
from among the following measures to determine whether the performance goals
established by the Committee and applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or
earnings before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total shareholder return and/or total shareholder return
growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual confidential business objectives.
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Integrated Systems, Inc.
1998 Equity Incentive Plan
"PERFORMANCE PERIOD" means the period of service determined by
the Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
"PLAN" means this Integrated Systems, Inc. 1998 Equity Incentive
Plan, as amended from time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu of
Shares, pursuant to Section 7.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
"UNVESTED SHARES" means "Unvested Shares" as defined in the Award
Agreement.
"VESTED SHARES" means "Vested Shares" as defined in the Award
Agreement.
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INTEGRATED SYSTEMS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
AUGUST 3, 1999
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 August 3, 1999 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, 3, 4 AND 5 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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Please mark
your votes as
indicated in
this example [X]
MANAGEMENT RECOMMENDS A VOTE FOR ALL THE NOMINEES FOR DIRECTOR LISTED BELOW
AND A VOTE FOR PROPOSALS 2, 3, 4 AND 5.
PROPOSAL 1: To elect directors to hold office until the next Annual Meeting
of Shareholders and until their successors are elected.
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to the contrary). FOR ALL nominees listed below.
[ ] [ ]
Nominees: Charles M. Boesenberg, John C. Bolger, Michael A. Brochu, Narendra
K. Gupta, Vinita Gupta, Thomas Kailath and Richard C. Murphy
To withhold authority to vote for any nominee(s), write such nominee(s)
name(s) below:
- -------------------------------------------------------
PROPOSAL 2: To approve an amendment to the 1998 Equity Incentive Plan to
increase the number of shares of common stock reserved for issuance.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 3: To approve the adoption of the 1999 Employee Stock Purchase Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 4: To approve an amendment to the Bylaws to change the numbers of
authorized directors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
PROPOSAL 5: To ratify the selection of PricewaterhouseCoopers LLP as the
Company's independent accountants.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
SIGN EXACTLY AS YOUR NAME(S) APPEARS ON YOUR STOCK CERTIFICATE. IF SHARES OF
STOCK STAND OF RECORD IN THE NAMES OF TWO OR MORE PERSONS OR IN THE NAME OF
HUSBAND AND WIFE, WHETHER AS JOINT TENANTS OR OTHERWISE, BOTH OR ALL OF SUCH
PERSONS SHOULD SIGN THE ABOVE PROXY. IF SHARES OF STOCK ARE HELD OF RECORD
BY A CORPORATION, THE PROXY SHOULD BE EXECUTED BY THE PRESIDENT OR VICE
PRESIDENT AND THE SECRETARY OR ASSISTANT SECRETARY. EXECUTORS OR
ADMINISTRATORS OR OTHER FIDUCIARIES WHO EXECUTE THE ABOVE PROXY FOR A
DECEASED SHAREHOLDER SHOULD GIVE THEIR FULL TITLE. PLEASE DATE THE PROXY.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
SIGN AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK
MAY BE REPRESENTED AT THE MEETING.
Signature: ________________________________________ Date: ____________________
Signature: ________________________________________
- -------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
