<PAGE> 1
CONFIDENTIAL; FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
APPLIED INNOVATION 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)(4) and 0-11.
1) Title of each class of Securities to which transaction
applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
APPLIED INNOVATION INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
APRIL 23, 1998
AND
PROXY STATEMENT
- --------------------------------------------------------------------------------
================================================================================
IMPORTANT
PLEASE MARK, SIGN AND DATE YOUR PROXY AND
PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 3
APPLIED INNOVATION INC.
5800 Innovation Drive
Dublin, Ohio 43016
(614) 798-2000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 23, 1998
March 23, 1998
To the Stockholders of Applied Innovation Inc.:
NOTICE is hereby given that the Annual Meeting of Stockholders of
Applied Innovation Inc., a Delaware corporation (the "Company"), will be held at
5800 Innovation Drive, Dublin, Ohio, on Thursday, the 23rd day of April, 1998,
at 1:00 p.m., local time, for the following purposes:
1. To elect three Class II directors, each for a three-year term
expiring at the Annual Meeting of Stockholders in 2001.
2. To approve and adopt amendments to the Company's 1996 Stock
Option Plan.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Owners of Common Stock of the Company of record at the close of
business on March 6, 1998, will be entitled to vote at the meeting.
Whether or not you plan to attend the meeting, please date, sign and
mail the enclosed proxy in the envelope provided.
A copy of the Annual Report of the Company for the fiscal year ended
December 31, 1997, is enclosed herewith. Thank you for your cooperation and
support.
By Order of the Board of Directors
Gerard B. Moersdorf, Jr.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 4
APPLIED INNOVATION INC.
5800 Innovation Drive
Dublin, Ohio 43016
(614) 798-2000
March 23, 1998
PROXY STATEMENT
FOR
1998 ANNUAL MEETING OF STOCKHOLDERS
INTRODUCTION
This Proxy Statement is furnished to the stockholders of Applied
Innovation Inc., a Delaware corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company of proxies to be used at
the Annual Meeting of Stockholders (the "Annual Meeting") to be held at the
Company's offices, 5800 Innovation Drive, Dublin, Ohio, on April 23, 1998, at
1:00 p.m., local time, and at any adjournment thereof. The Proxy Statement and
the enclosed proxy are being mailed to the stockholders on or about the date set
forth above.
All shares represented by properly executed proxies received by the
Board of Directors pursuant to this solicitation will be voted in accordance
with each stockholder's directions specified on the proxy or, in the absence of
specific instructions to the contrary, will be voted in accordance with the
Board of Director's unanimous recommendations, which are FOR the election of
Curtis A. Loveland, Gerard B. Moersdorf, Sr., and Thomas W. Huseby as Class II
Directors of the Company; FOR the approval and adoption of an amendment to the
Company's 1996 Stock Option Plan; and, at the discretion of the persons acting
under the proxy, to transact such other business as may properly come before the
meeting or any adjournment thereof. A proxy may be revoked, without affecting
any vote previously taken, by written notice mailed to the Company (attention
Gerard B. Moersdorf, Jr.) or delivered in person at the meeting, by filing a
duly executed, later dated proxy, or by attending the meeting and voting in
person. Proxies marked as abstaining will be treated as present for purposes of
determining a quorum at the Annual Meeting, but will not be counted as voting on
the item for which the abstention is noted. Proxies returned by brokers on
behalf of shares held in street name will not be treated as present for purposes
of determining a quorum for the Annual Meeting unless they are voted by the
broker on at least one matter on the agenda. Such non-voted shares will not be
counted as voting on any matter as to which a non-vote is indicated on the
broker's proxy.
1
<PAGE> 5
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
VOTING RIGHTS
Only stockholders of record at the close of business on March 6, 1998,
are entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof. Each stockholder is entitled to one vote for each share held. At March
6, 1998, the Company had 15,790,832 outstanding shares of Common Stock, $.01 par
value. There are no cumulative voting rights in the election of directors.
OWNERSHIP OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS
The following table sets forth information as of February 27, 1998
(except as noted below), relating to the beneficial ownership of Common Stock by
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock.
<TABLE>
<CAPTION>
NAME OF NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OF CLASS(3)
- ------------------------------- ------------------------------ ----------------
<S> <C> <C>
Gerard B. Moersdorf, Jr. 6,554,104 (4) 41.5%
Linda S. Moersdorf 6,554,104 (4) 41.5%
- -------------------------------
<FN>
(1) The address of Gerard B. Moersdorf, Jr. and Linda S. Moersdorf is c/o
Applied Innovation Inc., 5800 Innovation Drive, Dublin, Ohio 43016.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities.
(3) "Percentage of Class" is calculated by dividing the number of shares
beneficially owned by the total number of outstanding shares of the Company
on February 27, 1998 plus the number of shares such person has the right to
acquire within 60 days of February 27, 1998.
(4) Gerard B. Moersdorf, Jr. and Linda S. Moersdorf are husband and wife. Under
the rules of the Securities and Exchange Commission, each may be deemed to
beneficially own the shares of the other; consequently, the number reported
in the table above for each includes 5,558,188 shares held of record by Mr.
Moersdorf, 793,716 shares held of record by Mrs. Moersdorf, 184,200 shares
held by their children, and 18,000 shares which could be acquired by Mrs.
Moersdorf under stock options exercisable within 60 days of February 27,
1998. Mr. and Mrs. Moersdorf each expressly disclaim beneficial ownership
of shares held by the other.
</TABLE>
2
<PAGE> 6
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 27, 1998, the beneficial
ownership of the Company's Common Stock by each director, each of the Company's
executive officers named in the Summary Compensation Table, and by all directors
and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS(2)
- ------------------------- --------------------- -----------
<S> <C> <C> <C>
Gerard B. Moersdorf, Jr.(3) 6,554,104 41.5%
Gerard B. Moersdorf, Sr.(4) 83,900 *
Curtis A. Loveland(5) 112,600 *
James H. Blough(6) 63,000 *
Richard W. Oliver(7) 64,500 *
Thomas W. Huseby(8) 9,500 *
Alexander B. Trevor(9) 5,000 *
William H. Largent 0 *
James K. Hinderliter(10) 0 *
Lawrence H. Corbett(11) 1,000 *
All directors and executive officers 6,941,557 43.1%
as a group (12 persons)(12)
- ------------------------------------
<FN>
(1) For purposes of the above table, a person is considered to "beneficially
own" any shares with respect to which he exercises sole or shared voting or
investment power or as to which he has the right to acquire the beneficial
ownership within 60 days of February 27, 1998. Unless otherwise indicated,
voting power and investment power are exercised solely by the person named
above or shared with members of his household.
(2) "Percentage of Class" is calculated on the basis of the number of shares
outstanding on February 27, 1998, or 15,790,832 shares, plus the number of
shares a person has the right to acquire within 60 days of February 27,
1998.
An "*" indicates less than 1%.
(3) Includes 5,558,188 shares held of record by Mr. Moersdorf, 793,716 shares
held by Mr. Moersdorf's wife, 184,200 shares held by their children, and
18,000 shares which could be acquired by Mrs. Moersdorf under stock options
exercisable within 60 days of February 27, 1998. Mr. and Mrs. Moersdorf
each expressly disclaim beneficial ownership of shares held by the other.
(4) Includes 20,900 shares held by Mr. Moersdorf, Sr. as trustee of a trust and
63,000 shares which may be purchased under stock options exercisable within
60 days of February 27, 1998.
(5) Includes 81,000 shares which may be purchased under stock options
exercisable within 60 days of February 27, 1998, and 1,000 shares held by
Mr. Loveland's children.
(6) Includes 63,000 shares which may be purchased under stock options
exercisable within 60 days of February 27, 1998.
(7) Includes 63,000 shares which may be purchased under stock options
exercisable within 60 days of February 27, 1998.
(8) Includes 9,000 shares which may be purchased under stock options
exercisable within 60 days of February 27, 1998.
(9) Includes 4,000 shares which may be purchased under stock options
exercisable within 60 days of February 27, 1998.
(10) Mr. Hinderliter resigned from his position as Vice President-Sales of the
Company effective September 30, 1997.
(11) Mr. Corbett resigned from his position as Senior Vice President-Sales and
Marketing of the Company effective September 22, 1997.
(12) Includes no shares for William J. Mrukowski and 47,953 shares held by John
M. Spiegel, of which 22,300 are shares which may be purchased under stock
options exercisable within 60 days of February 27, 1998.
</TABLE>
3
<PAGE> 7
ELECTION OF DIRECTORS
The Board of Directors has designated Curtis A. Loveland, Gerard B.
Moersdorf, Sr., and Thomas W. Huseby for election as Class II Directors of the
Company, each to serve for a term of three years and until their successors are
duly elected and qualified. The shares represented by the enclosed proxy, if
returned duly executed and unless instructions to the contrary are indicated
thereon, will be voted FOR the nominees. If for any reason a nominee should not
be a candidate for election at the time of the meeting, the proxies may be voted
for a substitute nominee in the discretion of those named as proxies. The Board
of Directors has no reason to believe that any nominee will be unavailable. The
election of each nominee requires the favorable vote of a plurality of all votes
cast by the holders of Common Stock. Abstentions and broker non-votes are not
counted in the election of directors and thus have no effect.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ELECTION OF EACH NOMINEE FOR CLASS II DIRECTOR.
The following table sets forth (i) the nominees for election as Class
II Directors of the Company, and (ii) the Class I and Class III Directors of the
Company whose terms in office will continue. Each director has held the
occupation indicated for more than the past five years unless otherwise
indicated.
4
<PAGE> 8
<TABLE>
<CAPTION>
DIRECTOR
CONTINUOUSLY
NAME AND AGE SINCE PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------------------------------------------
NOMINEES - TERMS TO EXPIRE 2001 (CLASS II)
<S> <C> <C>
Curtis A. Loveland, 51 1991 Partner, Porter, Wright, Morris & Arthur, Attorneys at Law, since 1979
and Secretary of the Company since April 1992. Mr. Loveland is
also a director of Rocky Shoes & Boots, Inc. and of Cross Medical
Products, Inc. both companies which have a class of equity securities
registered pursuant to the Securities Exchange Act of 1934.
Gerard B. Moersdorf, Sr., 68 1987 Retired as Export Manager of Industrial Chemical Sales Division of
Procter & Gamble Distributing Company, Cincinnati, Ohio.
Gerard B. Moersdorf, Sr. is the father of Gerard B. Moersdorf, Jr.,
President, Chief Executive Officer, Treasurer and a director of the
Company.
Thomas W. Huseby, 59 1996 Retired as director of Network Systems Division of Lucent
Technologies.
<CAPTION>
CONTINUING DIRECTORS - TERMS TO EXPIRE 2000 (CLASS I)
<S> <C> <C>
James H. Blough, 66 1993 Retired as National Sales Manager for Chemicals Division of Procter
& Gamble Distributing Company, Cincinnati, Ohio.
Richard W. Oliver, 51 1993 Professor of Management at the Owen Graduate School of
Management, Vanderbilt University, Nashville, Tennessee, since
September 1992. From 1977 to September 1992, Mr. Oliver served
in various marketing capacities, including as Vice President,
Business and Residential Services, Vice President, Corporate
Marketing and special assistant to the Chairman and Chief Executive
Officer, for Northern Telecom Ltd. Mr. Oliver is also a director of
Communications Central, Inc., a company which has a class of equity
securities registered pursuant to the Securities Exchange Act of 1934.
<CAPTION>
CONTINUING DIRECTOR - TERMS TO EXPIRE 1999 (CLASS III)
<S> <C> <C>
Gerard B. Moersdorf, Jr., 45 1986 Director, President, Chief Executive Officer and Treasurer of the
Company since 1986.
Alexander B. Trevor, 52 1997 President of Nuvocom Inc., Columbus, Ohio, a computer telephony
company and consultant to Internet related companies. Previously,
Mr. Trevor was Executive Vice President and Chief Technology
Officer of CompuServe Corporation from 1983 to June 1996. Prior
to 1983, Mr. Trevor was employed in various other positions at
CompuServe Corporation, including Vice President of Computer
Technology and Executive Vice President of Network Services.
</TABLE>
5
<PAGE> 9
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company had a total of ten meetings
during 1997. No director attended fewer than 75% of the meetings of the Board of
Directors. The Board of Directors has an Audit Committee and a Stock Option and
Compensation Committee.
From January 1, 1997 to March 2, 1997, the members of the Audit
Committee were Curtis A. Loveland, Gerard B. Moersdorf, Sr., and Ledo A. Ross.
Mr. Ross resigned from his position as director of the Company effective March
2, 1997, and Thomas W. Huseby has replaced him on the Audit Committee. The Audit
Committee oversees the work of the internal accounting staff and external
auditors. The Audit Committee met three times during 1997, and all members of
the Audit Committee attended the meetings.
From January 1, 1997 to March 2, 1997, the members of the Stock Option
and Compensation Committee were James H. Blough, Richard W. Oliver, and Ledo A.
Ross. Mr. Ross resigned from his position as a director of the Company effective
March 2, 1997 and Alexander B. Trevor has replaced him on the Stock Option and
Compensation Committee. The Committee has the authority and responsibility to
determine and administer the Company's compensation policies and to establish
the salaries of executive officers, the formula for bonus awards to executive
officers, and the grant of stock options under the Company's stock option plan.
The Committee met once during 1997, and all members of the Committee attended
the meeting.
EXECUTIVE OFFICERS
The officers of the Company are elected annually by the Board of
Directors and serve at the pleasure of the Board. In addition to Gerard B.
Moersdorf, Jr., President, Treasurer and Chief Executive Officer, and Curtis A.
Loveland, Secretary, the following persons are officers of the Company.
WILLIAM H. LARGENT, age 42, joined the Company in April 1997 and serves
as Senior Vice President, Operations and Chief Financial Officer of the Company.
Prior to joining the Company, Mr. Largent served as the Executive Vice President
and Chief Financial Officer of Metatec Corporation, an information services
company engaged in optical disc manufacturing and distribution, software
development and network services. Mr. Largent had been an officer at Metatec
since 1993 and a director of Metatec since 1990. From 1990 to 1993, Mr. Largent
was President of Liebert Capital Management Corporation, a private investment
management and consulting company.
WILLIAM J. MRUKOWSKI, age 56, joined the Company in October 1997 and
serves as Senior Vice President, Sales and Marketing. Prior to joining the
Company, Mr. Mrukowski served with Liebert Corporation as Senior Vice President
responsible for worldwide sales. Mr. Mrukowski had been with Liebert Corporation
for seventeen years prior to joining the Company.
JOHN M. SPIEGEL, age 34, joined the Company in May 1992 and serves as
Controller. His previous experience includes serving as Manager with Clark,
Schaefer, Hackett & Company from January 1987 until joining the Company. Mr.
Spiegel is a Certified Public Accountant.
6
<PAGE> 10
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's Chief Executive Officer, and the only other executive officers of the
Company whose combined salary and bonus exceeded $100,000 for fiscal year ended
December 31, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------------------------ ----------------------
Restricted
Name and Fiscal Other Annual Stock All Other
Principal Position Year Salary Bonus Compensation Awards Options # Compensation
------------------ ---- ------ ----- ------------ ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerard B. Moersdorf, Jr. 1997 $238,500 -- $542 -- -- $2,100(2)
Chairman, President, 1996 $238,500 -- -- -- -- $8,002(2)
Treasurer and CEO 1995 $225,000 $16,875 -- $19,163(1) -- $13,068(2)
William H. Largent(3) 1997 $94,808 $35,000 -- -- 50,000 $1,283(2)
Senior Vice President
of Operations and
Chief Financial Officer
Lawrence H. Corbett(4) 1997 $109,615 -- $44,070 -- 80,000 $1,313(2)
Senior Vice President - 1996 $132,500 $11,042 $500 -- -- $3,560(2)
Sales and Marketing 1995 $73,077 $5,481 $25,000 $6,223(1) -- --
James K. Hinderliter(5) 1997 $78,750 $42,252 $26,250 -- 1,500 --
Vice President - Sales 1996 $95,000 $73,438 -- -- -- $3,724(2)
1995 $85,000 $41,783 -- $2,409(1) -- $8,068(2)
- --------------------
<FN>
(1) For 1995, represents the value of 2,100, 264, and 682 shares of restricted
stock received by Mr. Moersdorf, Mr. Hinderliter, and Mr. Corbett,
respectively, pursuant to the Company's 1995 Officer and Manager
Compensation Plan, based upon the closing price of $9.125 per share, on
March 15, 1996. The shares issued to Messrs. Hinderliter and Corbett have
been cancelled because Mr. Hinderliter and Mr. Corbett resigned their
positions with the Company prior to vesting.
(2) Represents the amount of the contribution by the Company under the
Company's 401(k) Plan and Trust.
(3) Mr. Largent joined the Company in April 1997.
(4) Mr. Corbett joined the Company in June 1995, and resigned effective
September 22, 1997. The dollar amount in "Other Annual Compensation" for
1997 represents severance pay.
(5) Mr. Hinderliter resigned from the Company effective September 30, 1997. The
dollar amount in "Other Annual Compensation" for 1997 represents severance
pay.
</TABLE>
7
<PAGE> 11
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding stock
options granted during 1997, to each of the executive officers named in the
Summary Compensation Table.
<TABLE>
<CAPTION>
(f)
Potential Realizable Value
At Assumed Annual Rates
Of Stock Price Appreciation
Individual Grants For Option Term(1)
---------------------------------------------------- ---------------------------------
(c)
% of Total
(b) Options (d)
Options Granted To Exercise (e)
(a) Granted Employees Price Expiration
Name (#) In Fiscal Year ($/Sh) Date 5%($) 10%($)
- --------------------------- ---------- ------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gerard B. Moersdorf, Jr. -- -- -- -- -- --
William H. Largent 50,000(2) 10.4% $5.25 05/08/03 $89,275 $202,535
Lawrence H. Corbett 80,000(3) 16.6% $5.00 12/31/02 $110,513 $244,204
James K. Hinderliter 1,500(4) 0.3% $5.00 03/01/05 $3,581 $8,577
- ---------------------------
<FN>
(1) The amounts under the columns labeled "5%($)" and "10%($)" are included
by the Company pursuant to certain rules promulgated by the Securities
and Exchange Commission and are not intended to forecast future
appreciation, if any, in the price of the Company's Common Stock. Such
amounts are based on the assumption that the option holders hold the
options granted for their full term. The actual value of the options
will vary in accordance with the market price of the Company's Common
Stock.
(2) On May 8, 1997, an incentive option to purchase 50,000 shares of Common
Stock was granted to Mr. Largent, at an exercise price equal to the
fair market value of the Company's Common Stock on the date of grant.
These options vest and become exercisable at a rate of 20% per year and
terminate on May 8, 2003.
(3) On March 1, 1997, an incentive option to purchase 80,000 shares of
Common Stock was granted to Mr. Corbett, at an exercise price equal to
the fair market value of the Company's Common Stock on the date of
grant. These options vest and become exercisable at a rate of 25% on
each December 31, beginning December 31, 1997, and terminate on
December 31, 2002. As a result of his resignation, options granted to
Mr. Corbett terminated.
(4) On March 1, 1997, an incentive option to purchase 1,500 shares of
Common Stock was granted to Mr. Hinderliter, at an exercise price equal
to the fair market value of the Company's Common Stock on the date of
grant. These options vest and become exercisable at a rate of 20% per
year and terminate on March 1, 2005. As a result of his resignation,
options granted to Mr. Hinderliter terminated.
</TABLE>
8
<PAGE> 12
AGGREGATED OPTION EXERCISES AND FISCAL
YEAR-END OPTION VALUE TABLE
The following table provides certain information regarding the value of
stock options held by the Company's named executive officers at December 31,
1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END ($)(1)
ACQUIRED VALUE --------------------------- --------------------------------
ON EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- ------------ ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Gerard B. Moersdorf, Jr. -- -- -- -- -- --
William H. Largent -- -- -- 50,000 -- $12,500
Lawrence H. Corbett -- -- -- -- -- --
James K. Hinderliter -- -- -- -- -- --
<FN>
- -------------------------------
(1) Represents the total gain which would have been realized if all
in-the-money options held at fiscal year-end had been exercised, determined
by multiplying the number of shares underlying the options by the
difference between the per share option exercise price and per share fair
market value at year-end. An option is in-the-money if the fair market
value of the underlying shares exceeds the exercise price of the option.
</TABLE>
TEN-YEAR OPTION REPRICING
On February 26, 1997, the Committee approved a stock option repricing
program to provide optionholders additional opportunity and incentive to achieve
business plan goals. All options with an exercise price in excess of $5.00 per
share held on March 1, 1997 were repriced to $5.00 per share, which was the
closing price on February 28, 1997. All other terms of the options remained the
same and, accordingly, there was no change to the vesting or term of any option.
The table below presents the required disclosure with respect to any
repricing of options held by any executive officer during the last ten completed
years.
<TABLE>
<CAPTION>
Number of Length of Original
Securities Market Price Exercise Option Term
Underlying of Stock at Price at Remaining at Date of
Options Time of Time of New Repricing or
Repriced Repricing or Repricing or Exercise Amendment
Name Date or Amended Amendment Amendment Price (Years)
---- ---- ---------- --------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
James K. Hinderliter(1) 3/1/97 20,000 $5.00 $12.375 $5.00 3
3/1/97 20,000 $5.00 $10.750 $5.00 3
<FN>
(1) As a result of his resignation, options granted to Mr. Hinderliter
terminated.
</TABLE>
Compensation Committee: James H. Blough, Richard W. Oliver, and Alexander
B. Trevor.
9
<PAGE> 13
COMPENSATION OF DIRECTORS
The 1996 Stock Option Plan provides for the automatic grant of an
option to purchase 9,000 shares of Common Stock of the Company on March 1 of
each year to each nonemployee director of the Company. Such options will be
exercisable at any time for a period of five years from the first anniversary of
the date of grant and will have an exercise price equal to the fair market value
of the Company's Common Stock on the date of grant. Pursuant to this provision,
on March 1, 1997, James H. Blough, Curtis A. Loveland, Gerard B. Moersdorf, Sr.,
Richard W. Oliver, Ledo A. Ross and Thomas W. Huseby each received an option to
purchase 9,000 shares of Common Stock of the Company exercisable during a period
of five years from the first anniversary of the date of grant at a price of
$5.00 per share. Additionally, each director receives $1,000 for each Board of
Directors meeting attended and $500 for each committee meeting attended,
provided such committee meeting was not on the same day as a Board of Directors
meeting.
RELATED PARTY TRANSACTIONS
The Company has entered into a consulting contract with Mr. Oliver, a
director of the Company, pursuant to which Mr. Oliver provides marketing,
technology and strategy consulting to the Company. Under this arrangement, the
Company paid Mr. Oliver $25,500 in 1997 for his consulting services.
The Company has entered into an arrangement with Mr. Trevor, a director
of the Company, pursuant to which Mr. Trevor provides management consulting
services to the Company. Under this arrangement, the Company paid Mr. Trevor
$22,225 and granted him a stock option for 4,000 shares in 1997.
Mr. Loveland, a director and Secretary of the Company, is a partner in
the law firm of Porter, Wright, Morris & Arthur, which firm serves as general
counsel to the Company.
The Company believes that all terms of the transactions and existing
arrangements set forth above are no less favorable to the Company than similar
transactions and arrangements which might have been entered into with unrelated
parties.
The following Board Compensation Committee Report on Executive
Compensation and Performance Graph will not be deemed incorporated by reference
by any general statement incorporating by reference this Proxy Statement into
any of the Company's filings under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference, and will not
otherwise be deemed filed under such Acts.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Stock Option and Compensation Committee (the "Committee") reviews
and evaluates individual executive officers and determines the compensation for
each executive officer. In general, compensation is designed to attract and
retain qualified key executives, reward individual performance, relate
compensation to Company goals and objectives and enhance stockholder value.
Prior to 1994, compensation for executive officers included base salary
and stock option awards. Base salary was reviewed annually in light of the
Committee's perception of individual performance and performance of the Company
as a whole. No specific weight was given to any of these factors in the
evaluation of an executive officer's
10
<PAGE> 14
base salary. Beginning with fiscal 1994, the Committee established in advance a
formula for determining the amount of bonus to be paid to senior executive
officers.
The 1997 Officer and Manager Compensation Plan (the "1997 Plan") was
adopted by the Board of Directors in February 1997. The 1997 Plan had both a
short-term and long-term incentive component. With the exceptions of Mr.
Largent, who received a guaranteed bonus under the 1997 Plan, and Mr.
Hinderliter, who received a bonus based on total revenues, the 1997 Plan
established a total bonus amount equal to a percentage of base salary, with the
percentage increasing based on target levels of pre-tax, pre-bonus income for
1997 or attaining budgeted total revenues. With the exception of Mr. Largent's
and Mr. Hinderliter's bonuses, no bonuses were awarded under the 1997 Plan,
because target income levels were not obtained.
The Committee also awards stock options to executive officers to
encourage share ownership and to give them a stake in the performance of the
Company's stock. The specific number of stock options granted to individual
executive officers is determined by the Committee's perception of relative
contributions or anticipated contributions to overall corporate performance. To
date, Mr. Moersdorf has received no stock options under any of the Company's
stock option plans.
On February 26, 1997, the Committee and the Board of Directors approved
a stock option repricing program to provide option holders additional
opportunity and incentive to achieve business plan goals. The exercise prices
for all options with an exercise price in excess of $5.00 per share held on
March 1, 1997 were repriced to $5.00 per share, which was the market price on
February 28, 1997. All other terms of the options remained the same and,
accordingly, there was no change to the vesting or term of any option.
Compensation for the named executive officers during the 1997 fiscal
year included base salary and awards under the 1997 Plan. Base salary was
determined by reviewing the previous levels of base salary, perceived level of
individual performance and the overall performance of the Company. No specific
weight was given to any of these factors in the evaluation of base salaries
because each of these factors was considered significant and the relevance of
each varies depending on an officer's responsibilities.
The Budget Reconciliation Act of 1993 amended the Code to add Section
162(m) which bars a deduction to any publicly held corporation for compensation
paid to a "covered employee" in excess of $1,000,000 per year. The Compensation
Committee does not believe that this law will impact the Company because the
current level of compensation for each of the Company's executive officers is
well below the $1,000,000 salary limitation.
Compensation Committee: James H. Blough, Richard W. Oliver, and Alexander
B. Trevor.
11
<PAGE> 15
AMENDMENT TO THE COMPANY'S 1996 STOCK OPTION PLAN
The Board of Directors has approved amendments to the Company's 1996
Stock Option Plan (the "Plan"), subject to approval of the amendments by the
stockholders at the Annual Meeting: (a) to increase the number of shares
available for issuance under the Plan from 1,000,000 to 2,000,000 shares, and to
increase the number of shares for which options may be granted to any one
individual during the term of the Plan from 300,000 to 750,000 shares; (b) to
provide that the members of the Stock Option and Compensation Committee be
"non-employee directors"; and (c) to provide that non-employee directors,
including those on the Stock Option and Compensation Committee, are eligible to
receive options under the Plan. Approval of these amendments requires the
affirmative vote of the holders of a majority of the shares of the Company's
common stock represented at the Annual Meeting. The following summary does not
purport to be complete and is qualified in its entirety by the terms of the
Amended and Restated 1996 Stock Option Plan.
PURPOSE OF THE 1996 STOCK OPTION PLAN
The Company's Board of Directors believes that providing selected
persons with an opportunity to invest in the Company will give them additional
incentive to increase their efforts on behalf of the Company and will enable the
Company to attract and retain the best available associates, officers,
directors, consultants and advisors. The Company's Board of Directors has
approved an amendment to the Plan to increase the number of shares of the
Company's common stock reserved for issuance upon the exercise of options
granted under the Plan from 1,000,000 shares to 2,000,000 shares, and to
increase the number of shares for which options may be granted to any one
individual during the term of the Plan from 300,000 to 750,000 shares.
The Plan was adopted by the Board of Directors on February 1, 1996, and
approved by stockholders on April 25, 1996. The amendment increasing the number
of shares of the Company's common stock issuable under the Plan was adopted by
the Company's Board of Directors on February 12, 1998. The options may either
meet the requirements of Section 422 ("Incentive Options") of the Internal
Revenue Code of 1986, as amended (the "Code") or not meet such requirements
("Nonqualified Options"). Key employees, officers, and directors of, and
consultants and advisors who render services to the Company are eligible to
receive options under the Plan.
ADMINISTRATION OF THE 1996 STOCK OPTION PLAN
The Plan is administered by the Stock Option and Compensation Committee
which, under the Plan, must consist of not less than two members of the Board
of Directors appointed by the Board who are "disinterested persons." As
amended, the Stock Option and Compensation Committee would consist of not less
than two members of the Board of Directors appointed by the Board who are
"non-employee directors" as defined by the amended Rule 16b-3(b)(2)(i) under
the Securities Exchange Act of 1934, as amended. The members of the Stock
Option and Compensation Committee and all other independent members of the
Board of Directors are eligible to receive options under the Plan pursuant to a
formula set forth in the Plan which provides that, on March 1 of each year,
each director who is not an employee of the Company will be granted a
Nonqualified Option to purchase 9,000 shares of the Company's common stock. See
"Compensation of Directors." There are currently six independent directors
eligible to receive options pursuant to the Plan on March 1 of each year.
With respect to all eligible persons, the Stock Option and Compensation
Committee is authorized to determine to whom and at what time options may be
granted. The Stock Option and Compensation Committee
12
<PAGE> 16
determines the number of shares subject to option, the duration of the option,
the per share exercise price, the rate and manner of exercise, and whether the
option is intended to be a Nonqualified Option or an Incentive Option. An
Incentive Option may not have an exercise price less than fair market value of
the common stock on the date of grant or an exercise period that exceeds ten
years from the date of grant and is subject to certain other limitations which
allow the option holder to qualify for favorable tax treatment. None of these
restrictions apply to the grant of Nonqualified Options, which may have an
exercise price less than the fair market value of the underlying common stock on
the date of grant and may be exercisable for an indeterminate period of time.
The Stock Option and Compensation Committee also has the discretion under the
Plan to make cash grants to option holders that are intended to offset a portion
of the taxes payable upon exercise of Nonqualified Options or on certain
dispositions of shares acquired under Incentive Options.
The exercise price of the option may be paid in cash or, with the
consent of the Stock Option and Compensation Committee, (i) with previously
acquired shares of common stock valued at their fair market value on the date
they are tendered, (ii) delivery of a full recourse promissory note, the terms
and conditions of which will be determined by the Stock Option and Compensation
Committee, or (iii) by delivery of written instructions to forward the notice of
exercise to a broker or dealer and to deliver to a specified account a
certificate for the shares purchased upon exercise of the option and a copy of
irrevocable instructions to the broker or dealer to deliver the purchase price
of the shares to the Company.
TERMINATION OF OPTIONS
Any option granted under the Plan will terminate automatically (i) 30
days after an employee's termination of employment with the Company (other than
by reason of death or disability or for cause), and (ii) one year after an
employee's death or termination of employment by reason of disability, unless
the option expires earlier by its terms. Options not exercisable as of the date
of a change in control of the Company will become exercisable immediately as of
such date. Options granted under the Plan are not transferable except by will or
the laws of descent and distribution.
TERM OF THE 1996 STOCK OPTION PLAN
The Plan terminates on April 25, 2006, unless earlier terminated by the
Board of Directors.
AMENDMENT
The Board of Directors may terminate, amend or modify the Plan at any
time provided that (a) no amendment may be made to the Plan which would cause
the Incentive Options granted thereunder to fail to qualify as incentive stock
options under the Code; and (b) any amendment which requires the approval of the
stockholders of the Company under the Code or Section 16 of the Securities
Exchange Act of 1934, as amended, or the regulations promulgated thereunder,
will be subject to such approval in accordance with the applicable law or
regulations. No amendment, modification or termination of the Plan may in any
manner adversely affect any option previously granted under the Plan without the
consent of the option holder or a permitted transferee of such option holder.
1996 STOCK OPTION PLAN TABLE
As of February 27, 1998, options to purchase an aggregate of 843,200
shares of the Company's common stock (net of options canceled) had been granted
pursuant to the Plan, no options had been exercised, options to
13
<PAGE> 17
purchase 843,200 shares remained outstanding, and only 156,800 shares remained
available for future grant. As of February 27, 1998, the market value of all
shares of the Company's common stock subject to outstanding options under the
Plan and all of the Company's stock option plans were approximately $5,902,400
and $9,275,000, respectively (based upon the closing sale price per share of the
Company's common stock as reported on the Nasdaq National Market on February 27,
1998). During the 1997 fiscal year, options to purchase 482,650 shares of the
Company's common stock were granted to employees of the Company under the Plan.
Shares underlying presently exercisable, but unexercised, options will
constitute outstanding shares of the Company's common stock for purposes of
calculating the Company's net income (loss) per share. The market value of the
2,000,000 shares of the Company's common stock to be subject to the Plan was
approximately $14,000,000 as of February 27, 1998.
As of February 27, 1998, the following current directors and executive
officers named in the Company's Proxy Statement had been granted options under
the Plan as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS AVERAGE EXERCISE PRICE
NAME GRANTED PER SHARE
---- ------- ---------
<S> <C> <C>
Gerard B. Moersdorf, Jr. -- --
Gerard B. Moersdorf, Sr. 9,000 $5.00
Curtis A. Loveland 9,000 $5.00
James H. Blough 9,000 $5.00
Richard W. Oliver 9,000 $5.00
Thomas W. Huseby 9,000 $5.00
Alexander B. "Sandy" Trevor 4,000 $5.00
William H. Largent 100,000 $6.03
William J. Mrukowski 100,000 $6.46
John M. Spiegel 1,500 $5.00
</TABLE>
Since adoption of the Plan: (i) all current executive officers, as a
group, have been granted options under the Plan covering 201,500 shares of the
Company's common stock which represents approximately 23.9% of the total number
of options granted pursuant to the Plan; and (iii) all current employees,
excluding executive officers, as a group, have been granted options under the
Plan covering 583,700 shares of the Company's common stock which represents
approximately 69.2% of the total number of options granted pursuant to the Plan.
FEDERAL INCOME TAX CONSEQUENCES
The Plan permits the granting of Incentive Stock Options as well as
Non-Statutory Stock Options. Generally, no income is recognized when either type
of option is granted to the optionholder, but the subsequent tax treatment
differs widely.
Non-Statutory Stock Options. Generally, upon the exercise of a
Non-Statutory Stock Option, the excess of the fair market value of the shares on
the date of exercise over the option price is ordinary income to the
optionholder at the time of the exercise. The tax basis for the shares purchased
is their fair market value on the date of exercise. Any gain or loss realized
upon a later sale of the shares for an amount in excess of or less than their
tax basis will be
14
<PAGE> 18
taxed as capital gain or loss, with the character of the gain or loss
(short-term or long-term) depending upon how long the shares were held since
exercise.
Incentive Stock Options. Generally, no regular taxable income is
recognized upon the exercise of an Incentive Stock Option. The tax basis of the
shares acquired will be the exercise price. In order to receive this favorable
treatment, shares acquired pursuant to the exercise of an Incentive Stock Option
may not be disposed of within two years after the date the option was granted,
nor within one year after the exercise date (the "Holding Periods"). If the
shares are sold before the end of the Holding Periods, the amount of that gain
which equals the lesser of the difference between the fair market value on the
exercise date and the option price or the difference between the sale price and
the option price is taxed as ordinary income and the balance, if any, as
short-term or long-term capital gain, depending upon how long the shares were
held. If the Holding Periods are met, all gain or loss realized upon a later
sale of the shares for an amount in excess of or less than their tax basis will
be taxed as a capital gain or loss.
Alternative Minimum Tax. For purposes of determining the optionholder's
alternative minimum taxable income subject to the alternative minimum tax, the
exercise of an Incentive Stock Option by an optionholder will result in the
recognition of taxable income at the time of the exercise of the option in an
amount equal to the excess of the fair market value of the shares on the
exercise date over the option price. The alternative minimum tax is paid only if
it exceeds an individual's regular tax. It is imposed at a rate of 26% on the
first $175,000 of alternative minimum taxable income in excess of the applicable
exemption amount and at a rate of 28% for any additional alternative minimum
taxable income. The exemption amount is phased out for higher income taxpayers.
Exercise with Previously-Owned Shares. All options granted under the
Plan may be exercised with payment either in cash or, if authorized in its sole
discretion by the Company's Board of Directors, in previously-owned shares of
the Company Common Stock at their then fair market value, or in a combination of
both. When previously-owned shares ("Old Shares") are used to purchase shares
("New Shares") upon the exercise of an Incentive Stock Option or a Non-Statutory
Stock Option, no gain or loss is recognized by the optionholder to the extent
that the total value of the Old Shares surrendered does not exceed the total
value of all of the New Shares received. If, as would almost always be the case,
the value of the New Shares exceeds the value of the Old Shares, the excess
amount is not regular taxable income to the optionholder, if the option
exercised is an Incentive Stock Option and the Holding Periods discussed above
are met for the Old Shares at the time of exercise. The New Shares would also be
subject to the Holding Periods discussed above. On the other hand, if the option
exercised is a Non-Statutory Stock Option, the excess amount is taxable as
ordinary income.
The Company Deduction. No deduction is available to the Company in
connection with the exercise of an Incentive Stock Option if the Holding Periods
discussed above are met. The Company, however, is entitled to a deduction in
connection with the exercise of an Incentive Stock Option if the Holding Periods
discussed above are not met, in an amount equal to the ordinary income
recognized by the optionholder (conditioned upon proper reporting and tax
withholding and subject to possible deduction limitations). The Company is
entitled to a tax deduction in connection with the exercise of a Non-Statutory
Stock Option equal to the ordinary income recognized by the optionholder
(conditioned upon proper reporting and tax withholding and subject to possible
deduction limitations).
1997 Tax Act. Under recently enacted legislation, capital gains
recognized by optionholders generally will be subject to a maximum federal
income tax rate of 20%, provided the shares sold or exchanged are held for more
15
<PAGE> 19
than eighteen (18) months. If the shares are held for more than one year but
less than eighteen months, then the capital gains recognized by optionholders
will be taxed at a maximum federal income tax rate of 28%.
Section 162(m). Section 162(m) of the Internal Revenue Code does not
permit the Company to deduct non-performance based compensation in excess of
$1,000,000 per year paid to certain covered officers. The Company believes that
compensation paid pursuant to the Plan should qualify as performance-based
compensation and, therefore, Section 162(m) should not cause the Company to be
denied a deduction for compensation paid to certain covered officers pursuant to
the Plan.
The affirmative vote of a majority of the votes entitled to be cast by
the holders of the Company's common stock present in person or represented by
proxy at the Annual Meeting is required to adopt the amendments to the Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
APPROVAL OF THE AMENDMENT TO THE 1996 STOCK OPTION PLAN. UNLESS A CONTRARY
CHOICE IS SPECIFIED, PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED
FOR APPROVAL OF THE PLAN.
16
<PAGE> 20
PERFORMANCE GRAPH
The following graph shows the dollar change in the cumulative total
return performance to holders of the Company's Common Stock with that of the
Nasdaq Stock Market - U.S. Index and the Standard & Poor's Communication
Equipment Manufacturers Index, both of which are published indexes. This
comparison includes the period beginning May 31, 1993 through December 31, 1997.
The Company's Common Stock was registered under the Securities and Exchange Act
of 1934 effective on May 9, 1993. The Company's Common Stock is traded on The
Nasdaq National Market under the symbol "AINN." The comparison of the cumulative
total returns for each investment assumes that $100 was invested in the
Company's Common Stock on May 9, 1993, and in the respective index on May 31,
1993, and that all dividends were reinvested.
<TABLE>
<CAPTION>
COMPARISON OF 56 MONTH CUMULATIVE TOTAL RETURN*
AMONG APPLIED INNOVATION INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE S & P COMMUNICATIONS EQUIPMENT INDEX
Research Data Group Total Return - Data Summary
AINN
Cumulative Total Return
--------------------------------------------------
5/9/93 12/93 12/94 12/95 12/96 12/97
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
APPLIED INNOVATION INC. AINN 100.00 244.44 297.22 261.11 136.11 122.22
NASDAQ STOCK MARKET (U.S.) INAS 100.00 117.71 115.06 162.72 200.14 245.60
S&P COMMUNICATIONS EQUIPMENT ICME 100.00 103.68 118.27 177.00 207.30 270.08
</TABLE>
<PAGE> 21
INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP, independent
public accountants, as auditors for the Company for fiscal 1998. KPMG Peat
Marwick LLP has served as the independent auditors for the Company since 1993.
The Board of Directors believes that the reappointment of KPMG Peat Marwick LLP
for fiscal 1998 is appropriate because of the firm's reputation, qualifications,
and experience. Representatives of KPMG Peat Marwick LLP will be present at the
meeting and will have an opportunity to make a statement if they desire to do
so. Such representatives will be available to respond to appropriate questions.
ANNUAL REPORT
The Company's Annual Report to Stockholders for the fiscal year ended
December 31, 1997, containing financial statements for such year and the signed
opinion of KPMG Peat Marwick LLP, independent auditors, with respect to such
financial statements, is being sent to stockholders concurrently with this Proxy
Statement. The Annual Report is not to be regarded as proxy soliciting material,
and management does not intend to ask, suggest or solicit any action from the
stockholders with respect to such report.
A COPY OF THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS AVAILABLE
WITHOUT CHARGE TO STOCKHOLDERS UPON REQUEST TO: JOHN M. SPIEGEL, CONTROLLER,
APPLIED INNOVATION INC., 5800 INNOVATION DRIVE, DUBLIN, OHIO 43016.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and greater than 10%
stockholders, to file reports of ownership and changes in ownership of the
Company's securities with the Securities and Exchange Commission. Copies of the
reports are required by SEC regulation to be furnished to the Company. Based on
its review of such reports and written representations from reporting persons,
the Company believes that all filing requirements were complied with during
fiscal 1997.
COST OF SOLICITATION OF PROXIES
The cost of this solicitation will be paid by the Company. In addition
to the solicitation of proxies by mail, the directors, officers and employees of
the Company may solicit proxies personally or by telephone. The Company may
request persons holding shares in their names for others to forward soliciting
materials to their principals to obtain authorization for the execution of
proxies, and the Company may reimburse such persons for their expenses in doing
so.
STOCKHOLDER PROPOSALS
Each year the Board of Directors submits its nominations for election
of directors at the Annual Meeting of Stockholders. Other proposals may be
submitted by the Board of Directors or the stockholders for inclusion in the
Proxy Statement for action at the Annual Meeting. Any proposal submitted by a
stockholder for inclusion in the
18
<PAGE> 22
Proxy Statement for the Annual Meeting of Stockholders to be held in 1999 must
be received by the Company (addressed to the attention of the Secretary) on or
before November 30, 1998. To be submitted at the meeting, any such proposal must
be a proper subject for stockholder action under the laws of the State of
Delaware.
OTHER MATTERS
The only business which management intends to present at the meeting
consists of the matters set forth in this statement. Management knows of no
other matters to be brought before the meeting by any other person or group. If
any other matter should properly come before the meeting, the proxy holders will
vote thereon in their discretion.
All proxies received duly executed will be voted. You are requested to
sign and date the enclosed proxy and mail it promptly in the enclosed envelope.
If you later desire to vote in person, you may revoke your proxy, either by
written notice to the Company, Attention: Gerard B. Moersdorf, Jr., or in person
at the meeting, without affecting any vote previously taken.
BY ORDER OF THE BOARD OF DIRECTORS
GERARD B. MOERSDORF, JR.
CHAIRMAN OF THE BOARD AND PRESIDENT
19
<PAGE> 23
APPLIED INNOVATION INC.
5800 INNOVATION DRIVE, DUBLIN, OHIO 43016
--------------------------------------------------------------
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS -- APRIL 23, 1998
The undersigned hereby appoints GERARD B. MOERSDORF, JR., and CURTIS A.
LOVELAND, or either of them acting alone, my attorneys and proxies, with full
power of substitution to each, to vote all shares of Common Stock which the
undersigned is entitled to vote at the Annual Meeting of Stockholders of said
corporation to be held on April 23, 1998, at 1:00 p.m., local time, at 5800
Innovation Drive, Dublin, Ohio 43016, and at any adjournment thereof, with all
of the powers I would have if personally present, for the following purposes:
1. ELECTION OF CLASS II DIRECTORS
[ ] FOR all nominees listed below (except as marked to the contrary).
[ ] WITHHOLD AUTHORITY to vote for all nominees below.
THOMAS W. HUSEBY CURTIS A. LOVELAND GERARD B. MOERSDORF, SR.
(INSTRUCTIONS: Do not check "WITHHOLD AUTHORITY" to vote for only a certain
individual nominee. To withhold authority to vote for any individual
nominee, strike a line through the nominee's name and check "FOR").
2. TO APPROVE AND ADOPT amendments to the Company's 1996 Stock Option Plan.
o FOR o AGAINST o ABSTAIN
3. TO TRANSACT such other business as may properly come before the meeting
and any adjournment thereof.
<PAGE> 24
giving unto said attorneys and proxies, or substitutes, full power and authority
to do whatsoever in their opinion may be necessary or proper to be done in the
exercise of the power hereby conferred, including the right to vote for any
adjournment, hereby ratifying all that said attorneys and proxies, or
substitutes, may lawfully do or cause to be done by virtue hereof. Either of
said attorneys and proxies, or substitutes, who shall be present and shall act
at the meeting shall have and may exercise all the powers of said attorneys and
proxies hereunder.
THIS PROXY, WHEN EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1 AND 2.
The undersigned hereby acknowledges receipt of the Notice of the Annual
Meeting of Stockholders, dated March 23, 1998, the Proxy Statement and the
Annual Report of the company furnished therewith. Any proxy heretofore given to
vote said shares is hereby revoked.
Please sign and date this Proxy below and return in the enclosed
envelope.
Dated______________________________, 1998
Signature___________________________ Signature_________________________________
SIGNATURE(S) SHALL AGREE WITH THE NAME(S) PRINTED ON THIS PROXY. IF SHARES ARE
REGISTERED IN TWO NAMES, BOTH STOCKHOLDERS SHOULD SIGN THIS PROXY. IF SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE YOUR FULL
TITLE AS SUCH.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
<PAGE> 1
Exhibit 99
APPLIED INNOVATION INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
----------------------
1. PURPOSE. This plan (the "Plan") is intended as an incentive and to
encourage stock ownership by certain key employees, officers and directors of,
and consultants and advisers who render services to, Applied Innovation Inc., a
Delaware corporation (the "Company"), and any current or future Parent or
Subsidiary thereof (the "Company Group") by the granting of stock options (the
"Options") as provided herein. By encouraging such stock ownership, the Company
seeks to attract, retain and motivate employees, officers, directors,
consultants and advisers of training, experience and ability. The Options
granted under the Plan may be either incentive stock options ("ISOs") which meet
the requirements of section 422 of the Internal Revenue Code of 1986, as amended
from time to time hereafter (the "Code"), or options which do not meet such
requirements ("Non-Statutory Options").
2. EFFECTIVE DATE. The Plan will become effective on April 25, 1996
(the "Effective Date").
3. ADMINISTRATION.
(a) The Plan will be administered by a committee (the "Committee")
appointed by the Board of Directors of the Company (the "Board") which consists
of not fewer than two members of the Board. If any class of equity securities of
the Company is registered under section 12 of the Securities Exchange Act of
1934, as amended (the "1934 Act"), all members of the Committee will be
"non-employee directors" as defined in Rule 16b-3(b)(2)(i) promulgated under the
1934 Act (or any successor rule of like tenor and effect) and "outside
directors" as defined in section 162(m) of the Code and the regulations
promulgated thereunder.
(b) Subject to the provisions of the Plan, the Committee is
authorized to establish, amend and rescind such rules and regulations as it
deems appropriate for its conduct and for the proper administration of the Plan,
to make all determinations under and interpretations of, and to take such
actions in connection with the Plan or the Options granted thereunder as it
deems necessary or advisable. All actions taken by the Committee under the Plan
are final and binding on all persons. No member of the Committee is liable for
any action taken or determination made relating to the Plan, except for willful
misconduct.
(c) The Company will indemnify each member of the Committee against
costs, expenses and liabilities (other than amounts paid in settlements to which
the Company does not consent, which consent will not be unreasonably withheld)
reasonably incurred by such member in connection with any action to which he or
she may be a party by reason of service as a member of the Committee, except in
relation to matters as to which he or she is adjudged in such action to be
personally guilty of negligence or willful misconduct in the performance of his
or her duties. The foregoing right to indemnification is in addition to such
other rights as the Committee member may enjoy as a matter of law, by reason of
insurance coverage of any kind, or otherwise.
<PAGE> 2
4. ELIGIBILITY.
(a) The Committee may grant Options and Tax Offset Payments, as
defined in paragraph 10, to such Key Employees of (or, in the case of
Non-Statutory Options only, to directors who are not employees of and to
consultants and advisers who render services to) the Company or the Company
Group as the Committee may select from time to time (the "Optionees"). The
Committee may grant more than one Option to an individual under the Plan.
(b) If any class of equity securities of the Company is registered
under section 12 of the 1934 Act, on March 1 of each year, each member of the
Board who is not an employee of the Company or of its Parent or any Subsidiary,
including members of the Committee, will automatically receive under this Plan a
Non-Statutory Option to purchase 9,000 shares of the Company's common stock,
$.01 par value, at an exercise price equal to 100% of the Fair Market Value of
the shares on the date of grant. Such Option will not be exercisable until a
period of one year from the date of grant and will terminate on the sixth
anniversary of the date of grant. This paragraph 4(b) may not be amended more
than once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended from time to time,
or the rules thereunder.
(c) No ISO may be granted to an individual who, at the time an ISO
is granted, is considered under section 422(b)(6) of the Code as owning stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of its Parent or any Subsidiary; provided,
however, this restriction will not apply if at the time such ISO is granted the
option price per share of such ISO is at least 110% of the Fair Market Value of
such share, and such ISO by its terms is not exercisable after the expiration of
five years from the date it is granted. This paragraph 4(c) has no application
to Options granted under the Plan as Non-Statutory Options.
(d) The aggregate Fair Market Value (determined as of the date the
ISO is granted) of shares with respect to which ISOs are exercisable for the
first time by any Optionee during any calendar year under the Plan or any other
incentive stock option plan of the Company or the Company Group may not exceed
$100,000. If an ISO which exceeds the $100,000 limitation of this paragraph 4(d)
is granted, the portion of such Option which is exercisable for Shares in excess
of the $100,000 limitation shall be treated as a Non-Statutory Option pursuant
to Section 422(d) of the Code. Except as otherwise provided in the preceding
sentence, this paragraph 4(d) has no application to Options granted under the
Plan as Non-Statutory Options.
5. STOCK SUBJECT TO PLAN. The shares subject to Options under the Plan
are the shares of common stock, $.01 par value, of the Company (the "Shares").
The Shares issued pursuant to Options granted under the Plan may be authorized
and unissued Shares, Shares purchased on the open market or in a private
transaction, or Shares held as treasury stock. The aggregate number of Shares
for which Options may be granted under the Plan may not exceed 2,000,000 shares,
subject to adjustment in accordance with the terms of paragraph 13 of the Plan.
The maximum number of Shares for which Options may be granted under the Plan
during the term of the Plan to any one individual may not exceed 750,000 shares
subject to adjustment in accordance with the terms of paragraph 13 of the Plan.
The unpurchased Shares subject to terminated or expired Options may
<PAGE> 3
again be offered under the Plan. The Committee, in its sole discretion, may
permit the exercise of any Option as to full Shares or fractional Shares.
Proceeds from the sale of Shares under Options will be general funds of the
Company.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) At the time of grant, the Committee will determine whether the
Options granted will be ISOs or Non-Statutory Options. All Options and Tax
Offset Payments granted will be authorized by the Committee and, within a
reasonable time after the date of grant, will be evidenced by stock option
agreements in writing ("Stock Option Agreements"), in the form attached hereto
as Exhibit A, or in such other form and containing such terms and conditions not
inconsistent with the provisions of this Plan as the Committee may determine.
Any action under paragraph 13 may be reflected in an amendment to, or
restatement of, such Stock Option Agreements.
(b) The Committee may grant Options and Tax Offset Payments having
terms and provisions which vary from those specified in the Plan if such Options
or Tax Offset Payments are granted in substitution for, or in connection with
the assumption of, existing options granted by another corporation and assumed
or otherwise agreed to be provided for by the Company pursuant to or by reason
of a transaction involving a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation to which the
Company is a party.
7. PRICE. The Committee will determine the option price per Share (the
"Option Price") of each Option granted under the Plan. Notwithstanding the
foregoing, the Option Price of each ISO granted under the Plan may not be less
than the Fair Market Value of a Share on the date of grant of such Option. The
date of grant will be the date the Committee acts to grant the Option or such
later date as the Committee specifies and the Fair Market Value will be
determined in accordance with paragraph 26(c) and without regard to any
restrictions other than a restriction which, by its terms, will never lapse.
8. OPTION PERIOD. The Committee will determine the period during which
each Option may be exercised (the "Option Period"); provided, however, any ISO
granted under the Plan will have an Option Period which does not exceed 10 years
from the date of grant.
9. NONTRANSFERABILITY OF OPTIONS. An Option will not be transferable by
the Optionee otherwise than by will or the laws of descent and distribution and
may be exercised, during the lifetime of the Optionee, only by the Optionee or
by the Optionee's guardian or legal representative. Notwithstanding the
foregoing, an Optionee may transfer a Non-Statutory Option to members of his or
her immediate family (as defined in Rule 16a-1 promulgated under the 1934 Act),
to one or more trusts for the benefit of such family members or to partnerships
in which such family members are the only partners if (a) the stock option
agreement with respect to such Non-Statutory Option as approved by the Committee
expressly so provides and (b) the Optionee does not receive any consideration
for the transfer. Non-Statutory Options held by such transferees are subject to
the same terms and conditions that applied to such Non-Statutory Options
immediately prior to transfer.
<PAGE> 4
10. TAX OFFSET PAYMENTS. The Committee has the authority and discretion
under the Plan to make cash grants to Optionees to offset a portion of the taxes
which may become payable upon exercise of Non-Statutory Options or on certain
dispositions of Shares acquired under ISOs ("Tax Offset Payments"). In the case
of Non-Statutory Options, such Tax Offset Payments will be in an amount
determined by multiplying a percentage established by the Committee by the
difference between the Fair Market Value of a Share on the date of exercise and
the Option Price, and by the number of Shares as to which the Option is being
exercised. If the Tax Offset Payment is being made on account of the disposition
of Shares acquired under an ISO, such Tax Offset Payments will be in an amount
determined by multiplying a percentage established by the Committee by the
difference between the Fair Market Value of a Share on the date of disposition,
if less than the Fair Market Value on the date of exercise, and the Option
Price, and by the number of Shares acquired under an ISO of which an Optionee is
disposing. The percentage will be established, from time to time, by the
Committee at that rate which the Committee, in its sole discretion, determines
to be appropriate and in the best interest of the Company to assist Optionees in
the payment of taxes. The Company has the right to withhold and pay over to any
governmental entities (federal, state or local) all amounts under a Tax Offset
Payment for payment of any income or other taxes incurred on exercise.
11. EXERCISE OF OPTIONS.
(a) The Committee, in its sole discretion, will determine the terms
and conditions of exercise and vesting percentages of Options granted hereunder.
Notwithstanding the foregoing or the terms and conditions of any Stock Option
Agreement to the contrary, (i) if the Optionee's employment is terminated as a
result of disability or death, his or her Options will be exercisable to the
extent and for the period specified in paragraph 12(b); (ii) if the Optionee's
employment is terminated other than as a result of disability or death or For
Cause, his or her Options will be exercisable to the extent and for the period
specified in paragraph 12(a); (iii) if a merger or similar reorganization or
sale of substantially all of the Company's assets occurs, all outstanding
Options will be exercisable to the extent and for the period specified in
paragraph 13(b) or paragraph 13(c), whichever paragraph applies; and (iv) if a
Change in Control occurs, all outstanding Options will be exercisable for the
period specified in paragraph 13(d).
(b) An Option may be exercised only upon delivery of a written
notice to the Committee, any member of the Committee, or any officer of the
Company designated by the Committee to accept such notices on its behalf,
specifying the number of Shares for which it is exercised.
(c) Within five business days following the date of exercise of an
Option, the Optionee or other person exercising the Option will make full
payment of the Option Price in cash or, with the consent of the Committee, (i)
by tendering previously acquired Shares (valued at Fair Market Value, as
determined by the Committee, as of such date of tender); (ii) with a full
recourse promissory note of the Optionee for the portion of the Option Price in
excess of the par value of Shares subject to the Option, under terms and
conditions determined by the Committee; (iii) any combination of the foregoing;
or (iv) if the Shares subject to the Option have been registered under the
Securities Act of 1933, as amended (the "1933 Act"), and there is a regular
public market for the
<PAGE> 5
Shares, by delivering to the Company on the date of exercise of the Option
written notice of exercise together with:
(A) written instructions to forward a copy of such notice of
exercise to a broker or dealer, as defined in section 3(a)(4) and
3(a)(5) of the 1934 Act ("Broker"), designated in such notice and to
deliver to the specified account maintained with the Broker by the
person exercising the Option a certificate for the Shares purchased
upon the exercise of the Option, and
(B) a copy of irrevocable instructions to the Broker to
deliver promptly to the Company a sum equal to the purchase price of
the Shares purchased upon exercise of the Option and any other sums
required to be paid to the Company under paragraph 18 of the Plan.
(d) If Tax Offset Payments sufficient to allow for withholding of
taxes are not being made at the time of exercise of an Option, the Optionee or
other person exercising such Option will pay to the Company an amount equal to
the withholding amount required to be made less any amount withheld by the
Company under paragraph 18.
12. TERMINATION OF EMPLOYMENT.
(a) Upon termination of an Optionee's employment with the Company or
the Company Group, other than (i) termination of employment by reason of death
or Disability, or (ii) termination of employment For Cause, the Optionee will
have 30 days after the date of termination (but not later than the expiration
date of the Stock Option Agreement) to exercise all Options held by him or her
to the extent the same were exercisable on the date of termination; provided,
however, if such termination is a result of the Optionee's retirement with the
consent of the Company, such Option shall then be exercisable to the extent of
100% of the Shares subject thereto. The Committee will determine in each case
whether a termination of employment is a retirement with the consent of the
Company and, subject to applicable law, whether a leave of absence is a
termination of employment. The Committee may cancel an Option during the 30-day
period after termination of employment referred to in this paragraph if the
Optionee engages in employment or activities contrary, in the opinion of the
Committee, to the best interests of the Company.
(b) Upon termination of employment by reason of death or Disability,
the Optionee's personal representative, or the person or persons to whom his or
her rights under the Options pass by will or the laws of descent or
distribution, will have one year after the date of such termination (but not
later than the expiration date of the Stock Option Agreement) to exercise all
Options held by Optionee to the extent the same were exercisable on the date of
termination; provided, however, the Committee, in its sole discretion, may
permit the exercise of all or any portion of any Option granted to such Optionee
not otherwise exercisable.
(c) Upon termination of employment For Cause, all Options held by
such Optionee will terminate effective on the date of termination of employment.
<PAGE> 6
13. STOCK SPLITS; MERGERS; REORGANIZATIONS; CHANGE IN CONTROL.
(a) If a stock split, stock dividend, combination or exchange of
shares, exchange for other securities, reclassification, reorganization,
redesignation or other change in the Company's capitalization occurs, the
Committee will proportionately adjust or substitute the aggregate number of
Shares for which Options may be granted under this Plan, the number of Shares
subject to outstanding Options and the Option Price of the Shares subject to
outstanding Options to reflect the same. The Committee will make such other
adjustments to the Options, the provisions of the Plan and the Stock Option
Agreements as may be appropriate and equitable, which adjustments may provide
for the elimination of fractional Shares.
(b) In the event of a change of the Company's common stock, $.01 par
value, resulting from a merger or similar reorganization as to which the Company
is the surviving corporation, or a merger or similar reorganization involving
only a change in the state of incorporation or an internal reorganization not
involving a Change in Control, the number and kind of Shares which thereafter
may be purchased pursuant to an Option under the Plan and the number and kind of
Shares then subject to Options granted hereunder and the price per Share thereof
will be appropriately adjusted in such manner as the Board may deem equitable to
prevent dilution or enlargement of the rights available or granted hereunder.
(c) Except as otherwise determined by the Board, a merger or a
similar reorganization which the Company does not survive (other than a merger
or similar reorganization involving only a change in the state of incorporation
or an internal reorganization not involving a Change in Control), or a sale of
all or substantially all of the assets of the Company, will cause every Option
hereunder to terminate, to the extent not then exercised, unless any surviving
entity agrees to assume the obligations hereunder on terms reasonably acceptable
to the Board; provided, however, that, in the case of such a merger or similar
reorganization, or such a sale of all or substantially all of the assets of the
Company, if there is no such assumption, the Board, in its sole discretion, may
provide that some or all of the unexercised portion of any one or more of the
outstanding Options will be immediately exercisable and vested as of such date
prior to such merger, similar reorganization or sale of assets as the Board
determines. If the Board makes an Option fully exercisable under this paragraph
13(c), the Board will notify the Optionee that the Option will be fully
exercisable for a period of thirty (30) days from the date of such notice, and
the Option will terminate upon the expiration of such period.
(d) If a Change in Control occurs, all outstanding Options granted
under this Plan will become immediately exercisable to the extent of 100% of the
Shares subject thereto notwithstanding any contrary waiting or vesting periods
specified in this Plan or in any applicable Stock Option Agreement.
14. SALE OF OPTION SHARES. If any class of equity securities of the
Company is registered pursuant to section 12 of the 1934 Act, any Optionee or
other person exercising the Option who is subject to section 16 of the 1934 Act
by virtue of his or her relationship to the Company shall not sell or otherwise
dispose of the Shares subject to the Option unless at least six months have
elapsed from the date of the grant of the Option.
<PAGE> 7
15. RIGHTS AS SHAREHOLDER. The Optionee has no rights as a shareholder
with respect to any Shares covered by an Option until the date of issuance of a
stock certificate to the Optionee for such Shares.
16. NO CONTRACT OF EMPLOYMENT. Nothing in the Plan or in any Option or
Stock Option Agreement confers on any Optionee any right to continue in the
employment or service of the Company or any Parent or Subsidiary of the Company
or interfere with the right of the Company to terminate such Optionee's
employment or other services at any time. The establishment of the Plan will in
no way, now or hereafter, reduce, enlarge or modify the employment relationship
between the Company or any Parent or Subsidiary of the Company and the Optionee.
Options granted under the Plan will not be affected by any change of duties or
position as long as the Optionee continues to be employed by the Company or any
Parent or Subsidiary of the Company.
17. AGREEMENTS AND REPRESENTATIONS OF OPTIONEES. As a condition to the
exercise of an Option, the Committee, in its sole determination, may require the
Optionee to represent in writing that the Shares being purchased are being
purchased only for investment and without any present intent at the time of the
acquisition of such Shares to sell or otherwise dispose of the same.
18. WITHHOLDING TAXES. The Company or any Parent or Subsidiary of the
Company has the right (a) to withhold from any salary, wages, or other
compensation for services payable by the Company or any Parent or Subsidiary of
the Company to or with respect to an Optionee, or to demand payment from the
Optionee or other person to whom the Company is delivering certificates for
Shares purchased upon exercise of an Option of, amounts sufficient to satisfy
any federal, state or local withholding tax liability attributable to such
Optionee's (or any beneficiary's or personal representative's) receipt or
disposition of Shares purchased under any Option or (b) to take any such other
action as it deems necessary to enable it to satisfy any such tax withholding
obligations. The Committee, in its sole discretion, may permit an Optionee to
elect to have Shares that would be acquired upon exercise of Options (valued at
Fair Market Value as of the date of exercise) withheld by the Company in
satisfaction of such Optionee's withholding tax liabilities.
19. EXCHANGES. The Committee may permit the voluntary surrender of all
or a portion of any Option granted under the Plan to be conditioned upon the
granting to the Optionee of a new Option for the same or a different number of
Shares as the Option surrendered, or may require such voluntary surrender as a
condition precedent to a grant of a new Option to such Optionee. Subject to the
provisions of the Plan, such new Option will be exercisable at such price,
during such period and on such other terms and conditions as are specified by
the Committee at the time the new Option is granted. Upon surrender, the Options
surrendered will be cancelled, and the Shares previously subject to them will be
available for the grant of other Options. The Committee also may grant Tax
Offset Payments to any Optionee surrendering such Option for a new Option.
20. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Company to sell and
deliver the Shares under such Options, will be subject to all applicable federal
and state laws, rules and regulations and to such approvals by any government or
regulatory agency as may be required. Options issued under this Plan are not
exercisable prior to (i) the date upon which the Company has registered the
Shares for
<PAGE> 8
which Options may be issued under the 1933 Act and the completion of any
registration or qualification of such Shares under state law, or any ruling or
regulation of any government body which the Company, in its sole discretion,
determines to be necessary or advisable in connection therewith, or (ii) receipt
by the Company of an opinion from counsel to the Company stating that the
exercise of such Options may be effected without registering the Shares subject
to such Options under the 1933 Act or under state or other law.
21. ASSUMPTION. The Plan may be assumed by the successors and assigns of
the Company.
22. EXPENSES. The Company will bear all expenses and costs in connection
with administration of the Plan.
23. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may
terminate, amend or modify the Plan at any time without further action on the
part of the shareholders of the Company; provided, however, that (a) no
amendment to the Plan may cause the ISOs granted hereunder to fail to qualify as
incentive stock options under the Code; and (b) any amendment to the Plan which
requires the approval of the shareholders of the Company under the Code, the
regulations promulgated thereunder or the rules promulgated under section 16 of
the 1934 Act will be subject to approval by the shareholders of the Company in
accordance with the Code, such regulations or such rules. No amendment,
modification or termination of the Plan may adversely affect in any manner any
Option previously granted to an Optionee under the Plan without the consent of
the Optionee or the transferee of such Option.
24. TERM OF PLAN. The Plan will become effective on the Effective Date,
subject to the approval of the Plan by the holders of a majority of the shares
of stock of the Company entitled to vote within twelve months of the date of the
Plan's adoption by the Board, and the exercise of all Options granted prior to
such approval will be subject to such approval. The Plan will terminate on the
tenth anniversary of the Effective Date, or such earlier date as may be
determined by the Board. Termination of the Plan, however, will not affect the
rights of Optionees under Options previously granted to them, and all unexpired
Options will continue in force and operation after termination of the Plan
except as they may lapse or terminate by their own terms and conditions.
25. LIMITATION OF LIABILITY. The liability of the Company under this
Plan or in connection with any exercise of an Option is limited to the
obligations expressly set forth in the Plan and in any Stock Option Agreements,
and no term or provision of this Plan or of any Stock Option Agreements will be
construed to impose any further or additional duties, obligations or costs on
the Company not expressly set forth in the Plan or the Stock Option Agreements.
26. DEFINITIONS.
(a) Change In Control. A "Change in Control" will be deemed to have
occurred if and when (i) a person, partnership, corporation, trust or other
entity ("Person") acquires or combines with the Company, or 50 percent or more
of its assets or earning power, in one or more
<PAGE> 9
transactions, and after such acquisition or combination, less than a majority of
the outstanding voting shares of the Person surviving such transaction (or the
ultimate parent of the surviving Person) is owned by the owners of the voting
shares of the Company outstanding immediately prior to such acquisition or
combination, unless the Change in Control transaction or transactions have been
approved in advance by Board members representing at least two-thirds of the
Board members; or (ii) during any period of two consecutive years during the
term of this Plan, individuals who at the beginning of such period are members
of the Board ("Original Board Members") cease for any reason to constitute at
least a majority of the Board, unless the election of each Board member who was
not an Original Board Member has been approved in advance by Board members
representing at least two-thirds of the Board members then in office who were
Original Board Members.
(b) Disability. The term "Disability" means a physical or mental
condition resulting from bodily injury, disease, or mental disorder which
renders the Optionee incapable of continuing the Optionee's usual and customary
employment or service with the Company or the Company Group.
(c) Fair Market Value. If the Shares are publicly traded, the term
"Fair Market Value" as used in this Plan means (i) the closing price quoted in
the Nasdaq National Market, if the shares are so quoted, (ii) the last quote
reported by Nasdaq for small-cap issues, if the shares are so quoted, (iii) the
mean between the bid and asked prices as reported by Nasdaq, if the Shares are
so quoted, or (iv) if the Shares are listed on a securities exchange, the
closing price at which the Shares are quoted on such exchange, in each case at
the close of the date immediately before the Option is granted or, if there be
no quotation or sale on that date, the next preceding date on which the Shares
were quoted or traded. In all other cases, the Fair Market Value will be
determined in accordance with procedures established in good faith by the
Committee and with respect to ISOs, conforming to regulations issued by the
Internal Revenue Service regarding incentive stock options.
(d) Key Employees. The term "Key Employees" means those executive,
administrative, operational and managerial employees of the Company Group who
are determined by the Committee to be eligible for Options under the Plan.
(e) Parent and Subsidiary. The terms "Parent" and "Subsidiary" as
used in the Plan have the respective meanings set forth in sections 424(e) and
(f) of the Code.
(f) Termination For Cause. Termination of Employment "For Cause"
means termination of employment for (a) the commission of an act of dishonesty,
including but not limited to misappropriation of funds or property of the
Company; (b) the engagement in activities or conduct injurious to the reputation
of the Company; (c) the conviction or entry of a guilty or no contest plea to a
misdemeanor involving an act of moral turpitude or a felony; (d) the violation
of any of the terms and conditions of any written agreement the Optionee may
have with the Company or its Parent or Subsidiary (following 30 days' written
notice from the Company specifying the violation and the employee's failure to
cure such violation within such 30-day
<PAGE> 10
period) or (e) any refusal to comply with the written directives, policies or
regulations established from time to time by the Board.
APPLIED INNOVATION INC.
By: /s/ Gerard B. Moersdorf, Jr.
--------------------------------
Gerard B. Moersdorf, Jr.
Adopted by the Board of Directors: February 1, 1996
Adopted by the Stockholders: April 25, 1996
Effective Date: April 25, 1996
Amended by the Board of Directors: February 12, 1998
