<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SOUTHWALL TECHNOLOGIES, 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:
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(4) Date Filed:
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Notes:
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
OF
SOUTHWALL TECHNOLOGIES INC.
1029 CORPORATION WAY
PALO ALTO, CALIFORNIA 94303
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Southwall
Technologies Inc., a Delaware corporation (the "Company"), will be held on
Wednesday, May 21, 1997, at 3:00 p.m. at the Company's principal executive
offices at 1029 Corporation Way, Palo Alto, California, for the following
purposes:
1. To elect directors to serve for the ensuing year.
2. To ratify the appointment of Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending December 31, 1997.
3. To approve the adoption of the Company's 1997 Stock Incentive Plan.
4. To approve the adoption of the Company's 1997 Employee Stock Purchase
Plan.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 27, 1997 as
the record date for the determination of stockholders entitled to notice of
and to vote at the Annual Meeting and at any continuation or adjournment
thereof.
L. Ray Christie
/s/ L. Ray Christie
Secretary
Palo Alto, California
April 21, 1997
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU EXPECT
TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED
PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE
MEETING. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU
HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING.
<PAGE>
PROXY STATEMENT
----------------
SOUTHWALL TECHNOLOGIES INC.
1029 CORPORATION WAY
PALO ALTO, CALIFORNIA 94303
----------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Southwall Technologies Inc. (the "Company") for use at the Annual Meeting of
Stockholders to be held on May 21, 1997 (the "Annual Meeting"), at which
stockholders of record on March 27, 1997 will be entitled to vote. The
specific proposals to be considered and acted upon at the Annual Meeting are
summarized in the accompanying Notice and are described in more detail in this
Proxy Statement (the "Proxy Statement"). On February 28, 1997, 6,538,589
shares of the Company's common stock (the "Common Stock"), $.001 par value,
were issued and outstanding. No shares of the Company's preferred stock were
outstanding. Each stockholder is entitled to one vote for each share of Common
Stock held by said stockholder.
Directors are elected by a plurality vote. The other matters submitted for
stockholder approval at this Annual Meeting will be decided by the affirmative
vote of a majority of shares present in person or represented by proxy and
entitled to vote on each matter. With regard to the election of directors,
votes may be cast in favor of or withheld from each nominee; votes that are
withheld will be excluded entirely from the vote and will have no effect.
Abstentions may be specified on all proposals except the election of directors
and will be counted as present for purposes of determining the existence of a
quorum regarding the item on which the abstention is noted. If shares are not
voted by the broker who is the record holder of the shares, or if shares are
not voted in other circumstances in which proxy authority is defective or has
been withheld with respect to any matter, these non-voted shares are not
deemed to be present or represented for purposes of determining whether
stockholder approval of that matter has been obtained.
The Company intends to mail this proxy statement and the accompanying proxy
card on or about April 21, 1997 to all stockholders entitled to vote at the
Annual Meeting.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by the holder of
record by filing with the Secretary of the Company at the Company's principal
executive office, 1029 Corporation Way, Palo Alto, California, 94303, a
written notice of revocation or a duly executed proxy bearing a later date, or
it may be revoked by the holder of record attending the Annual Meeting and
voting in person. Attendance at the Annual Meeting will not, by itself, revoke
a proxy.
SOLICITATION
The Company will bear the entire cost of proxy solicitation, including costs
of preparing, assembling, printing and mailing this proxy statement, the proxy
card, and any additional material furnished to stockholders. Copies of the
solicitation materials will be furnished to brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. The original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other
regular employees for such services.
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Each director to be elected will hold office until the next Annual Meeting
of Stockholders and until his successor is elected and has qualified, or until
such director's earlier death, resignation or removal.
There are five nominees for the five positions on the Board of Directors of
the Company (the "Board") authorized pursuant to the Company's Bylaws. Each of
the five nominees listed below is currently a director of the Company and was
elected by the stockholders at the last annual meeting. The five candidates
receiving the highest number of affirmative votes cast at the Annual Meeting
will be elected directors of the Company. Each person nominated for election
has agreed to serve if elected, and management has no reason to believe that
any nominee will be unavailable to serve. Unless otherwise instructed, the
proxy holders will vote the proxies received by them for the five nominees
named below. In the event that any nominee should be unavailable for election
as a result of an unexpected occurrence, such shares will be voted for the
election of such substitute nominee as management may propose.
NOMINEES
Set forth below is information regarding the nominees, including information
furnished by them as to their principal occupations for the last five years,
certain other directorships held by them and their ages as of February 28,
1997.
<TABLE>
<CAPTION>
NAME AGE
---- ---
<S> <C>
Bruce J. Alexander(2).............................. 52
Joseph B. Reagan(2)................................ 62
Martin M. Schwartz................................. 52
Walter C. Sedgwick(1)(2)........................... 50
J. Larry Smart(1).................................. 49
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Human Resources Committee.
Mr. Alexander has served as a member of the Board of Directors of the
Company since April 1981. Since 1997 he has been a Managing Director with
Needham & Co., Inc., an investment bank, and from 1994 until 1997 he was a
Senior Vice President with Needham & Co., Inc. From 1991 to 1994, he was a
General Partner with Materia Ventures, L.P., a venture capital firm investing
in advanced materials companies. From March 1987 to July 1991, he was
President and Chief Executive Officer of the Company. From 1982 to March 1987,
he held various offices with the Company, including Executive Vice President,
Vice Chairman of the Board, Chairman and acting Chief Executive Officer, and
Chief Financial Officer.
Dr. Reagan has served as a member of the Board of Directors of the Company
since June 1993, and previously served as a director from October 1987 through
May 1992. Dr. Reagan is a senior management consultant to industry and the
United States Government. He retired in 1996 after 37 years with the Lockheed
Martin Corporation where he was a corporate officer and Vice President and
General Manager of the Research and Development Division of the Missiles and
Space Company.
Mr. Schwartz has served as a director and President and Chief Executive
Officer of the Company since May 1994. From April 1988 to May 1994, he was
Vice President, Operations of the Company.
Mr. Sedgwick has served as a member of the Board of Directors of the Company
since January 1979. Mr. Sedgwick has worked as a private investor for more
than the past six years.
2
<PAGE>
Mr. Smart has served as Chairman of the Board of Directors of the Company
since March 1994 and as a director of the Company since July 1991. Since July
1995 he has served as Chairman, President and Chief Executive Officer for
StreamLogic Corporation. From May 1994 to February 1995, he was President and
Chief Executive Officer of Maxtor Corporation. From July 1991 to May 1994, he
was President and Chief Executive Officer of the Company. From November 1987
to July 1991, he was Senior Vice President of SCI Systems, Inc. Mr. Smart also
serves on the board of directors of Western Micro Technologies, Inc.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL OF THE
ABOVE NOMINEES FOR ELECTION AS DIRECTORS.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company (the "Board"), which held nine
meetings during 1996, currently has two standing committees, the Audit
Committee and the Human Resources Committee. During 1996, each nominee for
director attended more than 75% of the aggregate of the meetings of the Board
and of the committees on which he served.
The Audit Committee recommends engagement of the Company's independent
accountants, approves the services performed by such accountants, reviews the
results of the annual audit, and evaluates the Company's accounting systems
and internal financial controls. The Audit Committee held two meetings during
1996.
The Human Resources Committee is authorized to periodically make and review
recommendations regarding employee compensation and to perform other duties
regarding compensation for employees as the Board may delegate to such
Committee from time to time. The Human Resources Committee is also authorized
to administer the Company's stock option plans and employee stock purchase
plans. The Human Resources Committee held four meetings during 1996.
DIRECTOR COMPENSATION
The Company paid during 1996 and currently pays its non-employee directors
(other than the Chairman of the Board) an annual fee of $6,000 for their
services as directors of the Company. In addition, each non-employee member of
the Board, except the Chairman, received $500 plus expenses for each Board
meeting attended. Non-employee directors who served on committees of the Board
also received $500 for each committee meeting attended. Each committee
chairman received $750 for each committee meeting attended. The Company pays
an annual fee of $24,000 to the Chairman of the Board.
Board members are also eligible to receive options to purchase shares of
Common Stock under the Company's Restated 1987 Stock Option Plan. During 1996,
the non-employee Board members received options to purchase the following
number of shares: Mr. Alexander--3,000 shares at an exercise price of $8.125
per share and 5,000 shares at an exercise price of $6.50 per share; Mr.
Reagan--15,000 shares at an exercise price $5.875 per share and 5,000 shares
at an exercise price of $6.50 per share; Mr. Sedgwick--18,000 shares at an
exercise price of $5.875 per share and 5,000 shares at an exercise price of
$6.50 per share; and Mr. Smart--3,000 shares at an exercise price of $8.125
per share and 5,000 shares at an exercise price of $6.50 per share. For option
grants made to Mr. Schwartz, please see "Executive Compensation--Stock
Options" below.
No other compensation is paid to directors of the Company in respect of
their services as directors.
3
<PAGE>
MANAGEMENT
Set forth below is certain information regarding executive officers of the
Company who are not directors, including their ages and positions as of
February 28, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
L. Ray Christie............. 52 Vice President, Chief Financial Officer and
Secretary
Robert L. Cormia............ 61 Senior Vice President, Technology
Leonard H. Garigliano....... 47 Vice President, Manufacturing/General
Manager, Tempe Operations
Thomas G. Hood.............. 41 Senior Vice President/General Manager,
Energy Products Division
David Jones................. 39 Vice President, Operations, Energy Products
Division
Brian P. Kenedy............. 36 Vice President, Marketing and Sales, Energy
Products Division
Ted L. Larsen, Ph.D......... 61 Vice President, Marketing and Business
Development, Electronics Products Division
Catherine B. Poliak......... 39 Vice President, Human Resources
F. Eugene Woodard, Ph.D..... 46 Vice President, Engineering, Electronics
Products Division
William K. Woodrow.......... 49 Senior Vice President/General Manager,
Electronics Products Division
</TABLE>
Mr. Christie has served as the Company's Vice President, Chief Financial
Officer and Secretary since November 1996. From April 1996 to November 1996,
he served as Controller of the Company. From November 1993 to March 1996, he
served in various positions with California Microwave, Inc. From February 1990
to November 1993, he served as Controller of the Company.
Mr. Cormia has served as the Company's Senior Vice President, Technology
since March 1988. From October 1986 to February 1988, he served as Vice
President, Technology and Operations of the Company. From June 1983 to October
1986, he served as the Company's Vice President, Engineering, and from January
1979 until June 1983, he was Director of Thin Film Development.
Mr. Garigliano has served as the Company's Vice President,
Manufacturing/General Manager, Tempe Operations since July 1996. Previously,
he served as Vice President, Operations of the Company from July 1994 to July
1996. He held various positions at Courtaulds Performance Films, a division of
Courtaulds Plc, from September 1990 to July 1994, and at Letrasat Nielsen &
Bainbridge, a division of Esselte from September 1981 to August 1990.
Mr. Hood has served as the Company's Senior Vice President/General Manager,
Energy Products Division since July 1996. From January 1995 to July 1996, he
was Vice President/General Manager, International Operations of the Company
and from October 1991 to January 1995, he was Vice President, Marketing and
Sales of the Company. From September 1990 to October 1991, he was Vice
President, Business Development of the Company. From June 1989 to September
1990, he served as Vice President, Glazing Laminates. Previously, from July
1981 to June 1989, he served in various positions with the Company including
Director of New Product Development and Director of Engineering Development.
Mr. Jones has served as the Company's Vice President, Operations, Energy
Products Division since January 1997. From July 1996 until January 1997, he
was the Company's Vice President, Manufacturing, and from January 1986 he
served in various positions with the Company, including Director of Product
and Marketing Services and Director of Quality Assurance
Mr. Kenedy has served as the Company's Vice President, Marketing and Sales,
Energy Products Division since July 1996. From July 1994 to June 1996, he
served as Director, Marketing and Sales and from May 1992 to June 1994, he
served as Manager, Architectural Sales of the Company.
Dr. Larsen has served as the Company's Vice President, Marketing and
Business Development, Electronics Products Division since July 1996. From
January 1994 to July 1996, he was Vice President, Aerospace and
4
<PAGE>
Engineered Products of the Company. From September 1989 to January 1994, he
served as Vice President, Engineering of the Company.
Ms. Poliak has served as the Company's Vice President, Human Resources since
January 1994. From November 1988 to January 1994, she served as Director of
Human Resources of the Company. Previously, from January 1983 to November
1988, she served in various other positions with the Company.
Dr. Woodard has served as the Company's Vice President, Engineering, Energy
Products Division since January 1994. From September 1989 to January 1994, he
served as Director of Advanced Products of the Company.
Mr. Woodrow has served as the Company's Senior Vice President/General
Manager, Electronics Products Division since July 1996. Previously he held the
position of Vice President, Marketing for Hexcel Corporation from January 1993
to June 1996, and from June 1973 to December 1992 he served in various
positions at Raychem Corporation, including Director of Marketing and General
Manager of Chemelex Industrial Markets Division.
5
<PAGE>
SECURITY OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the ownership of the Company's Common Stock as of March 27, 1997 by
(i) each stockholder known to the Company to be a beneficial owner of more
than 5% of the Company's Common Stock, (ii) all directors, (iii) the Company's
current Named Executive Officers, and (iv) all current officers and directors
as a group. Beneficial ownership has been determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended. Under this rule,
certain shares may be deemed to be beneficially owned by more than one person
(if, for example, persons share the power to vote or the power to dispose of
the shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire shares (for example, upon
exercise of an option or warrant) within sixty (60) days of the date as of
which the information is provided; in computing the percentage ownership of
any person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of such
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(1)
---------------------
APPROXIMATE
NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES CLASS
---------------- --------- -----------
<S> <C> <C>
Ashley K. Carrithers(2).............................. 496,573 7.6%
Crystal Island Ranch, Box 278
Carbondale, CO 81623
Monsanto Company(3).................................. 400,876 5.9%
800 North Lindbergh Boulevard
St. Louis, MO 63167
Advisory Clients of
Dimensional Fund Advisors, Inc.................... 352,500 5.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Bruce J. Alexander(4)(8)............................. 141,147 2.2%
Robert L. Cormia(8).................................. 62,323 *
Leonard H. Garigliano(8)............................. 8,900 *
Thomas G. Hood(5)(8)................................. 54,900 *
Joseph B. Reagan(8).................................. 32,077 *
Martin M. Schwartz(6)(8)............................. 112,061 1.7%
Walter C. Sedgwick(7)(8)............................. 176,950 2.7%
J. Larry Smart(8).................................... 195,999 2.9%
F. Eugene Woodard(8)................................. 37,225 *
All current officers and directors as a group (15
persons)(4)-(8)..................................... 947,447 13.4%
</TABLE>
- -------
*Less than one percent.
(1) The table is based upon information supplied by officers, directors and
principal stockholders. Unless otherwise indicated, each of the
stockholders named in the table has sole voting and investment power with
respect to all securities shown as beneficially owned, subject to
community property laws where applicable and the information contained in
the footnotes to the table.
(2) Includes 6,701 shares held by Mr. Carrithers' wife, 2,520 shares held by
Mr. Carrithers' mother and 2,310 shares held by Mr. Carrithers' son.
(3) Includes 266,332 shares that Monsanto Company had the right to receive
upon conversion of a convertible debenture within 60 days of March 27,
1997.
(4) Includes 654 shares held by Mr. Alexander's wife and 9,421 shares held by
Mr. Alexander's daughter.
(5) Includes 100 shares held by Mr. Hood's daughter and 100 shares held by Mr.
Hood's son.
(6) Includes 3,000 shares held in a living trust owned by Mr. & Mrs. Schwartz.
(7) Includes 17,272 shares held in trust for Mr. Sedgwick's son.
(8) For each such officer or director, the number includes shares that such
officer or director had the right to acquire within 60 days of March 27,
1997 pursuant to outstanding options.
6
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning compensation earned by the Chief Executive Officer and each of the
four most highly compensated executive officers of the Company and one former
executive officer who earned salary and bonus for the 1996 fiscal year in
excess of $100,000 for services rendered in all capacities to the Company
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL ---------------------------------
COMPENSATION AWARDS
---------------- ---------------------------------
SECURITIES
NAME AND PRINCIPAL SALARY BONUS UNDERLYING ALL OTHER
POSITION YEAR ($)(1) ($) OPTIONS SAR(#) COMPENSATION($)(2)
------------------ ---- -------- ------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Martin M. Schwartz..... 1996 $197,846 $70,000 96,500 $1,000
President and Chief 1995 189,894 30,000 30,000 --
Executive 1994 156,764 -- 133,999(3) --
Officer
Thomas G. Hood ........ 1996 132,899 75,815 40,800 1,310
Sr. Vice 1995 121,869 63,058 5,000 930
President/General 1994 115,504 -- 60,217(3) 1,895
Manager,
Energy Products
Division
Leonard H. Garigliano.. 1996 122,846 21,500 12,600 33,266
Vice President, 1995 121,677 13,500 15,000 55,837
Manufacturing/General 1994 47,808 10,000 40,000 13,368
Manager,
Tempe Operations
F. Eugene Woodard...... 1996 118,119 23,000 14,400 10,620
Vice President, 1995 119,205 18,500 20,000 15,813
Engineering, 1994 102,339 -- 49,000(3) 13,772
Electronics Products
Division
Robert L. Cormia....... 1996 124,739 21,000 10,800 1,000
Sr. Vice President, 1995 122,821 11,000 4,000 310
Technology 1994 116,531 -- 85,125(3) --
Alfred V. Larrenaga(4). 1996 151,802 -- 12,600 1,000
Former Sr. Vice 1995 152,959 14,000 15,000 --
President & Chief 1994 131,808 -- 135,999(3) --
Financial Officer
</TABLE>
- --------
(1) The amounts listed under Salary and Bonus include amounts deferred
pursuant to the Company's 401(k) Plan.
(2) The amounts listed under "All Other Compensation" include reimbursement of
relocation expenses to Mr Garigliano; Company-paid patent awards to Mr.
Hood and Dr. Woodard; $10,000 in compensation paid to Dr. Woodard pursuant
to his employment agreement; and a Company matching contribution under the
Company's 401(k) Plan of $1,000 each to Messrs. Schwartz, Hood,
Garigliano, Cormia and Larrenaga, starting in 1996.
(3) This number includes shares subject to options which were granted to
replace (in reduced numbers) previously granted options that were canceled
in 1994. The total number of new shares for which each of the Named
Executive Officers received options in 1994, after subtracting the number
of shares subject to options that were canceled in 1994 is as follows: Mr.
Schwartz--86,000; Mr. Hood--10,000; Dr. Woodward--10,000; Mr. Cormia--
12,000; and Mr. Larrenaga--52,000.
(4) Mr. Larrenaga resigned from his position as Senior Vice President and
Chief Financial Officer effective October 31, 1996, and has served as
Senior Vice President, Corporate Development since November 1, 1996 with
service after November 30, 1996 being on a part-time basis.
7
<PAGE>
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Company's Restated 1987 Stock Option Plan for the 1996
fiscal year to the Named Executive Officers. No stock appreciation rights
("SARs") were granted during the fiscal year to such individuals.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#)(2) FISCAL YEAR ($/SH)(3) DATE 5%($) 10%($)
---- ------------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Martin M. Schwartz...... 26,500 6.09% $4.63 01/29/03 $ 49,949 $ 116,403
70,000 16.09 6.50 08/15/03 185,231 431,666
Thomas G. Hood.......... 10,800 2.48 4.63 01/29/03 20,357 47,440
30,000 6.90 6.50 07/22/03 79,385 185,000
Leonard H. Garigliano... 12,600 2.90 4.63 01/29/03 23,749 55,346
F. Eugene Woodard....... 14,400 3.31 4.63 01/29/03 27,142 63,253
Robert L. Cormia........ 10,800 2.48 4.63 01/29/03 20,357 47,440
Alfred V. Larrenaga..... 12,600 2.90 4.63 01/29/03 23,749 55,346
</TABLE>
- --------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any Named Executive Officer or any other
holder of the Company's securities that the actual stock price
appreciation over the 7-year option term will be at the assumed 5% and 10%
levels or at any other defined level. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized
from the option grants made to the Named Executive Officers.
(2) Option grants were made under the Company's Restated 1987 Stock Option
Plan which is administered by the Human Resources Committee of the Board.
The options vest in four equal annual installments, with the first such
25% installment vesting one year after the grant date. In the event of
certain corporate transactions such as an acquisition or liquidation of
the Company, the outstanding options of the Company's Named Executive
Officers will become immediately exercisable for fully vested shares of
common stock. See "Severance Agreements" below.
(3) The exercise price may be paid in cash or cash equivalents or in shares of
the Company's Common Stock valued at fair market value on the exercise
date.
8
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named Executive
Officers concerning the exercise of options during the 1996 fiscal year and
unexercised options held as of the end of the 1996 fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL YEAR- THE-
END MONEY OPTIONS AT FISCAL
SHARES VALUE (#) YEAR-END($)(2)
ACQUIRED ON REALIZED ------------------------- --------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERECISABLE
---- ----------- -------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Martin M. Schwartz...... 16,500 $ 84,563 55,060 191,439 $184,690 $331,544
Thomas G. Hood.......... 25,842 124,789 34,250 49,425 117,763 48,244
Leonard H. Garigliano... 13,750 49,756 0 43,850 0 122,713
F. Eugene Woodard....... 12,000 64,500 26,750 34,650 98,113 92,738
Robert L. Cormia........ 45,000 208,844 23,218 19,707 86,628 49,631
Alfred V. Larrenaga..... 22,500 115,313 40,436 61,163 140,610 197,636
</TABLE>
- --------
(1) Based on the fair market value of the shares on the exercise date less the
exercise price paid for the shares.
(2) Based on the fair market value of the Company's Common Stock at the end of
the 1996 fiscal year ($6.25 per share) less the exercise price payable for
such shares.
SEVERANCE AGREEMENTS
The Company has entered into a series of severance agreements with its Named
Executive Officers, pursuant to which they may become entitled to special
benefits in connection with certain changes in control of the Company effected
by merger, liquidation or tender offer.
Under each of the agreements, a liquidation or acquisition of the Company
may result in the immediate acceleration of vesting of the Named Executive
Officers' outstanding options granted under the Company's option plans.
Accordingly, should there occur a sale of substantially all of the Company's
assets or an acquisition of the Company by merger or consolidation, then all
options at the time held by each such officer will become immediately
exercisable for fully-vested shares of Common Stock. However, such vesting
acceleration will not occur to the extent the options are to be assumed by the
acquiring entity.
In the event that (i) the outstanding options are so assumed or the change
in control is effected through the acquisition of 50% or more of the Company's
outstanding voting stock pursuant to a hostile tender offer and (ii) the
officer's employment is involuntarily terminated (other than for cause) within
18 months following such assumption or acquisition, then the vesting of any
options at the time held by each officer granted under the Company's option
plans will immediately accelerate.
Involuntary termination is defined in each severance agreement as the
officer's discharge or dismissal (other than for cause) or other termination
of employment, whether voluntary or involuntary, following a material
reduction in the officer's compensation or level of responsibilities, a change
in the officer's job location without his or her consent or a material
reduction in the officer's benefits and perquisites. Termination for cause
includes any involuntary termination triggered by the executive officer's
willful misconduct, gross negligence or unauthorized use or disclosure of
trade secrets or other confidential information of the Company.
In addition to the acceleration of vesting of each Named Executive Officer's
outstanding options, such individual may become entitled to a lump sum
severance payment upon his or her involuntary termination within 18 months
after a change in control. Accordingly, to the extent the spread on the
officer's accelerated options
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(the excess of the market price, at the time of acceleration, of the shares of
Common Stock for which the options are accelerated over the aggregate exercise
price payable for such shares) does not exceed 2.99 times the officer's
average W-2 wages from the Company for the five fiscal years preceding the
fiscal year in which the change in control occurs, a cash severance payment
will be provided to the officer. However, the cash payment will in no event
exceed the lesser of (i) two times the sum of the executive officer's annual
rate of base salary in effect at the time of his or her involuntary
termination plus the bonuses earned by him or her for the immediately
preceding fiscal year or (ii) the amount necessary to bring the total benefit
package (acceleration plus severance) up to the "2.99 times average W-2 wages"
limitation.
The Company has entered into an agreement with Mr. Larrenaga pursuant to
which Mr. Larrenaga resigned as Senior Vice President and Chief Financial
Officer of the Company effective October 31, 1996. The Agreement further
provided that Mr. Larrenaga would serve as Senior Vice President, Corporate
Development beginning November 1, 1996, and after November 30, 1996 Mr.
Larrenaga will continue on a part-time basis through May 31, 1997. The
Agreement provided for continuation of Mr. Larrenaga's full salary and
automobile allowance and health benefits through his period of employment. The
Agreement also provides for continued vesting of Mr. Larrenaga's stock options
following his termination of service and provides that his options would
continue to be in effect through the end of their original seven-year terms.
Mr. Larrenaga remained eligible through November 30, 1996 for change in
control severance benefits available to the other officers of the Company.
In the event benefits had become due as of March 27, 1997 under the
severance agreements currently in effect for each of the Named Executive
Officers (except Mr. Larrenaga who is no longer eligible for such severance
benefits), the maximum cash amounts payable would be as follows: Mr. Schwartz,
$0; Mr. Hood, $304,232; Mr. Garigliano, $351,860; Dr. Woodard, $215,795; and
Mr. Cormia, $321,711.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All members of the Board participated in deliberations of the Board
concerning executive compensation. Mr. Schwartz, the Company's President and
Chief Executive Officer, is a member of the Board. The other members of the
Board include Messrs. Alexander and Smart, former officers of the Company, and
Messrs. Reagan and Sedgwick.
REPORT OF THE HUMAN RESOURCES COMMITTEE OF THE BOARD OF DIRECTORS CONCERNING
EXECUTIVE COMPENSATION
It is the duty of the members of the Company's Board to set the base salary
of certain executive officers and to administer the Company's benefit plans.
In addition, the Board approves the individual bonus programs to be in effect
for certain executive officers each fiscal year. The Board acts pursuant to
recommendations of the Human Resources Committee. In addition, the Company's
Restated 1987 Stock Option Plan, under which stock option grants may be made
to such officers and other key employees, is administered by the Human
Resources Committee. Mr. Schwartz abstained with respect to actions of the
Board relating to his own compensation.
For the 1996 fiscal year, the Board established the compensation payable to
Mr. Schwartz, President and Chief Executive Officer; Mr. Hood, Senior Vice
President/General Manager, Energy Products Division; Mr. Garigliano, Vice
President, Manufacturing/General Manager, Tempe Operations; Dr. Woodard, Vice
President, Engineering, Electronics Products Division; Mr. Cormia, Senior Vice
President, Technology; and Mr. Larrenaga, formerly Senior Vice President and
Chief Financial Officer.
GENERAL COMPENSATION POLICY. The Company's executive compensation policy is
competitive in order to recruit, retain and motivate people of needed
capabilities. For executives, the Company strives to link total compensation
to performance. Base compensation, benefits and perquisites are intended to be
competitive. Incentive compensation is provided in the form of cash bonuses
and stock options. The Company anticipates that the compensation levels of its
executive officers will generally be reviewed in the early part of each fiscal
year.
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FACTORS. Several of the more important factors which were considered in
establishing the components of each executive officer's compensation package
for the 1996 fiscal year are summarized below.
BASE SALARY. The base salary for each executive officer is set on the basis
of personal performance and salary levels for comparable positions at
companies with revenue levels comparable to that of the Company. Information
regarding comparable salary levels is obtained from published surveys of
companies which may or may not be in industries comparable to that of the
Company. Generally, the Company targets base salaries at the mid-point of such
market data.
ANNUAL INCENTIVE COMPENSATION. The annual pool of bonuses for executive
officers is determined solely on the basis of the Company's achievement of the
financial performance targets established at the start of the fiscal year.
Actual bonuses paid reflect an individual's accomplishment of both corporate
and functional objectives, with substantially greater weight being given to
achievement of corporate rather than functional objectives. In particular,
approximately 70% of an executive's target bonus is based on achieving
corporate objectives and the balance on achieving the executive's functional
objectives, such as profitability improvement, asset management, market
position, product leadership and key projects. These factors are evaluated on
a subjective basis without specific weighting.
For 1996, Mr. Hood's incentive compensation was based upon the International
Operations net revenues and operating income.
LONG-TERM INCENTIVE COMPENSATION. In 1996, the Human Resources Committee
approved stock option grants to each of the Named Executive Officers under the
Company's Restated 1987 Stock Option Plan. The grants are designed to align
the interests of each of the Named Executive Officers with those of the
stockholders and provide each such individual with a significant incentive to
manage the Company from the perspective of an owner with an equity stake in
the Company. The decision to award options to certain officers and the number
of shares subject to each such option grant was based upon the officer's type
and level of function, criticality of function, contribution and performance
against objectives as described above. The Committee considers the number of
options already held by executives when approving new options to executives.
Each option grant allows the officer to acquire shares of Common Stock at a
fixed price per share (the market price on the grant date) over a specified
period of time (up to 7 years). Accordingly, the option will provide a return
to the executive officer only if the market price of the Common Stock
appreciates over the option term.
CEO COMPENSATION. The annual base salary for the Company's Chief Executive
Officer, Mr. Schwartz, was established primarily on the basis of Mr.
Schwartz's personal performance and the range of base salaries paid to the
chief executive officers of companies with comparable revenue levels. Mr.
Schwartz's new salary was approximately at the midpoint of the range of base
salaries paid to the chief executive officers of comparable companies. The
option grants made to Mr. Schwartz, which were based upon his position and a
subjective evaluation of his performance, were intended to place a significant
portion of his total compensation at risk, since the options will have no
value unless there is appreciation in the value of the Common Stock over the
option term.
DEDUCTION LIMIT FOR EXECUTIVE COMPENSATION. Section 162(m) of the Internal
Revenue Code limits federal income tax deductions for compensation paid after
1993 to the chief executive officer and the four other most highly compensated
officers of a public company to $1 million per year, but contains an exception
for performance-based compensation that satisfies certain conditions.
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The Company believes that stock options granted to its executives with an
exercise price equal to or greater than the fair market value of the Common
Stock on the date of grant qualify for the performance-based compensation
exception to the deduction limit, because (i) it is unlikely that other
compensation payable to any Company executive would exceed the deduction limit
in the near future and (ii) the conditions imposed by regulations issued under
Section 162(m) would require the elimination of discretion which the Company
believes important in administering its performance-related compensation
plans.
The Human Resources Committee
Joseph B. Reagan, Chairman
Bruce J. Alexander
Walter C. Sedgwick
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PERFORMANCE GRAPH
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG SOUTHWALL TECHNOLOGIES INC.
MEDIA GENERAL INDEX AND PEER GROUP INDEX
LOGO
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG SOUTHWALL TECHNOLOGIES, MEDIA GENERAL INDEX AND PEER GROUP
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period SOUTHWALL MEDIA PEER
(Fiscal Year Covered) TECHNOLOGIES GENERAL GROUP
- ------------------- ------------ --------- ----------
<S> <C> <C> <C>
Measurement Pt-12/31/91 $100.00 $100.00 $100.00
FYE 12/31/92 $177.78 $104.00 $124.44
FYE 12/31/93 $103.70 $119.39 $153.07
FYE 12/31/94 $ 81.48 $118.39 $135.31
FYE 12/31/95 $125.93 $153.50 $179.17
FYE 12/31/96 $185.19 $185.38 $199.09
</TABLE>
ASSUMES $100 INVESTED ON JAN. 1, 1991
ASSUMES DIVIDEND REINVESTED
YEAR ENDED DECEMBER 31, 1995
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CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
In 1989, the Company sold 300,000 shares of Common Stock to Monsanto Company
("Monsanto") for $2,100,000 and a $2,650,000 convertible debenture due May 31,
1999 which bears interest at 2% below prime, but not less than 7% nor more
than 11%. During 1996, the Company issued 26,050 shares of Common Stock to
Monsanto for payment of interest on the convertible debenture.
PROPOSAL 2
RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected Price Waterhouse LLP as the Company's independent
accountant for the year ending December 31, 1997, and has further directed
that management submit the selection of independent accountants for
ratification by the stockholders at the Annual Meeting. Price Waterhouse LLP
has audited the Company's financial statements since 1983. Representatives of
Price Waterhouse LLP are expected to be present at the Annual Meeting, will
have an opportunity to make a statement if they so desire and will be
available to respond to appropriate questions.
Stockholder ratification of the selection of Price Waterhouse LLP as the
Company's independent accountants is not required by the Company's Bylaws or
otherwise. Nonetheless, the Board is submitting the selection of Price
Waterhouse LLP to the stockholders for ratification as a matter of good
corporate practice. In the event the stockholders fail to ratify the
selection, the Board will reconsider whether to retain Price Waterhouse LLP.
Even if the selection is ratified, the Board in its discretion may direct the
appointment of a different independent accounting firm at any time during the
year if the Board determines that such a change would be in the best interests
of the Company and its stockholders. The affirmative vote of the holders of a
majority of the shares represented and voting at the meeting will be required
to ratify the selection of Price Waterhouse LLP.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
SELECTION OF PRICE WATERHOUSE LLP TO SERVE AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
PROPOSAL 3
APPROVAL OF SOUTHWALL TECHNOLOGIES INC. 1997 STOCK INCENTIVE PLAN
The Company's stockholders are being asked to approve of the adoption of the
Southwall Technologies Inc. 1997 Stock Incentive Plan (the "1997 Plan"). The
1997 Plan was adopted by the Board on March 20, 1997 and supersedes and serves
as the successor equity incentive program to the Southwall Technologies
Restated 1987 Stock Option Plan (the "Predecessor Plan"). The Board of
Directors has authorized the implementation of the 1997 Plan as a
comprehensive equity incentive program to attract and retain the services of
those individuals essential to the Company's growth and financial success. The
1997 Plan will become effective upon the approval of the adoption of such plan
by the stockholders at the Annual Meeting. If the stockholders approve of the
adoption of the 1997 Plan, this approval will not prohibit the Company from
proposing to stockholders that they also approve other equity incentive
programs.
The following is a summary of the principal features of the 1997 Plan. The
summary, however, does not purport to be a complete description of all the
provisions of the 1997 Plan. Any stockholder of the Company who wishes to
obtain a copy of the actual plan document may do so upon written request to
the Corporate Secretary at the Company's principal executive offices in Palo
Alto, California.
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<PAGE>
EQUITY INCENTIVE PROGRAMS
The 1997 Plan contains four separate equity incentive programs: (i) a
Discretionary Option Grant Program, (ii) a Salary Investment Option Grant
Program, (iii) a Stock Issuance Program and (iv) a Director Fee Option Grant
Program. The principal features of these programs are described below. The
1997 Plan (other than the Director Fee Option Grant Program) will be
administered by a committee consisting of members of the Board. This committee
(the "Plan Administrator") will have complete discretion (subject to the
provisions of the 1997 Plan) to authorize option grants and direct stock
issuances under the 1997 Plan. However, all grants under the Director Fee
Option Grant Program will be made in strict compliance with the provisions of
those programs, and no administrative discretion will be exercised by the Plan
Administrator with respect to the grants made under such programs.
SHARE RESERVE
The number of shares of Common Stock initially reserved for issuance under
the 1997 Plan will be 400,000 shares plus the number of shares which remained
available for issuance under the Predecessor Plan, including shares which are
subject to outstanding options under the Predecessor Plan. This share reserve
will automatically increase by 250,000 shares of Common Stock on the first
trading day of each calendar year during the term of the Plan, beginning with
the 1998 calendar year. In no event may any one participant in the 1997 Plan
be granted stock options and direct stock issuances for more than 200,000
shares in the aggregate per calendar year, beginning with the 1997 calendar
year.
In the event any change is made to the outstanding shares of Common Stock by
reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will
be made to (i) the maximum number and/or class of securities issuable under
the 1997 Plan, (ii) the number and/or class of securities for which any one
person may be granted options and direct stock issuances under the 1997 Plan
per calendar year and (iii) the number and/or class of securities and the
exercise price per share in effect under each outstanding option under the
1997 Plan, including the outstanding options incorporated from the Predecessor
Plan.
ELIGIBILITY
Officers and other employees of the Company and its subsidiaries (whether
now existing or subsequently established) will be eligible to participate in
the Discretionary Option Grant, Salary Investment Option Grant and Stock
Issuance Programs. Non-employee members of the Board and independent
consultants and advisors of the Company and its subsidiaries will be eligible
to participate in the Discretionary Option Grant and Stock Issuance Programs.
Only non-employee members of the Board will be eligible to participate in the
Director Fee Option Grant Program.
As of March 27, 1997, 4 executive officers and approximately 203 other
employees were eligible to participate in the 1997 Plan, and 4 non-employee
Board members were eligible to participate in the Director Fee Option Grant
Program.
VALUATION
The fair market value per share of Common Stock on any relevant date under
the 1997 Plan will be the closing selling price per share on that date on the
Nasdaq National Market. On March 27, 1997, the closing selling price per share
was $6.625.
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<PAGE>
DISCRETIONARY OPTION GRANT PROGRAM
PRICE AND EXERCISABILITY. Incentive stock options may be granted under the
Discretionary Option Grant Program at an exercise price per share not less
than 100% of the fair market value of the Common Stock on the grant date, and
non-statutory options may be granted at an exercise price per share not less
than 85% of the fair market value per share of Common Stock on the grant date.
No granted option will have a term in excess of 10 years.
The exercise price may be paid in cash or in shares of Common Stock. In
addition, options may be exercised through a same-day sale program, pursuant
to which a designated brokerage firm effects the immediate sale of the shares
purchased under the option and pays over to the Company, out of the sale
proceeds on the settlement date, sufficient funds to cover the exercise price
for the purchased shares plus all applicable withholding taxes.
No optionee has any stockholder rights with respect to the option shares
until the optionee has exercised the option, paid the exercise price and
become a holder of record of the shares. Options are generally not assignable
or transferable other than by will or the laws of descent and distribution,
and during the optionee's lifetime, the option may be exercised only by the
optionee.
TERMINATION OF SERVICE. Upon termination of service, the optionee will have
a limited period of time in which to exercise any outstanding option to the
extent exercisable for vested shares. If the optionee begins or accepts
employment with a competitor, any outstanding option which is exercisable on
the date of the optionee's termination of service may, subject to the Plan
Administrator's discretion, terminate and cease to be outstanding for any
vested shares for which the option has not been exercised. If the optionee is
terminated for misconduct or unsatisfactory performance, then all outstanding
options held by such optionee will immediately terminate and cease to be
outstanding, unless the Plan Administrator determines otherwise.
The Plan Administrator will also have complete discretion to extend the
period following the optionee's termination of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability
or vesting of such options in whole or in part. Such discretion may be
exercised at any time while the options remain outstanding, whether before or
after the optionee's actual termination of service.
INCENTIVE STOCK OPTIONS. Incentive stock options may only be granted to
employees of the Company or its parent or subsidiary corporation. During any
calendar year, the aggregate fair market value (determined as of the grant
date(s)) of the Common Stock for which one or more options granted to any
employee under the 1997 Plan (or any other option plan of the Company or its
parent or subsidiary corporations) may for the first time become exercisable
as incentive stock options under Section 422 of the Code shall not exceed
$100,000.
CANCELLATION/REGRANT. The Plan Administrator will have the authority to
effect the cancellation of outstanding options under the Discretionary Option
Grant Program which have exercise prices in excess of the then current market
price of Common Stock and to issue replacement options with an exercise price
based on the market price of Common Stock at the time of the new grant.
ACCELERATION OF OPTIONS/TERMINATION OF REPURCHASE RIGHTS. The Plan
Administrator has the discretion to provide for the automatic acceleration of
one or more outstanding options upon the occurrence of a Corporate
Transaction. A Corporate Transaction is defined as a (i) sale, transfer or
other disposition of all or substantially all of the Company's assets in
complete liquidation or dissolution of the Company or (ii) merger or
consolidation in which securities possessing more than 50% of the total
combined voting power of the Company's outstanding securities are transferred
to a person or persons different from the persons holding those securities
immediately prior to such transaction. However, an outstanding option will not
be accelerated if and to the extent: (i) such option is, in connection with
the Corporate Transaction, either to be assumed by the successor corporation
(or parent) or to be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares
at the time of the Corporate
16
<PAGE>
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those option shares or (iii) the acceleration
of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
Also upon a Corporate Transaction, the Company's outstanding repurchase
rights applicable to options will terminate automatically unless assigned to
the successor corporation.
Notwithstanding the above, the Plan Administrator has the discretionary
authority to provide for the automatic acceleration of one or more outstanding
options under the Discretionary Option Grant Program upon the occurrence of a
Corporate Transaction, whether or not those options are to be assumed or
replaced in the Corporate Transaction. In addition, the Plan Administrator may
provide that one or more of the Company's outstanding repurchase rights with
respect to shares held by an optionee at the time of such Corporate
Transaction will immediately terminate, and the shares subject to those
terminated repurchase rights will accordingly vest in full, even in the event
the options are to be assumed.
The Plan Administrator has the authority to provide for the automatic
acceleration of one or more outstanding options under the Discretionary Option
Grant Program in the event of a Change in Control or in the event the
optionee's service subsequently terminates by reason of an involuntary
termination within a designated period (not to exceed 18 months) following the
effective date of any Corporate Transaction or Change in Control in which
those options are assumed or replaced and do not otherwise accelerate. Any
options so accelerated will remain exercisable for fully-vested shares until
the earlier of (i) the expiration of the option term or (ii) the expiration of
the 1-year period measured from the effective date of the involuntary
termination. In addition, the Plan Administrator may provide that one or more
of the Company's outstanding repurchase rights with respect to shares held by
the optionee at the time of such involuntary termination will immediately
terminate, and the shares subject to those terminated repurchase rights will
accordingly vest in full.
A Change in Control is any of the following transactions: (i) any person or
related group of persons (other than the Company or a person that directly or
indirectly controls, is controlled by or is under common control with, the
Company) acquires beneficial ownership of more than 50% of the Company's
outstanding voting stock without the Board's recommendation or (ii) a change
in the composition of the Board over a period of 36 consecutive months or less
such that a majority of the Board members ceases by reason of a proxy contest,
to be comprised of individuals who (a) have been Board members since the
beginning of such period or (b) have been elected or nominated for selection
as Board members by a majority of the Board in (a) who were still in office at
the time such election or nomination was approved by the Board.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an antitakeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other
efforts to gain control of the Company.
SALARY INVESTMENT OPTION GRANT PROGRAM
The Plan Administrator will have complete discretion in selecting the
individuals who are to participate in the Salary Investment Option Grant
Program. As a condition to such participation, each selected individual must,
prior to the start of the calendar year of participation, file with the Plan
Administrator an irrevocable authorization directing the Company to reduce, by
not less than $10,000 but not more than $50,000, his or her base salary for
the upcoming calendar year. To the extent the Plan Administrator approves one
or more salary reduction authorizations, the affected individuals will be
granted options under the program.
Each option will be subject to substantially the same terms and conditions
applicable to option grants made under the Discretionary Option Grant Program,
except for the following differences:
. The exercise price per share will be equal to one-third of the fair
market value per share of Common Stock on the option grant date.
17
<PAGE>
. The number of option shares will be determined by dividing the total
dollar amount of the approved reduction in the participant's base salary
by two-thirds of the fair market value per share of Common Stock on the
option grant date. As a result, the total spread on the option (the fair
market value of the option shares on the grant date less the aggregate
exercise price payable for those shares) will equal the dollar amount of
the reduction to the optionee's base salary to be in effect for the
calendar year for which the option grant is made.
. Provided the optionee continues in service, the option shares will become
exercisable in a series of 12 successive equal monthly installments upon
the optionee's completion of each calendar month of service in the
calendar year for which the salary reduction is in effect.
. Should the optionee cease to perform service for any reason, then each
option may be exercised, for all shares for which the option is
exercisable at the time of the optionee's cessation of service. This
right of exercise will lapse, and the option will terminate, upon the
earlier of (i) the expiration of the 10-year option term or (ii) the 3-
year period measured from the date of the optionee's cessation of
service. Should the optionee die or become disabled while in service,
then each option may be exercised in accordance with this paragraph by
the personal representative of the optionee's estate or by the person or
persons to whom the option is transferred pursuant to the optionee's will
or in accordance with the laws of descent and distribution.
. Each option will have a maximum term of 10 years measured from the grant
date, whether or not the individual continues in service.
ACCELERATION OF OPTIONS/TERMINATION OF REPURCHASE RIGHTS. Upon a Corporate
Transaction or Change in Control, each outstanding option held by an optionee
under this Salary Investment Option Grant Program will automatically
accelerate so that each such option will become fully exercisable with respect
to the total number of shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. Each such outstanding option will remain exercisable
for the fully-vested shares until the earlier of (i) the expiration of the 10-
year option term or (ii) the expiration of the 3-year period measured from the
date of the optionee's termination of service.
The Plan Administrator may also provide that, upon the occurrence of a
Hostile Take-Over, an optionee will have a 30-day period in which to surrender
to the Company each of his or her outstanding option grants in return for a
cash distribution from the Company in an amount equal to the excess of (i) the
Take-Over Price of the shares of Common Stock at the time subject to each
surrendered option (whether or not the optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for
such shares. Such cash distribution will be paid within 5 days following the
surrender of the option to the Company.
A Hostile Take-Over is an acquisition, directly or indirectly, by any person
or related group of persons (other than the Company or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934
Act) of securities possessing more than 50% of the total combined voting power
of the Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders which the Board does not recommend
such stockholders to accept. The Take-Over Price is the greater of (i) the
fair market value per share of Common Stock on the date the option is
surrendered to the Company in connection with a Hostile Take-Over or (ii) the
highest reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over. However, if the surrendered option is an
incentive stock option, the Take-Over Price will not exceed the clause (i)
price per share.
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STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per share not
less than 100% of fair market value, payable in cash or through a promissory
note payable to the Company, if permitted by the Plan Administrator. Shares
may also be issued solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will, however, have the
discretionary authority at any time to accelerate the vesting of any unvested
shares.
ACCELERATION OF OPTIONS/TERMINATION OF REPURCHASE RIGHTS. Upon a Corporate
Transaction, all outstanding repurchase rights under the Stock Issuance
Program will terminate automatically, and all the shares subject to such
terminated rights will immediately vest in full, except to the extent (i)
those repurchase rights are assigned to the successor corporation in
connection with the Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed in the stock issuance agreement.
Notwithstanding the above, the Plan Administrator has the discretionary
authority, exercisable either at the time the unvested shares are issued or
any time while the Corporation's repurchase rights remain outstanding under
the Stock Issuance Program, to provide that those rights will automatically
terminate in whole or in part, and the shares of Common Stock subject to those
terminated rights will immediately vest, in the event of a (i) Corporate
Transaction, whether or not those repurchase rights are to be assigned to the
successor corporation (or its parent) in connection with such Corporate
Transaction, (ii) Change in Control or (iii) an involuntary termination of the
optionee within a designated period (not to exceed 18 months) following the
Corporate Transaction or Change in Control.
DIRECTOR FEE OPTION GRANT PROGRAM
Under the Director Fee Option Grant Program, each individual serving as a
non-employee Board member will be eligible to elect to apply all or any
portion of the annual retainer fee otherwise payable in cash to such
individual to the acquisition of option shares of Common Stock. The non-
employee Board member must make the reduced fee election prior to the start of
the calendar year for which the election is to be in effect.
Each option will be subject to the following terms and conditions applicable
to option grants made under the Discretionary Option Grant Program, except for
the following differences:
. The exercise price per share will be equal to one-third of the fair
market value per share of Common Stock on the option grant date.
. The number of option shares will be determined by dividing the total
portion of the annual retainer fee subject to the Board member's election
by two-thirds of the fair market value per share of Common Stock on the
option grant date. As a result, the total spread on the option (the fair
market value of the option shares on the grant date less the aggregate
exercise price payable for those shares) will equal the dollar amount of
the reduction in the Board member's annual retainer fee to be in effect
for the calendar year for which the option grant is made.
. 50% of the option shares will become exercisable upon the optionee's
completion of 6 months of Board service in the calendar year for which
his or her election under this Director Fee Option Grant Program is in
effect, and the balance of the option shares will become exercisable in a
series of 6 successive equal monthly installments upon the optionee's
completion of each additional month of Board service during that calendar
year.
. Should the optionee cease Board service for any reason (other than death
or permanent disability) while holding one or more options under this
Director Fee Option Grant Program, then each such option will remain
exercisable, for any or all of the shares for which the option is
exercisable at the time of such
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<PAGE>
cessation of Board service, until the earlier of (i) the expiration of the
10-year option term or (ii) the expiration of the 3-year period measured
from the date of such cessation of Board service. However, each option
held by the optionee under this Director Fee Option Grant Program at the
time of his or her cessation of Board service will immediately terminate
and cease to remain outstanding with respect to any and all shares of
Common Stock for which the option is not otherwise at that time
exercisable.
. Should the optionee's service as a Board member cease by reason of death
or permanent disability, then each option held by such optionee under
this Director Fee Option Grant Program will immediately become
exercisable for all the shares of Common Stock at the time subject to
that option, and the option may be exercised for any or all of those
shares as fully vested shares until the earlier of (i) the expiration of
the 10-year option term or (ii) the expiration of the 3-year period
measured from the date of such cessation of Board service.
. Should the optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program,
then each such option may be exercised, for all shares for which the
option is exercisable at the time of the optionee's cessation of Board
service, by the personal representative of the optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
optionee's will or in accordance with the laws of descent and
distribution. Such right of exercise will lapse, and the option will
terminate, upon the earlier of (i) the expiration of the 10-year option
term or (ii) the 3-year period measured from the date of the optionee's
cessation of Board service.
. Each option will have a maximum term of ten years measured from the grant
date, whether or not the individual continues in service.
ACCELERATION OF OPTIONS/TERMINATION OF REPURCHASE RIGHTS. Upon a Corporate
Transaction or Change in Control, each outstanding option held by an optionee
under this Director Fee Option Grant Program will automatically accelerate so
that each such option will become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common
Stock. Each such outstanding option will remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the 10-year option
term or (ii) the expiration of the 3-year period measured from the date of the
optionee's termination of service.
Upon the occurrence of a Hostile Take-Over, an optionee will have a 30-day
period in which to surrender to the Company each of his or her outstanding
option grants in return for a cash distribution from the Company in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock
at the time subject to each surrendered option (whether or not the optionee is
otherwise at the time vested in those shares) over (ii) the aggregate exercise
price payable for such shares. Such cash distribution will be paid within 5
days following the surrender of the option to the Company.
GENERAL PROVISIONS
FINANCIAL ASSISTANCE
The Plan Administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options or the purchase
of shares under the 1997 Plan. The Plan Administrator will determine the terms
of any such assistance. However, the maximum amount of financing provided any
participant may not exceed the cash consideration payable for the issued
shares plus all applicable taxes incurred in connection with the acquisition
of the shares. Any such financing may be subject to forgiveness in whole or in
part, at the discretion of the Plan Administrator, over the participant's
period of service.
SPECIAL TAX ELECTION
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the
20
<PAGE>
tax liability incurred by such individuals in connection with the exercise of
those options or the vesting of those shares. Alternatively, the Plan
Administrator may allow such individuals to deliver previously acquired shares
of Common Stock in payment of such tax liability.
AMENDMENT AND TERMINATION
The Board may amend or modify the 1997 Plan in any or all respects
whatsoever subject to any required stockholder approval. The Board may
terminate the 1997 Plan at any time, and the 1997 Plan will in all events
terminate by the earlier of (i) May 21, 2007 or (ii) the termination of all
outstanding options.
NEW PLAN BENEFITS AND OPTION GRANT TABLE
Because the 1997 Plan is discretionary, benefits to be received by
individual optionees are not determinable. The table below shows, as to each
of the Company's current executive officers named in the Summary Compensation
Table and the various indicated individuals and groups, the number of shares
of Common Stock subject to options granted between January 1, 1996 and March
27, 1997 under the Predecessor Plan together with the weighted average
exercise price payable per share.
OPTION TRANSACTIONS
JANUARY 1, 1996--MARCH 27, 1997
<TABLE>
<CAPTION>
OPTIONS GRANTED WEIGHTED AVERAGE
NAME (NUMBER OF SHARES) EXERCISE PRICE
---- ------------------ ----------------
<S> <C> <C>
Martin M. Schwartz, President and Chief
Executive Officer......................... 96,500 $5.99
Thomas G. Hood, Sr. Vice President/General
Manager, Energy Products Division......... 40,800 $6.00
Leonard H. Garigliano, Vice President,
Operations................................ 12,600 $4.63
F. Eugene Woodard, Vice President,
Engineering, Electronics Products
Division.................................. 14,400 $4.63
Robert L. Cormia, Sr. Vice President,
Technology................................ 10,800 $4.63
All current executive officers as a group
(4 persons)............................... 247,300 $5.91
J. Larry Smart, Chairman of the Board...... 8,000 $7.11
Bruce J. Alexander, Director............... 8,000 $7.11
Joseph B. Reagan, Director................. 20,000 $6.03
Walter C. Sedgwick, Director............... 23,000 $6.01
All non-employee directors as a group (4
persons).................................. 59,000 $6.32
All employees, including current officers
who are not executive officers as a group
(203 persons)............................. 197,800 $6.04
</TABLE>
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<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
Options granted under the 1997 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Stock Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize
taxable income in the year in which the purchased shares are sold or otherwise
disposed of. For Federal tax purposes, dispositions are divided into two
categories: (i) qualifying and (ii) disqualifying. A qualifying disposition
occurs if the sale or other disposition is made after the optionee has held
the shares for more than two years after the option grant date and more than
one year after the exercise date. If either of these two holding periods is
not satisfied, then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over
(ii) the exercise price paid for such shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of
those shares on the date the option was exercised over (ii) the exercise price
paid for the shares will be taxable as ordinary income. Any additional gain
recognized upon the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
The Company anticipates that any compensation deemed paid by the Company upon
one or more disqualifying dispositions of incentive stock option shares by the
Company's executive officers will remain deductible by the Company and will
not have to be taken into account for purposes of the $1 million limitation
per covered individual on the deductibility of the compensation paid to
certain executive officers of the Company.
Non-Statutory Stock Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general
recognize ordinary income, in the year in which the option is exercised, equal
to the excess of the fair market value of the purchased shares on the exercise
date over the exercise price paid for the shares, and the optionee will be
required to satisfy the tax withholding requirements applicable to such
income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but
will have to report as ordinary income, as and when the Company's repurchase
right lapses, an amount equal to the excess of (i) the fair market value of
the shares on the date the repurchase right lapses over (ii) the exercise
price paid for the shares. The optionee may, however, elect under Section
83(b) of the Internal Revenue Code to include as ordinary income in the year
of exercise of the option an amount equal to the excess of (i) the fair market
value of the purchased shares on the exercise date over (ii) the exercise
price paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the repurchase
right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the
optionee. The Company anticipates that the compensation deemed paid by the
Company upon the exercise of non-statutory
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<PAGE>
stock options with exercise prices equal to the fair market value of the
option shares on the grant date will remain deductible by the Company and will
not have to be taken into account for purposes of the $1 million limitation
per covered individual on the deductibility of the compensation paid to
certain executive officers of the Company.
DIRECT STOCK ISSUANCE
The tax principles applicable to direct stock issuances under the 1997 Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
ACCOUNTING TREATMENT
Option grants or stock issuances with exercise or issue prices less than the
fair market value of the shares on the grant or issue date will result in a
compensation expense to the Company's earnings equal to the difference between
the exercise or issue price and the fair market value of the shares on the
grant or issue date. Such expense will be accruable by the Company over the
period that the option shares or issued shares are to vest. Option grants or
stock issuances at 100% of fair market value will not result in any charge to
the Company's earnings. However, the Company must disclose, in pro-forma
statements to the Company's financial statements, the impact such option and
stock purchase rights granted under the 1997 Plan would have upon the
Company's reported earnings were the value of such rights treated as
compensation expense. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully diluted basis.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Annual Meeting is
required for approval of the 1997 Plan. If such approval is obtained, the 1997
Plan will become effective upon the date of the Annual Meeting. Should such
stockholder approval not be obtained, then the 1997 Plan will not become
effective. The Predecessor Plan terminated effective March 18, 1997, in
accordance with its terms.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE ADOPTION OF THE 1997 STOCK INCENTIVE PLAN.
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PROPOSAL 4
APPROVAL OF SOUTHWALL TECHNOLOGIES INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
On March 20, 1997, the Board adopted the Southwall Technologies Inc. 1997
Employee Stock Purchase Plan (the "Purchase Plan"), pursuant to which 100,000
shares of the Company's common stock (the "Common Stock") will be reserved for
issuance. The Company's stockholders are being asked to approve of the
adoption of the Purchase Plan to be effective June 1, 1997. The Purchase Plan
supersedes the Company's 1987 Employee Stock Purchase Plan (the "Predecessor
Plan").
PURPOSE
The purpose of the Purchase Plan is to provide eligible employees of the
Company and designated parent or subsidiary corporations an opportunity to
acquire a proprietary interest in the Company through payroll deductions or
lump sum payments. The Company is currently the only corporation participating
in the Purchase Plan.
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to meet the requirements of an "employee stock
purchase plan" as defined in Section 423 of the Internal Revenue Code. This
description is also being given to satisfy the requirements of Rule 16b-
3(b)(2) under the Federal securities laws in order to ensure the favorable
treatment of Rule 16b-3 for the officers participating in the Purchase Plan.
Rule 16b-3 exempts acquisitions of Common Stock under the Purchase Plan from
liability under the Federal securities laws which prohibit short-swing trading
by executive officers.
The terms and provisions of the Purchase Plan are summarized below. However,
the summary does not purport to be a complete description of the Purchase
Plan. Copies of the actual plan document may be obtained by any stockholder
upon written request to the Corporate Secretary at the Company's principal
offices in Palo Alto, California.
ADMINISTRATION
The Purchase Plan will be administered by the Board or by a committee (the
"Committee") comprised of members appointed from time to time by the Board or
a delegate of either. The plan administrator (whether the Board or the
Committee or a delegate) has full authority to administer the Purchase Plan,
including authority to interpret and construe any provision of the Purchase
Plan and to adopt such rules and regulations for administering the Purchase
Plan as it may deem necessary. Decisions of the plan administrator are final
and binding on all parties who have an interest in the Purchase Plan. All
costs and expenses incurred in plan administration are paid by the Company
without charge to participants.
SECURITIES SUBJECT TO THE PURCHASE PLAN
The shares of Common Stock issuable under the Purchase Plan may be either
shares newly issued by the Company or shares reacquired by the Company,
including shares purchased on the open market. The maximum number of shares of
Common Stock which may be sold to participants over the term of the Purchase
Plan may not exceed 100,000 shares, subject to the "Adjustments" section
below.
ADJUSTMENTS
In the event that any change is made to the Company's outstanding Common
Stock (whether by reason of recapitalization, stock dividend, stock split,
exchange or combination of shares or other change in corporate structure
effected without the Company's receipt of consideration), appropriate
adjustments will be made to (i) the class and maximum number of securities
issuable over the term of the Purchase Plan, (ii) the class and
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<PAGE>
maximum number of securities purchasable per participant on any one semi-
annual purchase date and (iii) the class and number of securities and the
price per share in effect under each outstanding purchase right.
PURCHASE PERIODS
Shares of Common Stock will be offered for purchase under the Purchase Plan
through a series of six (6) month purchase periods. The first purchase period
will begin on June 1, 1997 and subsequent purchase periods will begin on each
December 1 and June 1 thereafter until all shares available under the Purchase
Plan have been purchased or the Purchase Plan terminates in accordance with
its terms.
An employee who participates in the Purchase Plan for a particular purchase
period will have the right to purchase Common Stock on the terms and
conditions set forth below and must execute a purchase agreement embodying
terms and conditions and other provisions (not inconsistent with the Purchase
Plan) as the plan administrator may deem advisable.
ELIGIBILITY AND PARTICIPATION
Any individual who is employed on a basis under which he or she is expected
to work more than twenty (20) hours per week for more than five (5) months per
calendar year in the employ of the Company or any participating parent or
subsidiary corporation (including any corporation which subsequently becomes
such at any time during the term of the Purchase Plan) and who has completed
at least one year of continuous service with any such corporation is eligible
to participate in the Purchase Plan. As of March 27, 1997, the Company
estimated that approximately 196 employees would be eligible to participate in
the Purchase Plan.
In order to participate in the Purchase Plan for a particular purchase
period, the employee must complete the enrollment forms prescribed by the plan
administrator (including a purchase agreement and payment authorization) and
file those forms with the plan administrator (or its designate) during the
designated enrollment period. In the payment authorization form, the employee
may choose one of the following methods of payment for the shares to be
acquired on his/her behalf during the purchase period:
(i) periodic payroll deduction; or
(ii) lump sum payment;
provided that the plan administrator may, for any purchase period, prohibit
lump sum payments.
If periodic payroll deductions are selected, those deductions must be made
in a multiple of 1% of the compensation paid to the employee during the
purchase period, up to a maximum of 15%. Compensation includes all payments
received by a participant as compensation for services rendered to the Company
or one or more of the companies designated to participate in the Purchase
Plan, including wages, salaries, overtime payments, bonuses, commissions and
incentive payments and any contributions made on the behalf of a participant
to a plan qualified under Internal Revenue Code section 125 or 401(k), but
excludes contributions made to any other employee benefit plan.
The deduction rate chosen will continue in effect for the entire purchase
period, unless the employee, before the beginning of any payroll period within
that purchase period, designates a lower rate (including a 0% rate) by filing
the appropriate form with the plan administrator. The new rate will become
effective on the first day of the payroll period following the filing of the
form and may not be increased during the remainder of the purchase period.
Payroll deductions, however, will automatically stop upon the termination of
the employee's purchase right.
If the lump sum payment method is permitted by the Company and selected by
the participant, the lump sum payment may not exceed 15% of the compensation
paid to the employee during the purchase period and must be paid within the
first fifteen (15) days of the final month of the purchase period. However, no
lump sum payment may be made with respect to a purchase right that has been
terminated.
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<PAGE>
PURCHASE RIGHT
Outstanding purchase rights will be automatically exercised on the last day
of a purchase period by applying the amount credited to a participant's
account on such date to the purchase of whole shares of Common Stock (by
dividing such amount by the purchase price), subject to the "Special
Limitations" section below. Any amount remaining in a participant's account
after such purchase will be held for the purchase of Common Stock in the next
purchase period, provided such participant continues participating in the
Purchase Plan for such purchase period.
PURCHASE PRICE
The purchase price per share will be the lesser of (i) 85% of the fair
market value per share of Common Stock on the date on which the purchase right
is granted or (ii) 85% of the fair market value per share of Common Stock on
the date the purchase right is exercised.
The fair market value of the Common Stock on any relevant date under the
Purchase Plan will be the closing price per share on such date, as reported on
the Nasdaq National Market. On March 27, 1997, the fair market value per share
of Common Stock was $6.625 per share.
SPECIAL LIMITATIONS
The Purchase Plan imposes certain limitations upon a participant's rights to
acquire Common Stock, including the following limitations:
. Purchase rights may not be granted to any individual who immediately
thereafter would own stock (including stock purchasable under any
outstanding purchase rights) possessing 5% or more of the total combined
voting power or value of all classes of stock of the Company or any of
its affiliates.
. Purchase rights granted to a participant may not accrue at a rate that
exceeds $25,000 in fair market value of the Common Stock (valued at the
time each purchase right is granted) during any one calendar year in
which such purchase right is outstanding.
. No participant may purchase more than 600 shares of Common Stock in any
purchase period.
TERMINATION OF PURCHASE RIGHTS
The participant may withdraw from the Purchase Plan before the last ten (10)
days in the purchase period and elect to have his or her accumulated payroll
deductions refunded immediately. The termination will be irrevocable for the
purchase period in which it is made, but the employee may re-enroll in the
Purchase Plan (by making a timely filing of a new purchase agreement and
payment authorization) if the participant wishes to resume participation in a
subsequent purchase period.
The participant's purchase right will immediately terminate upon his or her
cessation of employment or loss of eligible employee status. Any payroll
deductions which the participant may have made for the six-month purchase
period in which his or her employment terminates will be refunded.
PRORATION OF PURCHASE RIGHTS
If the total number of shares of Common Stock to be purchased pursuant to
outstanding purchase rights exceeds on the exercise date the number of shares
then available for issuance under the Purchase Plan, the plan administrator
will make a pro rata allocation of the shares available on a uniform and
nondiscriminatory basis, and any amounts credited to the accounts of
participants, to the extent not used to purchase Common Stock under the
Purchase Plan, will be refunded to the participants.
26
<PAGE>
STOCKHOLDER RIGHTS
No participant will have any stockholder rights with respect to the shares
covered by his or her purchase rights until the shares are actually purchased
on the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date
of such purchase.
ASSIGNABILITY
No purchase rights will be assignable or transferable by the participant,
and the purchase rights will be exercisable only by the participant.
MERGER OR LIQUIDATION OF COMPANY
If one or more of the following transactions occurs during a purchase
period: (a) a dissolution or liquidation of the Company; (b) a merger or
consolidation in which the Company is not the surviving corporation; (c) a
reverse merger in which the Company is the surviving corporation but in which
fifty percent (50%) or more of the Company's outstanding voting stock is
transferred to holders different from those who held the stock immediately
prior to the merger, then at the plan administrator's discretion, either all
purchase rights outstanding under the Purchase Plan immediately before the
consummation of the transaction will be exercised by applying the sums
previously collected from participants during the purchase period to the
purchase of whole shares of Common Stock, subject to the special limitations
listed above, or all sums previously collected from participants during that
purchase period will be refunded upon the consummation of the transaction.
AMENDMENT AND TERMINATION
The Purchase Plan will terminate upon the earlier of (i) May 31, 2007 or
(ii) the date on which all shares available under the Purchase Plan have been
sold.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, the Board may not, without stockholder approval, take any action that
may adversely affect purchase rights at the time outstanding under the
Purchase Plan and may not take action without the approval of the Company's
stockholders if and to the extent that the Board determines that such approval
is necessary to satisfy regulatory requirements.
FEDERAL TAX CONSEQUENCES
The Purchase Plan is intended to be an "employee stock purchase plan" within
the meaning of Section 423 of the Internal Revenue Code. Under a plan which so
qualifies, no taxable income will be recognized by a participant, and no
deductions will be allowable to the Company, upon either the grant or the
exercise of the purchase rights. Taxable income will not be recognized until
there is a sale or other disposition of the shares acquired under the Purchase
Plan.
If the participant sells or otherwise disposes of the purchased shares
within two years after his or her entry date into the purchase period in which
such shares were acquired or within one year after the semi-annual purchase
date on which those shares were actually acquired, then the participant will
recognize ordinary income in the year of sale or disposition equal to the
amount by which the fair market value of the shares on the purchase date
exceeded the purchase price paid for those shares, and the Company will be
entitled to an income tax deduction, for the taxable year in which such
disposition occurs, equal in amount to such excess.
If the participant sells or disposes of the purchased shares more than two
years after his or her entry date into the purchase period in which the shares
were acquired and more than one year after the semi-annual purchase date of
those shares, then the participant will recognize ordinary income in the year
of sale or disposition equal to the lesser of (i) the amount by which the fair
market value of the shares on the sale or disposition date exceeded the
purchase price paid for those shares or (ii) 15% of the fair market value of
the shares on the participant's entry date into that purchase period; and any
additional gain upon the disposition will be taxed as a
27
<PAGE>
long-term capital gain. The Company will not be entitled to an income tax
deduction with respect to such disposition.
The foregoing is only a summary of the federal income taxation consequences
to the participant and the Company with respect to the shares purchased under
the Purchase Plan. The summary does not discuss the tax consequences of a
participant's death or the income tax laws of any city, state or foreign
country in which the participant may reside.
ACCOUNTING TREATMENT
Under current accounting rules, the issuance of Common Stock under the
Purchase Plan will not result in a compensation expense chargeable against the
Company's reported earnings. However, the Company must disclose, in pro-forma
statements to the Company's financial statements, the impact the purchase
rights granted under the Purchase Plan would have upon the Company's reported
earnings were the value of those purchase rights treated as compensation
expense.
NEW PURCHASE PLAN BENEFITS
Since purchase rights are subject to discretion, including an employee's
decision not to participate in the Purchase Plan, awards under the Purchase
Plan for the current fiscal year are not determinable. Each of the current
Named Executive Officers, including Mr. Schwartz, Mr. Hood, Mr. Cormia, Mr.
Garigliano and Mr. Woodard, has the right on December 31, 1997 to purchase a
maximum of 600 shares of Common Stock at a price that will not exceed the
lesser of 85% of the fair market value of the Common Stock on June 1, 1997 or
December 31, 1997.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Annual Meeting is
required for approval of the Purchase Plan. Should such stockholder approval
not be obtained, then no purchase rights will be granted under the Purchase
Plan, and the Predecessor Plan will continue in effect as last approved by the
stockholders or until its expiration date of September 30, 1997.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
APPROVAL OF THE ADOPTION OF THE 1997 EMPLOYEE STOCK PURCHASE PLAN.
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STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Proposals of stockholders that are intended to be presented by such
stockholders at the Company's 1998 Annual Meeting of Stockholders must be
received by the Company no later than December 15, 1997 in order to be
included in the proxy statement and proxy relating to that meeting.
OTHER BUSINESS
The Company knows of no other business that may be presented for
consideration at the meeting. If any other matters are properly presented to
the meeting, however, it is the intention of the persons named in the
accompanying proxy card to vote, or otherwise to act, in accordance with their
best judgment on such matters.
The Board hopes that stockholders will attend the Annual Meeting. Whether or
not you plan to attend, you are urged to complete, sign and return the
enclosed proxy in the accompanying envelope. A prompt response will greatly
facilitate arrangements for the meeting, and your cooperation will be
appreciated. Stockholders who attend the Annual Meeting may vote their shares
personally even though they have sent in their proxies.
By Order of the Board of Directors
/s/ L. Ray Christie
L. Ray Christie, Secretary
Palo Alto, California
April 21, 1997
29
<PAGE>
644-PS-97
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
1997 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1997 Stock Incentive Plan is intended to promote the interests of
Southwall Technologies Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation. Effective May 21, 1997, this Plan
shall supersede and serve as the successor equity incentive program to the
Southwall Technologies Restated 1987 Stock Option Plan ("Predecessor Plan").
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into four separate equity programs:
(i) the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
(ii) the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special option grants,
(iii) the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),
(iv) the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. Administration of the Plan may, at the Board's discretion, be vested in
one or more committees consisting of members of the Board, or the Board may
retain the power to administer the Plan.
B. Members of a committee shall serve for such period of time as the Board
may determine and may be removed by the Board at any time. The Board may also at
any time terminate the functions of any committee and reassume all powers and
authority previously delegated to such committee.
C. Each Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority (subject to the
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for proper administration of the Discretionary Option Grant, Salary
Investment Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of such
programs and any outstanding options or stock issuances thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator within the
scope of its administrative functions under the Plan shall be final and binding
on all parties who have an interest in the Discretionary Option Grant, Salary
Investment Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. Service on a committee shall constitute service as a Board member, and
members of each such committee shall accordingly be entitled to full
indemnification and reimbursement as Board members for their service on such
committee. No member of a committee shall be liable for any act or omission made
in good faith with respect to the Plan or any option grants or stock issuances
under the Plan.
E. Administration of the Director Fee Option Grant Program shall be self-
executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grant or stock issuances made under that program.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors of
any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide services
to the Corporation (or any Parent or Subsidiary).
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B. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority to determine, (i) with respect
to the option grants under the Discretionary Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a Non-
Statutory Option, the time or times when each option is to become exercisable,
the vesting schedule (if any) applicable to the option shares and the maximum
term for which the option is to remain outstanding and (ii) with respect to
stock issuances under the Stock Issuance Program, which eligible persons are to
receive stock issuances, the time or times when such issuances are to be made,
the number of shares to be issued to each Participant, the vesting schedule (if
any) applicable to the issued shares and the consideration for such shares.
C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
D. All non-employee Board members shall be eligible to participate in the
Director Fee Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
400,000 shares plus the number of shares which remain available for issuance, as
of the Plan Effective Date, under the Predecessor Plan as last approved by the
Corporation's stockholders, including the shares subject to the outstanding
options to be incorporated into the Plan and the additional shares which would
otherwise be available for future grant.
B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of each calendar year
during the term of the Plan by 250,000 shares of Common Stock for each year
after 1997.
C. No one person participating in the Plan may receive options for more
than 200,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1997 calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently canceled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should
3
<PAGE>
the exercise price of an option under the Plan be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance.
E. If any change is made to the Common Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall be made to
(i) the maximum number and/or class of securities issuable under the Plan, (ii)
the number and/or class of securities for which any one person may be granted
stock options and direct stock issuances under this Plan per calendar year,
(iii) the number and/or class of securities and the exercise price per share in
effect under each outstanding option under the Plan and (v) the number and/or
class of securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
4
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ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
---------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Six and
the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the Optionee
shall concurrently provide irrevocable written instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such
----------------------------
time or times, during such period and for such number of shares as shall be
determined by the
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Plan Administrator and set forth in the documents evidencing the option.
However, no option shall have a term in excess of ten (10) years measured from
the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for up to eighteen
(18) months (or such other period of time determined by the Plan Administrator
and set forth in the documents evidencing the option), but no such option shall
be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised, by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution, for up to eighteen (18) months (or such other
period of time determined by the Plan Administrator and set forth in the
documents evidencing the option), but no such option shall be exercisable after
the expiration of the option term.
(iii) Unless the Plan Administrator determines otherwise, if the
Optionee's Service is terminated for Misconduct or for Unsatisfactory
Performance, then all outstanding options held by the Optionee shall terminate
immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of vested
shares for which the option is exercisable on the date of the Optionee's
cessation of Service. The option shall, immediately upon the Optionee's
cessation of Service, terminate and cease to be outstanding to the extent the
option is not otherwise at that time exercisable for vested shares. If the
Optionee accepts or begins employment during the post-Service exercise period
with a competitor as determined by the Plan Administrator, the option for vested
shares which is exercisable on the date of the Optionee's cessation of Service
may, subject to the Plan Administrator's discretion, terminate and cease to be
outstanding for any vested shares for which the option has not been exercised.
Upon the expiration of the applicable exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been exercised.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the limited
exercise period
6
<PAGE>
otherwise in effect for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond the expiration of
the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested had the Optionee continued
in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder
------------------
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
-----------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Six shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------
B. EXERCISE PRICE. The exercise price per share shall not be less than
--------------
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
7
<PAGE>
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of
-----------------
Common
Stock (determined as of the respective date or dates of grant) for which one or
more options granted to any employee under the plan (or any other option plan of
the Corporation or any Parent or Subsidiary) may for the first time become
exercisable as Incentive Options during any one calendar year shall not exceed
the sum of one hundred thousand dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability of
such options as Incentive Options shall be applied on the basis of the order in
which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, the Plan Administrator
shall have full power and authority exercisable, either at the time the option
is granted or at any time while the option remains outstanding, to provide for
the automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program upon the occurrence of any Corporate
Transaction, so that immediately prior to the effective date of the Corporate
Transaction, the option becomes fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall not so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant. The determination of option comparability under clause (i)
above shall be made by the Plan Administrator, and its determination shall be
final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
8
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options and
direct stock issuances under the Plan per calendar year.
E. Notwithstanding Section III.A. of this Article Two, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed or replaced in the
Corporate Transaction. In addition, the Plan Administrator may provide that one
or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Corporate Transaction shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full, even in the event the options are to be
assumed.
F. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service subsequently terminates by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of any Corporate Transaction in which those options
are assumed or replaced and do not otherwise accelerate. Any options so
accelerated shall remain exercisable for fully-vested shares until the earlier
-------
of (i) the expiration of the option term or (ii) the expiration of the one (1)-
year period measured from the effective date of the Involuntary Termination. In
addition, the Plan Administrator may provide that one or more of the
Corporation's outstanding repurchase rights with respect to shares held by the
Optionee at the time of such Involuntary Termination shall immediately
terminate, and the shares subject to those terminated repurchase rights shall
accordingly vest in full.
G. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program upon (i) a
Change in Control or (ii) the subsequently termination of the Optionee's Service
by reason of an Involuntary Termination within a designated period (not to
exceed eighteen (18) months) following the effective date of such Change in
Control. Each option so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the one (1)-year period measured from the effective date of the
Optionee's cessation of Service. In addition, the
9
<PAGE>
Plan Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to shares held by the Optionee at the time of
such Change in Control or Involuntary Termination shall immediately terminate,
and the shares subject to those terminated repurchase rights shall accordingly
vest in full.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
10
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
A committee consisting of members of the Board shall have the sole and
exclusive authority to determine the calendar year or years (if any) for which
the Salary Investment Option Grant Program is to be in effect and to select the
Employees eligible to participate in the Salary Investment Option Grant Program
for those calendar year or years. Each selected individual who elects to
participate in the Salary Investment Option Grant Program must, prior to the
start of each calendar year of participation, file with the Plan Administrator
(or its designate) an irrevocable authorization directing the Corporation to
reduce his or her base salary for that calendar year by an amount not less than
Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars
($50,000.00). A committee of Board members shall have complete discretion to
determine whether to approve the filed authorization in whole or in part. To the
extent a committee approves the authorization, the individual who filed that
authorization shall be granted an option under the Salary Investment Grant
Program on or before the last trading day in January for the calendar year for
which the salary reduction is to be in effect. All grants under the Salary
Investment Option Grant Program shall be at the sole discretion of a committee
consisting of Board members.
This program enables specific Employees to defer compensation in the form
of stock options and thus defer taxes on compensation that would otherwise be
received in salary over the year. As indicated in Section II, this program
effectively enables a highly compensated Employee to defer taxes on his or her
salary by setting aside a portion of next year's salary (prior to the beginning
of the calendar year) so that he or she may "purchase" an option with an
exercise price equal to one third of the fair market value on the grant date.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure
11
<PAGE>
specified thereunder is utilized, payment of the exercise price for the
purchased shares must be made on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject
-----------------------
to the option shall be determined pursuant to the following formula (rounded
down to the nearest whole number):
X = A , (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
Example: Employee X sets aside $30,000 of salary prior to the
beginning of the calendar year. If the fair market value of the stock
is $9 per share on the subsequent grant date, he will effectively be
entitled to buy (using his salary reduction) 5,000 option shares with
an exercise price of $3 per share. The number of option shares (5,000)
is determined by the amount of salary deferred ($30,000) divided by
the "spread" ($9 minus $3) on the grant date. The 5,000 shares will
become exercisable in twelve equal installments over the year. The
employee will be taxed when, if ever, he exercises the option to
purchase at $3 per share.
D. Effect of Termination of Service. Should the Optionee cease Service
--------------------------------
for any reason while holding one or more options under this Article Three, then
each such option shall remain exercisable, for any or all of the shares for
which the option is exercisable at the time of such cessation of Service, until
the earlier of (i) the expiration of the ten (10)-year option term or (ii) the
-------
expiration of the three (3)-year period measured from the date of such cessation
of Service. Should the Optionee die while holding one or more options under this
Article Three, then each such option may be exercised, for any or all of the
shares for which the option is exercisable at the time of the Optionee's
cessation of Service (less any shares subsequently purchased by Optionee prior
to death), by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution. Such right of
exercise shall lapse, and the option shall terminate, upon the earlier of (i)
-------
the expiration of the ten (10)-year option term or (ii) the three (3)-year
period measured from the date of the Optionee's cessation of Service.
12
<PAGE>
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the Optionee remains
in Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and shall remain exercisable for the
fully-vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earlier or (i) the expiration
of the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.
C. The Plan Administrator may provide that, upon the occurrence of a
Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to
surrender to the Corporation each of his or her outstanding option grants. The
Optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the shares of
Common Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. No approval or consent of the Board or any Plan Administrator shall
be required in connection with such option surrender and cash distribution.
D. The grant of options under the Salary Investment Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
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ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share shall be fixed by the Plan Administrator,
but shall not be less than one hundred percent (100%) of the Fair Market Value
per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. VESTING PROVISIONS.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program may, in
the discretion of the Plan Administrator, be fully and immediately vested upon
issuance or may vest in one or more installments over the Participant's period
of Service or upon attainment of specified performance objectives.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect to any
shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant
14
<PAGE>
shall have the right to vote such shares and to receive any regular cash
dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding one or
more unvested shares of Common Stock issued under the Stock Issuance Program or
should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further stockholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant's purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender and
cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the non-
attainment of the performance objectives applicable to those shares. Such waiver
shall result in the immediate vesting of the Participant's interest in the
shares as to which the waiver applies. Such waiver may be effected at any time,
whether before or after the Participant's cessation of Service or the attainment
or non-attainment of the applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the Stock
Issuance Program shall terminate automatically, and all the shares of Common
Stock subject to those terminated rights shall immediately vest in full, in the
event of any Corporate Transaction, except to the extent (i) those repurchase
rights are to be assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed in the Stock Issuance Agreement.
B. Notwithstanding Section II.A. of this Article Four, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the unvested shares are issued or any time while the Corporation's
repurchase rights remain outstanding under the Stock Issuance Program, to
provide that those rights shall automatically terminate in whole or in part, and
the shares of Common Stock subject to those terminated rights shall immediately
vest, in the event of a Corporate Transaction, whether or not those repurchase
rights are to be assigned to the successor corporation (or its parent) in
connection with such Corporate Transaction.
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not
15
<PAGE>
to exceed eighteen (18) months) following the effective date of any Corporate
Transaction in which those repurchase rights are assigned to the successor
corporation (or parent thereof).
D. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest upon (i) a Change in Control or (ii) the subsequent termination
of the Participant's Service by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of such Change in Control or Involuntary Termination.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
16
<PAGE>
ARTICLE FIVE
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
Each non-employee Board member may elect to apply all or any portion of the
annual retainer fee otherwise payable in cash for his or her service on the
Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to the first day of the calendar year for which the
annual retainer fee which is the subject of that election is otherwise payable.
Each non-employee Board member who files such a timely election shall
automatically be granted an option under this Director Fee Option Grant Program
on the first trading day in January in the calendar year for which the annual
retainer fee which is the subject of that election would otherwise be payable.
This program enables a non-employee Board member to defer compensation in
the form of stock options and thus defer taxes on compensation that he or she
would have otherwise received as a director fee during the year. As indicated in
Section II, this program effectively enables a non-employee director to defer
taxes on his or her director fee by setting aside a portion of next year's fee
(prior to the beginning of the calendar year) so that he or she may use that fee
to "purchase" an option with an exercise price equal to one third of the fair
market value on the grant date.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of the
option and shall be payable in one or more of the alternative forms authorized
under the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject
-----------------------
to the option shall be determined pursuant to the following formula (rounded
down to the nearest whole number):
17
<PAGE>
X = A , (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable for
----------------------------
fifty percent (50%) of the option shares upon the Optionee's completion of six
(6) months of Board service in the calendar year for which his or her election
under this Director Fee Option Grant Program is in effect, and the balance of
the option shares shall become exercisable in a series of six (6) successive
equal monthly installments upon the Optionee's completion of each additional
month of Board service during that calendar year. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
Example: Director X sets aside $12,000 of her fee prior to the
beginning of the calendar year. If the fair market value of the stock
is $9 per share on the grant date, she will effectively be entitled to
buy (using her fee reduction) 2,000 option shares with an exercise
price of $3 per share. The number of option shares (2,000) is
determined by the amount of fee deferred ($12,000) divided by the
"spread" ($9 minus $3) on the grant date. The 1,000 option shares
will become exercisable after six months of service and an additional
1,000 option shares will become exercisable over the following six
months in six equal installments. The employee will be taxed when, if
ever, she exercises the option to purchase at $3 per share.
D. Termination of Board Service. Should the Optionee cease Board service
----------------------------
for any reason (other than death or Permanent Disability) while holding one or
more options under this Director Fee Option Grant Program, then each such option
shall remain exercisable, for any or all of the shares for which the option is
exercisable at the time of such cessation of Board service, until the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the expiration of
the three (3)-year period measured from the date of such cessation of Board
service. However, each option held by the Optionee under this Director Fee
Option Grant Program at the time of his or her cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a
-----------------------------
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be
18
<PAGE>
exercised for any or all of those shares as fully-vested shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Board service.
Should the Optionee die after cessation of Board service but while holding
one or more options under this Director Fee Option Grant Program, then each such
option may be exercised, for any or all of the shares for which the option is
exercisable at the time of the Optionee's cessation of Board service (less any
shares subsequently purchased by Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the Optionee remains a
Board member, each outstanding option held by such Optionee under this Director
Fee Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Corporate Transaction,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Each such outstanding
option shall be assumed by the successor corporation (or parent thereof) in the
Corporate Transaction and shall remain exercisable for the fully-vested shares
until the earlier of (i) the expiration of the ten (10)-year option term or (ii)
-------
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. The
option shall remain so exercisable until the earlier or (i) the expiration of
-------
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding option grants. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Take-Over Price of the shares of Common Stock at the time subject to each
surrendered option (whether or not the Optionee is otherwise at the time vested
in those shares) over (ii) the aggregate exercise price payable for such shares.
Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. No approval or consent of the Board
or any Plan Administrator shall be required in connection with such option
surrender and cash distribution.
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<PAGE>
D. The grant of options under the Director Fee Option Grant Program shall
in no way affect the right of the Corporation to adjust, reclassify, reorganize
or otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
20
<PAGE>
ARTICLE SIX
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Director Fee
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at the
--------------
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
21
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan Effective
Date. However, the Salary Investment Option Grant Program shall not be
implemented until such time as a committee of Board members may deem
appropriate. Options may be granted under the Discretionary Option Grant Program
at any time on or after the Plan Effective Date. However, no options granted
under the Plan may be exercised, and no shares shall be issued under the Plan,
until the Plan is approved by the Corporation's stockholders. If such
stockholder approval is not obtained within twelve (12) months after the Plan
Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and no
further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation) the
option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) May 21, 2007, or
(ii) the termination of all outstanding options. Upon such plan termination, all
outstanding option grants and unvested stock issuances shall thereafter continue
to have force and effect in accordance with the provisions of the documents
evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common
22
<PAGE>
Stock available for issuance under the Plan. If such stockholder approval is not
obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically canceled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option under
the Plan and the issuance of any shares of Common Stock (i) upon the exercise of
any granted option or (ii) under the Stock Issuance Program shall be subject to
the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or delivered
under the Plan unless and until there shall have been compliance with all
applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant any
right to continue in Service for any period of specific duration or interfere
with or otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining such person) or of the Optionee or
the Participant, which rights are hereby expressly reserved by each, to
terminate such person's Service at any time for any reason, with or without
cause.
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<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
-----
B. CHANGE IN CONTROL shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than twenty-five percent (25%) of the
total combined voting power of the Corporation's outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (A) who were still in office
at the time the Board approved such election or nomination.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMON STOCK shall mean the Corporation's Common Stock.
------------
E. CORPORATE TRANSACTION shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. CORPORATION shall mean Southwall Technologies INC., a Delaware
-----------
Corporation, and its successors.
G. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
---------------------------------
grant in effect for non-employee Board members under Article Five of the Plan.
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<PAGE>
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
----------------------------------
grant program in effect under the plan.
I. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question, as such price
is reported on the Nasdaq National Market or any successor system. If there is
no closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
L. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
-----------------
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
M. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
N. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
A-2
<PAGE>
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces his
or her level of responsibility, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and participation in any
corporate-performance based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of such individual's place of employment by
more than fifty (50) miles, provided and only if such change, reduction or
relocation is effected by the Corporation without the individual's consent.
O. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).
P. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy the-
--------------------
requirements of Code Section 422.
R. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant, Salary Investment Option Grant, or Director Fee
Option Grant Program.
S. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
T. PARTICIPANT shall mean any person who is issued shares of common stock
-----------
under the stock issuance program.
U. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Director Fee Option Grant Programs,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
V. PLAN shall mean the Corporation's 1997 Stock Incentive Plan, as set
----
forth in this document.
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<PAGE>
W. PLAN ADMINISTRATOR shall mean the particular entity, whether the Board
------------------
or a particular committee, which is authorized to administer the Discretionary
Option Grant, Salary Investment Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
X. PLAN EFFECTIVE DATE shall mean may 21, 1997, the date on which the
-------------------
Plan was adopted by the Board.
Y. PREDECESSOR PLAN shall mean the pre-existing Southwall Technologies
----------------
Inc. Restated 1987 Stock Option Plan, as amended and restated through February
14, 1994, in effect immediately prior to the Plan Effective Date hereunder.
Z. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
--------------------------------------
investment grant program in effect under the Plan.
AA. SERVICE shall mean the performance of services for the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
BB. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
CC. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
DD. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
EE. SUBSIDIARY shall mean any Corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
FF. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
---------------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
GG. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
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<PAGE>
HH. 10% STOCKHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
II. UNSATISFACTORY PERFORMANCE shall include, but is not limited to, the
--------------------------
failure of the Optionee to meet performance goals, the failure of Optionee to
carry out job responsibilities in a satisfactory manner, the Optionee's breach
of company policy, or the Optionee's failure to develop satisfactory managerial
skills. The Plan Administrator shall have sole discretion to determine if an
optionee's termination of service was a result of Unsatisfactory Performance
under the Plan. The Plan Administrator's determination has no effect on the at-
will nature of employment that Southwall Technologies Inc. maintains with its
employees (see Article Six, Section VII of the Plan). The employment
relationship may be terminated at any time, for any reason with or without cause
or advance notice.
A-5
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE
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The Southwall Technologies Inc. 1997 Employee Stock Purchase Plan (the
"Plan") is intended to provide eligible employees of the Company and one or more
of its Corporate Affiliates with the opportunity to acquire a proprietary
interest in the Company through participation in a plan designed to qualify as
an employee stock purchase plan under Section 423 of the Internal Revenue Code.
The Plan supersedes the Company's 1987 Employee Stock Purchase Plan (the
"Predecessor Plan") effective June 1, 1997.
II. DEFINITIONS
-----------
For purposes of administration of the Plan, the following terms have
the meanings indicated:
Board means the Board of Directors of the Company.
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Code means the Internal Revenue Code of 1986, as amended.
----
Common Stock means shares of the common stock, $.001 par value, of the
------------
Company.
Company means Southwall Technologies Inc., a Delaware corporation, and
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any corporate successor to all or substantially all of the assets or voting
stock of Southwall Technologies Inc. which by appropriate action adopts the
Plan.
Compensation means (i) all payments received by a Participant as
------------
compensation for services rendered to the Company or one or more other
Participating Companies, including all wages, salaries, overtime payments,
bonuses, commissions and incentive payments, and (ii) all contributions made on
the Participant's behalf pursuant to any qualified cafeteria plan or salary
deferral arrangement under Code Section 125 or 401(k) established by the
Company, but excluding all other contributions made by the Company or its
Corporate Affiliates for the benefit of the Participant to any employee benefit
or welfare plan now or hereafter established.
Corporate Affiliate means any company which is a parent or subsidiary
-------------------
corporation of the Company (as determined in accordance with Code Section 425),
including any parent or subsidiary corporation which becomes such after the
Effective Date.
Effective Date of the Plan means June 1, 1997; provided, however, that
-------------- --------
any Corporate Affiliate which becomes a Participating Company in the Plan after
that date shall designate a subsequent Effective Date with respect to its
employee-Participants.
Employee means any person who is regularly engaged, for a period of
--------
more than 20 hours per week and more than 5 months per calendar year, in the
rendition of personal
<PAGE>
services to the Company or any other Participating Company for earnings
considered wages under Code Section 3121(a).
Participant means any Employee of a Participating Company who (i) has
-----------
satisfied the service requirement set forth in Article V and (ii) is actively
participating in the Plan.
Participating Company means the Company and those Corporate Affiliate
---------------------
or Affiliates as may be designated from time to time by the Board.
III. ADMINISTRATION
--------------
The Plan will be administered by the Board or by a committee (the
"Committee") comprised of members appointed from time to time by the Board or a
delegate of either. The Plan Administrator (whether the Board or the Committee
or a delegate) has full authority to administer the Plan, including authority to
interpret and construe any provision of the Plan and to adopt such rules and
regulations for administering the Plan as it may deem necessary. Decisions of
the Plan Administrator are final and binding on all parties who have an interest
in the Plan.
IV. PURCHASE PERIODS
----------------
(a) Common Stock will be offered for purchase under the Plan through a
series of six (6) month purchase periods. The first purchase period will begin
on June 1, 1997 and subsequent purchase periods will begin on each December 1
and June 1 thereafter until (i) all shares available under the Plan have been
purchased or (ii) the Plan terminates in accordance with Article IX.
(b) Under no circumstances may any purchase rights granted under the
Plan be exercised, nor may any shares of Common Stock be issued hereunder, until
the Company has complied with all applicable requirements of the Securities Act
of 1933 (as amended), all applicable listing requirements of any securities
exchange on which the Common Stock is listed and all other applicable
requirements established by law or regulation.
V. ELIGIBILITY AND PARTICIPATION
-----------------------------
(a) An Employee of a Participating Company is eligible to participate
in the Plan for a purchase period if he or she has completed at least one (1)
year of continuous service with the Company or any Corporate Affiliate on or
before the first day of that purchase period.
(b) In order to participate in the Plan for a particular purchase
period, the Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a purchase agreement and payment authorization) and
file those forms with the Plan Administrator (or its designate) during the
designated enrollment period. In the payment authorization form, the Employee
may choose one of the following methods of payment for the shares to be acquired
on his/her behalf during the purchase period:
(i) periodic payroll deduction; or
2
<PAGE>
(ii) lump sum payment;
provided that the Administrator may, for any purchase period, prohibit lump sum
payments.
(c) If periodic payroll deductions are selected, those deductions must
be made in a multiple of 1% of the Compensation paid to the Participant during
the purchase period, up to a maximum of 15%. The deduction rate chosen will
continue in effect for the entire purchase period, unless the Participant,
before the beginning of any payroll period within that purchase period,
designates a lower rate (including a 0% rate) by filing the appropriate form
with the Plan Administrator (or its designate). The new rate will become
effective on the first day of the payroll period following the filing of the
form and may not be increased during the remainder of the purchase period.
Payroll deductions, however, will automatically stop upon the termination of the
Participant's purchase right in accordance with Section VII(d) or (e) below.
(d) If the lump-sum alternative is selected, the lump sum payment may
not exceed 15% of the Compensation paid to the Participant during the purchase
period and must be paid within the first fifteen (15) days of the final month of
the purchase period. However, no lump-sum payment may be made with respect to a
purchase right terminated in accordance with Section VII(d) or (e) below.
VI. STOCK SUBJECT TO PLAN
---------------------
(a) The Common Stock issuable under the Plan shall, solely in the
Board's discretion, be made available from either authorized but unissued shares
of Common Stock or from reacquired shares, including shares purchased on the
open market. The total number of shares which may be issued under the Plan shall
not exceed 100,000 shares (subject to adjustment under subparagraph (b) below).
If any right granted under the Plan terminates without having been exercised,
the shares not purchased under that right will again be available for issuance
under the Plan.
(b) If any change is made to the Common Stock issuable under the Plan
by reason of (I) any merger, consolidation or reorganization or (II) any stock
dividend, stock split, combination of shares or other change affecting the
outstanding Common Stock as a class without receipt of consideration,
appropriate adjustments will be made by the Plan Administrator to (i) the class
and maximum number of shares issuable under the Plan, (ii) the class and maximum
number of shares purchasable per Participant under any one purchase right, and
(iii) the class and number of shares and the price per share of the Common Stock
subject to each purchase right at the time outstanding under the Plan.
VII. PURCHASE RIGHT
--------------
An Employee who participates in the Plan for a particular purchase
period will have the right to purchase Common Stock on the terms and conditions
set forth below and must execute a purchase agreement embodying such terms and
conditions and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
3
<PAGE>
(a) Purchase Price. The purchase price per share will be the lesser of
--------------
(i) 85% of the fair market value per share of Common Stock on the date on which
the purchase right is granted or (ii) 85% of the fair market value per share of
Common Stock on the date the purchase right is exercised. The fair market value
per share of Common Stock on any relevant date will be the closing selling price
of a share of Common Stock on that date, as officially quoted on the principal
exchange on which the Common Stock is at the time traded or, if not traded on
any exchange, the closing selling price per share of Common Stock on that date,
as reported on the NASDAQ National Market System. If there are no sales of
Common Stock on that day, then the closing selling price for the Common Stock on
the next preceding day for which quotations do exist will be determinative of
fair market value.
(b) Number of Purchasable Shares. The number of shares that a
----------------------------
Participant may purchase for a particular purchase period is the number of whole
shares obtained by dividing the payments made by the Participant for that
purchase period, together with any amount carried over from the preceding
purchase period pursuant to the provisions of Section VII(f), by the purchase
price in effect for the purchase period. However, a Participant may not purchase
more than 600 shares (subject to adjustment under Section VI(b)) in any purchase
period.
Under no circumstances may purchase rights be granted under the Plan
to any Employee who would, immediately after the grant, own (within the meaning
of Code Section 425(d)), or otherwise hold outstanding options or other rights
to purchase, stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or any of its Corporate Affiliates.
(c) Payment. Payment for the Common Stock purchased under the Plan
-------
must be made in accordance with the method of payment authorized by the
Participant. Each payment made by the Participant will be credited to his/her
individual account under the Plan, but no interest will be paid on the balance
from time to time outstanding in the account. All payments may be commingled
with the general assets of the Company and may be used for general corporate
purposes.
(d) Termination of Purchase Rights.
-------------------------------
(i) A Participant may, before the last ten (10) days of the
purchase period, terminate his/her outstanding purchase right by filing the
prescribed notification form with the Plan Administrator (or its designate). All
payments previously collected from the Participant for that purchase period will
be promptly refunded and no further payments may be made for that purchase
period.
(ii) The termination will be irrevocable for the purchase right
in which it is made and the Participant must re-enroll in the Plan (by making a
timely filing of a new purchase agreement and payment authorization) if the
Participant wishes to resume participation in a subsequent purchase period.
(e) Termination of Service. If a Participant leaves the Service of the
----------------------
Company before the end of a Purchase Period, the purchase right for that
purchase Period will immediately
4
<PAGE>
terminate and all payments collected from the Participant during that purchase
period will be promptly refunded to the Participant.
A Participant will be considered to be in the Service of the Company
for so long as the Participant remains in the active employ of the Company or
any other Participating Company under the Plan.
(f) Stock Purchase. Outstanding purchase rights (other than purchase
--------------
rights previously terminated in accordance with Section VII(d) or (e) above)
will be automatically exercised on the last day of the purchase period. The
exercise will be made by applying the amount credited to each Participant's
account on the last date of the purchase period to the purchase of whole shares
of Common Stock (subject to the limitations on the maximum number of purchasable
shares set forth in Section VII(b)) at the purchase price in effect for that
purchase period. Any amount remaining in the Participant's account will be held
for the purchase of Common Stock in the next purchase period, provided the
--------
Participant continues in the Plan for that purchase period. However, any amount
not applied to the purchase of Common Stock by reason of the Section VII(b)
limitation on the maximum number of purchasable shares will be refunded promptly
after the close of the purchase period.
(g) Proration of Purchase Rights. Should the total number of shares to
----------------------------
be purchased pursuant to outstanding purchase rights exceed on the exercise date
the number of shares then available for issuance under the Plan, the Plan
Administrator will make a pro-rata allocation of the available shares on a
uniform and nondiscriminatory basis, and any amounts credited to the accounts of
Participants will, to the extent not applied to the purchase of Common Stock, be
refunded to the Participants.
(h) Rights as Stockholder. A Participant has no rights as a
---------------------
stockholder with respect to shares covered by the purchase right granted to the
Participant until the shares are actually purchased on the Participant's behalf
in accordance with Section VII(f). No adjustments will be made for dividends,
distributions or other rights for which the record date is before the date of
purchase.
A Participant will receive, as soon as practicable after the date of
each purchase, stock certificates for the number of shares purchased on his/her
behalf. The certificates may, upon the Participant's request, be issued in the
names of the Participant and his/her spouse as community property or as joint
tenants with right of survivorship.
The Plan Administrator has full power and authority to implement an
immediate sale program under the Plan with one or more selected broker/dealers
which will allow Participants to sell their purchased shares of Common Stock on
the open market immediately after the close of the purchase period and prior to
the actual issuance of the stock certificates for the purchased shares.
(i) Assignability. Purchase rights are not assignable or transferable
-------------
by a Participant and may be exercised only by the Participant.
5
<PAGE>
(j) Merger or Liquidation of Company. If one or more of the following
--------------------------------
transactions occurs during a purchase period: (a) a dissolution or liquidation
of the Company; (b) a merger or consolidation in which the Company is not the
surviving corporation; (c) a reverse merger in which the Company is the
surviving corporation but in which fifty percent (50%) or more of the Company's
outstanding voting stock is transferred to holders different from those who held
the stock immediately prior to the merger, then at the Plan Administrator's
discretion (I) all purchase rights outstanding under the Plan immediately before
the consummation of the transaction will be exercised by applying the sums
previously collected from Participants during the purchase period to the
purchase of whole shares of Common Stock, subject, however, to the applicable
limitations of Section VII(b) or (II) all sums previously collected from
Participants during that purchase period will be refunded upon the consummation
of the transaction.
VIII. ACCRUAL LIMITATIONS
-------------------
No Participant may accrue rights to acquire Common Stock under this
Plan if and to the extent that such accrual, when aggregated with (I) stock
rights accrued under other purchase rights outstanding under this Plan and (II)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Company or its Corporate Affiliates, would
otherwise permit the Participant to purchase more than $25,000 worth of stock of
the Company or any Corporate Affiliate (determined on the basis of the fair
market value of the stock on the date or dates that the rights are granted to
the Participant) for each calendar year that the rights are at any time
outstanding.
IX. AMENDMENT AND TERMINATION
-------------------------
The Board may from time to time alter, amend, suspend or discontinue
the Plan; provided, however, that no such action may adversely affect purchase
--------
rights at the time outstanding under the Plan; and provided, further, no such
-------- -------
action may be taken without the approval of the Company's stockholders if and to
the extent that the Board determines that such approval is necessary to satisfy
regulatory requirements.
X. GENERAL PROVISIONS
------------------
(a) The Plan will terminate on the earlier of (i) May 31, 2007 or (ii)
-------
the date on which all shares available under the Plan have been sold.
(b) All costs and expenses incurred in the administration of the Plan
will be paid by the Company.
(c) Neither the action of the Company in establishing the Plan, nor
any action taken under the Plan by the Board or the Plan Administrator, nor any
provision of the Plan itself shall confer upon the Participant any right to
continue in the employ of the Company or any of its Corporate Affiliates for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Company (or any of its Corporate Affiliates employing
Participant)
6
<PAGE>
to terminate the Employee status of the Participant at any time and for any
reason, with or without cause.
(d) The provisions of the Plan shall be governed by the laws of the
State of California.
7
<PAGE>
PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SOUTHWALL TECHNOLOGIES INC.
1997 ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 1997
The undersigned hereby appoints Martin M. Schwartz and L. Ray Christie,
and each of them, as attorneys and proxies of the undersigned, with power of
substitution, to vote all of the shares of stock of Southwall Technologies
Inc. (the "Company") which the undersigned may be entitled to vote at the
1997 Annual Meeting of Stockholders of the Company to be held at the Company's
principal executive offices at 1029 Corporation Way, Palo Alto, California on
May 21, 1997 at 3:00 p.m. PDT, and at all continuations, and adjournments or
postponements thereof, with all of the powers the undersigned would possess
if personally present, upon and in respect of the following matters and in
accordance with the following instructions, and with the discretionary authority
as to all other matters that may properly come before the meeting.
Receipt is hereby acknowledged of the Notice of Annual Meeting of
Stockholders and Proxy Statement dated April 21, 1997 (the "Proxy Statement").
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4 AS MORE
SPECIFICALLY SET FORTH IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
PLEASE VOTE, DATE, SIGN, AND PROMPTLY RETURN THIS PROXY CARD USING THE
ENCLOSED POSTPAID ENVELOPE.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES FOR DIRECTORS
LISTED BELOW AND "FOR" PROPOSALS 2, 3 AND 4.
1. Election of directors to hold office until the 1998 Annual Meeting of
Stockholders and until their successors are elected:
NOMINEES: Bruce J. Alexander, Joseph B. Reagan, Martin M. Schwartz, Walter
C. Sedgwick and J. Larry Smart
[ ] FOR [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
[ ] ______________________________________ MARK HERE
For all nominees except as noted above FOR ADDRESS [ ]
CHANGE AND
NOTE BELOW
2. Ratification of the selection of Price Waterhouse LLP as independent public
accountants of the Company for the fiscal year ending December 31, 1997.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Approval of the adoption of the Company's 1997 Stock Incentive Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Approval of the adoption of the Company's 1997 Employee Stock Purchase Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. In their discretion, the proxies are authorized to vote on such other
business as may properly come before the meeting.
Please sign exactly as your name appears hereon. If the stock is registered in
the names of two or more persons, each should sign. If signer is a
corporation, please give full corporate name and have a duly authorized
officer sign stating title. If signer is a partnership, please sign in
partnership name by authorized person.
Signature:________________ Date:_______ Signature:________________ Date:_______
