<PAGE> 1
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
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
PROTEON, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[PROTEON LOGO]
April 27, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of Shareholders
of Proteon, Inc. at 10:00 a.m. on Wednesday, June 10, 1998, at the offices of
Boston EquiServe, Blue Hills Office Park, 150 Royall Street, Canton,
Massachusetts.
At the Annual Meeting four members will be elected to the Board of
Directors. The Board of Directors recommends the election of the four nominees
named in the enclosed Proxy Statement.
In addition, the Board of Directors recommends approval of the proposed
amendment to the 1991 Restated Stock Option Plan to increase by 500,000 the
number of shares reserved for issuance upon the exercise of options granted
under the Plan.
The Board of Directors also recommends approval of the proposed amendment
of the Company's Restated Articles of Organization to change the name of the
Company from Proteon, Inc. to OpenROUTE Networks, Inc.
Whether you plan to attend or not it is important that you promptly sign,
date and return the enclosed proxy card in accordance with the instructions
pertaining to the card. This will ensure your proper representation at the
Meeting.
Sincerely,
Daniel J. Capone, Jr.
DANIEL J. CAPONE, JR.
President and Chief
Executive Officer
YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR PROXY PROMPTLY.
<PAGE> 3
PROTEON, INC.
9 TECHNOLOGY DRIVE
WESTBOROUGH, MA 01581
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, JUNE 10, 1998
To Shareholders of Proteon, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of Proteon,
Inc. will be held at the offices of Boston EquiServe, Blue Hills Office Park,
150 Royall Street, Canton, Massachusetts, on Wednesday, June 10, 1998, at 10:00
a.m. local time for the following purposes:
1. To elect four Directors to hold office until the next Annual Meeting of
Shareholders and until their successors are chosen and qualified.
2. To consider and act upon an amendment to the Company's 1991 Restated
Stock Option Plan which would increase by 500,000 the number of shares
reserved for issuance upon exercise of options granted under the Plan.
3. To consider and act upon an amendment of the Company's Restated
Articles of Organization to change the name of the Company from
Proteon, Inc. to OpenROUTE Networks, Inc.
To transact such other business as may properly come before the Meeting or
any postponements or adjournments thereof, including any motion to adjourn the
Meeting to a later date to permit further solicitation of proxies.
Only Shareholders of record at the close of business on April 17, 1998,
will receive notice of the Meeting and be entitled to vote at the Meeting or any
adjournment(s) thereof. The transfer books will not be closed.
You are cordially invited to attend the Meeting in person. Whether you plan
to attend the Meeting or not, please fill out, sign and date the enclosed Proxy
and return it in the envelope enclosed for this purpose. The Proxy is revocable
by the person giving it at any time prior to the exercise thereof by written
notice received by the Company, by delivery of a duly executed Proxy bearing a
later date, or by attending the Meeting and voting in person.
By Order of the Board of Directors,
/s/ Steven T. Shedd
STEVEN T. SHEDD
Clerk
April 27, 1998
<PAGE> 4
PROTEON, INC.
9 TECHNOLOGY DRIVE
WESTBOROUGH, MA 01581
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, JUNE 10, 1998
PROXY STATEMENT
GENERAL INFORMATION
Date, Time and Place. This Proxy Statement is furnished in connection with
the solicitation by and on behalf of the Board of Directors of Proteon, Inc.
("Proteon" or the "Company") of Proxies for use at the Annual Meeting of
Shareholders of the Company to be held at the offices of Boston EquiServe, Blue
Hills Office Park, 150 Royall Street, Canton, Massachusetts, on Wednesday, June
10, 1998, at 10:00 a.m. local time and at any adjournment(s) thereof and,
together with the enclosed form of Proxy and Annual Report to Shareholders for
the fiscal year ended December 31, 1997, is being mailed to the Shareholders on
or about April 27, 1998. The Annual Report does not constitute any part of this
Proxy Statement.
Revocability of Proxies. Any Proxy given pursuant to this solicitation may
be revoked by the person giving it at any time before its exercise by delivering
to the Company a written notice of revocation or a duly executed Proxy bearing a
later date, or by attending the Meeting and voting in person.
Cost of Solicitation. The entire cost of this solicitation will be paid by
the Company. In addition, the Company may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
forwarding solicitation material to such beneficial owners. Solicitation of
proxies by mail may be supplemented by telephone, facsimile and personal
solicitation by directors, officers or employees of the Company. Proteon, at an
estimated cost of $5,500.00, has entered into a contract with Corporate Investor
Communications, Inc. to provide proxy solicitation services in connection with
the Shareholders Meeting.
Quorum and Voting. Only Shareholders of record of the Company's 15,296,857
shares of Common Stock, $.01 par value (the "Common Stock"), outstanding as of
the close of business on April 17, 1998 will be entitled to vote. Each share of
Common Stock is entitled to one vote at the Meeting or any adjournment(s)
thereof. The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of Common Stock entitled to vote is necessary to
constitute a quorum at the Meeting. With respect to the tabulation of votes on
the proposal to amend the 1991 Restated Stock Option Plan, abstentions and
broker non-votes will have no effect on the vote. With respect to the tabulation
of votes on the proposal to amend the Company's Restated Articles of
Organization to change the corporate name, abstentions and broker non-votes will
count as votes against the proposal.
Market Value of Common Stock. On March 25, 1998, the closing market price
of the Company's Common Stock was $1.313 as reported by the Nasdaq Stock Market.
<PAGE> 5
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 25, 1998, (on which date 15,296,857 shares
were outstanding) by (a) each person or entity known by the Company to be the
beneficial owner of more than five percent of the Common Stock, (b) each
Director of the Company, (c) each Named Executive Officer (the Named Executive
Officers can be found in the Summary Compensation Table below), and (d) all
current Executive Officers and Directors of the Company as a group. Except as
otherwise indicated, each shareholder has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------------------------- ------------------ --------------------
<S> <C> <C>
Howard C. Salwen(2)........................................ 1,006,264 6.6%
c/o Proteon, Inc.
9 Technology Drive
Westborough, MA 01581
Dr. David Clark(3)......................................... 45,000 *
Dr. Robert M. Glorioso..................................... -- *
Daniel J. Capone, Jr.(4)................................... 412,006 2.7%
Robert A. Koch(5).......................................... 28,250 *
Steven J. Bielagus(6)...................................... 63,780 *
William T. Greer........................................... -- *
All current Executive Officers and Directors as a group
(9 persons)(7)........................................... 1,491,520 9.8%
</TABLE>
- ---------------
* Less than 1%
(1) Addresses are given only for beneficial owners of more than five percent of
the Common Stock. The stock ownership information has been furnished to the
Company by the named persons. Share ownership includes shares of Common
Stock issuable upon exercise of certain outstanding options as described in
the footnotes below.
(2) Includes 125,164 shares owned by trusts of which Mr. Salwen is a trustee for
the benefit of his adult children, David J. Salwen and Andrea G. Salwen. Mr.
Salwen disclaims beneficial ownership of the 125,164 shares held in trust,
as to which he has no investment power. Mr. Salwen is Chairman of the
Company's Board of Directors.
(3) Includes 20,000 shares which Dr. Clark, a Director of the Company, may
acquire upon the exercise of options within sixty days after March 25, 1998.
(4) Includes 387,687 shares, which Mr. Capone may acquire upon the exercise of
options within sixty days after March 25, 1998. Mr. Capone is a Director,
President and Chief Executive Officer of the Company.
(5) Consists of 28,250 shares which Mr. Koch, Vice President of Engineering,
Product Planning and Development of the Company, may acquire upon the
exercise of options within sixty days after March 25, 1998.
(6) Includes 60,750 shares which Mr. Bielagus, the Company's former Vice
President of Business Development may acquire upon the exercise of options
within sixty days after March 25, 1998.
(7) Includes an aggregate of 435,937 shares, which may be acquired upon the
exercise of options within 60 days after March 25, 1998.
2
<PAGE> 6
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS' COMPENSATION
The Company paid Dr. Clark and Dr. Glorioso, and will pay any future
non-employee Directors, an annual fee of $10,000 for their services as Directors
of the Company. In addition, Dr. Clark, Dr. Glorioso and Mr. Salwen receive, and
any future non-employee Directors will receive, $1,000 for each Board meeting
attended and $1,000 for each Committee meeting attended on a day other than when
the Board of Directors meets. The Company reimburses Directors who request it
for the expense of attending meetings, including airfare, hotel and auto/travel
mileage.
Pursuant to the 1991 Restated Stock Option Plan, all non-employee Directors
who first become Directors on or after May 14, 1992, are automatically granted
an option to purchase 5,000 shares of the Company's Common Stock at the then
calculated fair market value. The options become exercisable over four years at
the rate of twenty-five percent per year and terminate ten years after the grant
date, so long as the individual remains a Director. The options terminate ninety
days after the individual ceases to be a Director, unless the Directorship is
terminated as a result the Director's removal from the Board of Directors for
cause (as defined), in which event the options terminate immediately. In the
event of the death or disability of the Director, the options which had become
exercisable through the last option vesting date, and an additional number,
prorated up to the date of death or disability, may be exercised by the Director
or the Director's survivors, as the case may be, in accordance with their
original terms up to one year after the death or disability of the Director.
In addition to his responsibility as Director, Mr. Salwen is employed as a
management consultant by the Company and is remunerated at the rate of $1,200
per day. Mr. Salwen's total remuneration for Director's fees and consulting fees
during fiscal year 1997 was $53,664.
EXECUTIVE OFFICER COMPENSATION
The following table shows compensation paid by the Company for services
rendered during fiscal years 1997, 1996 and 1995 to the: Chief Executive
Officer; Vice President, Engineering and Product Planning and Management; Former
Vice President, Business Development; and Former Vice President, Sales of the
Americas of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
---------------------------- SECURITIES
COMMISSIONS UNDERLYING ALL OTHER
SALARY AND BONUSES OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(A) ($)(A) (#) ($)(B)
--------------------------- ---- ------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Daniel J. Capone, Jr.................... 1997 241,324 43,899 77,500 3,200
CEO and President 1996 241,405 39,719 120,500 3,000
1995 237,058 75,556 50,000 3,000
Robert A. Koch.......................... 1997 122,847 16,090 40,000 0
Vice President, Engineering and
Product Planning and Management
Steven J. Bielagus(C)................... 1997 149,438 19,954 30,000 1,900
Former Vice President, 1996 141,017 6,244 65,000 1,900
Business Development 1995 140,673 31,405 25,000 2,189
William T. Greer(D)..................... 1997 91,345 47,930 30,000 2,184
Former Vice President, 1996 93,565 54,265 35,000 560
Sales of the Americas
</TABLE>
3
<PAGE> 7
- ---------------
(A) Amounts shown include cash compensation earned and/or received by the
executive officers.
(B) The totals in this column reflect the aggregate value of the Company's
contributions under the 401(k) Retirement Benefit Plan for the Named
Executive Officers.
(C) Mr. Bielagus' employment as the Company's Vice President of Business
Development has terminated.
(D) Mr. Greer resigned his position as Vice President, Sales of the Americas on
September 26, 1997.
OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table provides information with respect to the Named
Executive Officers regarding the number of shares covered by both exercisable
and unexercisable stock options as of December 31, 1997, and the value of
unexercised options. No options were exercised by any named Executive Officer
during fiscal year 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISE IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)(A)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel J. Capone, Jr............................. 362,062 135,937 0 0
Robert A. Koch................................... 17,000 60,000 0 0
Steven J. Bielagus(B)............................ 60,750 0 0 0
William T. Greer(C).............................. 0 0 0 0
</TABLE>
- ---------------
(A) The potential unrealized value is the fair market value at fiscal year-end
($1.16 per share) less the option exercise price times the number of shares.
All options have an exercise price greater than $1.16 per share.
(B) Former Vice President of Business Development.
(C) Former Vice President of Sales of the Americas.
4
<PAGE> 8
OPTION GRANTS
The following table sets forth information regarding each stock option
granted to the Named Executive Officers during fiscal year 1997. All options
were granted under the 1991 Restated Stock Option Plan (the "Plan").
Additionally, in accordance with Securities and Exchange Commission rules,
hypothetical gains or "option spreads" that would exist for the respective
options are also shown. These gains are based on assumed rates of annual
compounded stock price appreciation of 5% and 10% from the date the options were
granted to the option expiration date. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the future performance of
the Common Stock and overall market conditions.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM
GRANTED IN FISCAL PRICE EXPIRATION ---------------------------
NAME (#) YEAR ($/SH) DATE 5%($)(K) 10%($)(K)
---- ---------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Capone, Jr...... 13,275(A) 1.32 2.53 2/10/07 20,473 52,494
8,600(B) 0.85 2.53 2/10/07 13,263 34,007
28,125(C) 2.79 2.53 2/10/07 43,375 111,216
25,000(D) 2.48 1.70 9/24/07 23,674 62,871
2,500(E) 0.25 2.56 10/22/07 4,025 10,200
Robert A. Koch............ 10,000(F) 0.99 2.66 1/3/07 22,267 51,212
10,000(G) 0.99 2.53 2/10/07 15,422 39,544
20,000(H) 1.98 1.83 4/23/07 20,411 54,181
Steven J. Bielagus........ 30,000(I) 2.98 2.53 2/10/07 46,267 118,631
William T. Greer.......... 30,000(J) 2.98 2.53 2/10/07 46,267 118,631
</TABLE>
- ---------------
(A) Non-Qualified stock options were granted on February 10, 1997, and are
exercisable for 1,625 shares on May 10, 1997; 2,725 shares on August 10,
1997 and 3,125 shares on November 11, 1997. Additionally, 2,675 shares and
3,125 shares are exercisable on August 10, 1998 and November 11, 1998
respectively.
(B) Incentive stock options were granted on February 10, 1997, and are
exercisable for 1,500 shares on May 10, 1997; 400 shares on August 10,
1997; 3,125 shares on February 10, 1998; 3,125 shares on May 10, 1998 and
450 shares on August 10, 1998.
(C) Incentive stock options were granted on February 10, 1997, and are
exercisable quarterly beginning on February 10, 1999.
(D) Non-Qualified stock options were granted on September 24, 1997, and are
exercisable at a rate of twenty-five percent per year beginning on
September 24, 1998 through September 24, 2001.
(E) Non-Qualified stock options were granted on October 22, 1997, and are
exercisable at a rate of twenty-five percent per year beginning on October
22, 1998 through October 22, 2001.
(F) Incentive stock options were granted on January 3, 1997 and are exercisable
at a rate of twenty-five percent per year beginning on January 3, 1998
through January 3, 2001.
(G) Incentive stock options were granted on February 10, 1997, and are
exercisable at a rate of twenty-five percent per year beginning on February
10, 1998 through February 10, 2001.
5
<PAGE> 9
(H) Incentive stock options were granted on April 23, 1997, and are exercisable
at a rate of twenty-five percent per year beginning on April 23, 1998
through April 23, 2001.
(I) Incentive stock options were granted on February 10, 1997, and would have
become exercisable at a rate of twenty-five percent per year beginning on
February 10, 1998 through February 10, 2001, had Mr. Bielagus' employment
not terminated with the Company.
(J) Incentive stock options were granted on February 10, 1997, and would have
become exercisable at a rate of twenty-five percent per year beginning on
February 10, 1998 had Mr. Greer not resigned his position with the Company.
(K) Potential realizable value based on an assumption that the price of Common
Stock appreciates at the annual rate shown (compounded annually) from the
date of grant until the end of the option term. These numbers are
calculated based on the requirements of the Securities and Exchange
Commission and do not necessarily reflect the Company's estimate of future
stock price.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
In accordance with Daniel J. Capone, Jr.'s employment contract, Mr. Capone
was paid a base salary of $240,000 and received a bonus of $43,899 in 1997. In
1997 Mr. Capone was eligible for a bonus of up to 55% of base salary based upon
attainment of goals jointly developed and agreed to between Mr. Capone and the
Company's Board of Directors. Mr. Capone was also granted options to purchase a
total of 77,500 shares of Common Stock of the Company, of which 50,000 shares
vest quarterly over four years and 27,500 shares vest annually over four years
from the date of grant. Stock options were granted at fair market value on the
date of grant. In the event Mr. Capone's employment is terminated by the Company
for any reason other than "cause", he will be entitled to receive his then
current base compensation for an additional twelve months as well as the
continuation of certain benefits for a twelve month period and certain placement
services. The agreement also contains a twelve month non-compete provision.
In April 1997 the Company appointed Robert A. Koch as Vice President
Product Planning and Management for the Company. Mr. Koch had previously held
the position of Senior Director of Product Marketing. Under the terms of this
appointment, Mr. Koch was granted an option to purchase 20,000 shares of Common
Stock. In addition, Mr. Koch is eligible for a management bonus of up to 40% of
his annual base salary. In September 1997 Mr. Koch was appointed as Vice
President Engineering, Product Planning and Management. In his current position
of Vice President Engineering, Product Planning and Management if Mr. Koch's
employment is terminated for any reason other than "cause", he will be entitled
to receive his then current base compensation for an additional six months.
Steven J. Bielagus' employment as the Company's Vice President of Business
Development has terminated.
The Company has entered into agreements with certain of its Executive
Officers, including Messrs. Capone and Koch, whereby each could be paid
severance payments in the event of a change in control of the Company. Except
for the identity of the executives and the dates, the agreements are identical
in all material respects. Upon the occurrence of certain events and the
fulfillment of certain conditions, each of the executives may receive a
severance benefit equal to one years' salary and all outstanding options held by
the executive will become immediately exercisable in full. Each of the
agreements has a term from the date of the agreement to the earliest to occur of
(a) two years from the date of the agreement; (b) termination of the executive's
employment (i) by death or disability, (ii) for cause, or (iii) by the
executive, unless justified under the terms of the agreement by actions of the
Company subsequent to a change in control; or (c) one year after the date of a
change in control. The agreements include a twelve month non-compete provision
in the event severance payments are made pursuant to the agreements.
6
<PAGE> 10
For purposes of the agreements, a "change in control" is defined as (i) a
person becoming the beneficial owner of 50% or more of the outstanding shares of
Common Stock of the Company; (ii) a merger or consolidation where the Company is
not the survivor or the shareholders of the Company prior to the merger or
consolidation are not the holders of at least a majority of the voting power of
the entity resulting from such merger or consolidation; (iii) sale of all or
substantially all of the assets of the Company; or (iv) changes in the identity
of the Directors of the Company within a two-year period, unless certain
conditions specified in the agreements are met.
INFORMATION ABOUT THE EXECUTIVE OFFICERS
The Executive Officers serve at the discretion of the Board of Directors
and serve until their respective successors are chosen and qualified or until
their earlier resignation or removal.
The current Executive Officers who are not Directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eugene Y. Chang................................. 43 Vice President, Marketing
Kenneth W. Hovaldt.............................. 47 Vice President, Sales for the Americas and
Europe
Robert A. Koch.................................. 45 Vice President, Engineering, and Product
Planning and Management
Jack A. Ritter.................................. 59 Vice President, Asia Pacific Operations
Steven T. Shedd................................. 45 Vice President, Finance, Chief Financial
Officer, Treasurer and Clerk
</TABLE>
Mr. Eugene Y. Chang joined the Company in October 1997 as Vice President,
Marketing from General DataComm Industries, Inc. where he had been serving as
Assistant Vice President for Systems and Architectures since March 1996. From
1995 to 1996 Mr. Chang was Vice President for Strategic Business Development at
Zoom Telephonics. From 1985 to 1995 Mr. Chang served as Vice President of
ISDN/Digital Access Technologies at Microcom, Inc.
Mr. Hovaldt joined the Company in November 1997 as Vice President, Sales
for the Americas and Europe. From September 1996 to October 1997, Mr. Hovaldt
held the position of Vice President, Global Sales for Telco Systems. From 1988
to 1996 Mr. Hovaldt served as Senior Vice President of Marketing, Sales and
Business Services for Fijitsu Network Switching of America, Inc.
Mr. Koch joined the Company in April 1993 as Product Marketing Director and
held that position until April 1997. In April 1997, Mr. Koch became Vice
President of Product Planning for the Company. As of September 1997, Mr. Koch
has held the position of Vice President, Engineering, and Product Planning and
Management.
Mr. Ritter joined the Company in December 1997 as Vice President, Asia
Pacific Operations. Prior to joining Proteon, Mr. Ritter was the Director of
Marketing and Sales for the Southeast Asia Trade Alliance since 1995. From 1993
to 1995 Mr. Ritter was the Director of Independent Company Sales for Fujitsu
Networking Switching of America, Inc.
Mr. Shedd joined the Company in July 1997. Prior to joining Proteon Mr.
Shedd served as the Vice President and Chief Financial Officer of Zoom
Telephonics since 1996. In 1995 Mr. Shedd was the Vice President and Chief
Financial Officer for Versyss, Inc. From 1992 to 1995 Mr. Shedd served as Vice
President and Chief Financial Officer of TSI Corporation.
7
<PAGE> 11
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors determines the
remuneration and benefits for senior executives, reviews executive development
and succession, and acts in an advisory capacity to the Board of Directors as a
whole with regard to general compensation issues. The Compensation Committee is
comprised solely of outside directors.
The Compensation Committee's policies in compensating the Chief Executive
Officer and senior management are based on several principles: (i) the payment
of competitive salaries so as to attract and retain high quality personnel; (ii)
the providing of a cash bonus program which is structured to reward the
successful achievements of both overall Company financial goals, as measured by
profitability, market share and cost management, and technical and market
development goals; and (iii) the granting of stock options based upon the
competitive environment for recruiting and retaining personnel and designed to
strongly align management's interests with shareholders' interests so as to
motivate employees to pursue overall Company success. The Committee continues to
manage the total compensation program so that it is straightforward and easily
communicated to and understood by employees and shareholders. The compensation
program is structured in such a manner that the achievement of goals and
performance can be understood and measured. Further, it is the Company's
philosophy that executives participate in the general benefit programs offered
to all employees.
Competitive base salaries are established through use of published industry
surveys and targeted peer company surveys examining, depending on the particular
position, competitive companies in the data communications market as well as
other technically oriented companies in the relevant geographic area which may
constitute competition to the Company in hiring or retaining strong performers.
Compensation surveys used are The Survey Group Report and the Radford Associates
Benchmark Salary Survey. The Compensation Committee, utilizing the survey data,
and applying the members' significant experience in hiring and managing in a
technical environment, seeks to set base salaries by taking into account, for
both new and existing management, not only competitive factors, but the breadth
of experience and recent individual performances of current or future employees.
It is not the Company's intent to establish a set percentile rank for its
compensation in general or for specific positions, but rather to establish
levels dictated on a case by case basis as recommended by management and
determined by the Committee in the exercise of the members' best collective
judgment.
The process followed by the Compensation Committee in determining executive
bonus levels begins with the Board of Directors' review of management's annual
strategic and financial plan. A review of the performance of the Company against
the agreed upon overall corporate financial goals, along with recommendations,
is presented to the Compensation Committee quarterly by the Chief Executive
Officer. The Committee reviews and considers the recommendations and then,
acting pursuant to its authorization from the Board of Directors, establishes
the bonus for the Chief Executive Officer and other executives.
The Company's Management Incentive Program generally allows for four
payments each year. Actual payments, some of which are subject to certain
guaranteed minimums, are otherwise based upon achievement of corporate goals.
The terms of the plan are geared to recognize several key aspects of the
Company's business environment. Payments are currently capped at a maximum of
55% of base salary for the Chief Executive Officer, and generally lower
percentages of base salary for other executive officers. All participants in the
Company's Management Incentive Program receive bonuses based on objectively
measured parameters. These goals include: revenue goals; unit product shipment
goals; profitability goals and balance sheet goals. The extent to which these
goals are achieved, the relative position of the individual in the Company and
the individual's gross salary for each quarter are used to determine the
individual's quarterly bonus. Performance factors are assigned to each goal
based on the Company's accomplishment toward that goal in the quarter. If a
performance factor of less than 75% is determined for a particular goal, that
goal does not contribute to the
8
<PAGE> 12
calculation of bonus. Similarly, the performance factor is capped at 125% of any
goal. The Compensation Committee believes strongly that senior management's
compensation program should include stock option grants for a number of reasons,
including competitive practices, motivation for continued employment, and
alignment of management's interests with those of shareholders. In granting
options, the Compensation Committee in 1997 considered, among other factors, the
quality of performance, the competitive market for the employee, the aggregate
sizes of individual grants and the number of options outstanding as a whole.
Option grants have been awarded to all senior management personnel upon hire and
periodically thereafter based upon specific individual and/or corporate
achievements.
In 1997, stock option grants were made to certain of the executive officers
as an incentive to motivate them in their efforts to continue the strategic
repositioning of the Company. These options were issued with exercise prices
equal to the fair market value on the date of the grant and generally vest
annually over four years depending on the grant. All options were granted under
the 1991 Restated Stock Option Plan (the "Plan").
In considering compensation of the Company's executives, one of the factors
that the Committee takes into account is the anticipated tax treatment of
various components of compensation. In 1994, the Company's 1991 Stock Option
Plan was amended to preserve the deductibility of compensation expense under
Section 162(m) of the Internal Revenue Code. Section 162(m) eliminates the
deductibility by the Company of certain executive compensation in excess of one
million per year per person. The amendment provided for a limit of 750,000
shares of common stock with respect to which stock options may be granted per
employee per year. The Committee has no present intentions of qualifying any
other compensation paid to its executive officers for deductibility under
Section 162(m), but may consider doing so in the future.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
In June 1994, the Company entered into an employment agreement with Daniel
J. Capone, Jr. appointing him President and Chief Executive Officer. Prior to
that date, Mr. Capone was Vice President of the Company's LAN Products Division.
Under Mr. Capone's Employment Agreement he received a base salary of $240,000 in
1997. In addition, Mr. Capone was eligible for a bonus of up to 55% of base
salary based upon attainment of certain quantifiable goals. These goals which
include: revenue goals; unit product shipment goals; profitability goals and
balance sheet goals (Management Incentive Program) were jointly developed and
agreed to between Mr. Capone and the Company's Board of Directors. Mr. Capone
received a bonus of $43,899 in accordance with the Management Incentive Program.
Mr. Capone was also granted options in 1997 to purchase a total of 77,500 shares
of Common Stock of the Company of which 50,000 shares vest quarterly over four
years and 27,500 shares vest annually over four years from the date of grant.
The stock options were granted at fair market value on the date of grant.
Mr. Howard C. Salwen
Dr. Robert M. Glorioso
9
<PAGE> 13
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE DECEMBER 31, 1992
AMONG PROTEON, INC., NASDAQ STOCK MARKET
AND H & Q COMMUNICATIONS SECTOR INDEX
The following line graph compares the total return on investment, assuming
reinvestment of dividends, of the Company since December 31, 1992, with that of
the NASDAQ Stock Market (U.S. Companies) as measured by the Center for Research
in Securities Prices (CRSP) and a sub index of Hambrecht & Quist's Technology
Index entitled the Communications Sector. The companies in Hambrecht & Quist's
Communications Sector Index are: 3Com, Bay Networks, Cisco, Fore Systems, FTP
Software, Gandalf, Madge NV, Network General, Optical Data Systems, Shiva Corp.,
Standard Microsystems, Xircom.
[PROTEON LINE GRAPH OMITTED]
<TABLE>
<CAPTION>
H&Q
H&Q NASDAQ STOCK COMMUNICATIONS
DATES PROTEON TECHNOLOGY MARKET-U.S. SECTOR
----- ------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Dec-92 9.13 396.79 217.960 353.42
Jan-93 10.75 429.85 224.165 380.92
Feb-93 7.50 415.17 215.802 363.43
Mar-93 6.38 421.59 222.048 375.53
Apr-93 4.88 396.59 212.571 376.67
May-93 5.75 437.96 225.270 444.34
Jun-93 5.25 432.34 226.312 456.09
Jul-93 4.13 407.52 226.579 436.93
Aug-93 5.50 433.57 238.290 453.38
Sep-93 5.63 441.52 245.386 456.60
Oct-93 5.13 449.08 250.902 468.09
Nov-93 6.88 455.69 243.423 479.04
Dec-93 5.88 465.88 250.210 542.57
Jan-94 6.38 494.64 257.805 591.16
Feb-94 6.63 510.98 255.398 586.14
Mar-94 5.75 483.05 239.692 534.97
Apr-94 6.00 470.62 236.582 518.51
May-94 5.50 472.00 237.160 452.79
Jun-94 3.13 441.91 228.487 407.52
Jul-94 2.94 458.40 233.173 422.88
Aug-94 3.50 505.56 248.039 468.38
Sep-94 5.63 503.92 247.404 484.11
Oct-94 6.38 550.09 252.267 523.94
Nov-94 5.88 545.37 243.898 544.71
Dec-94 5.25 559.63 244.582 602.12
Jan-95 7.38 551.45 245.953 571.81
Feb-95 6.38 599.25 258.960 593.63
Mar-95 6.25 626.68 266.639 625.98
Apr-95 6.50 673.62 275.035 635.23
May-95 6.25 697.75 282.131 656.70
Jun-95 5.88 781.75 304.996 750.01
Jul-95 6.50 853.13 327.415 827.22
Aug-95 6.88 862.91 334.050 869.61
Sep-95 9.38 883.50 341.732 914.70
Oct-95 7.25 895.90 339.774 941.14
Nov-95 7.63 884.90 347.752 102.74
Dec-95 6.63 836.78 345.901 959.56
Jan-96 6.38 849.15 347.606 975.48
Feb-96 5.88 891.69 360.837 1060.16
Mar-96 5.48 852.89 362.034 979.71
Apr-96 5.75 970.78 392.070 1106.39
May-96 5.75 985.41 410.072 l141.88
Jun-96 3.88 913.62 391.587 1100.97
Jul-96 3.00 819.73 356.709 940.73
Aug-96 2.75 869.35 376.696 1028.05
Sep-96 3.00 969.86 405.510 1119.26
Oct-96 2.19 955.98 401.031 1091.31
Nov-96 3.98 1068.70 425.822 1152.64
Dec-96 2.50 1040.00 425.440 1100.91
Jan-97 2.44 1151.37 455.675 1153.51
Feb-97 2.31 1057.35 430.483 956.99
Mar-97 1.50 991.30 402.381 861.58
Apr-97 1.94 1027.99 414.961 875.59
May-97 2.50 1182.70 462.008 1117.34
Jun-97 1.84 1193.17 476.138 1100.37
Jul-97 1.84 1385.12 526.396 1243.69
Aug-97 1.69 1389.07 525.593 1183.66
Sep-97 2.06 1446.03 556.679 1249.07
Oct-97 1.94 1291.56 527.744 1152.21
Nov-97 1.63 1278.10 530.354 1112.95
Dec-97 1.16 1219.28 522.072 1042.24
Dec-92 100.00 100.00 100.00 100.00
Jan-93 117.81 108.33 102.85 107.78
Feb-93 82.19 104.63 99.01 102.83
Mar-93 69.86 106.25 101.88 106.26
Apr-93 53.42 99.95 97.53 106.58
May-93 63.01 110.38 103.35 125.73
Jun-93 57.53 108.96 103.83 129.05
Jul-93 45.21 102.70 103.95 123.63
Aug-93 60.27 109.27 109.33 128.29
Sep-93 61.64 111.27 112.58 129.19
Oct-93 56.16 113.18 115.11 132.45
Nov-93 75.34 114.84 111.68 135.54
Dec-93 64.38 117.41 114.80 153.52
Jan-94 69.86 124.66 118.28 167.27
Feb-94 72.60 128.78 117.18 165.85
Mar-94 63.01 121.74 109.97 151.37
Apr-94 65.75 118.61 108.54 146.71
May-94 60.27 118.95 108.81 128.12
Jun-94 34.25 111.37 104.83 115.31
Ju1-94 32.19 115.53 106.98 119.65
Aug-94 38.36 127.41 113.80 132.53
Sep-94 61.64 127.00 113.51 136.98
Oct-94 69.86 138.64 115.74 148.25
Nov-94 64.38 137.45 111.90 154.12
Dec-94 57.53 141.04 112.21 170.37
Jan-95 80.82 138.98 112.84 161.79
Feb-95 69.86 151.02 118.81 167.97
Mar-95 68.49 157.94 122.33 177.12
Apr-95 71.23 169.77 126.19 179.74
May-95 68.49 175.85 129.44 185.81
Jun-95 64.38 197.02 139.93 212.21
Jul-95 71.23 215.01 150.22 234.06
Aug-95 75.34 217.47 153.26 246.06
Sep-95 102.74 222.66 156.79 258.81
Oct-95 79.45 225.79 155.89 266.30
Nov-95 83.56 223.01 159.55 289.10
Dec-95 72.60 210.89 158.70 271.51
Jan-96 69.86 214.00 159.48 276.01
Feb-96 64.38 224.73 165.55 299.97
Mar-96 60.10 214.95 166.10 277.21
Apr-96 63.01 244.66 179.88 313.05
May-96 63.01 248.35 188.14 323.10
Jun-96 42.47 230.25 179.66 311.52
Jul-96 32.88 206.59 163.66 266.18
Aug-96 30.14 219.10 172.83 290.89
Sep-96 32.88 244.43 186.05 316.69
Oct-96 23.97 240.93 183.99 308.79
Nov-96 43.66 269.34 195.37 326.14
Dec-96 27.40 262.10 195.19 311.50
Jan-97 26.71 290.17 209.06 326.38
Feb-97 25.34 266.48 197.51 270.78
Mar-97 16.44 249.83 184.61 243.78
Apr-97 21.23 259.08 190.38 247.75
May-97 27.40 298.07 211.97 316.15
Jun-97 20.21 300.71 218.45 311.35
Jul-97 20.21 349.08 241.51 351.90
Aug-97 18.49 350.08 241.14 334.92
Sep-97 22.60 364.43 255.40 353.43
Oct-97 21.23 325.50 242.13 326.02
Nov-97 17.81 322.11 243.33 314.91
Dec-97 12.67 307.29 239.53 294.90
</TABLE>
COMMITTEES OF BOARD OF DIRECTORS AND MEETING ATTENDANCE
Howard C. Salwen and David Clark currently serve on the Audit Committee.
The Audit Committee reviews the engagement of the Company's independent
accountants, reviews the annual financial statements, considers matters relating
to accounting policy and internal controls, and reviews the scope of the annual
audits.
Howard C. Salwen and Robert M. Glorioso comprised the Compensation
Committee during fiscal year 1997. The Compensation Committee reviews, approves
and makes recommendations on the Company's compensation policies, practices and
procedures to ensure that legal and fiduciary responsibilities of the Board of
Directors are met and that such policies, practices and procedures contribute to
the success of the Company. The Compensation Committee also administers the
Company's Stock Option Plans and Employee Stock Purchase Plan.
10
<PAGE> 14
The Company does not have a standing Nominating Committee.
During the fiscal year ended December 31, 1997, there were nine meetings of
the Board of Directors, one Audit Committee meeting, and nine meetings of the
Compensation Committee. In addition, from time to time, the members of the Board
of Directors and its committees act by unanimous written consent pursuant to
Massachusetts Law.
PROPOSAL 1: ELECTION OF DIRECTORS
At the Annual Meeting, four Directors will be elected until the next Annual
Meeting of Shareholders and until their successors have been elected and
qualified or until their earlier resignation or removal.
The enclosed Proxy, unless authority to vote is withheld, will be voted for
the election of the nominees named herein as Directors of the Company. The Board
of Directors has no reason to believe that any nominee will become unavailable.
However, in the event any one or more of such nominees shall unexpectedly become
unavailable for election, votes will be cast, pursuant to authority granted by
the enclosed Proxy, for such person or persons as may be designated by the Board
of Directors.
The names of the nominees and certain information about them are set forth
below:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND AGE THE PAST FIVE YEARS; OTHER DIRECTORSHIPS
------------ ----------------------------------------
<S> <C>
Daniel J. Capone, Jr. (age 48)............ Mr. Capone joined the Company in 1987 and is currently
President and Chief Executive Officer. Prior to becoming
President in June 1994, Mr. Capone was Vice President
and General Manager of the LAN Products Division. He has
also held Vice President level positions in
Manufacturing, Strategic Relations and Sales. Mr. Capone
was elected to the Proteon Board in 1994. Prior to
joining Proteon, Mr. Capone was Vice President, Sales
and Marketing for Charles River Data Systems in
Framingham, Massachusetts.
Howard C. Salwen (age 61)................. Mr. Salwen founded the Company as a partnership in 1972
and served as its President until 1984. Since the
Company's incorporation in 1974 he has been Chairman of
the Company's Board of Directors. He served as Chief
Technical Officer from February 1984 to April 1991 and
as Clerk and Treasurer from 1974 to April 1991. Mr.
Salwen currently sits on the Board of Directors of
Marathon Technologies Corp., a company which designs and
manufactures fault-tolerant computers. Mr. Salwen is
also on the Board of Directors of the Mass
Telecommunications Council and an Overseer of the
DeCordova Museum and the Computer Museum.
Dr. David Clark (age 54).................. Dr. Clark has been a member of the Company's Board of
Directors since 1984. He has been employed since 1973 at
Massachusetts Institute of Technology Laboratory for
Computer Science, where he is a Senior Research
Scientist. Dr. Clark is a member of the Board of
Directors of FTP Software, Inc., a company that develops
software for network access host systems.
</TABLE>
11
<PAGE> 15
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND AGE THE PAST FIVE YEARS; OTHER DIRECTORSHIPS
------------ ----------------------------------------
<S> <C>
Dr. Robert M. Glorioso (age 58)........... Dr. Glorioso joined the Board in March 1997. Since April
1993, Dr. Glorioso has held the position of President,
CEO and is a board member of Marathon Technologies
Corp., a company which designs and manufactures
fault-tolerant computers. He previously held several
senior executive positions while a corporate Vice
President at Digital Equipment Corporation including
Vice President of Information Systems Business and Vice
President of Executive Consulting from January 1976 to
December 1992.
</TABLE>
No nominee for Director or Executive Officer has any family relationship
with any other nominee or with any other Executive Officer.
A plurality of the votes cast at the Meeting is required to elect each
nominee as a Director.
THE BOARD OF DIRECTORS RECOMMENDS ELECTION OF THE NOMINEES AS DIRECTORS.
PROPOSAL 2: AMENDMENT OF THE 1991 RESTATED STOCK OPTION PLAN TO
INCREASE BY 500,000 THE NUMBER OF SHARES AVAILABLE FOR ISSUANCE
UPON THE EXERCISE OF OPTIONS GRANTED UNDER THE PLAN.
The Company's Board of Directors and the stockholders approved Proteon's
Restated Stock Option Plan (the "Plan") in 1991. A total of 349,200 shares of
Common Stock are currently available for the grant of options under the Plan. By
the terms of the Plan, the Plan may be amended by the Board of Directors or the
Compensation Committee of the Board of Directors (the "Compensation Committee"),
provided that any amendment approved by the Board of Directors or the
Compensation Committee which is of a scope that requires stockholder approval in
order to ensure favorable federal income tax treatment for any incentive stock
options under Code Section 422, is subject to obtaining such stockholder
approval. On March 25, 1998, the Board of Directors voted to approve an
amendment to the Plan to increase by 500,000 shares the aggregate number of
shares of Common Stock for which stock options may be granted under the Plan.
This amendment is being submitted for stockholder approval at the Meeting to
ensure continued qualification of the Plan under the federal income tax rules
relating to incentive stock options. The Board believes that the increase is
advisable to give the Company the flexibility needed to attract, retain and
motivate employees, directors and consultants. All employees and consultants of
the Company and the members of the Board of Directors are eligible to
participate in the Plan.
MATERIAL FEATURES OF THE PLAN
The purpose of the Plan is to attract, retain and motivate employees,
directors and consultants through the issuance of stock options and to encourage
ownership of shares of Common Stock by employees, directors and consultants of
the Company. The Plan is administered by the Compensation Committee. Subject to
the provisions of the Plan, the Compensation Committee determines the persons to
whom options will be granted, the number of shares to be covered by each option
and the terms and conditions upon which an option may be granted, and has the
authority to administer the provisions of the Plan. All employees, directors and
consultants of the Company and its affiliates (approximately 150 people) are
eligible to participate in the Plan.
Options granted under the Plan may be either (i) options intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or (ii) non-qualified stock options.
Incentive stock options may be granted under the Plan to employees of the
Company and its
12
<PAGE> 16
affiliates. Non-qualified stock options may be granted to consultants, directors
and employees of the Company and its affiliates. The Plan provides for an
initial grant upon election to the Board of Directors to each non-employee
director of an option, which vests in four equal annual installments, to
purchase 5,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on such grant date.
The aggregate fair market value (determined at the time of grant) of shares
issuable pursuant to incentive stock options which become exercisable in any
calendar year under any incentive stock option plan of the Company may not
exceed $100,000. Incentive stock options granted under the Plan may not be
granted at a price less than the fair market value of the Common Stock on the
date of grant, or 110% of fair market value in the case of options granted to an
employee holding 10% or more of the voting stock of the Company. Non-qualified
stock options granted under the Plan may not be granted at an exercise price
less than 50% of the fair market value of the Common Stock on the date of grant.
Incentive stock options granted under the Plan expire not more than ten years
from the date of grant, or not more than five years from the date of grant in
the case of incentive stock options granted to an employee holding 10% or more
of the voting stock of the Company. An option granted under the Plan is
exercisable, during the option holder's lifetime, only by the option holder and
is not transferable by him or her except by will or by the laws of descent and
distribution.
An incentive stock option granted under the Plan may, at the Compensation
Committee's discretion, be exercised after the termination of the optionholder's
employment with the Company (other than by reason of death, disability or
termination for cause as defined in the Plan) to the extent exercisable on the
date of such termination, at any time prior to the earlier of the option's
specified expiration date or 90 days after such termination. In granting any
non-qualified stock option, the Compensation Committee may specify that such
non-qualified stock option shall be subject to such termination or cancellation
provisions as the Compensation Committee shall determine. In the event of the
optionholder's death or disability, both incentive stock options and
non-qualified stock options generally may be exercised, to the extent
exercisable on the date of death or disability (plus a prorata portion of the
option if the option vests periodically), by the optionholder or the
optionholder's survivors at any time prior to the earlier of the option's
specified expiration date or one year from the date of the optionholder's death
or disability. Generally, in the event of the optionholder's termination for
cause, all outstanding and unexercised options are forfeited.
If the shares of Common Stock shall be subdivided or combined into a
greater or smaller number of shares or if the Company shall issue any shares of
Common Stock as a stock dividend on its outstanding Common Stock, the number of
shares of Common Stock deliverable upon the exercise of an option granted under
the Plan shall be appropriately increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend. If the Company is to be
consolidated with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"), the
Compensation Committee or the Board of Directors of any entity assuming the
obligations of the Company under the Plan (the "Successor Board"), shall, as to
outstanding options under the Plan either (i) make appropriate provision for the
continuation of such options by substituting on an equitable basis for the
shares then subject to such options the consideration payable with respect to
the outstanding shares of Common Stock in connection with the Acquisition or
securities of the successor or acquiring entity; or (ii) upon written notice to
the participants, provide that all options must be exercised within a specified
number of days of the date of such notice, at the end of which period the
options shall terminate; or (iii) terminate all options in exchange for a cash
payment equal to the excess of the fair market value of the shares subject to
each such option over the exercise price thereof. In the event of a
recapitalization or reorganization of the Company (other than an Acquisition)
pursuant to which securities of the Company or of another corporation are issued
with respect to the outstanding shares of Common Stock, an optionholder upon
exercising an option under the Plan, shall be entitled to receive for the
13
<PAGE> 17
purchase price paid upon such exercise the securities he or she would have
received if he or she had exercised such option prior to such recapitalization
or reorganization.
The Plan may be amended by the stockholders of the Company. The Plan may
also be amended by the Board of Directors or the Compensation Committee,
provided that any amendment approved by the Board of Directors or the
Compensation Committee which is of a scope that requires stockholder approval in
order to ensure favorable federal income tax treatment for any incentive stock
options under Code Section 422, is subject to obtaining such stockholder
approval.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of certain U.S. federal income tax
consequences of the issuance and exercise of options under the Plan:
Incentive Stock Options. An incentive stock option does not result in
taxable income to the optionee or deduction to the Company at the time it
is granted or exercised, provided that no disposition is made by the
optionee of the shares acquired pursuant to the option within two years
after the date of grant of the option nor within one year after the date of
issuance of shares to him (the "ISO holding period"). However, the
difference between the fair market value of the shares on the date of
exercise and the option price will be an item of tax preference includible
in "alternative minimum taxable income." Upon disposition of the shares
after the expiration of the ISO holding period, the optionee will generally
recognize long term capital gain or loss based on the difference between
the disposition proceeds and the option price paid for the shares. Such
gain will be eligible for the 20 percent maximum rate introduced by the
Taxpayers Relief Act of 1997 if the shares have been held for more than 18
months after option exercise, otherwise such gain will be eligible for the
28% maximum rate. If the shares are disposed of prior to the expiration of
the ISO holding period, the optionee generally will recognize taxable
compensation, and the Company will have a corresponding deduction, in the
year of the disposition, equal to the excess of the fair market value of
the shares on the date of exercise of the option over the option price. Any
additional gain realized on the disposition will normally constitute
capital gain. If the amount realized upon such a disqualifying disposition
is less than fair market value of the shares on the date of exercise, the
amount of compensation income will be limited to the excess of the amount
realized over the optionee's adjusted basis in the shares.
Non-Qualified Stock Options. The grant of a non-qualified option will
not result in taxable income to the optionee or deduction to the Company at
the time of grant. The optionee will recognize taxable compensation, and
the Company will have a corresponding deduction, at the time of exercise in
the amount of the excess of the then fair market value of the shares
acquired over the option price. Upon disposition of the shares, the
optionee will generally realize capital gain or loss, and his basis for
determining gain or loss will be the sum of the option price paid for the
shares plus the amount of compensation income recognized on exercise of the
option.
The affirmative vote of a majority of the shares present or represented and
voting at the Meeting is required to approve the increase in the aggregate
number of shares of Common Stock available under the Plan.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE ADOPTION OF AN AMENDMENT
TO THE PLAN TO INCREASE BY 500,000 SHARES THE AGGREGATE NUMBER OF SHARES FOR
WHICH STOCK OPTIONS MAY BE GRANTED UNDER THE PLAN, AND PROXIES SOLICITED BY THE
BOARD WILL BE VOTED IN FAVOR OF SUCH AMENDMENT UNLESS A STOCKHOLDER HAS
INDICATED OTHERWISE ON THE PROXY.
14
<PAGE> 18
PROPOSAL 3: TO APPROVE AN AMENDMENT TO THE COMPANY'S RESTATED
ARTICLES OF ORGANIZATION TO CHANGE THE NAME OF THE COMPANY FROM
PROTEON, INC., TO OPENROUTE NETWORKS, INC.
At the Meeting, stockholders will be asked to vote upon a proposal to
approve an amendment to the Company's Restated Articles of Organization (the
"Charter") to change the formal name of the Company from Proteon, Inc. to
OpenROUTE Networks, Inc., (the "Name Change Amendment"). At a meeting on March
25, 1998 the Company's Board of Directors unanimously approved the proposed
amendment to the Charter.
The Company was founded in 1972 as a consultancy. The Company was
incorporated in Massachusetts in January 1974 as Proteon Associates, Inc. The
Company changed its name to Proteon, Inc. in July 1983. Since its founding, the
Company has evolved from a consultancy, to a manufacturer of Token Ring adapter
cards and hubs, to a designer and manufacturer of enterprise routing solutions
for Token Ring and Ethernet network topologies.
On January 9, 1997, the Company announced the formation of a subsidiary
named OpenROUTE Networks, Inc. This subsidiary was formed in keeping with the
Company's new focus on the rapidly growing market for Internet and Intranet
products. The new subsidiary was formed to bring together the Company's
resources on its GT family of high-performance Internet Access routers and the
licensing of its OpenROUTE internetworking software suite. The name OpenROUTE
Networks is intended to reflect the Company's specific emphasis on the Internet
Access market. "OpenROUTE" also better reflects the "open" and interoperable
nature of the Internet. The Company first used the name "OpenROUTE Networks,
Inc." in April 1995 in conjunction with the formation of the OpenROUTE Business
Unit. This Business Unit has been involved in licensing "OpenROUTE" software for
a number of years, and continues to do so. The Company intends to move
aggressively forward with the OpenROUTE Networks, Inc. name both domestically
and internationally. A new logo, which incorporates the OpenROUTE Networks
subsidiary, has already been created and used in a wide range of pro-active
marketing activities since January 9, 1997.
Accordingly, the change of name is proposed to adopt a more universally
appropriate name which the Board of Directors believes will more accurately
depict the corporate image of the Company and the nature of its product lines
and current business endeavors. The Board of Directors believes that the name
"Proteon" no longer accurately reflects the nature of the Company's current
business. The Company believes that the proposed name change to OpenROUTE
Networks, Inc. will create a stronger association between Proteon and the
OpenROUTE Networks product lines in the minds of the investment community,
potential customers and others. The name "OpenROUTE Networks, Inc." is a
registered trademark of Proteon, Inc. The Company intends to continue to
manufacture certain Token Ring network adapter cards and hubs with the Proteon
nameplate. However, the Company will no longer be known as "Proteon, Inc.".
If there are not sufficient votes to approve the Name Change Amendment,
then the proposal could not be approved unless the Meeting were adjourned to
permit further solicitation of proxies from Proteon's stockholders. Proxies
being solicited by the Board of Directors grant the discretionary authority to
vote for any such adjournment. If it is necessary to adjourn the Meeting, no
notice of the time or place of the adjourned Meeting is required to be given to
Proteon's stockholders other than the announcement of such time and place at the
Meeting. The affirmative vote of the holders of at least a majority of the
Common Stock, present or represented, and voting at the Meeting is required to
approve such adjournment, whether or not a quorum is present at the Meeting. An
adjournment of the Meeting may be necessary because the limited time between the
mailing of the proxy statement and the Meeting could result in the lack of a
quorum at the Meeting. In addition, the vote of a majority of the outstanding
Common Stock is required to approve the Name Change Amendment, not merely the
vote of a majority of the shares of Common Stock present and voting at the
Meeting. To obtain the requisite vote, it may be necessary to adjourn the
Meeting to solicit additional proxies.
15
<PAGE> 19
If the proposed Name Change Amendment is authorized by the stockholders at
the Meeting, the change will become effective when articles of amendment are
filed with the Secretary of The Commonwealth of Massachusetts, which would be
expected to occur as soon as practicable following the Meeting. Stock
certificates representing shares of Proteon's Common Stock may be retained by
the stockholders of Proteon and need not be exchanged for certificates
containing Proteon's new name. Approval of the proposed amendment requires the
affirmative vote of a majority of the shares outstanding and entitled to vote at
the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE PROPOSED AMENDMENT TO THE
COMPANY'S RESTATED ARTICLES OF ORGANIZATION TO CHANGE THE COMPANY'S NAME FROM
PROTEON, INC. TO OPENROUTE NETWORKS, INC., AND PROXIES WILL BE VOTED IN FAVOR OF
SUCH AMENDMENT UNLESS A STOCKHOLDER HAS INDICATED OTHERWISE ON THE PROXY.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., independent accountants, audited the Company's
financial statements for the fiscal year ended December 31, 1997. The Company
has selected Coopers & Lybrand L.L.P. to audit the Company's financial
statements for the fiscal year ending December 31, 1998. The Company expects
that representatives of Coopers & Lybrand L.L.P. will be present at the Meeting,
with the opportunity to make a statement if they so desire, and will be
available to respond to appropriate questions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and Officers, and persons who own more than ten percent of the
Company's Common Stock, to file with the Securities and Exchange Commission (the
"SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, Directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of reports furnished
to the Company and written representations that no other reports were required
during the 1997 fiscal year, all Section 16(a) filing requirements were
satisfied.
SHAREHOLDER PROPOSALS AND OTHER MATTERS
In order to be considered for inclusion in the Proxy Statement distributed
to shareholders prior to the Annual Meeting in 1999, a Shareholder proposal must
be received by the Company no later than Monday, December 28, 1998. Proposals
should be delivered in writing to Mr. Steven T. Shedd, Vice President, Finance,
Chief Financial Officer, Treasurer and Clerk, Proteon, Inc., 9 Technology Drive,
Westborough, Massachusetts 01581.
The Board of Directors does not know of any other matters which will be
brought before the Meeting. If other business is properly presented for
consideration at the Meeting including, among other things, consideration of a
motion to adjourn the Meeting (including for purposes of soliciting additional
proxies) to another time and/or place, the persons named in the enclosed form of
proxy and acting thereunder will have discretion to vote such matters in
accordance with their best judgement.
16
<PAGE> 20
In order that your shares may be represented, if you do not plan to attend
the Meeting, and in order to assure the required quorum, please fill out, sign,
date and return your Proxy promptly.
By Order of the Board of Directors,
/s/ Steven T. Shedd
STEVEN T. SHEDD
Clerk
Dated: April 27, 1998
17
<PAGE> 21
1062-PS-98
<PAGE> 22
DETACH HERE
PROXY
PROTEON, INC.
THIS PROXY IS BEING SOLICITED BY PROTEON, INC.'S BOARD OF DIRECTORS
The undersigned, revoking previous proxies relating to these shares, hereby
acknowledges receipt of the Notice and Proxy Statement dated April 20, 1998, in
connection with the Annual Meeting of Shareholders of Proteon, Inc. at
10:00 a.m., local time, on Wednesday, June 10, 1998 at the offices of Boston
EquiServe, Blue Hills Office Park, 150 Royall Street, Canton, Massachusetts, and
hereby appoints Steven T. Shedd and Daniel J. Capone, Jr., and each of them
(with full power to act alone), the attorneys and proxies of the undersigned,
with power of substitution to each, to vote at the 1998 Annual Meeting of
Shareholders, and at any adjournment or adjournments thereof, with all the
powers that undersigned would have if personally present. Without limiting the
general authorization hereby given, said proxies are, and each of them is,
instructed to vote or act as follows on the proposals as set forth in said
Proxy.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF DIRECTORS AND
FOR PROPOSALS 2 AND 3.
If you wish to vote in accordance with the Board of Directors' recommendations,
just sign on the reverse side. You need not mark any boxes.
- ------------- -------------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
- ------------- -------------
<PAGE> 23
DETACH HERE
<TABLE>
<S> <C>
[X] Please mark
votes as in
the example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
1. Election of four Directors to hold office until the next
Annual Meeting of Shareholders and until their successors are
chosen and qualified.
FOR AGAINST ABSTAIN
Nominees: Daniel J. Capone, Jr., Howard C. Salwen, 2. To consider and act upon an amendment [ ] [ ] [ ]
Dr. David Clark, Dr. Robert M. Glorioso to the Company's 1991 Restated Stock
Option Plan which would increase by
FOR WITHHELD 500,000 the number of shares received
[ ] [ ] for issuance upon exercise of options
granted under the Plan.
FOR AGAINST ABSTAIN
[ ] ________________________________________ 3. To consider and act upon an amendment [ ] [ ] [ ]
For all nominees except as noted above of the Company's Restated Articles of
Organization to change the name of the
Company from Proteon, Inc. to OpenROUTE
Networks, Inc.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO TRANSACT SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY
POSTPONEMENTS OR ADJOURNMENTS THEREOF, INCLUDING ANY MOTION TO
ADJOURN THE MEETING TO A LATER DATE TO PERMIT FURTHER
SOLICITATION OF PROXIES.
Please sign exactly as name(s) appear(s) hereon. Joint owners
should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as
such.
Signature: ______________________________ Date: _____________ Signature: ______________________________ Date: _____________
</TABLE>
<PAGE> 24
PROTEON, INC.
1991 RESTATED STOCK OPTION PLAN
1. PURPOSE. This 1991 Restated Stock Option Plan (the "Plan") is
intended to provide incentives to the officers, other employees, consultants and
Directors of Proteon, Inc. (the "Company") and any present or future
subsidiaries by providing them with opportunities to purchase stock in the
Company pursuant to options granted hereunder ("Options"). As used herein the
term "subsidiary" has the meaning assigned to it in Section 424 of the United
States Internal Revenue Code of 1986, as amended (the "Code"), "Incentive Stock
Option" has the meaning assigned to it in Section 422 of the Code and
"Non-Qualified Option" means an Option which is not intended to qualify as an
Incentive Stock Option.
The Plan shall be treated as an amendment to and restatement of
the Company's 1984 Employee Stock Option Plan. As amended and restated the Plan
shall apply to options issued by the Company on or after the date of such
amendment of the Plan, but the amendments to the Plan shall apply to any option
issued prior to such amendments if and only to the extent that the agreement
pursuant to which such option was issued is amended in writing to adopt the
amended terms of the Plan.
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by
the Board of Directors of the Company (the "Board"), except to the extent the
Board of Directors delegates its authority to a committee of the Board of
Directors. The Board may appoint a committee (the "Committee") of two or more of
its members to administer this Plan. All references in this Plan to the
Administrator shall mean the Board, unless it has delegated its authority to the
Committee, in which event Administrator shall mean the Committee. With respect
to the grants of Options to Directors, officers and beneficial owners of more
than 10% of a class of equity security registered pursuant to the Securities
Exchange Act of 1934, as amended (the "1934 Act"), the Plan shall be
administered in such manner as will ensure compliance with Rule 16b-3,
promulgated pursuant to Section 16 of the 1934 Act, (or any successor rule)
("Rule 16b-3").
Subject to the terms of the Plan, the Administrator, if so
appointed, shall have authority to determine the persons to whom Options shall
be granted, the number of shares covered by each Option, the price per share
specified in each Option, the time or times at which Options shall be granted
and the terms and provisions of the instruments by which Options shall be
<PAGE> 25
evidenced, but the foregoing provisions shall not give the Administrator
authority to alter the terms and provisions of Director Options as provided in
Paragraph 3B below. The Administrator is authorized to interpret the provisions
of the Plan or of any Option or Option agreement and to make all rules and
determinations which it deems necessary or advisable for the administration of
the Plan, provided, however, that all such interpretations, rules and
determinations shall be made and prescribed in the context of preserving the tax
status under Code Section 422 of those Options which are designated as Incentive
Stock Options. Subject to the foregoing, the interpretation and construction by
the Administrator of any provisions of the Plan or of any Option granted under
it shall be final. No member of the Board or the Committee shall be liable for
any action or determination made in good faith with respect to the Plan or any
Option granted under it.
3. ELIGIBLE PARTICIPANTS AND DIRECTOR OPTIONS.
A. ELIGIBLE EMPLOYEES AND CONSULTANTS. Subject to the
limitations contained in Paragraph 2, Options may be granted to any officer,
other employee or consultant of the Company or any subsidiary. Incentive Stock
Options may only be granted to employees. Non-Qualified Options may be granted
to officers, other employees and consultants. Those Directors of the Company who
are neither employees nor consultants may not be granted Options under the Plan,
except as provided in Subparagraph B below. Granting of any Option to an
employee or consultant shall neither entitle him to, nor disqualify him from,
participation in any other grant of options.
B. ELIGIBLE DIRECTORS AND DIRECTOR OPTIONS. Each Director of
the Company who is elected as a Director of the Company by the stockholders of
the Company or by the Board of Directors on or after May 14, 1992, and who has
not previously been a Director of the Company, provided such Director is not an
employee or consultant of the Company at such time of election, shall be granted
as of the date of such election (the "Director Grant Date"), an option to
purchase five thousand (5,000) shares of Common Stock (as defined below) (a
"Director Option"), which number of shares shall be subject to adjustment in
accordance with Paragraph 15 hereof.
(1) VESTING OF DIRECTOR OPTIONS. Each Director Option shall
become exercisable as to twenty-five percent (25%) of the shares subject thereto
on each anniversary of the Director Grant Date for such Director Option,
provided, however, if the annual meeting of stockholders (or special meeting in
lieu thereof) in any calendar year subsequent to the Director Grant Date is held
prior to but within two months of the anniversary of the Director Grant Date in
such calendar year, then such Director Option shall
- 2 -
<PAGE> 26
become exercisable as to twenty-five percent (25%) of the shares subject thereto
on the date of the annual meeting of stockholders (or special meeting in lieu
thereof) (whether or not such Director is reelected at such meeting) in such
calendar year in lieu of the vesting that would otherwise occur on the
anniversary of the Director Grant Date in such calendar year, which rights shall
be cumulative, but in no event shall a Director Option be exercisable for more
than five thousand (5,000) shares of Common Stock, subject to adjustment in
accordance with Paragraph 15 hereof.
(2) OPTION PRICE OF DIRECTOR OPTIONS. The price per share for
each Director Option shall be the fair market value per share of the Common
Stock on the Director Grant Date, determined in accordance with Paragraph 6
below.
(3) TERM OF DIRECTOR OPTIONS. Subject to earlier termination
as provided below, including, without limitation, in Paragraph 18, each Director
Option shall expire ten years from the Director Grant Date.
(4) TERMINATION FOR REASONS OTHER THAN CAUSE, DEATH OR
DISABILITY. If a Director should cease to be a Director of the Company other
than by reason of death or Disability (as defined in Paragraph 11 below) or a
termination "for cause" (as defined in subparagraph 3B(7) below), no further
installments of his Director Option shall become exercisable, and his Director
Option shall terminate after the passage of three (3) months from the date he
should cease to be a Director, but in no event later than ten years from the
Director Grant Date. The provisions of the preceding sentence shall apply to a
Director who becomes disabled or dies after ceasing to be a Director, provided,
however, in the case of a Director's death within three (3) months after ceasing
to be a Director, the Director's Survivors (as defined below) may exercise the
Director Option within one (1) year after the date of the Director's death, but
in no event later than ten years from the Director Grant Date.
(5) DEATH. In the event of the death of a Director to whom a
Director Option has been granted hereunder, while a Director of the Company,
such Option may be exercised by any person or persons who acquired the
Director's rights to the Option by will or by the laws of descent and
distribution (the "Director's Survivors") (a) to the extent exercisable but not
exercised on the date of death; and (b) to the extent of a pro rata portion of
any additional rights as would have accrued had the Director not died prior to
the end of the accrual period which next ends following the date of death. The
prorating shall be based upon the number of days of such accrual period prior to
the Director's death. If the Director's Survivors wish to exercise the Director
Option, they must take all necessary steps
- 3 -
<PAGE> 27
to exercise the Director Option within one (1) year after the date of death of
the Director, notwithstanding that the decedent might have been able to exercise
the Director Option as to some or all of the shares on a later date if he had
not died and had continued to be a Director, but in no event later than ten
years from the Director Grant Date.
(6) TERMINATION FOR DISABILITY. A Director who ceases to be a
Director of the Company by reason of Disability may exercise a Director Option
granted to him within one (1) year after the date he became disabled (a) to the
extent that the right to purchase shares has accrued on the date of his
Disability; and (b) to the extent of a pro rata portion of any additional rights
as would have accrued had the Director not become Disabled prior to the end of
the accrual period which next ends following the date of Disability. The
proration shall be based upon the number of days of such accrual period prior to
the date of Disability. A Disabled Director or his representative may exercise
such rights only within a period of not more than one (1) year after the date
that the Director became Disabled or, if earlier, within the originally
prescribed term of the Director Option. "Disability" or "Disabled" means
permanent and total disability as defined in Section 22(e)(3) of the Code. The
Administrator shall make the determination both of whether Disability has
occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and the
Director, in which case such procedure shall be used for such determination). If
requested, the Director shall be examined by a physician selected or approved by
the Administrator, the cost of which examination shall be paid for by the
Company.
(7) REMOVAL FOR CAUSE. If a Director is removed from his
position as a Director "for cause," then to the extent unexercised, his Director
Option will immediately be forfeited as of the date he is notified his service
is terminated "for cause." For purposes of this Paragraph 3.B(7) only (and not
for any other purpose, including, without limitation, any right of the Board of
Directors or stockholders of the Company to remove a Director for cause),
"cause" shall mean only (i) conviction of a felony or (ii) declaration of
unsound mind by order of court.
(8) RIGHTS OF DIRECTOR. Nothing in this Plan shall be deemed
to give any Director the right to continue as a Director of the Company for any
period of time.
(9) INAPPLICABLE PARAGRAPHS. The provisions of Paragraphs 9,
10, 11 and 12 below shall not apply to Director Options.
- 4 -
<PAGE> 28
4. STOCK. The stock subject to the Options shall be
authorized but unissued shares of Common Stock of the Company, par value $.01
per share (the "Common Stock"), or shares of Common Stock reacquired by the
Company, including shares purchased in the open market. The aggregate number of
shares which may be issued pursuant to the Plan is 3,300,000, subject to
adjustment as provided in Paragraph 15. In the event any Option granted under
the Plan shall expire or terminate for any reason without having been exercised
in full or shall cease for any reason to be exercisable in whole or in part, the
unpurchased shares subject thereto, shall again be available for grants of
Options under the Plan. The shares issued upon exercise of Options granted under
the Plan may be authorized and unissued shares or shares held by the Company in
its treasury, or both.
5. GRANTING OF OPTIONS. Options may be granted under the
Plan at any time and prior to April 2, 2001, which is ten years from the date of
approval of the Plan by the Board. The Administrator shall specify at the time
of each grant of an Option under the Plan whether such Option is an incentive
stock option. Except as otherwise provided in Paragraph 3B, the date of grant of
an Option under the Plan will be the date specified by the Administrator at the
time it awards the Option, provided, however, that such date shall not be prior
to the date of award. Notwithstanding any other provisions of this Plan, the
Administrator may authorize the grant of an Option to a person not then an
employee or consultant of the Company or of a subsidiary. The actual grant of
such Option, however, shall be conditioned upon such person becoming an employee
or consultant, as the case may be, at or prior to the time of the execution of
the Option agreement evidencing such Option.
6. MINIMUM OPTION PRICE. The price per share specified in
each Option granted under the Plan shall be as follows:
A. The price per share specified in each Non-Qualified
Stock Option granted under the Plan shall in no event be less
than 50% of the fair market value per share of Common Stock on
the date of such grant.
B. The price per share specified in each Incentive Stock
Option granted under the Plan shall not be less than the fair
market value per share of the Common Stock on the date of such
grant. In the case of an Incentive Stock Option to be granted to
an employee owning, directly or by reason of the applicable
attribution rules in Section 424(d) of the Code, more than ten
percent (10%) of the total combined voting power of all classes
of share capital of the Company or a subsidiary, the Option price
per share of the shares
- 5 -
<PAGE> 29
covered by each Option shall be not less than one hundred ten
percent (110%) of the said fair market value on the date of
grant.
C. In no event shall the aggregate fair market value
(determined as of the time of grant) of the Common Stock with
respect to which Incentive Stock Options are exercisable (under
all plans of the Company and any subsidiaries) for the first time
by an employee in any calendar year exceed $100,000, provided
that this subparagraph C shall have no force or effect if its
inclusion in the Plan is not necessary for Options issued as
Incentive Stock Options to qualify as Incentive Stock Options
pursuant to Section 422 of the Code.
For purposes of this Plan, "fair market value" with respect to a
share of Common Stock, shall mean the average of the daily market prices for the
period of 10 consecutive trading days ending immediately prior to the applicable
date. The market price for each such trading day shall be the last sale price on
such day on the New York Stock Exchange, or, if the Common Stock is not then
listed or admitted to trading on the New York Stock Exchange, on such other
principal stock exchange on which such stock is then listed or admitted to
trading, or, if no sale takes place on such day on any such exchange, the
average of the closing bid and asked prices on such day as officially quoted on
any such exchange, or, if the Common Stock is not then listed or admitted to
trading on any stock exchange, the market price for each such trading day shall
be the last sale reported on the NASDAQ National Market System as published in
The Wall Street Journal or, if no such sale is so reported, the average of the
reported closing bid and asked prices on such day in the over-the-counter
market, as furnished by the National Association of Securities Dealers Automated
Quotation system, or, if such price at the time is not available from such
system, as furnished by any similar system then engaged in the business of
reporting such prices and selected by the Administrator or, if there is no such
system, as furnished by any member of the National Association of Securities
Dealers, selected by the Administrator. If the Company's stock is not then
publicly traded, the fair market value shall be deemed to be the fair value of
the Common Stock as determined by the Administrator after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
Paragraphs 9, 10, 11, 12 and 18, and except as otherwise provided in Paragraph
3B, each Option shall expire on the date specified by the Administrator, but not
more than ten
- 6 -
<PAGE> 30
years from the date of grant, provided, however, that for optionees who own more
than 10% of the total combined voting power of all classes of share capital of
the Company or a subsidiary, each Option other than a Director Option shall
terminate not more than five (5) years from the date of the grant. Subject to
Paragraph 17, the Administrator may extend the term of any previously granted
Option other than a Director Option provided that such Option, as extended,
expires within ten years of its original date of grant.
8. EXERCISE OF OPTION. Subject to the provisions of
Paragraphs 9, 10, 11, 12, 13, 14 and 18, and except as otherwise provided in
Paragraph 3B, each Option granted under the Plan shall be exercisable ("vest")
as follows:
A. The Option shall either be fully exercisable upon
grant or shall become exercisable thereafter in such installments
as the Administrator may specify.
B. Once an installment becomes exercisable it shall
remain exercisable until expiration or termination of the Option,
unless otherwise specified by the Administrator.
C. Each Option may be exercised from time to time, in
whole or in part, for up to the total number of shares with
respect to which it is then exercisable, but no Option granted
before January 28, 1987 and qualifying as an Incentive Stock
Option may be exercised while there is outstanding any stock
option to acquire shares of the Company's stock, whether under
this Plan or any other plan, which was granted earlier than the
Option in question and which qualifies as an Incentive Stock
Option.
D. The Administrator shall have the right to accelerate
the date any installment of any Option may be exercised, other
than an installment of a Director Option, provided further that
the Administrator shall not accelerate the exercise date of any
installment of any Option granted to an optionee as an Incentive
Stock Option (and not previously converted into a Non-Qualified
Option pursuant to Paragraph 23) if such acceleration would
violate the annual vesting limitation contained in Section 422(d)
of the Code, as described in Paragraph 6.C., unless the optionee
shall have consented to such acceleration.
E. If any Option or Options by its or their terms are
exercisable at a particular time but cannot be exercised at such
time as a result of the
- 7 -
<PAGE> 31
restrictions upon exercise described in subparagraph C above, the
Company shall, upon an optionee's request and subject to the
following condition, accelerate the date of exercise of any
Options (in the order of their respective dates of grant) for
that aggregate number of shares which is equal to that number of
shares under the Option or Options which cannot be exercised as a
result of said restrictions. In consideration and as a condition
of such acceleration, the Company shall have the right upon
termination of the optionee's employment with the Company for any
reason, other than by reason of death, to repurchase that number
of shares equal to the amount by which (a) the total number of
shares which optionee shall have purchased pursuant to all
Options granted to him under the Plan, including without
limitation Options the exercisability of which has been
accelerated as aforesaid, exceeds (b) the number of shares under
all of the optionee's Options under the Plan which the optionee
would have been entitled to purchase at such time if there were
no such restrictions on exercise and if there had been no such
acceleration. The shares subject to repurchase by the Company
shall be that portion of the shares purchased by the optionee
which caused such excess to occur, and the repurchase price per
share to be paid by the Company shall be equal to the purchase
price per share paid by the optionee for such shares. The
Company, in its discretion, may elect to repurchase any or all of
such shares. For purposes of determining which shares are subject
to repurchase by the Company, shares purchased pursuant to a
simultaneous exercise of more than one Option will be considered
purchased in the order of the dates of grant of the respective
Options under which they are purchased and, with respect to
shares purchased pursuant to the exercise of the same Option, in
the order of the dates on which portions of such Options became
exercisable.
The Company shall have the right to exercise such right of
repurchase by giving written notice to the optionee within sixty
(60) days after the expiration of any period after the optionee
ceases to be employed by the Company during which the optionee
may exercise any portion of the optionee's Options, specifying in
such notice the number of shares which it has elected to
repurchase. Within fifteen (15) days after receipt of the
Company's notice, the optionee shall deliver to the Company a
certificate or certificates, duly endorsed or accompanied by a
duly executed stock power or stock powers, representing the
shares being repurchased by the Company. As soon thereafter as
practicable, the
- 8 -
<PAGE> 32
Company shall mail or otherwise transmit to the optionee a bank
check for the aggregate repurchase price for the shares which the
Company has repurchased. If the optionee shall fail timely to
deliver the certificate or certificates representing such shares,
such shares shall nonetheless be deemed cancelled as of the
expiration of such fifteen-day period and all rights of the
optionee as a shareholder of the Company with respect to such
shares shall cease and determine, whereupon the optionee, with
respect to such shares, shall have only the right to receive
payment of the repurchase price for such shares.
The purchase by an optionee of any shares pursuant to any portion
of an Option which has been accelerated will be deemed to
constitute the consent of the optionee to the provisions of this
Paragraph 8E. If, without the prior written consent of the
Company, an optionee sells, assigns, pledges, hypothecates or
otherwise transfers, or attempts to sell, assign, pledge,
hypothecate or otherwise transfer, whether voluntarily or by
operation by law or by order of any court or otherwise, any
shares so long as they are subject to the Company's right of
repurchase, the Company shall at any time thereafter be entitled
to exercise its right to repurchase such shares as if the
optionee's employment with the Company had terminated for a
reason other than death of the optionee. In any event, such
shares shall remain subject to the Company's right of repurchase
in the hands of any holder to the same extent as if the optionee
were to continue to hold them. The Company may instruct its
transfer agent not to effect transfers contrary to such
restriction and each certificate representing shares subject to
the Company's right to repurchase shall bear a legend
substantially in the following form:
"The shares represented by this certificate are subject
to the right of the Company to repurchase such shares,
and the Company shall have the right to repurchase such
shares if they are purportedly sold, assigned, pledged,
hypothecated or otherwise transferred without the prior
written consent of the Company. In any event, such shares
shall remain subject to the Company's right of repurchase
in the hands of any holder. The repurchase rights of the
Company and the terms of such transfer restriction are
set forth in Paragraph 8E of the Company's Restated 1991
Stock Option Plan, a copy of which paragraph may be
- 9 -
<PAGE> 33
obtained by written request to the Company's principal
office without charge."
Neither the absence of such a legend on a certificate
representing shares subject to the Company's right of repurchase
nor the failure of the Company to give any such instructions to
its transfer agent shall affect the Company's right of
repurchase.
Any certificate representing shares subject to the right of the
Company to repurchase such shares and also shares not subject to
such repurchase right shall be exchangeable for a certificate
representing the number of shares subject to such repurchase
right bearing such legend and a separate certificate representing
the balance of such shares not subject to such repurchase right.
The Company shall also issue a certificate without such legend
representing shares purchased pursuant to an Option as to which
the repurchase right shall have lapsed, upon surrender to the
Company of the certificate for such shares bearing such legend.
Any purported sale, assignment, pledge, hypothecation or other
transfer in violation of this Paragraph 8E shall be void and
ineffectual and shall not operate to transfer any interest or
title.
9. TERMINATION OF EMPLOYMENT OR CONSULTING. Except as the
Administrator may otherwise determine, if an optionee ceases to be employed or
retained by the Company or any subsidiary other than by reason of death or
Disability (as defined in Paragraph 11 below) or a termination "for cause", no
further installments of his Options shall become exercisable, and his Options
shall terminate after the passage of three (3) months from the date of
termination of his employment, but in no event later than on their specified
expiration dates. In no event may an Option agreement provide, if the Option is
intended to be an Incentive Stock Option, that the time for exercise be later
than three (3) months after the optionee's termination of employment except as
otherwise provided in the following paragraph of this Paragraph 9 and in
Paragraphs 10 and 11. Whether leave of absence by approval of the Company or by
reason of military or governmental service constitutes employment for purposes
of the Plan shall be conclusively determined by the Administrator. Nothing in
the Plan shall be deemed to give any optionee the right to be retained in
employment by or as a consultant to the Company or its subsidiaries for any
period of time.
The provisions of this Paragraph 9, and not the provisions of
Paragraph 10 or 11, shall apply to an optionee who subsequently becomes disabled
or dies after the termination of employment or consultancy, provided, however,
in the case of an
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optionee's death within three (3) months after the termination of employment or
consulting, the Optionee's Survivors (as defined below) may exercise the Option
within one (1) year after the date of the optionee's death, but in no event
after the date of expiration of the term of the Option.
Notwithstanding anything herein to the contrary, if subsequent to
an optionee's termination of employment or consultancy, but prior to the
exercise of an Option, the Administrator determines that, either prior or
subsequent to the optionee's termination, the optionee engaged in conduct which
would constitute "cause", then such optionee shall forthwith cease to have any
right to exercise any Option.
Options granted under the Plan shall not be affected by any
change of employment or other service within or among the Company and any
subsidiaries, so long as the optionee continues to be an employee or consultant
of the Company or any subsidiary, provided, however, if an optionee's employment
by either the Company or a subsidiary should cease (other than to become an
employee of a subsidiary or the Company), such termination shall affect the
optionee's rights under any Option granted to such optionee in accordance with
the terms of the Plan and the pertinent Option agreement.
10. DEATH. Except as otherwise provided in the pertinent Option
agreement, in the event of the death of an optionee to whom an Option has been
granted hereunder, while the optionee is an employee or consultant of the
Company or of a subsidiary, such Option may be exercised by any person or
persons who acquired the optionee's rights to the Option by will or by the laws
of descent and distribution (the "Optionee's Survivors"):
A. to the extent exercisable but not exercised on the
date of death; and
B. in the event rights to exercise the Option accrue
periodically, to the extent of a pro rata portion of any
additional rights as would have accrued had the optionee not died
prior to the end of the accrual period which next ends following
the date of death. The prorating shall be based upon the number
of days of such accrual period prior to the optionee's death.
If the Optionee's Survivors wish to exercise the Option, they
must take all necessary steps to exercise the Option within one (1) year after
the date of death of such optionee, notwithstanding that the decedent might have
been able to exercise the Option as to some or all of the shares on a later
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date if he had not died and had continued to be an employee or consultant or, if
earlier, within the originally prescribed term of the Option.
11. DISABILITY. Except as otherwise provided in the pertinent
Option agreement, an optionee who ceases to be an employee of or consultant to
the Company or of a subsidiary by reason of Disability may exercise any Option
granted to such optionee:
A. to the extent that the right to purchase shares has
accrued on the date of his Disability; and
B. in the event rights to exercise the Option accrue
periodically, to the extent of a pro rata portion of any
additional rights as would have accrued had the optionee not
become Disabled prior to the end of the accrual period which next
ends following the date of Disability. The proration shall be
based upon the number of days of such accrual period prior to the
date of Disability.
"Disability" or "Disabled" means permanent and total disability
as defined in Section 22(e)(3) of the Code.
A Disabled optionee or his or her representative (except in the
case of Incentive Stock Options, only as permitted by Section 422(b)(5) of the
Code) may exercise such rights only within a period of not more than one (1)
year after the date that the optionee became Disabled or, if earlier, within the
originally prescribed term of the Option.
The Administrator shall make the determination both of whether
Disability has occurred and the date of its occurrence (unless a procedure for
such determination is set forth in another agreement between the Company and
such optionee, in which case such procedure shall be used for such
determination). If requested, the optionee shall be examined by a physician
selected or approved by the Administrator, the cost of which examination shall
be paid for by the Company.
12. TERMINATION FOR CAUSE. Except as otherwise provided in
the pertinent Option agreement, the following rules apply if the optionee's
service (whether as an employee or consultant) is terminated "for cause" prior
to the time that all of his outstanding Options have been exercised:
A. All outstanding and unexercised Options as of the date
the optionee is notified his service is terminated "for cause"
will immediately be forfeited, unless the Option agreement
provides otherwise.
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<PAGE> 36
B. For purposes of this Plan, "cause" shall include (but
is not limited to) dishonesty with respect to the employer or
entity retaining the consultant, insubordination, substantial
malfeasance or non-feasance of duty, unauthorized disclosure of
confidential information, and conduct substantially prejudicial
to the business of the Company or any subsidiary. The
determination of the Administrator as to the existence of cause
will be conclusive on the optionee and the Company.
C. "Cause" is not limited to events which have occurred
prior to a optionee's termination of service, nor is it necessary
that the Administrator's finding of "cause" occur prior to
termination. If the Administrator determines, subsequent to an
optionee's termination of service but prior to the exercise of an
Option, that either prior or subsequent to the optionee's
termination the optionee engaged in conduct which would
constitute "cause", then the right to exercise any Option is
forfeited.
D. Any definition in an agreement between the optionee
and the Company or a subsidiary, which contains a conflicting
definition of "cause" for termination and which is in effect at
the time of such termination, shall supersede the definition in
this Plan with respect to such optionee.
13. ASSIGNABILITY. No Option shall be assignable or
transferable by the optionee except by will or by the laws of descent and
distribution or if such Option is not an Incentive Stock Option, pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder, and during the
lifetime of the optionee each Option shall be exercisable only by him or his
legal representative, except in the case of Incentive Stock Options, only as
permitted by Section 422(b)(5) of the Code. Such Option shall not be assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise,
except as provided above) and shall not be subject to execution, attachment or
similar process. Any attempted transfer, assignment, pledge, hypothecation or
other disposition of any Option or of any rights granted thereunder contrary to
the provisions of this Plan, or the levy of any attachment or similar process
upon an Option, shall be null and void.
14. TERMS AND CONDITIONS OF OPTIONS. Options shall be
evidenced by agreements (which need not be identical) in such forms as the
Administrator may from time to time approve. Such agreements shall conform to
the terms and conditions set forth in
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<PAGE> 37
Paragraphs 3 and 6 through 13 hereof and may contain such other provisions, as
the Administrator deems advisable, which are not inconsistent with the Plan,
including restrictions applicable to shares of Common Stock issuable upon
exercise of Options other than Director Options.
15. ADJUSTMENTS. Upon the happening of any of the following
described events, an optionee's rights with respect to Options granted hereunder
shall be adjusted as hereinafter provided:
A. In the event shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares
or if, upon a merger, consolidation, reorganization, split-up,
liquidation, combination, recapitalization or the like of the
Company the shares of Common Stock shall be exchanged for other
securities of the Company or of another corporation, each
optionee shall be entitled, subject to the conditions herein
stated, to purchase such number of shares of common stock or
amount of other securities of the Company or such other
corporation as were exchangeable for the number of shares of
Common Stock which such optionee would have been entitled to
purchase except for such action, and appropriate adjustments
shall be made in the purchase price per share to reflect such
subdivision, combination, or exchange; and
B. In the event the Company shall issue any of its shares
as a stock dividend upon or with respect to the shares of stock
of the class which shall at the time be subject to option
hereunder, each optionee upon exercising an Option shall be
entitled to receive (for the purchase price paid upon such
exercise) the shares as to which he is exercising his Option and,
in addition thereto (at no additional cost), such number of
shares of the class or classes in which such stock dividend or
dividends were declared or paid, as he would have received if he
had been the holder of the shares as to which he is exercising
his Option at all times between the date of grant of such Option
and the date of its exercise and cash in lieu of fractional
shares.
Upon the happening of any of the foregoing events, the class and
aggregate number of shares set forth in Paragraph 4 hereof which are subject to
Options which have heretofore been or may hereafter be granted under the Plan
and the number of shares specified in Paragraph 3B shall also be appropriately
adjusted to reflect the events specified in subparagraphs A and B above. The
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<PAGE> 38
Administrator shall determine the adjustments to be made under this Paragraph
15, and its determination shall be conclusive.
16. MERGERS AND CONSOLIDATIONS. Unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option, if the Company is to be consolidated with or acquired by another
entity in a merger, sale of all or substantially all of the Company's assets or
otherwise (an "Acquisition"), the Administrator or the board of directors of any
entity assuming the obligations of the Company hereunder (the "Successor
Board"), shall, as to outstanding Options, either (i) make appropriate provision
for the continuation of such Options by substituting on an equitable basis for
the shares then subject to such Options the consideration payable with respect
to the outstanding shares of Common Stock in connection with the Acquisition; or
(ii) upon written notice to the optionees, provide that all Options must be
exercised, to the extent then exercisable, within a specified number of days of
the date of such notice, at the end of which period the Options shall terminate;
or (iii) terminate all Options in exchange for a cash payment equal to the
excess of the fair market value of the shares subject to such Options (to the
extent then exercisable) over the exercise price thereof.
17. MODIFICATION OF INCENTIVE STOCK OPTIONS. Notwithstanding any
other provision of this Plan, any adjustments or changes made with respect to
Incentive Stock Options shall be made only after the Administrator, after
consulting with counsel for the Company, determines whether such adjustments
would constitute a "modification" of such Incentive Stock Options (as that term
is defined in Section 424(h) of the Code) or would cause any adverse tax
consequences for the holders of such Incentive Stock Options. If the
Administrator determines that such adjustments made with respect to Incentive
Stock Options would constitute a modification of such Incentive Stock Options,
it may refrain from making such adjustments notwithstanding any other provision
of this Plan, unless the holder of an Incentive Stock Option specifically
requests in writing that such adjustment be made and such writing indicates that
the holder has full knowledge of the consequences of such "modification" on his
income tax treatment with respect to the Incentive Stock Option.
18. DISSOLUTION OR LIQUIDATION OF THE COMPANY. Upon the
dissolution or liquidation of the Company, all Options granted under this Plan
which as of such date shall not have been exercised will terminate and become
null and void; provided, however, that if the rights of an optionee or an
Optionee's Survivors or a Director's Survivors have not otherwise terminated and
expired, the optionee or the Optionee's Survivors or the Director's Survivors
will have the right immediately prior to such dissolution or liquidation to
exercise any Option to the
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<PAGE> 39
extent that the right to purchase shares has accrued under the Plan as of the
date immediately prior to such dissolution or liquidation.
19. EXERCISE OF OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, together with the tender of (or, alternatively, in the
case of clauses (b), (c) and (d) below, by making provision for) the full
payment of the purchase price in accordance with this Paragraph 19 for the
Shares as to which such Option is being exercised, and upon compliance with any
other conditions set forth in the Option agreement. Such written notice shall be
signed by the person exercising the Option, shall state the number of shares
with respect to which the Option is being exercised and shall contain any
representation required by the Plan or the Option agreement. Full payment of the
purchase price for the shares as to which such Option is being exercised shall
be made (a) in United States dollars in cash or by check, or (b) at the
discretion of the Administrator for any Option other than a Director Option,
through delivery of shares of Common Stock having a fair market value equal as
of the date of the exercise to the cash exercise price of the Option, determined
in good faith by the Board of Directors of the Company, or (c) at the discretion
of the Administrator for any Option other than a Director Option, in such other
manner as constitutes valid consideration in accordance with applicable law, or
(d) at the discretion of the Administrator for any Option other than a Director
Option, by any combination of (a), (b), and (c) above. Notwithstanding the
foregoing, the Administrator shall accept only such payment on exercise of an
Incentive Stock Option as is permitted by Section 422 of the Code.
The Company shall then deliver the shares as to which such Option
was exercised to the optionee (or to the Optionee's Survivors or the Director's
Survivors, as the case may be) reasonably promptly. In determining what
constitutes "reasonably promptly," it is expressly understood that the delivery
of the shares may be delayed by the Company in order to comply with any law or
regulation which requires the Company to take any action with respect to the
shares prior to their issuance. The shares shall, upon delivery, be evidenced
by an appropriate certificate or certificates for fully-paid non-assessable
shares.
The holder of an Option shall not have the rights of a
shareholder with respect to the shares covered by his Option until the date of
issuance of a stock certificate to him for such shares. No adjustment shall be
made for dividends or similar rights for which the record date is after the
exercise of the Option but before the date such stock certificate is issued,
except as provided in Paragraph 15B. In no event shall a fraction of a share be
purchased or issued under the Plan.
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<PAGE> 40
20. PURCHASE FOR INVESTMENT. Unless the offering and sale of
the shares to be issued upon the particular exercise of an Option shall have
been effectively registered under the Securities Act of 1933, as now in force or
hereafter amended (the "Act"), the Company shall be under no obligation to issue
the shares covered by such exercise unless and until the following conditions
have been fulfilled:
A. The person(s) who exercise such Option shall warrant
to the Company, at the time of such exercise or receipt, as the
case may be, that such person(s) are acquiring such shares for
their own respective accounts, for investment, and not with a
view to, or for sale in connection with, the distribution of any
such shares, in which event the person(s) acquiring such shares
shall be bound by the provisions of the following legend which
shall be endorsed upon the certificate(s) evidencing their shares
issued pursuant to such exercise or such grant:
"The shares represented by this certificate have been
taken for investment and they may not be sold or
otherwise transferred by any person, including a pledgee,
unless (1) either (a) a Registration Statement with
respect to such shares shall be effective under the
Securities Act of 1933, as amended, or (b) the Company
shall have received an opinion of counsel satisfactory to
it that an exemption from registration under such Act is
then available, and (2) there shall have been compliance
with all applicable state securities laws."
B. The Company shall have received an opinion of its
counsel that the shares may be issued upon such particular
exercise in compliance with the Act without registration
thereunder.
The Company may delay issuance of the shares until completion of
any action or obtaining of any consent which the Company deems necessary under
any applicable law (including, without limitation, state securities or "blue
sky" laws).
21. ISSUANCES OF SECURITIES. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to Options. Except as expressly provided herein, no adjustments shall be
made for dividends paid in cash or in property (including, without limitation,
securities) of the Company.
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<PAGE> 41
22. FRACTIONAL SHARES. No fractional share shall be issued under
the Plan and the person exercising such right shall receive from the Company
cash in lieu of such fractional share equal to the fair market value thereof
determined in good faith by the Board of Directors of the Company.
23. CONVERSION OF INCENTIVE STOCK OPTIONS INTO NON-QUALIFIED
OPTIONS: TERMINATION OF INCENTIVE STOCK OPTIONS. The Administrator, at the
written request of any optionee, may in its discretion take such actions as may
be necessary to convert such optionee's Incentive Stock Options (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such Incentive Stock Options, regardless of whether the optionee
is an employee of the Company or a subsidiary at the time of such conversion.
Such actions may include, but not be limited to, extending the exercise period
or reducing the exercise price of the appropriate installments of such Options.
At the time of such conversion, the Administrator (with the consent of the
optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Administrator in its discretion may determine,
provided that such conditions shall not be inconsistent with this Plan. Nothing
in the Plan shall be deemed to give any optionee the right to have such
optionee's Incentive Stock Options converted into Non-Qualified Options, and no
such conversion shall occur until and unless the Administrator takes appropriate
action. The Administrator, with the consent of the optionee, may also terminate
any portion of any Incentive Stock Option that has not been exercised at the
time of such termination.
24. TERM AND AMENDMENT OF PLAN. The Plan was initially adopted by
the Board on April 6, 1984 and was readopted by the Board as a new Plan on April
3, 1991, each time subject to its becoming effective upon approval by the
holders of a majority of the outstanding shares of Common Stock of the Company.
The Plan shall expire on April 2, 2001 (except as to Options outstanding on that
date). The Plan may be amended by the stockholders of the Company. The Plan may
also be amended by the Administrator, including, without limitation, to the
extent necessary to qualify any or all outstanding options granted under the
Plan or options to be granted under the Plan for favorable federal income tax
treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code, to the extent necessary
to ensure the qualification of the Plan under Rule 16b-3, and to the extent
necessary to qualify the shares issuable upon exercise of any outstanding
options granted, or options to be granted, under the Plan for listing on any
national securities exchange or quotation in any national automated quotation
system of securities dealers. Any amendment approved by the Administrator which
is of a scope
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<PAGE> 42
that requires stockholder approval in order to ensure favorable federal income
tax treatment for any Incentive Stock Options or requires stockholder approval
in order to ensure the qualification of the Plan under Rule 16b-3 shall be
subject to obtaining such stockholder approval. Notwithstanding any other
provision hereof, the provisions of Paragraph 3B shall not be amended more than
once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules thereunder. Any
modification or amendment of the Plan shall not, without the consent of an
optionee, affect his rights under an option previously granted to him. With the
consent of the optionee affected, the Administrator may amend outstanding Option
agreements in a manner not inconsistent with the Plan.
25. APPLICATION OF FUNDS. The proceeds received by the Company
from the sale of shares pursuant to Options granted under the Plan shall be used
for general corporate purposes.
26. GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
27. WITHHOLDING. Upon the exercise of a Non-Qualified Option for
less than its fair market value, the making of a Disqualifying Disposition (as
defined in Paragraph 28) or the vesting of restricted Common Stock acquired on
the exercise of an Option hereunder, the Company may withhold from the
optionee's wages, if any, or other remuneration, or may require the optionee to
pay additional federal, state, and local income tax withholding and employee
contributions to employment taxes in respect of the amount that is considered
compensation includable in such person's gross income. The Administrator in its
discretion may condition the exercise of an Option for less than its fair market
value or the vesting of restricted Common Stock acquired by exercising an Option
on the grantee's payment of such additional income tax withholding and employee
contributions to employment taxes.
28. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee
who receives an Incentive Stock Option must agree to notify the Company in
writing immediately after the employee makes a Disqualifying Disposition of any
shares acquired pursuant to the exercise of an Incentive Stock Option. A
Disqualifying Disposition is defined in Section 424(c) of the Code and includes
any disposition (including any sale) of such shares before the later of (a) two
years after the date the employee was granted the Incentive Stock Option, or (b)
one year after the date the employee acquired shares by exercising the Incentive
Stock
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<PAGE> 43
Option, except as otherwise provided in Section 424(c) of the Code. If the
employee has died before such stock is sold, these holding period requirements
do not apply and no Disqualifying Disposition can occur thereafter.
29. GOVERNING LAW. The validity and construction of the Plan and
the instruments evidencing Options shall be governed by the law of the
Commonwealth of Massachusetts.
30. GENDER. Wherever reference is made herein to the male, female
or neuter genders, such reference shall be deemed to include any of the other
genders as the context may require.
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