<PAGE>
SCHEDULE 14A
(Rule 14a-101)
Information Required in Proxy Statement
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
HDS NETWORK SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)
Nancy D. Weisberg, Esquire
MCCAUSLAND, KEEN & BUCKMAN
Five Radnor Corporate Center
100 Matsonford Road, Suite 500
Radnor, Pennsylvania 19087
(610) 341-1000
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which 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 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>
HDS Network Systems, Inc.
400 Feheley Drive
King of Prussia, Pennsylvania 19406
November 6, 1996
TO OUR STOCKHOLDERS:
You are cordially invited to attend the Annual Meeting of Stockholders to
be held on Tuesday, December 3, 1996, at 10:00 a.m., at the offices of the
Company, 400 Feheley Drive, King of Prussia, Pennsylvania 19406
The accompanying Notice of Meeting and Proxy Statement describe the matters
to be acted upon during the Annual Meeting. You are welcome to present your
views on these items and other subjects related to the Company's operations.
Your participation in the activities of the Company is important, regardless of
the number of shares you hold.
To ensure that your shares are represented at the Annual Meeting, whether
or not you are able to attend, please complete the enclosed proxy and return it
to us in the postage-paid envelope.
I hope you will attend the Annual Meeting.
Sincerely,
Arthur R. Spector
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
HDS NETWORK SYSTEMS, INC.
-------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 3, 1996
----------------
TO THE STOCKHOLDERS:
The Annual Meeting of the Stockholders of HDS Network Systems, Inc. (the
"Company"), a Delaware corporation, will be held on Tuesday, December 3, 1996,
at 10:00 a.m., at the offices of the Company, 400 Feheley Drive, King of
Prussia, Pennsylvania, for the following purposes:
1. To elect six Directors of the Company.
2. To consider and act upon a proposal to amend the Company's 1995 Stock
Option Plan.
3. To consider and act upon a proposal to approve the Company's wholly-
owned subsidiary's, Information Technology Consulting, Inc. 1996 Equity
Compensation Plan.
4. To vote upon a proposal to ratify the selection of Arthur Andersen LLP
as the Company's independent accountants for the fiscal year ending
June 30, 1997.
5. To transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
Stockholders of record at the close of business on October 23, 1996 are
entitled to notice of, and to vote at, the Annual Meeting and any adjournments
thereof.
All stockholders are cordially invited to attend the Annual Meeting in
person, but whether or not you plan to attend, please promptly sign, date and
mail the enclosed proxy in the return envelope. Returning your proxy does not
deprive you of the right to attend the Annual Meeting and vote your shares in
person.
By Order of the Board of Directors,
Scott Holland
Secretary
King of Prussia, Pennsylvania
November 6, 1996
<PAGE>
HDS Network Systems, Inc.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies at the direction of the Board of Directors of HDS Network Systems, Inc.
(the "Company") for use at the Annual Meeting of Stockholders to be held on
December 3, 1996.
Stockholders of record at the close of business on October 23, 1996 will be
entitled to vote at the Annual Meeting. At the close of business on October 23,
1996, 5,732,025 shares of the Company's $0.001 par value common stock ("Common
Stock") were outstanding. A stockholder is entitled to one vote for each share
of Common Stock held by such stockholder. This Proxy Statement and the enclosed
form of proxy are being mailed to the Company's stockholders on or about
November 6, 1996.
Shares represented by a proxy in the accompanying form, unless previously
revoked, will be voted at the Meeting if the proxy is returned to the Company
properly executed and in sufficient time to permit the necessary examination and
tabulation before a vote is taken. A proxy may be revoked at any time prior to
its exercise by giving written notice to the Secretary of the Company, by giving
a later dated proxy, or by voting in person at the meeting. Mere attendance at
the Annual Meeting will not revoke the proxy. Any specific instructions
indicated on your proxy will be followed. Unless contrary instructions are
given, your proxy will be voted FOR each of the proposals described in this
Proxy Statement and in the discretion of the proxy holders on such other
business as may properly come before the Annual Meeting.
Abstentions are counted as shares present for purposes of determining the
presence or absence of a quorum for the transaction of business. Brokers
holding shares for beneficial owners must vote their shares according to the
specific instructions they receive from the owners. If specific instructions
are not received, brokers may vote these shares in their discretion, except if
they are precluded from exercising their voting discretion on certain proposals
pursuant to the rules of the New York Stock Exchange. In such a case, the
broker may not vote on the proposal absent specific voting instructions. This
results in what is known as a "broker non-vote." A broker non-vote has the
effect of a negative vote when a majority of the shares issued and outstanding
is required for approval of the proposal. A broker non-vote has the effect of
reducing the number of required affirmative votes when a majority of the shares
present and entitled to vote or a majority of the votes cast is required for
approval of the proposal. The election of each nominee for director (Proposal
1) requires a plurality of votes cast. Brokers have discretionary authority to
vote on this proposal. Approval of the proposed amendment to the 1995 Stock
Option Plan (Proposal 2), the approval of the Information Technology Consulting,
Inc. 1996 Equity Compensation Plan (Proposal 3) and the ratification of the
selection of the auditors (Proposal 4)
<PAGE>
require the approval of a majority of the outstanding shares of Common Stock
represented and entitled to vote at the meeting. For purposes of Proposals 2,
3 and 4, abstentions will have the same effect as a vote against the proposal.
Broker non-votes will have no effect on the approval of Proposals 2, 3 or 4.
The New York Stock Exchange determines whether brokers have discretionary
authority to vote on a given proposal.
The cost of proxy solicitation, including the cost of reimbursing banks and
brokers for forwarding proxies and proxy statements to beneficial owners of the
Common Stock, will be paid by the Company. Proxies will be solicited without
extra compensation by certain officers and regular employees of the Company by
mail and, if found to be necessary, by telephone and personal interviews. All
shares represented by valid proxies will be voted.
ELECTION OF DIRECTORS
The By-Laws of the Company presently provide that the Board of Directors
shall designate the number of directors constituting the Board of Directors.
Currently, that number has been fixed by the Board of Directors at six. All of
the directors have been selected by the Board of Directors to be elected at the
meeting to serve for one-year terms expiring at the 1997 Annual Meeting and
until their respective successors are elected and qualified.
The names and biographical summaries of the six persons who have been
nominated to stand for election at the 1996 Annual Meeting appear below.
All nominees have indicated that they are willing and able to serve as
directors if elected. In the event that any nominee should become unavailable,
the proxy will be voted for the election of any substitute nominee designated by
the Board of Directors or its Nominating and Compensation Committee.
The Board of Directors recommends that you vote FOR the election of each of
the nominees for director.
The following biographical information is furnished as to each person
nominated for election as a director.
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------- --- ------------------------------------------
<S> <C> <C>
Arthur R. Spector 56 Chairman of the Board, President and Chief
Executive Officer
Michael G. Kantrowitz 36 Executive Vice President and Director
Howard L. Morgan /(1)/ 50 Director
John M. Ryan /(1)(2)/ 61 Director
Carl G. Sempier /(2)/ 65 Director
</TABLE>
2
<PAGE>
James W. Dixon 49 Director
- ------------------
/(1)/ Member of the Compensation and Stock Option Committee
/(2)/ Member of the Audit Committee
Mr. Spector has been Chairman of the Board of the Company since its
inception. Mr. Spector served as President and Chief Executive Officer from
inception until March 2, 1995, the date of the consummation of the merger of the
Company with Human Designed Systems, Inc. ("HDS"), and reassumed these positions
in May 1996. Since September 1996, he has also served as Chairman of Information
Technology Consulting, Inc., a wholly-owned subsidiary of the Company which was
formed for the purpose of acquiring companies in the network computer services
field ("ITC"). Mr. Spector is also Chairman of the Board of USDATA Corporation,
a developer of software tools for real-time data collection and control, and
FormMaker Software, a developer of document automation software. He has been
affiliated with Safeguard Scientifics, Inc. since January 1993 and currently
serves as its Director of Acquisitions. From July 1992 until May 1995, he was
Vice Chairman of Casino & Credit Services, Inc., a company which operated
nationwide debt collection and credit database businesses. Since October 1991,
Mr. Spector has been Chief Executive Officer and a director of Perpetual Capital
Corporation, a merchant banking organization.
Mr. Kantrowitz has been Executive Vice President of the Company since March
2, 1995. Prior to that, he was an employee of HDS from 1983, holding the
positions of Executive Vice President from 1991 until March 1995 and Vice
President of Marketing and Sales from 1987 until 1991. Prior to joining HDS,
Mr. Kantrowitz held positions with Raytheon Company and Adage Corporation.
Mr. Morgan has served as a director of the Company since March 2, 1995. He
has been the President of The Arca Group, Inc., a Pennsylvania-based consulting
and investment management firm, since July 1989. From April 1982 until March
1990, Mr. Morgan was President of Renaissance Technologies Corp., a venture
capital and consulting firm located in New York. Until 1986, he held the
position of Professor of Decision Sciences at the Wharton School of the
University of Pennsylvania and has served in editorial positions on various
academic and trade publications. Mr. Morgan also serves as a director of
Integrated Circuit Systems, Inc., Quarterdeck Corporation, Franklin Electronic
Publishers, Inc., Unitronix Corporation, a manufacturer of manufacturing
planning software, Segue Software Corp., a manufacturer of quality assurance
testing software, Cylink Corp., a manufacturer of encryption software,
MetaTools, Inc., a maker of graphics software, and Kentek Information Systems,
Inc., a manufacturer of laser printers. Mr. Morgan served as a member of HDS's
Board of Directors from 1977 until 1983.
Mr. Ryan has served as a director of the Company since March 2, 1995. He
is currently the principal in Devon Hill Ventures, a venture investing and
consulting firm which focuses on technology investments, and Chairman of DLB
Systems, Inc. Mr. Ryan is also a director of
3
<PAGE>
Integrated Systems Consulting Group, Inc. and a number of private companies,
including Control Software, Inc. Mr. Ryan was the founder of SunGard Data
Systems, Inc., a publicly-held computer services company, and served as its
Chairman and Chief Executive Officer from 1976 to 1987. From 1987 to 1989, he
was the President of Devon Hill Company, a merger and acquisition and venture
investing firm. From 1989 to 1991, Mr. Ryan was the Chairman of PC Concepts,
Inc., a computer training company, and President and Chief Executive Officer of
Analytics, Inc., a technical services company. From 1992 to 1994, he was an
advisory director of Foley, Mufson & Howe, an investment banking firm.
Mr. Sempier has served as a director of the Company since March 2, 1995.
He has been associated with Safeguard Scientifics, Inc. since 1990 and currently
serves as Vice Chairman of Safeguard International Group, Inc. From 1980 until
his retirement in 1988, he was the President and Chief Executive Officer of
Mannington Mills, Inc., a manufacturer of flooring. He is also a director of
Premier Solutions Limited, a supplier of asset management solutions to financial
institutions, and Tangram Enterprise Solutions, Inc., a publicly-traded company
providing network and connectivity software to corporations and government
entities.
Mr. Dixon has served as a director of the Company since July, 1996. Since
September 1996, he has also served as President and Chief Executive Officer of
ITC. From 1988 to 1995, Mr. Dixon served as Chairman of CompuCom Systems, Inc.
and was its CEO from 1988 until 1994. From January to July of 1996, Mr. Dixon
served as President and CEO of ClientLink Corporation. He continues to serve as
a Director of CompuCom, and is a director of USDATA Corporation and DesignBuild
Concepts, a construction company.
Board of Directors and Committees
The Company's Board of Directors held five meetings during the year ended
June 30, 1996. Each of the current directors attended at least 80% of the
meetings of the Board and Committees on which they serve held during the period
for which such persons have been directors or committee members, except for Mr.
Sempier, who attended 60% of the meetings.
The standing committees of the Board of Directors are the Compensation and
Stock Option Committee and the Audit Committee. These committees held,
respectively, one meeting and two meetings during the year ended June 30, 1996.
The responsibilities of the Compensation and Stock Option Committee
include the review of compensation practices, the determination of salaries and
bonus awards of executive officers and the administration of the Company's 1995
Stock Option Plan of the Company.
The duties of the Audit Committee include the selection of independent
accountants subject to the approval of the stockholders, the review of the scope
and results of the audit and the review of the organization and scope of the
Company's internal auditing and financial controls.
Compensation of Directors
Directors (other than those who are employees of the Company) receive a
cash payment of $1,000 for each Board meeting attended, and receive a one-time
grant of 10,000 options upon
4
<PAGE>
a director's initial election. Thereafter non-employee directors receive an
annual grant of 5,000 options.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid during the fiscal years ended June 30, 1996, 1995 and 1994 to
the Company's Chief Executive Officer and each of the Company's two other most
highly compensated executive officers whose total salary and bonus earned during
the 1995 fiscal year exceeded $100,000. Compensation through March 1, 1995
reflects compensation paid by Human Designed Systems, Inc. ("HDS"), which was
acquired by the Company pursuant to a merger consummated on March 2, 1995 (the
"Merger")
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
---------------------------------------------- --------------------------
Other Annual Securities All Other
Name and Principal Fiscal Compensation Underlying Compensation
Position Year Salary ($) Bonus($) ($)(1) Options(#) ($)(1)
- ------------------- -------- ---------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Arthur R. Spector /(2)/ 1996 $ -- $ --- $ --- 5,000 $ ---
President and
Chief Executive Officer
Mark A. Gelberg /(2)/ 1996 $119,423 $11,608 --- --- $ 500 /(4)/
President and Chief 1995 135,000 36,959 --- 253,000 500 /(4)/
Executive Officer 1994 96,000 29,000 --- --- 500 /(4)/
Michael G. Kantrowitz 1996 $125,000 $ 9,431 --- --- $ 500 /(4)/
Executive Vice President 1995 173,820/(3)/ 11,866 --- 200,000 500 /(4)/
1994 190,676/(3)/ --- --- --- 500 /(4)/
Edward M. Parks 1996 $100,000 $26,275 --- --- $ 500 /(4)/
Vice President of 1995 100,000 21,261 --- 100,000 500 /(4)/
Engineering 1994 100,000 10,140 --- --- 500 /(4)/
Scott Holland 1996 $105,000 --- --- --- ---
Vice President of Finance 1995 10,090 --- --- 50,000 ---
and Administration
</TABLE>
- -------------------------------------
/(1)/ Amount does not exceed the lesser of $50,000 or 10% of total salary
and bonus.
/(2)/ Mr. Spector was appointed to the position of President and Chief
Executive Officer upon Mr. Gelberg's resignation on May 17, 1996.
/(3)/ Includes commission earnings of $79,737 and $118,676 in 1995 and 1994,
respectively.
/(4)/ Consists of amounts contributed by the Company under the 401(k) Plan.
Option Grants During 1996 Fiscal Year
Except for the automatic grant of options to Mr. Spector as non-employee
director, no options were granted to any executive officers during the 1996
fiscal year.
5
<PAGE>
<TABLE>
<CAPTION>
Potential Realization Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term(1)
- ---------------------------------------------------------------------------------------- -----------------------------------
No. of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise Expiration
Name Granted (#) in Fiscal Year Price Date 0%($) 5%($) 10%($)
- ------------------------ ------------ ------------------ ----- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Arthur R. Spector 5,000 2.5 5.625 1/1/2001 28,125 35,895 45,296
- ---------------------------
</TABLE>
/(1)/ These amounts, based on assumed appreciation rates of 0%, 5% and 10%
prescribed by the Securities and Exchange Commission rules, are not
intended to forecast possible future appreciation, if any, of the
Company's stock price.
Aggregated Option Exercises During 1996 Fiscal Year
and Fiscal Year-End Option Values
The following table provides information related to options exercised by
the named executive officers during fiscal 1996 and the number of the Company's
options held at fiscal year-end.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year-End(#) at Fiscal Year End ($)(1)
Shares Acquired Value ---------------------------- ----------------------------
Name on Exercise(#) Realized($)(1)Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Arthur R. Spector 10,000 5,000 36,250 15,625
Mark A. Gelberg ---- -- 110,688 --- 262,884 ---
Michael G. Kantrowitz ---- -- 100,000 100,000 237,500 237,500
Edward M. Parks ---- -- 50,000 50,000 162,500 162,500
Scott Holland ---- -- 12,500 37,500 40,625 121,875
- -------------------------
</TABLE>
/(1)/ Value based on the closing price of $8.75 on June 30, 1996, less the
option exercise price.
Agreements with Executive Officers
In connection with the Merger, the Company entered into a four-year
employment contract with Mark Gelberg which provided for a base salary of
$135,000 per year and an annual bonus equal to 1.6% of the Company's
consolidated operating income, subject to certain adjustments. The agreement
contained confidentiality and non-competition agreements from Mr. Gelberg. The
agreement permitted the Company to terminate Mr. Gelberg's employment with or
without cause; however, in the event of a termination without cause, Mr. Gelberg
was entitled to severance
6
<PAGE>
benefits equivalent to the compensation he would have received for the remaining
term of the agreement.
In connection with the Merger, the Company entered into a three-year
employment contract with Michael Kantrowitz which provides for a base salary of
$125,000 per year and an annual bonus equal to 1.3% of the Company's
consolidated operating income, subject to certain adjustments. The agreement
contains confidentiality and non-competition agreements from Mr. Kantrowitz.
The agreement permits the Company to terminate Mr. Kantrowitz's employment with
or without cause; however, in the event of a termination without cause, Mr.
Kantrowitz is entitled to severance benefits equivalent to the compensation he
would have received for the remaining term of the agreement.
Change in Control Arrangements
Options granted under the Company's 1995 Stock Option Plan contain
provisions pursuant to which all outstanding options granted under such plan
shall become fully vested and immediately exercisable upon a "change in control"
as defined in such plan.
COMPENSATION AND STOCK OPTION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation and Stock Option Committee (the "Committee") of the Board
of Directors establishes the general compensation policies and specific
compensation levels regarding salaries and the award of stock options under the
Company's 1995 Stock Option Plan. The Committee currently consists of two non-
employee directors. Mr. Spector resigned from his position as a member of the
Committee as a result of his appointment as President and Chief Executive
Officer of the Company. Mr. Spector did not participate in any decisions
regarding his own compensation as an executive officer of the Company.
The Company's compensation program includes annual salary and possible
long-term incentives, in the form of stock options, designed to attract,
motivate and retain highly qualified executives who will effectively manage the
Company and maximize stockholder value. In establishing total compensation, the
Committee considers individual and Company performance, as well as compensation
levels in comparable companies.
Annual Compensation
- -------------------
Annual salary levels are established based upon an evaluation of individual
performance and comparable compensation levels, although the Committee has not
made formal comparisons with peer group companies and has not used specific
criteria to evaluate individual performance. The Committee relies on the
foregoing evaluation and exercises subjective judgment and discretion in light
of the Company's general compensation policies and practices described above to
7
<PAGE>
determine salaries. The annual salaries and bonuses of the former chief
executive officer and another executive officer were determined pursuant to
employment agreements which were negotiated between the Company and such persons
at the time of the merger with HDS in March 1995. Except for the bonuses which
were provided for in such agreements, the Committee has not included bonus
payments in its annual compensation program.
Long-Term Compensation
- ----------------------
Long-term incentives are provided through the grant of stock options under
the Company's stock option plan. The Committee reviews and approves the
participation of executive officers of the Company under the Company's stock
option plan. The Committee has the authority to determine the individuals to
whom stock options are awarded, the terms of the options and the number of
shares subject to each option. Options typically vest in four equal annual
installments beginning one year from the date of grant and are exercisable at
an exercise price equal to the fair market value of shares of the Common Stock
on the date of grant. The size of option grants are generally based upon the
executive officer's level of responsibility. Through the grant of stock
options, the objective of aligning executive officers' long-range interests with
those of the stockholders are met by providing the executive officers with the
opportunity to build a meaningful stake in the Company. The Committee evaluates
the individual's and the Company's performance and the data of comparable
companies, although it has not relied on formal comparisons, and exercises
subjective judgment and discretion in view of this information and the Company's
general compensation policies and practices.
Chief Executive Officer Compensation
- ------------------------------------
Arthur R. Spector has been the Company's President and Chief Executive
Officer since May 17, 1996. Mr. Spector did not receive any compensation as
President and Chief Executive Officer during fiscal 1996. He received 5,000
options as a non-employee director prior to becoming President and Chief
Executive Officer. For services to be rendered as President and Chief Executive
Officer during 1997, Mr. Spector will receive an annual salary of $40,000. Mr.
Spector will also receive an annual salary of $20,000 as Chairman of ITC. Mark
A. Gelberg, the former president and chief executive officer served in such
positions from March 2, 1995, the date of the merger with HDS, to May 17, 1996,
the date of his resignation. His annual compensation and the number of options
granted to him were determined pursuant to his employment agreement, which had
been negotiated with the Company at the time of the merger with HDS.
Deductibility of Executive Compensation
- ---------------------------------------
Federal tax laws impose requirements in order for compensation payable to
certain executive officers to be fully deductible. The Company intends, to the
extent practicable, to preserve deductibility under the Internal Revenue Code of
compensation paid to its executive officers while maintaining compensation
programs to attract and retain highly qualified executives in a competitive
environment.
8
<PAGE>
The foregoing report has been furnished by the Compensation and Stock
Option Committee of the Board of Directors. The current membership of the
Committee is as follows:
Howard L. Morgan
John M. Ryan
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
Arthur R. Spector was a member of the Compensation and Stock Option
Committee until he assumed the position of President and Chief Executive Officer
on May 17, 1996. Mr. Spector has served as the President and Chief Executive
Officer of the Company since Mr. Gelberg's resignation on May 17, 1996.
PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Company's
Common Stock for the period April 2, 1993 (the date of the Company's initial
public offering) to June 30, 1996 with similar returns for the (i) S&P
Technology-500 and the S&P 500 Index.
[TOTAL SHAREHOLDER RETURNS GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Indexed Returns
Base
Period
Company/Index Name 2-Apr-93 Jun-93 Jun-94 Jun-95 Jun-96
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HDS NETWORK SYSTEMS 100 102.33 95.35 95.93 162.79
S&P TECHNOLOGY-500 100 110.12 119.26 194.03 231.20
S&P 500 INDEX 100 105.55 107.04 134.94 170.03
</TABLE>
9
<PAGE>
CERTAIN TRANSACTIONS
The Company entered into a consulting agreement with Mr. Spector pursuant
to which Mr. Spector provided corporate advisory, financial and other consulting
services to the Company, consistent with Mr. Spector's knowledge and expertise
in corporate management and financial affairs, long range strategic planning and
other areas that are considered to be of significant value to the Company. The
agreement was for a period of one year ending on March 2, 1996 and provided for
the payment of $100,000 to Mr. Spector for the services provided by Mr. Spector.
In September 1996, the Company formed ITC, a Delaware Corporation. Its
Board of Directors consists of the same members as the Company's Board. James W.
Dixon, a director of the Company, is the President and Chief Executive Officer
of ITC and receives an annual salary of $155,000, and Arthur R. Spector, the
Company's President and Chief Executive Officer, is the Chairman of ITC and
receives an annual salary of $20,000. The Company has made a commitment to
purchase, if and when determined by ITC, up to 3,500,000 shares of ITC's common
stock at a price of $1,000,000. The Company has purchased 350,000 shares for a
capital contribution of $100,000. The Company has also agreed to loan up to
$1,000,000 to ITC, repayable on demand.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of the shares of Common Stock of the Company as of June 30, 1996 by
(i) each stockholder known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each director of the Company and
(iii) all directors and executive officers as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the shares of
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
Number of Shares Percentage
Principal Stockholders Beneficially Owned Beneficially Owned
- ---------------------------------------- ------------------ ------------------
<S> <C> <C> <C>
Arthur R. Spector...................... 102,500 /(1)/ 1.7
Mark A. Gelberg /(2)/.................. 708,205 /(1)(3)/ 12.4
Michael G. Kantrowitz.................. 253,535 /(1)(3)/ 4.3
Howard L. Morgan....................... 28,146 /(1)(3)/ *
John M. Ryan........................... 13,500 /(1)/ *
Samuel A. Plum......................... 12,500 /(1)/ *
Carl G. Sempier........................ 12,500 /(1)/ *
James Dixon............................ --- *
Warren V. Musser /(4)/................. 500,000 /(3)/ 8.0
Terri N. Gelberg /(5)/................. 642,517 /(3)/ 11.0
Roger S. Pincus and Ruth M. Pincus 306,415 /(3)/ 5.3
/(6)/.................................
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C>
All Executive Officers and Directors
as a Group (10 persons)................ 520,181 /(1)(3)/ 8.6
- --------------------------
</TABLE>
* Less than 1%
/(1)/ Includes options exercisable within 60 days of June 30, 1996 to purchase
the Company's Common Stock issued pursuant to the Company's 1995 Stock
Option Plan: Mr. Spector, 12,500 shares; Mr. Gelberg, 110,688 shares;
Mr. Kantrowitz, 100,000 shares; Mr. Morgan, 12,500 shares; Mr. Ryan,
12,500 shares; Mr. Plum, 12,500 shares; and Mr. Sempier, 12,500 shares.
/(2)/ The stockholder's address is 649 South Henderson Road, King of Prussia,
Pennsylvania 19406
/(3)/ Includes Warrants exercisable within 60 days of June 30, 1996 to
purchase the Company's Common Stock: Mr. Gelberg, 115,863 shares; Mr.
Kantrowitz, 31,293 shares; Mr. Morgan, 3,442 shares; Mr. Musser, 500,000
shares; Ms. Gelberg, 115,863 shares; and Roger and Ruth Pincus, 63,228
shares.
/(4)/ The stockholder's address is 435 Devon Park Drive, Building 800, Wayne,
Pennsylvania 19087. Mr. Musser is the Chairman, Chief Executive Officer
and President of Safeguard Scientifics, Inc., which beneficially owns
140,000 shares of the Common Stock not included in the shares
beneficially owned by Mr. Musser. Mr. Musser disclaims beneficial
ownership of all such excluded shares. This information is presented in
reliance on information disclosed in a Schedule 13D filed with the
Securities and Exchange Commission (the "SEC") on February 3, 1994.
/(5)/ The stockholder's address is 1909 Panama Street, Philadelphia,
Pennsylvania 19031. The information is presented in reliance on
information disclosed in a Schedule 13D filed with the Securities and
Exchange Commission on February 7, 1996.
/(6)/ Except for 14,224 shares held individually by Roger Pincus, the
stockholders share investment and voting power. The stockholders'
address is 12 Bambi Lane, Haverford, Pennsylvania 19041. The information
is presented in reliance on information disclosed in Schedule 13D filed
with the Securities and Exchange Commission on February 10, 1996.
PROPOSAL TO AMEND THE 1995
STOCK OPTION PLAN
At the meeting, there will be presented a proposal to approve an amendment
to the Company's 1995 Stock Option Plan (the "1995 Plan"). The full text of the
1995 Plan, as proposed to be amended, is attached as Exhibit A. This amendment
provides (1) for an increase in the aggregate number of shares of Common Stock
reserved for issuance under the 1995 Plan from 1,000,000 shares to 1,100,000
shares and (2) for an additional increase in the aggregate number of shares of
Common Stock reserved for issuance from 1,100,000 shares to 1,500,000 shares in
the event that the Company's redeemable common stock purchase warrants (the
"Warrants") are called for redemption by the Company. The Warrants may be
called for redemption by the Company at a price of $.01 per Warrant if the last
sale price of the Company's Common Stock has been at least $10.00 per share for
20 consecutive days.
The Board of Directors believes that the granting of stock options is an
effective method of recruiting and retaining valuable employees of the Company
by providing an incentive to such persons and strengthening the identity of
interests between such key employees and the Company. An increase in the
aggregate number of shares of Common Stock reserved for
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<PAGE>
issuance under the 1995 Plan is necessary to continue the Company's efforts to
attract and retain qualified key executives, directors and other personnel.
Accordingly, on October 18, 1996, the Board of Directors adopted, subject to
stockholder approval, an amendment to increase the number of shares of Common
Stock available under the 1995 Plan as described above.
Vote Required for Approval
To be adopted, the amendment to the 1995 Plan must be approved by a
majority of the outstanding shares of Common Stock represented and entitled to
vote at the meeting.
The Board unanimously recommends a vote FOR the adoption of the amendment
to the 1995 Plan.
Description of the Plan
Eligibility
Those persons who are employees, officers, directors and independent
contractors of particular merit of the Company are eligible to be selected by
the committee (the "Committee") of the Board of Directors that administers the
1995 Plan.
Types of Options
The 1995 Plan authorizes (i) the granting of incentive stock options
("Incentive Options") to purchase shares of the Company's Common Stock and (ii)
the granting of nonqualified stock options ("Nonqualified Options") to purchase
shares of the Company's Common Stock. Unless the context otherwise requires,
the term "Option" includes both Incentive Options and Nonqualified Options.
Administration
The 1995 Plan is administered by the Compensation and Stock Option
Committee (the "Committee") which currently consists of two non-employee
members of the Board of Directors. The Committee in its sole discretion
determines the eligible persons to be awarded Options, the number of shares
subject thereto and the exercise price thereof, subject to certain limitations.
In addition, the determinations and the interpretation and construction of any
provision of the 1995 Plan by the Committee is final and conclusive.
Common Stock Subject to the 1995 Plan
A total of 1,000,000 shares of Common Stock (subject to adjustment as
discussed below) have been reserved for sale upon exercise of Options granted
under the 1995 Plan. As of the date hereof, 963,000 Options have been granted
under the 1995 Plan. The proposed amendment
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<PAGE>
would increase the number of shares to 1,100,000, and subsequently to 1,500,000
in the event that the Company called the Warrants for redemption.
Granting of Options
As of the date hereof, there were 70 employees and four non-employee
directors who were eligible to receive Options under the 1995 Plan. Except as
described below, the Committee grants Options from time to time in its
discretion. No determination has been made as to the number of Options that may
be allocated to the individuals named in the Summary Compensation Table,
current executive officers as a group, current directors who are not executive
officers as a group (except as described below), or all employees (including
all current officers who are not executive officers) as a group, as a result of
the amendment as set forth herein.
The 1995 Plan also provides for automatic grants of Options to non-employee
directors of the Company. Directors receive Options for 10,000 shares of Common
Stock upon becoming directors and Options for 5,000 shares of Common Stock on
each January 1.
Exercise Price of Options
Options may not be granted with an exercise price per share that is less
than the fair market value of a share of Common Stock at the date of grant. The
Options granted to non-employee directors will have an exercise price equal to
the fair market value of a share of Common Stock at the date of grant.
Payment of Exercise Price
The exercise price of an Option may be paid in cash, certified or cashier's
check, by money order, personal check, the delivery of already owned Common
Stock having a fair market value equal to the exercise price, or by the use of
the cashless exercise features of the 1995 Plan, provided, however, that if the
optionee acquired such stock directly or indirectly from the Company, he shall
have owned such stock to be surrendered for six months prior to tendering such
stock for the exercise of an Option.
Special Provisions for Incentive Options
An employee may receive more than one Incentive Option, but the maximum
aggregate fair market value of the Common Stock (determined when the Incentive
Option is granted) with respect to which Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no Incentive Option may be granted to an employee owning directly or
indirectly stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company unless the exercise price is set at not
less than 110% of the fair market value of the shares subject to such Incentive
Option on the date of grant and such Incentive Option expires not later than
five years from the date of grant.
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<PAGE>
Transferability of Options
No Incentive Option granted under the 1995 Plan is assignable or
transferable, otherwise than by will or by the laws of descent and distribution
or pursuant to a qualified domestic relations order. The Committee may grant
Nonqualified Options that are transferable without consideration, to immediate
family members.
Exercisability of Options
The Committee, in its sole discretion, may limit the optionee's right to
exercise all or any portion of an Option until one or more dates subsequent to
the date of grant. The Committee also has the right, exercisable in its sole
discretion, to accelerate the date on which all or any portion of an Option may
be exercised. The 1995 Plan provides that upon the occurrence of certain
changes in control, mergers or sales of substantially all of the assets of the
Company, each Option shall immediately become exercisable in full.
Expiration of Options
The expiration date of an Option is determined by the Committee at the time
of the grant, but in no event is an Option exercisable after the expiration of
10 years from the date of grant of the Option.
If an optionee's employment is terminated for cause, all rights of such
optionee under the 1995 Plan cease and the Options granted to such optionee
become null and void for all purposes. The 1995 Plan further provides that in
most instances an Option must be exercised by the optionee within 30 days after
the termination of an optionee's employment with the Company (for any reason
other than termination for cause, mental or physical disability or death), if
and to the extent such Option was exercisable on the date of such termination.
If the optionee is a director and is not otherwise employed by the Company, his
Option must be exercised within 30 days of the date he ceases to be a director.
The termination provisions of Options granted to optionees who are independent
contractors are determined at the discretion of the Committee. Generally, if an
optionee's termination of employment is due to mental or physical disability,
the optionee will have the right to exercise the Option (to the extent
otherwise exercisable on the date of termination) for a period of one year from
the date on which the optionee suffers the mental or physical disability. If an
optionee dies while actively employed by the Company, the Option may be
exercised (to the extent otherwise exercisable on the date of death) within one
year of the date of the optionee's death by the optionee's legal representative
or legatee.
As described above, an Option becomes exercisable in full upon the
occurrence of certain corporate transactions.
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<PAGE>
Expiration of the 1995 Plan
The 1995 Plan will expire on March 2, 2005, and any Option outstanding on
such date will remain outstanding until it has either expired or has been fully
exercised.
Adjustments
The 1995 Plan provides for adjustments to the number of shares under which
Options may be granted, to the number of shares subject to outstanding Options
and to the exercise price of such outstanding Options in the event of a
declaration of a stock dividend or any recapitalization resulting in a stock
split-up, combination or exchange of the Company's Common Stock.
Certain Corporate Transactions
All outstanding Options automatically become immediately exercisable upon a
change in control, as defined in the 1995 Plan. In general, a change in control
is deemed to have occurred if existing members of the Board of Directors
nominated by existing members cease to constitute a majority of the Board, any
person becomes a 50% or more stockholder of the Company (unless the acquisition
is approved by a majority of the existing members of the Board), the Company
becomes a party to a merger in which it will not be the surviving company or
the stockholders approve the disposition of all or substantially all of the
assets, or 50% or more of the capital stock, of the Company.
Amendments
The Board may amend, suspend or terminate the 1995 Plan or any Option at
any time subject to stockholder approval in certain instances, provided that
such action may not, without the consent of the optionee, substantially impair
the rights of an optionee under an outstanding Option. The Committee may not
amend the 1995 Plan without further stockholder approval to increase the number
of shares of Common Stock reserved for issuance, to change the class of
employees eligible to participate in the 1995 Plan, to permit the granting of
Options with more than a 10-year term or to extend the termination date of the
1995 Plan.
Federal Income Tax Consequences
Grants of Options
Under current tax laws, the grant of an Option will not be a taxable event
to the recipient optionee and the Company will not be entitled to a deduction
with respect to such grant.
Exercise of Nonqualified Options and Subsequent Sale of Stock
Upon the exercise of a Nonqualified Option, an optionee will recognize
ordinary income at the time of exercise equal to the excess of the then fair
market value of the Company's
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<PAGE>
Common Stock received over the exercise price. The taxable income recognized
upon exercise of a Nonqualified Option will be treated as compensation income
subject to withholding and the Company will be entitled to deduct as a
compensation expense an amount equal to the ordinary income an optionee
recognizes with respect to such exercise. When shares of the Common Stock
received upon the exercise of an Nonqualified Option subsequently are sold or
exchanged in a taxable transaction, the holder thereof generally will recognize
capital gain (or loss) equal to the difference between the total amount
realized and the fair market value of the Common Stock on the date of
exercise; the character of such gain or loss as long-term or short-term capital
gain or loss will depend upon the holding period of the shares following
exercise.
Exercise of Incentive Options and Subsequent Sale of Stock
The exercise of an Incentive Option will not be taxable to the optionee,
and the Company will not be entitled to any deduction with respect to such
exercise. However, to qualify for this favorable tax treatment of incentive
stock options under the Code, the optionee may not dispose of the Common Stock
acquired upon the exercise of an Incentive Option until after the later of two
years following the date of grant or one year following the date of exercise.
The surrender of shares of the Company's Common Stock acquired upon the
exercise of an Incentive Option in payment of the exercise price of an Option
within the required holding period for incentive stock options under the Code
will be a disqualifying disposition of the surrendered shares. Upon any
subsequent taxable disposition of the Company's Common Stock received upon
exercise of an Incentive Option, the optionee generally will recognize long-
term or short-term capital gain (or loss) equal to the difference between the
total amount realized and the exercise price of the Option.
If an Option that was intended to be an incentive stock option under the
Code does not qualify for favorable incentive stock option treatment under the
Code due to the failure to satisfy the holding period requirements, the
optionee may recognize ordinary income in the year of the disqualifying
disposition. Provided the amount realized in the disqualifying disposition
exceeds the exercise price, the ordinary income an optionee shall recognize in
the year of a disqualifying disposition shall be the lower of (i) the excess of
the amount realized over the exercise price or (ii) excess of the fair market
value of the Company's Common Stock at the time of the exercise over the
exercise price. In addition, the optionee shall recognize capital gain on the
disqualifying disposition in the amount, if any, by which the amount realized
in the disqualifying disposition exceeds the fair market value on the Company's
Common Stock at the time of the exercise. Such capital gain shall be taxable as
long-term or short-term capital gain, depending on the optionee's holding
period for such shares.
Notwithstanding the favorable tax treatment of Incentive Options for
regular tax purposes, as described above, for alternative minimum tax purposes,
an Incentive Option is generally treated in the same manner as a Nonqualified
Option. Accordingly, an optionee must generally include in alternative minimum
taxable income for the year in which an Incentive Option is exercised the
excess of the fair market value of the date of exercise of the Company's Common
Stock received over the exercise price. If, however, an optionee disposes of
the Company's
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<PAGE>
Common Stock acquired upon the exercise of an Incentive Option in the same
calendar year as the exercise, only an amount equal to the optionee's ordinary
income for regular tax purposes with respect to such disqualifying disposition
will be recognized for the optionee's calculation of alternative minimum
taxable income in such calendar year.
PROPOSAL TO APPROVE INFORMATION TECHNOLOGY CONSULTING, INC. 1996 EQUITY
COMPENSATION PLAN
Approval of ITC Plan
On October 18, 1996, the Board of Directors of ITC and the Company, as the
sole stockholder of ITC, adopted the Information Technology Consulting, Inc.
1996 Equity Compensation Plan (the "ITC Plan"). The full text of the ITC Plan
is attached as Exhibit B. The Company is seeking the approval of its
stockholders to allow ITC to qualify for certain tax deductions pursuant to
Section 162(m) of the Internal Revenue Code of 1986 (the "Code") for
compensation paid to ITC's executive officers. The purpose of the ITC Plan is
to provide designated key employees of ITC, its subsidiaries and its parent
company, the Company, and non-employee members of the Board of Directors of ITC
and the Company's Board of Directors with the opportunity to receive grants of
incentive stock options ("Incentive Options") and non-qualified stock options
("Non-Qualified Options"). ITC believes that the ITC Plan will cause the
optionees to contribute materially to the growth of ITC, thereby benefiting
ITC's stockholders, and will align the economic interests of the participants
with those of the stockholders.
Vote Required for Approval
To be approved by the Company's stockholders, the ITC Plan must be approved
by a majority of the outstanding shares of Common Stock represented and
entitled to vote at the meeting. Neither the ITC Plan nor the options granted
under the ITC Plan are conditioned upon approval by the Company's stockholders.
The Board unanimously recommends a vote FOR the adoption of the ITC Plan.
Description of the Plan
Eligibility
Those persons who are employees of ITC, its subsidiaries and the Company
and non-employee directors of ITC and the Company's Board of Directors shall be
eligible to receive Options under the ITC Plan.
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<PAGE>
Types of Options
The ITC Plan authorizes the granting of Incentive Options and Non-qualified
Options to purchase shares of ITC's Common Stock. Only persons who are
employees of ITC, its subsidiaries or the Company may receive Incentive
Options.
Administration
The ITC Plan shall be administered by a committee consisting of "outside
directors" as defined under Section 162(m) of the Code, except that with
respect to grants of options to non-employee directors, the ITC Board of
directors must ratify or approve any such grants. The committee shall have the
sole authority to determine the individuals to whom grants shall be made,
determine the type, size and terms of the grants to be made, determine the time
when the grants will be made and the duration of the exercise period, establish
the terms of any non-compete provisions applicable to grants and deal with any
other matters arising under the ITC Plan. The committee will have full power
and authority to administer and interpret the ITC Plan, to make factual
determinations and to adopt or amend rules, regulations, agreements and
instruments relating to the ITC Plan. The determinations and interpretations of
the ITC Plan made by the committee shall be conclusive and binding.
Shares Subject to the ITC Plan
A total of 1,500,000 shares of ITC Common Stock (subject to adjustment)
have been reserved for sale upon exercise of Options granted under the ITC
Plan, of which 150,00 shares shall be reserved for issuance to non-employee
directors and 1,350,000 shares shall be reserved for issuance to employees. The
maximum aggregate number of shares of ITC Common Stock that may be subject to
Options granted to any individual during any calendar year shall be 750,000
shares.
The ITC Plan provides for adjustment of shares available for issuance under
the ITC Plan, the maximum number of shares for which any individual
participating in the ITC Plan may be granted Options in any year, the number of
shares covered by outstanding Options, the kind of shares issued under the ITC
Plan and the price per share of such Option. In the event of a stock dividend,
spinoff, recapitalization, stock split or combination or exchange of shares,
merger, reclassification or other extraordinary or unusual event affecting the
outstanding shares of ITC Common Stock.
Exercise Price of Options
Non-qualified Options may be granted with an exercise price per share that
is equal to, greater than or less than, the fair market value (as defined in
the ITC Plan) of a share of ITC Common Stock on the date of grant. The exercise
price of Incentive Options shall be equal to, or greater than, the fair market
value of the ITC Common Stock on the date of grant.
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<PAGE>
Payment of Exercise Price
An Optionee may pay the exercise price of an Option as specified in the
Option grant in cash, or, with the approval of the committee, by delivering
shares of ITC Common Stock. In the event that ITC completes an initial public
offering, an optionee may exercise an option by use of the cashless exercise
feature provided under the ITC Plan.
Special Provisions for Incentive Options
An employee may receive more than one Incentive Option, but the maximum
aggregate fair market value of the Common Stock (determined when the Incentive
Option is granted) with respect to which Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no Incentive Option may be granted to an employee owning directly or
indirectly stock possessing more than 10% of the total combined voting power of
all classes of stock of ITC unless the exercise price is set at not less than
110% of the fair market value of the shares subject to such Incentive Option on
the date of grant and such Incentive Option expires not later than five years
from the date of grant.
Transferability of Options
No Incentive Option granted under the ITC Plan is assignable or
transferable, otherwise than by will or by the laws of descent and distribution
or pursuant to a qualified domestic relations order. The committee may grant
Nonqualified Options that are transferable to family members.
Exercisability of Options
Options shall become exercisable in accordance with the terms and
conditions determined by the committee. The committee also has the right to
accelerate the exercisability of outstanding Options at any time for any
reason.
Expiration of Options
The expiration date of an Option will be determined by the committee, but
in no event will an Option be exercisable for more than 10 years from the date
of grant.
If an optionee's relationship with ITC is terminated for cause, any Option
held by such optionee shall terminate as of the date of termination. Except as
provided in the option grant, an Option must be exercised by the optionee
within 90 days after the termination of an optionee's relationship with ITC
(for any reason other than termination for cause, disability or death), if and
to the extent that the Option was exercisable by the optionee upon termination.
If an optionee ceases to have their relationship with ITC due to disability,
the optionee will have the right to exercise the Option (to the extent
exercisable on the date of termination) for a period of one year from the date
in which the optionee's relationship with ITC terminates. If an
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<PAGE>
optionee dies while he or she has a relationship with ITC, or within 90 days
after termination, the Option may be exercised (to the extent otherwise
exercisable on the date of death) within one year of the date of the optionee's
death.
Change of Control
All outstanding options automatically become immediately exercisable upon a
change of control, as defined in the ITC Plan, unless determined otherwise by
the committee. Upon a change of control where ITC is not the surviving
corporation, all outstanding Options shall be assumed by, or replaced with
comparable Options of the surviving corporation, unless the committee
determines otherwise. In general, a change of control is deemed to have
occurred if ITC becomes a party to a merger where the stockholders of ITC,
immediately prior to the merger, will not beneficially own more than 50% of the
voting stock of the surviving corporation, where the existing members of the
Board cease to constitute a majority of the Board, upon the sale of all or
substantially all of the assets of ITC or upon a liquidation of ITC.
Amendments
The Board may amend or terminate the ITC Plan at any time, subject to
stockholder approval, to increase the aggregate number of shares under the ITC
Plan or if the amendment would require approval under Section 162(m) of the
Code. The Plan will terminate on the day immediately preceding the 10th
anniversary of its effective date, unless it is terminated earlier by the Board
or extended by the Board with the approval of the stockholders.
Federal Income Tax Consequences
Grants of Options
Under current tax laws, the grant of an Option will not be a taxable event
to the recipient optionee and ITC will not be entitled to a deduction with
respect to such grant.
Exercise of Nonqualified Options and Subsequent Sale of Stock
Upon the exercise of a Nonqualified Option, an optionee will recognize
ordinary income at the time of exercise equal to the excess of the then fair
market value of ITC's Common Stock received over the exercise price. The
taxable income recognized upon exercise of a Nonqualified Option will be
treated as compensation income subject to withholding and ITC will be entitled
to deduct as a compensation expense an amount equal to the ordinary income an
optionee recognizes with respect to such exercise. When shares of the Common
Stock received upon the exercise of an Nonqualified Option subsequently are
sold or exchanged in a taxable transaction, the holder thereof generally will
recognize capital gain (or loss) equal to the difference between the total
amount realized and the fair market value of the Common Stock on the date of
exercise; the character of such gain or loss as long-term or short-term capital
gain or loss will depend upon the holding period of the shares following
exercise.
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<PAGE>
Exercise of Incentive Options and Subsequent Sale of Stock
The exercise of an Incentive Option will not be taxable to the optionee,
and ITC will not be entitled to any deduction with respect to such exercise.
However, to qualify for this favorable tax treatment of incentive stock options
under the Code, the optionee may not dispose of the Common Stock acquired upon
the exercise of an Incentive Option until after the later of two years
following the date of grant or one year following the date of exercise. The
surrender of shares of ITC's Common Stock acquired upon the exercise of an
Incentive Option in payment of the exercise price of an Option within the
required holding period for incentive stock options under the Code will be a
disqualifying disposition of the surrendered shares. Upon any subsequent
taxable disposition of ITC's Common Stock received upon exercise of an
Incentive Option, the optionee generally will recognize long-term or short-term
capital gain (or loss) equal to the difference between the total amount
realized and the exercise price of the Option.
If an Option that was intended to be an incentive stock option under the
Code does not qualify for favorable incentive stock option treatment under the
Code due to the failure to satisfy the holding period requirements, the
optionee may recognize ordinary income in the year of the disqualifying
disposition. Provided the amount realized in the disqualifying disposition
exceeds the exercise price, the ordinary income an optionee shall recognize in
the year of a disqualifying disposition shall be the lower of (i) the excess of
the amount realized over the exercise price or (ii) excess of the fair market
value of ITC's Common Stock at the time of the exercise over the exercise
price. In addition, the optionee shall recognize capital gain on the
disqualifying disposition in the amount, if any, by which the amount realized
in the disqualifying disposition exceeds the fair market value on ITC's Common
Stock at the time of the exercise. Such capital gain shall be taxable as long-
term or short-term capital gain, depending on the optionee's holding period for
such shares.
Notwithstanding the favorable tax treatment of Incentive Options for
regular tax purposes, as described above, for alternative minimum tax purposes,
an Incentive Option is generally treated in the same manner as a Nonqualified
Option. Accordingly, an optionee must generally include in alternative minimum
taxable income for the year in which an Incentive Option is exercised the
excess of the fair market value of the date of exercise of ITC's Common Stock
received over the exercise price. If, however, an optionee disposes of ITC's
Common Stock acquired upon the exercise of an Incentive Option in the same
calendar year as the exercise, only an amount equal to the optionee's ordinary
income for regular tax purposes with respect to such disqualifying disposition
will be recognized for the optionee's calculation of alternative minimum
taxable income in such calendar year.
New Plan Benefits
The table below summarizes the number of options that were granted in
September and October 1996 under the ITC Plan.
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<PAGE>
<TABLE>
<CAPTION>
Name and Position Number of Shares /(1)/
- ----------------------------------------------- ----------------------
<S> <C> <C>
Arthur R. Spector
Chairman of ITC
Chairman, President and
CEO of the Company.................................. 500,000 /(2)/
James W. Dixon
President, CEO and Director of ITC
Director of the Company............................. 500,000 /(2)/
Michael G. Kantrowitz
Director of ITC
Executive Vice President and
Director of the Company............................. 15,000 /(3)/
Howard L. Morgan
Director of ITC and the Company..................... 15,000 /(3)/
John M. Ryan
Director of ITC and the Company..................... 15,000 /(3)/
Carl G. Sempier
Director of ITC and the Company..................... 15,000 /(3)/
Scott Holland
Secretary and Treasurer of ITC and
Vice President of Finance and
Administration of the Company....................... 15,000 /(4)/
Executive Officer Group...............................1,000,000
Non-Executive Officer Director
Group............................................... 60,000
Non-Executive Officer
Employee Group...................................... 15,000
</TABLE>
- ------------------------------
/(1)/ Except for the options listed above, future benefits under the ITC Plan
are not determinable since grants of options are at the discretion of the
ITC's committee and Board of Directors.
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<PAGE>
/(2)/ Options to acquire ITC Common Stock, which are fully exercisable
immediately at an exercise price of $0.44 per share.
/(3)/ Options to acquire ITC Common Stock, which vest in three equal
installments upon re-election at each of the three succeeding annual
meetings beginning at the December 1996 annual meeting.
/(4)/ Options to acquire ITC Common Stock, which vest in three equal annual
installments beginning December 1996.
PROPOSAL TO RATIFY ACCOUNTANTS
Arthur Andersen LLP has served as the Company's independent public
accountants for the year ended June 30, 1996. The Company has requested that a
representative of Arthur Andersen LLP attend the Annual Meeting. Such
representative will have an opportunity to make a statement, if he or she
desires, and will be available to respond to appropriate questions of
stockholders.
The Board of Directors recommends that you vote FOR the ratification of
Arthur Andersen LLP as independent public accountants.
STOCKHOLDERS PROPOSALS FOR
NEXT ANNUAL MEETING
Any properly submitted proposal which a stockholder intends to present at
the next Annual Meeting of Stockholders must be received by the Company by July
9, 1997 if it is to be included in the Company's proxy statement and form of
proxy relating to the next Annual Meeting.
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<PAGE>
HDS NETWORK SYSTEMS, INC.
PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE ANNUAL MEETING OF STOCKHOLDERS, DECEMBER 3, 1996
The undersigned holder of Common Stock of HDS Network Systems, Inc. hereby
appoints Michael G. Kantrowitz and Scott Holland, and each of them, proxies,
with powers of substitution in each, to vote on behalf of the undersigned at the
Annual Meeting of Stockholders to be held at 10:00 a.m. on Tuesday, December 3,
1996, at the Company's offices at 400 Feheley Drive, King of Prussia,
Pennsylvania, and at all adjournments thereof, according to the number of shares
which the undersigned would be entitled to vote if then personally present, and
in their discretion upon such other business as may come before the Meeting.
SHARES WILL BE VOTED AS INSTRUCTED, BUT IF NO INSTRUCTION IS GIVEN, SHARES
WILL BE VOTED FOR ALL THE NOMINEES FOR DIRECTOR NAMED IN THE PROXY STATEMENT,
FOR THE PROPOSALS DESCRIBED IN THE PROXY STATEMENT AND WITH DISCRETIONARY
AUTHORITY ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
The undersigned acknowledges receipt of this proxy with a copy of the
Notice of Annual Meeting of Stockholders and the Proxy Statement of the Board of
Directors. (Continued, and to be signed, on the other side)
1. ELECTION OF DIRECTORS
[_] FOR all nominees listed below
[_] WITHHOLD AUTHORITY
to vote for all nominees listed below
Nominees: Arthur R. Spector, Michael G. Kantrowitz, Howard L. Morgan, John M.
Ryan, Carl G. Sempier and James W. Dixon
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
_______________________________________________________________________________
2. AMEND THE COMPANY'S 1995 STOCK OPTION PLAN.
[_] FOR [_] AGAINST [_] ABSTAIN
3. APPROVE THE INFORMATION TECHNOLOGY CONSULTING, INC. 1996 EQUITY
COMPENSATION PLAN.
[_] FOR [_] AGAINST [_] ABSTAIN
4. RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITORS.
[_] FOR [_] AGAINST [_] ABSTAIN
5. IN THEIR DISCRETION, UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING.
Change of Address or [_]
Comments Mark Here
NOTE: Please sign exactly as name(s) appears hereon.
Executors, administrators, trustees, etc.
should give full title as such.
DATE:_______________________________________________
____________________________________________________
Signature
____________________________________________________
Signature
Votes must be indicated [_] or [X] in Black or Blue ink.
PLEASE SIGN AND RETURN PROMPTLY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
<PAGE>
Exhibit A
1995 STOCK OPTION PLAN
[Adopted by the Board of Directors on November 29, 1994]
PART I
DEFINITIONS AND ADMINISTRATIVE MATTERS
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SECTION 1. Purpose; Definitions
The purpose of the Information Systems Acquisition Corporation 1995 Stock
Option Plan (the "Plan") is to enable employees, officers, directors and
independent contractors of Information Systems Acquisition Corporation ("the
Company") to (i) own shares of stock in the Company, (ii) participate in the
stockholder value which has been created, (iii) have a mutuality of interest
with other stockholders and (iv) enable the Company to attract, retain and
motivate employees, officers, directors and independent contractors of
particular merit.
For the purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Board" means the Board of Directors of the Company.
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(b) "Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and any successor thereto.
(c) "Committee" means the Committee designated by the Board to adminis-
---------
ter the Plan.
(d) "Company" means Information Systems Acquisition Corporation, its
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Subsidiaries or any successor organization.
(e) "Disability" means permanent and total disability within the meaning
----------
of Section 22(e)(3) of the Code.
(f) "Disinterested Person" shall have the meaning set forth in the Rules.
--------------------
(g) "Eligible Independent Contractor" means an independent contractor
-------------------------------
hired by the Company who is neither an Employee of the Company nor a Non-
Employee Director.
(h) "Employee" means any person, including a director, who is employed
--------
by the Company and is compensated for such employment by a regular salary.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(j) "Fair Market Value" means the per share value of the Stock as of any
-----------------
given date, as determined by reference to the price of the last traded share of
Stock on the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation ("NASDAQ") System for such date or
the next preceding date that Stock was traded on such market, or, in the event
<PAGE>
the Stock is listed on a stock exchange, the closing price per share of Stock as
reported on such exchange for such date.
(k) "Incentive Stock Option" means any Stock Option intended to be and
----------------------
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(l) "Insider" means a Participant who is subject to Section 16 of the
-------
Exchange Act.
(m) "Non-Employee Director" means any member of the Board who is not an
---------------------
Employee of the Company and is not compensated for employment by a regular
salary.
(n) "Non-Qualified Stock Option" means any Stock Option that is not an
--------------------------
Incentive Stock Option.
(o) "Participant" means an Employee, officer, Non-Employee Director or
-----------
Eligible Independent Contractor to whom an award is granted pursuant to the
Plan.
(p) "Plan" means the Information Systems Acquisition Corporation 1995
----
Stock Option Plan, as hereinafter amended from time to time.
(q) "Rules" means Rule 16(b)(3) and any successor provisions promulgated
-----
by the Securities and Exchange Commission under Section 16 of the Exchange Act.
(r) "Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
(s) "Securities Broker" means the registered securities broker acceptable
-----------------
to the Company who agrees to effect the cashless exercise of an Option pursuant
to Section 5(d) hereof.
(t) "Stock" means the Common Stock of the Company, par value $.01 per
-----
share.
(u) "Stock Option" or "Option" means any option to purchase shares of
------------ ------
Stock (including Restricted Stock, if the Committee so determines) granted
pursuant to Section 5 below.
(v) "Subsidiary" means any corporation owned, in whole or in part, by the
----------
Company.
SECTION 2. Administration
2.1 The portion of the Plan with respect to the grant of Options
pursuant to Part II shall be administered by a Committee of not less than three
Directors who shall be Disinterested Persons appointed by the Board and who
shall serve at the pleasure of the Board; provided further, however, that,
notwithstanding the foregoing, Part II of the Plan shall be administered by such
number of Disinterested Persons as and to the extent required by the Rules.
The Committee shall have the authority to grant pursuant to the terms of
the Plan: Stock Options to Employees (including directors who are Employees)
and officers of the Company, and Eligible Independent Contractors. In
particular, the Committee shall, subject to the limitations and terms of the
Plan, have the authority:
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<PAGE>
(i) to select the officers, directors (who are Employees) and
other Employees of the Company, and the Eligible Independent Contractors to whom
Stock Options may from time to time be granted hereunder;
(ii) to determine whether and to what extent incentive Stock
Options are to be granted hereunder;
(iii) to determine the number of shares to be covered by each such
award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder, including the option or
exercise price and any restrictions or limitations, based upon such factors as
the Committee shall determine, in its sole discretion;
(v) to determine whether and under what circumstances a Stock
Option may be exercised and settled in cash or Stock or without a payment of
cash;
(vi) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award under
this Plan shall be deferred either automatically or at the election of the
Participant; and
(vii) to amend the terms of any outstanding award (with the consent
of the Participant) to reflect terms not otherwise inconsistent with the Plan,
including amendments concerning exercise price changes, vesting acceleration or
forfeiture waiver regarding any award or the extension of a Participant's right
with respect to awards granted under the Plan, as a result of termination of
employment or service or otherwise, based on such factors as the Committee shall
determine, in its sole discretion.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan, provided that the
Committee may delegate to the Chief Executive Officer of the Company, or such
other officer as may be designated by the Committee, the authority, subject to
guidelines prescribed by the Committee, to grant Options to Employees and
Eligible Independent Contractors who are not then subject to the provisions of
Section 16 of the Exchange Act, and to determine the number of shares to be
covered by any such Option, and the Committee may authorize any one or more of
such persons to execute and deliver documents on behalf of the Committee,
provided that no such delegation may be made that would cause grants of Options
to persons subject to Section 16 of the Exchange Act to fail to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act.
Determinations, interpretations or other actions made or taken by the Committee
pursuant to the provisions of the Plan shall be final and binding and conclusive
for all purposes and upon all persons.
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 Stock Option
granted under it. Nothing herein shall be deemed to expand the personal
liability of a member of the Board or Committee beyond that which may arise
under any applicable standards set forth in the Company's by-laws and Delaware
law, nor shall anything herein limit any rights to indemnification or
advancement of expenses to which any member of the Board or the Committee may be
entitled under any by-law, agreement, vote of the stockholders or directors, or
otherwise.
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<PAGE>
2.2 The portion of the Plan with respect to the grant of Options
pursuant to Part III shall be administered by the Board. Grants of Stock Options
under Part III of the Plan and the amount, price and timing of the awards to be
granted will be automatic, as described in Part III hereof. All questions of
interpretation of the Plan with respect to the grant of Options pursuant to Part
III will be determined by the Board, and such determination shall, unless
otherwise determined by the Board, be final and conclusive on all persons having
any interest hereunder.
SECTION 3. Stock Subject to the Plan
3.1 The aggregate number of shares of Stock that may be issued or
transferred under the Plan is 1,100,000, subject to adjustment pursuant to
Section 3.2 below. In the event that the Company's redeemable common stock
purchase warrants (the "Warrants") are called for redemption of the Company, the
aggregate number of shares of stock that may be issued or transferred under the
Plan shall be increased to 1,500,000, subject to adjustment pursuant to Section
3.2 below. Such shares may be authorized but unissued shares or reacquired
shares. If the number of shares of Stock issued under the Plan and the number of
shares of Stock subject to outstanding awards (taking into account the share
counting requirements established under the Rules) equals the maximum number of
shares of Stock authorized under the Plan, no further awards shall be made
unless the Plan is amended in accordance with the Rules or additional shares of
Stock become available for further awards under the Plan. If and to the extent
that Options granted under the Plan terminate, expire or are canceled without
having been exercised, such shares shall again be available for subsequent
awards under the Plan.
3.2 If any change is made to the Stock (whether by reason of merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
combination of shares, or exchange of shares or any other change in capital
structure made without receipt of consideration), then unless such event or
change results in the termination of all outstanding awards under the Plan, the
Board or the Committee shall preserve the value of the outstanding awards by
adjusting the maximum number and class of shares issuable under the Plan to
reflect the effect of such event or change in the Company's capital structure,
and by making appropriate adjustments to the number and class of shares subject
to an outstanding award and/or the option price of each outstanding Option,
except that any fractional shares resulting from such adjustments shall be
eliminated by rounding any portion of a share equal to .500 or greater up, and
any portion of a share equal to less than .500 down, in each case to the nearest
whole number.
3.3 In any fiscal year of the Company, the maximum number of shares of
Common Stock with respect to which Options may be granted to any optionee shall
not exceed 5% of the Common Stock outstanding, as adjusted for stock splits,
stock dividends or other similar changes affecting the Common Stock.
SECTION 4. Designation of Optionees
4.1 Optionees under Part II of the Plan shall be selected, from time to
time, by the Committee from among those Employees and Eligible Independent
Contractors who, in the opinion of the Committee, occupy responsible positions
and who have the capacity to contribute materially to the continued growth,
development and long-term success of the Company and its Subsidiaries.
4.2 All Non-Employee Directors on the date of grant shall be eligible to
receive Options under Part III of the Plan.
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<PAGE>
PART II
GRANTS TO EMPLOYEES AND ELIGIBLE INDEPENDENT CONTRACTORS
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SECTION 5. Stock Options
Any Stock Option granted under Part II of the Plan shall be in such form as
the Committee may from time to time approve. Stock Options granted under Part
II of the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-
Qualified Stock Options.
The Committee shall have the authority to grant Incentive Stock Options,
Non-Qualified Stock Options or both types of Stock Options. To the extent that
any Stock Option does not qualify as an Incentive Stock Option, it shall
constitute a Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this Plan
relating to Incentive Stock Options shall be interpreted, amended or altered,
nor shall any discretion or authority granted under the Plan be so exercised, so
as to disqualify the Plan under Section 422 of the Code, or, without the consent
of the optionee(s) affected, to disqualify any Incentive Stock Option under
Section 422.
Options granted hereunder shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
appropriate:
5.1 Option Price. The option price per share of Stock purchasable under
------------
a Stock Option shall be determined by the Committee at the time of grant;
provided, however, that the option price per share for any Stock Option shall be
not less than 100% of the Fair Market Value of the Stock on the date of grant.
Any Incentive Stock Option granted to any optionee who, at the time the
Option is granted, owns more than 10% of the voting power of all classes of
stock of the Company or of a Parent or Subsidiary corporation (within the
meaning of Section 424 of the Code), shall have an exercise price no less than
110% of Fair Market Value per share on the date of the grant.
5.2 Option Term. The term of each Stock Option shall be fixed by the
-----------
Committee, but no Stock Option shall be exercisable more than ten years after
the date the Stock Option is granted. However, any Incentive Stock Option
granted to any optionee who, at the time the Option is granted, owns more than
10% of the voting power of all classes of stock of the Company or of a Parent or
Subsidiary corporation may not have a term of more than five years. No Option
may be exercised by any person after expiration of the term of the Option.
5.3 Exercisability. Stock Options shall be exercisable at such time or
--------------
times and subject to such terms and conditions as shall be determined by the
Committee at or after grant. If the Committee provides, in its discretion, that
any Stock Option is exercisable only in installments, the Committee may waive
such installment exercise provisions at any time at or after grant in whole or
in part, based on such factors as the Committee shall determine, in its sole
discretion.
5.4 Method of Exercise. Subject to whatever installment exercise
------------------
provisions apply under Section 5.3, Stock Options may be exercised in whole or
in part at any time and from time to time during the Option period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by
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<PAGE>
cash, check, or such other instrument as the Committee may accept. As determined
by the Committee, in its sole discretion, at or after grant, payment in full or
in part may also be made in the form of unrestricted Stock already owned by the
optionee (based upon the Fair Market Value of a share of Stock on the business
date preceding tender if received prior to the close of the stock market and at
the Fair Market Value on the date of tender if received after the stock market
closes); provided, however, that, (i) in the case of an Incentive Stock Option,
the right to make a payment in the form of unrestricted Stock already owned by
the optionee may be authorized only at the time the Option is granted and (ii)
the Company may require that the Stock has been owned by the Participant for a
minimum period of time specified by the Committee. In addition, if such
unrestricted Stock was acquired through exercise of an Incentive Stock Option,
such Stock shall have been held by the optionee for a period of not less than
the holding period described in Section 422(a)(1) of the Code on the date of
exercise, or if such Stock was acquired through exercise of a Non-Qualified
Stock Option or of an option under a similar plan of the Company, such Stock
shall have been held by the optionee for a period of more than one year on the
date of exercise, and further provided that the optionee shall not have tendered
Stock in payment of the exercise price of any other Option under the Plan or any
other stock option plan of the Company within six calendar months of the date of
exercise.
To the extent permitted under the applicable laws and regulations, at the
request of the Participant, and with the consent of the Committee, the Company
shall permit payment to be made by means of a "cashless exercise" of an Option.
Payment by means of a cashless exercise shall be effected by the Participant
delivering to the Securities Broker irrevocable instructions to sell a
sufficient number of shares of Stock to cover the cost and expenses associated
therewith and to deliver such amount to the Company.
No shares of Stock shall be issued until full payment therefor has been
made. An optionee shall not have any right to dividends or other rights of a
stockholder with respect to shares subject to the Option until such time as
Stock is issued in the name of the optionee following exercise of the Option in
accordance with the Plan.
5.5 Stock Option Agreement. Each Option granted under this Plan shall
----------------------
be evidenced by an appropriate Stock Option agreement, which agreement shall
expressly specify whether such Option is an Incentive Stock Option or a Non-
Qualified Stock Option and shall be executed by the Company and the optionee.
The agreement shall contain such terms and provisions, not inconsistent with the
Plan, as shall be determined by the Committee. Such terms and provisions may
vary between optionees or as to the same optionee to whom more than one Option
may be granted.
5.6 Replacement Options. If an Option granted pursuant to the Plan may
-------------------
be exercised by an optionee by means of a stock-for-stock swap method of
exercise as provided in 5.4 above, then the Committee may, in its sole
discretion and at the time of the original Option grant, authorize the
Participant to automatically receive a replacement Option pursuant to this part
of the Plan. This replacement Option shall cover a number of shares determined
by the Committee, but in no event more than the number of shares equal to the
difference between the number of shares of the original Option exercised and the
net shares received by the Participant from such exercise. The per share
exercise price of the replacement Option shall equal the then current Fair
Market Value of a share of Stock, and shall have a term extending to the
expiration date of the original Option.
The Committee shall have the right, in its sole discretion and at any time,
to discontinue the automatic grant of replacement Options if it determines the
continuance of such grants to no longer be in the best interest of the Company.
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<PAGE>
5.7 Non-transferability of Options. No Stock Option shall be trans-
------------------------------
ferable by the optionee other than by will, by the laws of descent and
distribution, pursuant to a qualified domestic relations order, or as permitted
under the Rules, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the
Committee may grant non-qualified Options that are transferable, without payment
of consideration, to immediate family members (i.e., spouses, children and
grandchildren) of the Optionee or to trusts for, or partnerships whose only
partners are, such family members. The Committee may also amend outstanding non-
qualified Options to provide for such transferability.
5.8 Termination of Employment by Reason of Death. Unless otherwise
--------------------------------------------
determined by the Committee at or after grant, if any optionee dies during the
optionee's period of employment by the Company, or during the periods referred
to in Sections 5.9, 5.10 or 5.11, any Stock Option held by such optionee may
thereafter be exercised, to the extent then exercisable or on such accelerated
basis as the Committee may determine at or after grant, by the legal
representative of the estate or by the legatee of the optionee under the will of
the optionee, for a period of one year (or such shorter period as the Committee
may specify at grant) from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is shorter.
5.9 Termination of Employment by Reason of Disability. Unless otherwise
-------------------------------------------------
determined by the Committee at or after grant, if an optionee's employment by
the Company terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination, or on such accelerated basis as the
Committee may determine at or after grant, for a period of one year (or such
shorter period as the Committee may specify at grant) from the date of such
termination of employment or until the expiration of the stated term of such
Stock Option, whichever period is shorter. In the event of termination of
employment by reason of Disability, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified
Stock Option.
5.10 Termination of Employment Upon Retirement. Unless otherwise deter-
-----------------------------------------
mined by the Committee at or after grant, if an optionee's employment terminates
due to retirement (as hereinafter defined), any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the date of retirement, or on such accelerated basis as the
Committee may specify at grant, for a period of one-year (or such shorter period
as the Committee may specify at grant) from the date of such retirement or until
the expiration of the stated term of such Stock Option, whichever period is
shorter. For purposes of this Section 5.10, "Retirement" shall mean any Employee
retirement under the Company's retirement policy.
5.11 Other Termination of Employment. Unless otherwise determined by the
-------------------------------
Committee at or after grant, in the event of termination of employment
(voluntary or involuntary) for any reason other than death, Disability or
retirement, or if an Employee is terminated for cause, any Stock Option held by
such optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such termination or on such accelerated basis as the
Committee may determine at or after grant, for a period of three months (or such
shorter period as the Committee may specify at grant) from the date of such
termination of employment or the expiration of the stated term of such Stock
Option, whichever period is shorter. If an Employee is terminated for cause,
any Stock Option held by such Optionee shall terminate immediately.
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<PAGE>
5.12 Incentive Stock Option Limitation. The aggregate Fair Market Value
---------------------------------
(determined as of the time of grant) of the Stock with respect to which
Incentive Stock Options are exercisable for the first time by the optionee
during any calendar year under the Plan and/or any other stock option plan of
the Company shall not exceed $100,000.
5.13 Termination of Eligible Independent Contractors Options. The ter-
-------------------------------------------------------
mination provisions of Options granted to Eligible Independent Contractors shall
be determined by the Committee in its sole discretion.
5.14 Withholding and Use of Shares to Satisfy Tax Obligations. The
--------------------------------------------------------
obligation of the Company to deliver Stock upon the exercise of any Option shall
be subject to applicable federal, state and local tax withholding requirements.
If the exercise of any Option is subject to the withholding requirements of
applicable federal tax laws, the Committee, in its discretion (and subject to
such withholding rules ("Withholding Rules") as shall be adopted by the
Committee), may permit the optionee to satisfy the federal withholding tax, in
whole or in part, by electing to have the Company withhold (or by delivering to
the Company) shares of Stock, which Stock shall be valued, for this purpose, at
their Fair Market Value on the date the amount of tax required to be withheld is
determined (the "Determination Date"). Such election must be made in compliance
with and subject to the Withholding Rules, and the Committee may not withhold
shares of Stock in excess of the number necessary to satisfy the minimum federal
income tax withholding requirements. If Stock acquired under the exercise of an
Incentive Stock Option is used to satisfy such withholding requirement, such
Stock must have been held by the optionee for a period of not less than the
holding period described in Section 422(a)(1) of the Code on the Determination
Date. If Stock acquired through the exercise of a Non-Qualified Stock Option or
of an option under a similar plan is delivered by the optionee to the Company to
satisfy such withholding requirement, such Stock must have been held by the
optionee for a period of more than one year on the Determination Date. For
Optionees subject to Section 16 of the Exchange Act, to the extent required by
Section 16, the election to have Stock withheld by the Corporation hereunder
must be either (a) an irrevocable election made six months before the
Determination Date; or (b) an irrevocable election where both the election and
the Determination Date occur during one of the ten-day periods beginning on the
third business day following the date of release of the Company's quarterly or
annual summary financial data and ending on the twelfth business day following
such release.
5.15 Issuance of Shares and Compliance with Securities Acts. Within a
------------------------------------------------------
reasonable time after exercise of an Option, the Company shall cause to be
delivered to the optionee a certificate for the Stock purchased pursuant to the
exercise of the Option. At the time of any exercise of any Option, the Company
may, if it shall deem it necessary and desirable for any reason connected with
any law or regulation of any governmental authority relative to the regulation
of securities, require the optionee to represent in writing to the Company that
it is his or her then intention to acquire the Stock for investment and not with
a view to distribution thereof and that such optionee will not dispose of such
Stock in any manner that would involve a violation of applicable securities
laws. In such event, no Stock shall be issued to such holder unless and until
the Company is satisfied with such representation. Certificates for shares of
Stock issued pursuant to the exercise of Options may bear an appropriate
securities law legend.
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<PAGE>
PART III
GRANTS TO NON-EMPLOYEE DIRECTORS
--------------------------------
SECTION 6. Grant of Options
Options to purchase 10,000 shares of Common Stock, subject to adjustment as
provided in Section 3.2 (the "Initial Options") and options to purchase 5,000
shares, subject to adjustments as provided in Section 3.2, (the "Annual
Options"), shall be granted to Non-Employee Directors as follows:
(a) Each Non-Employee Director on the 30th day after the
stockholders of the Company have approved the Plan shall be granted an Initial
Option.
(b) Each Non-Employee Director who is not granted an Initial
Option pursuant to Section 6(a), shall be granted an Initial Option on the first
business day immediately following the date that such person is first elected or
appointed to serve as a Non-Employee Director.
(c) Each year on January 1, each Non-Employee Director on such
date shall be granted an Annual Option.
SECTION 7. Types of Options
All options granted under Part III of the Plan shall be non-qualified Stock
Options for purposes of the Code.
SECTION 8. Option Price
The purchase price of each share of Stock issuable upon exercise of an
Option will be equal to the Fair Market Value of the Stock on the date of grant.
SECTION 9. Option Term and Rights to Exercise
9.1 Period of Option and Rights to Exercise. Except as set forth
---------------------------------------
herein, each herein Non-Employee Director who receives options under this Plan
must continue to hold office as a Non-Employee Director of the Company for six
months from the date that the Initial Option is granted and six months from the
date each Annual Option is granted before he can exercise any part thereof.
Thereafter, subject to the provisions of the Plan, options will vest and be
exercisable as follows:
(a) Initial Options.
---------------
(i) Each Initial Option will vest and be exercisable in full
six months from the date of grant.
(ii) The right to exercise an Initial Option will expire on
the fifth anniversary of the date on which the option was granted.
(iii) Once an Initial Option has become exercisable, such
option may be exercised in whole at any time or in part from time to time
until the expiration of the
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<PAGE>
option, whether or not any option granted previously to the optionee
remains outstanding at the time of such exercise.
(b) Annual Options.
--------------
(i) Each Annual Option will vest and be exercisable on a
cumulative basis as to 2,500 shares beginning six months from the date of
grant and 2,500 additional shares beginning on the first anniversary of the
date of grant.
(ii) The right to exercise an Annual Option will expire on
the fifth anniversary of the date on which the option was granted.
(iii) Once each installment of an Annual Option has become
exercisable, it may be exercised in whole at any time or in part from time
to time until the expiration of the option, whether or not an option
granted previously to the optionee remains outstanding at the time of such
exercise.
SECTION 10. Payment of Option Price
Payment or provision for payment of the purchase price shall be made as
follows: (i) in cash or check; (ii) by exchange of Stock valued at its Fair
Market Value on the date of exercise; (iii) by means of a cashless exercise
procedure by the delivery to the Company of an exercise notice and irrevocable
instructions to the Securities Broker to sell a sufficient number of shares of
Stock to pay the purchase price of the shares of Common Stock as to which such
exercise relates and to deliver promptly such amount to the Company; or (iv) by
any combination of the foregoing.
Where payment of the purchase price is to be made with shares of Stock acquired
through exercise of a non-qualified Stock Option or of an option under a similar
plan of the Company, such Stock shall have been held by the optionee for a
period of more than one year on the date of exercise, and further provided that
the optionee shall not have tendered Stock in payment of the exercise price of
any other Option under the Plan or any other stock option plan of the Company
within six calendar months of the date of exercise.
SECTION 11. Termination of Service
Upon cessation of service as a Non-Employee Director (for reasons other
than retirement or death), including cessation of service due to physical or
mental disability that prevents such person from rendering further services as a
Non-Employee Director, only those options exercisable at the date of cessation
of service shall be exercisable by the Non-Employee Director. Such options
shall be exercisable for a period of three months from cessation of service of
the Non-Employee Director or the expiration of the Option, whichever period is
shorter.
Upon the retirement or death of a Non-Employee Director, options shall be
exercisable as follows:
(a) Retirement. Upon retirement as a Non-Employee Director after
----------
the Non-Employee Director has served for at least six consecutive years as a
director, all Options shall continue to be exercisable during their terms as if
such person had remained a Non-Employee Director.
-10-
<PAGE>
(b) Death. In the event of the death of a Non-Employee Director
-----
while a member of the Board, or within the period after termination of service
referred to in the first paragraph of Section 11, the Options granted to him
shall be exercisable, to the extent then exercisable, for a period of one year
from the date of the Non-Employee Director's death, or until the expiration of
the Option, whichever period is shorter.
SECTION 12. No Guaranteed Term of Office
Nothing in this Plan or any modification thereof, and no grant of an
option, or any term thereof, shall be deemed an agreement or condition
guaranteeing to any Non-Employee Director any particular term of office or
limiting the right of the Company, the Board or the stockholders to terminate
the term of office of any Non-Employee Director under the circumstances set
forth in the Company's Certificate of Incorporation or Bylaws, or as otherwise
provided by law.
SECTION 13. Other Restrictions
Sections 5.5, 5.7 and 5.15 of the Plan shall apply to options granted
pursuant to Part III of the Plan.
PART IV
MISCELLANEOUS
-------------
SECTION 14. Change in Control
A "Change in Control" for purposes of this Plan shall mean any one of the
events described below:
14.1 at any time during a period of two (2) consecutive years, at least a
majority of the Board shall not consist of Continuing Directors. "Continuing
Directors" shall mean directors of the Company at the beginning of such two-year
period and directors who subsequently became such and whose selection or
nomination for election by the Company's shareholders was approved by a majority
of the then Continuing Directors; or
14.2 any person or "group" (as determined for purposes of Regulation 13D-
G promulgated by the Commission under the Exchange Act or under any successor
regulation), but excluding any majority-owned subsidiary or any employee benefit
plan sponsored by the Company or any subsidiary or any trust or investment
manager for the account of such a plan, shall have acquired "beneficial
ownership" (as determined for purposes of such regulation) of the Company's
securities representing fifty percent (50%) or more of the combined voting power
of the Company's then outstanding securities unless such acquisition is approved
in advance by a majority of the directors of the Company who were in office
immediately preceding such acquisition and any individual selected to fill any
vacancy created by reason of the death or disability of any such director; or
14.3 the Company becomes a party to a merger, consolidation or share
exchange in which either (i) the Company will not be the surviving corporation
or (ii) the Company will be the surviving corporation and any outstanding shares
of Common Stock will be converted into shares of any other company (other than a
reincorporation or the establishment of a holding company involving no
-11-
<PAGE>
change in ownership of the Company or other securities or cash or other property
(excluding payments made solely for fractional shares); or
14.4 the Company's shareholders (i) approve any plan or proposal for the
disposition or other transfer of all, or substantially all, of the assets of the
Company, whether by means of a merger, reorganization, liquidation or
dissolution or otherwise or (ii) dispose of, or become obligated to dispose of,
50% or more of the outstanding capital stock of the Company by tender offer or
otherwise.
If a Change in Control has occurred, all outstanding options granted under
the Plan shall be immediately exercisable by the holder of the option for the
total remaining number of Shares covered by the option and shall survive any
such event.
SECTION 15. Amendments and Termination
The Board may amend, alter or discontinue the Plan at any time and from
time to time, but no amendment, alteration or discontinuation shall be made
which would impair the rights of an optionee or Participant under a Stock Option
award theretofore granted, without the optionee's or Participant's consent, or
which, without the approval of the Company's stockholders, would require
stockholder approval under the Rules.
Except for awards made pursuant to Part III, the Committee may amend the
terms of any Stock Option theretofore granted, prospectively or retroactively,
but no such amendment shall impair the rights of any holder without the holder's
consent. Except for awards made to Non-Employee Directors pursuant to Part III,
the Committee may also substitute new Stock Options for previously granted Stock
Options, including previously granted Stock Options having higher option prices.
Subject to the above provisions, the Board shall have broad authority to amend
the Plan to take into account changes in applicable tax laws, securities laws
and accounting rules, as well as other developments.
SECTION 16. Unfunded Status of Plan
The Plan is intended to constitute an "unfunded" plan of incentive and
deferred compensation. With respect to any payments not yet made to a
Participant or optionee by the Company, nothing contained herein shall give any
such Participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize
the creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that, unless the Committee otherwise determines
with the consent of the affected Participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan.
SECTION 17. General Provisions
17.1 All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities Act, the Exchange Act, any stock
exchange or over-the-counter market upon which the Stock is then listed, and any
applicable federal or state securities law, and the Committee or the Board may
cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
-12-
<PAGE>
17.2 Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required, and such arrangements may be either generally
applicable or applicable only in specific cases.
17.3 The adoption of the Plan shall not confer upon any Participant any
right to continued employment with the Company nor shall it interfere in any way
with the right of the Company to terminate its relationship with any of its
Employees, directors or Independent Contractors at any time.
17.4 No later than the date as of which an amount first becomes
includable in the gross income of the Participant for federal income tax
purposes with respect to any award under the Plan, the Participant who is an
Employee of the Company shall pay to the Company, or make arrangements
satisfactory to the Committee regarding the payment of, any federal, state, or
local taxes of any kind required by law to be withheld with respect to such
amount. To the extent permitted by the Committee, in its sole discretion, the
minimum required withholding obligations may be settled with Stock, including
Stock that is part of the award that gives rise to the withholding requirement.
The obligations of the Company under the Plan shall be conditional on such
payment or arrangements and the Company shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Participant.
17.5 The Committee shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.
17.6 The Plan shall be governed by and subject to all applicable laws and
to the approvals by any governmental or regulatory agency as may be required.
SECTION 18. Effective Date and Term of Plan
The Plan shall be effective as of the effective date of the merger of Human
Designed Systems, Inc. with and into ISAC Acquisition Co., a wholly-owned
subsidiary of the Company (the "Effective Date"), subject to the consent or
approval of the Company's stockholders as provided below. No Stock Option award
shall be granted pursuant to the Plan on or after ten years from the Effective
Date, but Stock Options granted prior to such tenth anniversary may be exercised
after such date. If the Plan is not approved by a majority of the votes cast at
a duly held meeting at which a quorum representing a majority of all outstanding
voting stock of the Company is, either in person or by proxy, present and voting
on the Plan, within 12 months after such effective date, any Incentive Stock
Options that have been granted shall automatically become Non-Qualified Stock
Options.
SECTION 19. Interpretation
A determination of the Committee as to any question which may arise with
respect to the interpretation of the provisions of this Plan or any Options
shall be final and conclusive, and nothing in this Plan, or in any regulation
hereunder, shall be deemed to give any Participant, his legal representatives,
assigns or any other person any right to participate herein except to such
extent, if any, as the Committee may have determined or approved pursuant to
this Plan. The Committee may consult with legal counsel who may be counsel to
the Company and shall not incur any liability for any action taken in good faith
in reliance upon the advice of such counsel.
-13-
<PAGE>
SECTION 20. Governing Law
With respect to any Incentive Stock Options granted pursuant to the Plan
and the agreements thereunder, the Plan, such agreements and any Incentive Stock
Options granted pursuant thereto shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the State of
Delaware shall govern the operation of, and the rights of Participants under,
the Plan, the agreements and any Options granted thereunder.
SECTION 21. Compliance With The Rules
21.1 Unless an Insider could otherwise transfer shares of Stock issued
hereunder without incurring liability under Section 16(b) of the Exchange Act,
at least six months must elapse from the date of grant of an Option to the date
of disposition of the Stock issued upon exercise of such Option.
21.2 It is the intent of the Company that this Plan comply in all
respects with the Rules in connection with any grant of Options to, or other
transaction by, an Insider. Accordingly, if any provision of this Plan or any
agreement relating to an Option does not comply with the Rules as then
applicable to any such Insider, such provision will be construed or deemed
amended to the extent necessary to conform to such requirements with respect to
such person. In addition, the Committee shall have no authority to make any
amendment, alteration, suspension, discontinuation, or termination of the Plan
or any agreement hereunder, or take other action if such authority would cause
an Insider's transactions under the Plan not to be exempt under the Rules.
21.3 Certain restrictive provisions of the Plan have been implemented to
facilitate the Company's and Insiders' compliance with the Rules. The
Committee, in its discretion, may waive certain of these restrictions, provided
the waiver does not relate in any way to an Insider and, provided further, such
waiver or amendment is carried out in accordance with Section 6 hereof.
SECTION 22. Substitution of Options in a Merger, Consolidation or Share Exchange
In the event that the Company becomes a party to a merger, consolidation or
share exchange (a "Business Combination") and in connection therewith
substitutes options under the Plan for options of another party to such Business
Combination, notwithstanding the provisions of the Plan, the terms of such
substituted options may have the same terms and conditions (provided that the
number of shares issuable and the exercise prices are adjusted in accordance
with the terms of the Business Combination) as the former options of such other
party to the Business Combination, provided, however, that the exercise price of
the Options to be granted under the Plan shall be lawful consideration as
determined by the Committee.
-14-
<PAGE>
10/25/96
--------
Exhibit B
---------
INFORMATION TECHNOLOGY CONSULTING, INC.
1996 EQUITY COMPENSATION PLAN
-----------------------------
The purpose of the Information Technology Consulting, Inc. 1996 Equity
Compensation Plan (the "Plan") is to provide (i) designated key employees of
Information Technology Consulting, Inc. (the "Company"), its subsidiaries and
its parent company, HDS Network Systems, Inc. ("HDS") ("Employees"), and (ii)
members of the Board of Directors of the Company (the "Board") and the HDS Board
of Directors ("the HDS Board") who are not employees of the Company or its
subsidiaries ("Non-Employee Directors") with the opportunity to receive grants
of incentive stock options and nonqualified stock options. The Company believes
that the Plan will cause the participants to contribute materially to the growth
of the Company, thereby benefitting the Company's stockholders, and will align
the economic interests of the participants with those of the stockholders.
1. Administration
--------------
(a) The Plan shall be administered and interpreted by a committee
consisting of "outside directors" as defined under section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code") and related Treasury
regulations. However, notwithstanding anything in the Plan to the contrary, the
Board must ratify or approve any grants made to Non-Employee Directors.
References in the Plan to the "Committee" shall be deemed to include the Board,
with respect to ratification or approval of grants made to Non-Employee
Directors.
(b) The Committee shall have the sole authority to (i) determine the
individuals to whom grants shall be made under the Plan, (ii) determine the
type, size and terms of the grants to be made to each such individual, (iii)
determine the time when the grants will be made and the duration of any
applicable exercise or restriction period, including the criteria for vesting
and the acceleration of vesting, (iv) establish the terms of any non-compete
provisions applicable to grants and the terms of any applicable stockholder's
agreement, and (v) deal with any other matters arising under the Plan.
(c) The Committee shall have full power and authority to administer and
interpret the Plan, to make factual determinations and to adopt or amend such
rules, regulations, agreements and instruments for implementing the Plan and for
the conduct of its business as it deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and all determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interest in the Plan or in any
awards granted hereunder. All powers of the Committee shall be executed in its
sole discretion, in the best
<PAGE>
interest of the Company and in keeping with the objectives of the Plan and need
not be uniform as to similarly situated individuals.
2. Grants
------
Awards under the Plan shall consist of Incentive Stock Options and
Nonqualified Stock Options, as defined in Section 5 ("Options"). All Options
shall be subject to the terms and conditions set forth herein and to those other
terms and conditions consistent with this Plan as the Committee deems
appropriate and as are specified in writing by the Committee to the individual
in a grant instrument (the "Grant Instrument") or in an amendment to the Grant
Instrument. The Committee shall approve the form and provisions of each Grant
Instrument. Grants under a particular Section of the Plan need not be uniform
as among the grantees.
3. Shares Subject to the Plan
--------------------------
(a) Subject to the adjustment specified below, the aggregate number of
shares of common stock of the Company ("Company Stock") that may be issued under
the Plan is 1,500,000 shares. Of such 1,500,000 shares, 150,000 shares shall be
reserved for issuance under Options to be granted to Non-Employee Directors, and
1,350,000 shares shall be reserved for issuance under Options to be granted to
Employees. The maximum aggregate number of shares of Company Stock that may be
subject to Options granted to any individual during any calendar year shall be
750,000 shares. The shares may be authorized but unissued shares of Company
Stock or reacquired shares of Company Stock, including shares purchased by the
Company on the open market for purposes of the Plan. If and to the extent
Options granted under the Plan terminate, expire, or are canceled, forfeited,
exchanged or surrendered without having been exercised, the shares subject to
such Options shall again be available for purposes of the Plan.
(b) If there is any change in the number or kind of shares of Company
Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization,
stock split, or combination or exchange of shares, (ii) by reason of a merger,
reorganization or consolidation in which the Company is the surviving
corporation, (iii) by reason of a reclassification or change in par value, or
(iv) by reason of any other extraordinary or unusual event affecting the
outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spinoff or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Options, the maximum number of shares of Company Stock for
which any individual participating in the Plan may be granted Options in any
year, the number of shares covered by outstanding Options, the kind of shares
issued under the Plan, and the price per share of such Options shall be
appropriately adjusted by the Committee to reflect any increase or decrease in
the number or kind of issued shares of Company Stock to preclude the enlargement
or dilution of rights and benefits under such Options; provided, however, that
any fractional shares resulting from such adjustment shall be eliminated. The
adjustments determined by the Committee shall be final, binding and conclusive.
-2-
<PAGE>
4. Eligibility for Participation
-----------------------------
(a) All Employees and Non-Employee Directors shall be eligible to receive
Options under the Plan. The Committee shall select the Employees and Non-
Employee Directors to receive Options and shall determine the number of shares
of Company Stock subject to a particular grant in such manner as it determines.
Employees and Non-Employee Directors who receive Options under this Plan shall
hereinafter be referred to as "Grantees".
(b) Nothing contained in this Plan shall be construed to (i) limit the
right of the Committee to make grants under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including options
granted to employees thereof who become Employees, or for other proper corporate
purpose, or (ii) limit the right of the Company to grant stock options or make
other awards outside of this Plan.
5. Stock Options
-------------
(a) Number of Shares. The Committee shall determine the number of shares
----------------
of Company Stock that will be subject to each grant of Options.
(b) Type of Option and Price.
------------------------
(i) The Committee may grant Options that are intended to qualify
as "incentive stock options" within the meaning of section 422 of the Code
("Incentive Stock Options") or options that are not intended so to qualify
("Nonqualified Stock Options") or any combination of Incentive Stock Options and
Nonqualified Stock Options, all in accordance with the terms and conditions set
forth herein. Only persons who are employees of the Company or its parent or
subsidiaries may receive Incentive Stock Options.
(ii) The purchase price (the "Exercise Price") of Company Stock
subject to an Option shall be determined by the Committee and may be equal to,
greater than, or less than the Fair Market Value (as defined below) of a share
of Company Stock on the date the Option is granted; provided, however, that (x)
the Exercise Price of an Incentive Stock Option shall be equal to, or greater
than, the Fair Market Value of a share of Company Stock on the date the
Incentive Stock Option is granted and (y) an Incentive Stock Option may not be
granted to a person who, at the time of grant, owns stock possessing more than
10 percent of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary of the Company, unless the Exercise Price
per share is not less than 110% of the Fair Market Value of Company Stock on the
date of grant.
(iii) If the Company Stock is traded in a public market, then the
Fair Market Value per share shall be determined as follows: (x) if the principal
trading market for the
-3-
<PAGE>
Company Stock is a national securities exchange or the National Market segment
of the Nasdaq Stock Market, the last reported sale price thereof on the relevant
date or (if there were no trades on that date) the latest preceding date upon
which a sale was reported, or (y) if the Company Stock is not principally traded
on such exchange or market, the mean between the last reported "bid" and "asked"
prices of Company Stock on the relevant date, as reported on Nasdaq or, if not
so reported, as reported by the National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting service, as applicable and as the
Committee determines. If the Company Stock is not traded in a public market or
subject to reported transactions or "bid" or "asked" quotations as set forth
above, the Fair Market Value per share shall be as determined by the Committee.
(c) Option Term. The Committee shall determine the term of each Option,
-----------
which shall not exceed 10 years from the date of grant. However, an Incentive
Stock Option may not be granted to a person who, at the time of grant, owns
stock possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or any parent or subsidiary of the Company,
unless the Option term does not exceed five years from the date of grant.
(d) Exercisability of Options. Options shall become exercisable in
-------------------------
accordance with the terms and conditions determined by the Committee and
specified in the Grant Instrument. The Committee may accelerate the
exercisability of any or all outstanding Options at any time for any reason.
(e) Termination of Employment, Disability or Death.
----------------------------------------------
(i) Except as provided in the Grant Instrument or as otherwise
provided below, an Option may only be exercised while the Grantee is associated
with the Company, its parent or any subsidiary of the Company as an Employee or
a Non-Employee Director (a "Company Relationship"). If a Grantee ceases to have
a Company Relationship for any reason other than a "disability", death, or
"termination for cause", any Option which is otherwise exercisable by the
Grantee shall terminate (except as provided in the Grant Instrument) unless
exercised within 90 days of the date on which the Grantee ceases to have a
Company Relationship (or within such other period of time as may be specified in
the Grant Instrument), but in any event no later than the date of expiration of
the Option term. Any of the Grantee's Options that are not otherwise
exercisable as of the date on which the Grantee ceases to have a Company
Relationship shall terminate as of such date.
(ii) If a Grantee ceases to have a Company Relationship on account
of a "termination for cause," any Option held by the Grantee shall terminate as
of the date the Grantee ceases to have a Company Relationship.
(iii) If a Grantee ceases to have a Company Relationship because
the Grantee is "disabled", any Option which is otherwise exercisable by the
Grantee shall terminate (except as provided in the Grant Instrument) unless
exercised within one year after the date on which the
-4-
<PAGE>
Grantee ceases to have a Company Relationship (or within such other period of
time as may be specified in the Grant Instrument), but in any event no later
than the date of expiration of the Option term. Any of the Grantee's Options
which are not otherwise exercisable as of the date on which the Grantee ceases
to have a Company Relationship shall terminate as of such date.
(iv) If a Grantee ceases to have a Company Relationship due to his
or her death while a Company Relationship exists or within 90 days after the
termination of a Company Relationship under Section 5(e)(i) above (or within
such other period of time as may be specified in the Grant Instrument), any
Option that is otherwise exercisable by the Grantee shall terminate (except as
provided in the Grant Instrument) unless exercised within one year after the
date on which the Grantee ceases to have a Company Relationship (or within such
other period of time as may be specified in the Grant Instrument), but in any
event no later than the date of expiration of the Option term. Any of the
Grantee's Options that are not otherwise exercisable as of the date on which the
Grantee ceases to have a Company Relationship shall terminate as of such date.
(v) For purposes of this Section 5(e):
(A) "Disability" shall mean a Grantee's becoming disabled
within the meaning of section 22(e)(3) of the Code.
(B) "Termination for cause" shall mean, except to the
extent otherwise provided in a Grantee's Grant Instrument, a finding by the
Committee, after full consideration of the facts presented, that the
Grantee committed a material breach of his or her employment or service
contract with the Grantee's employer, or has been engaged in disloyalty to
his or her employer, including, without limitation, fraud, embezzlement,
theft, commission of a felony or proven dishonesty in the course of his or
her employment or service, or has disclosed trade secrets or confidential
information of the Company or its parent or subsidiaries to persons not
entitled to receive such information. In the event a Grantee's Company
Relationship is terminated for cause, in addition to the immediate
termination of all Options, the Grantee shall automatically forfeit all
Option shares for any exercised portion of an Option for which the Company
has not yet delivered the share certificates, upon refund by the Company of
the Exercise Price paid by the Grantee for such shares.
(f) Exercise of Options.
-------------------
(i) The Grantee shall pay the Exercise Price for an Option as
specified in the Grant Instrument (x) in cash, (y) with the approval of the
Committee, by delivering shares of Company Stock owned by the Grantee (including
Company Stock acquired in connection with the exercise of an Option, subject to
such restrictions as the Committee deems appropriate) and having a Fair Market
Value on the date of exercise equal to the Exercise Price or (z) through any
combination of (x) and (y). The Grantee shall pay the Exercise Price and the
amount of any withholding tax due (pursuant to Section 6) at the time of
exercise. Shares of Company Stock
-5-
<PAGE>
shall not be issued upon exercise of an Option until the Exercise Price is fully
paid and any required withholding is made.
(ii) If an initial public offering of Company Stock occurs, a
Grantee may thereafter exercise an Option by delivering to the Company, with
payment of the Exercise Price in accordance with Subsection (i) above, a notice
of exercise instructing the Company to deliver shares of Company Stock due upon
the exercise of the Option to any registered broker or dealer designated by the
Committee in lieu of delivery to the Grantee. Such instructions shall designate
the account into which the shares are to be deposited.
(g) Limit on Incentive Stock Options. Each Incentive Stock Option shall
--------------------------------
provide that, if the aggregate Fair Market Value of the stock on the date of the
grant with respect to which Incentive Stock Options are exercisable for the
first time by a Grantee during any calendar year, under the Plan or any other
stock option plan of the Company or a parent or subsidiary, exceeds $100,000,
then the option, as to the excess, shall be treated as a Nonqualified Stock
Option.
6. Withholding of Taxes
--------------------
(a) All grants under the Plan shall be subject to applicable federal
(including FICA), state and local tax withholding requirements. The Company may
require the Grantee or other person receiving shares upon the exercise of an
Option to pay to the Company the amount of any such taxes that the Company is
required to withhold with respect to such Option, or the Company may deduct from
other wages paid by the Company the amount of any withholding taxes due with
respect to such Option.
(b) If the Grant Instrument (or an amendment) so provides, a Grantee may
elect to satisfy the Company's income tax withholding obligation with respect to
an Option by having shares withheld up to an amount that does not exceed the
Grantee's maximum marginal tax rate for federal (including FICA), state and
local tax liabilities. The election must be in a form and manner prescribed by
the Committee and may be subject to the prior approval of the Committee.
7. Transferability of Options
--------------------------
(a) Except as provided in the Grant Instrument or as otherwise provided
below, (i) only the Grantee may exercise rights under an Option during the
Grantee's lifetime and (ii) the Grantee may not transfer those rights except by
will or by the laws of descent and distribution or, with respect to Nonqualified
Stock Options, if permitted in any specific case by the Committee pursuant to a
domestic relations order (as defined under the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the regulations
thereunder). When a Grantee dies, the representative or other person entitled
to succeed to the rights of the Grantee ("Successor Grantee") may exercise such
rights. A Successor Grantee must furnish proof satisfactory to the Company of
his or her right to receive the Grant under the Grantee's will or under the
applicable laws of descent and distribution.
-6-
<PAGE>
(b) Notwithstanding the foregoing, the Committee may provide, in a Grant
Instrument, that a Grantee may transfer Nonqualified Stock Options to family
members or other persons or entities according to such terms as the Committee
may specify in the Grant Instrument, provided that the transferred Option
continues to be subject to the same terms and conditions as were applicable to
the Option immediately before the transfer.
8. Change of Control of the Company
--------------------------------
As used herein, a "Change of Control" shall be deemed to have occurred if
the stockholders of the Company approve (or, if stockholder approval is not
required, the Board approves) an agreement providing for:
(a) the merger or consolidation of the Company with another
corporation where the stockholders of the Company, immediately prior to the
merger or consolidation, will not beneficially own, immediately after the
merger or consolidation, shares entitling such stockholders to more than
50% of all votes to which all stockholders of the surviving corporation
would be entitled in the election of directors (without consideration of
the rights of any class of stock to elect directors by a separate class
vote), or where the members of the Board, immediately prior to the merger
or consolidation, would not, immediately after the merger or consolidation,
constitute a majority of the board of directors of the surviving
corporation,
(b) the sale or other disposition of all or substantially all of the
assets of the Company, or
(c) a liquidation, dissolution or statutory exchange of the Company.
9. Consequences of a Change of Control
-----------------------------------
(a) Upon a Change of Control, unless the Committee determines otherwise,
(i) the Company shall provide each Grantee who holds outstanding Options written
notice of such Change of Control and (ii) all outstanding Options that are not
then exercisable shall automatically accelerate and become fully exercisable.
(b) Unless the Committee determines otherwise, upon a Change of Control
where the Company is not the surviving corporation (or survives only as a
subsidiary of another corporation), all outstanding Options shall be assumed by,
or replaced with comparable options by, the surviving corporation.
(c) Notwithstanding the foregoing, subject to subsection (d) below, in
the event of a Change of Control, the Committee may take one or both of the
following actions: the Committee may (i) require that Grantees surrender their
outstanding Options in exchange for a payment by the Company, in cash or Company
Stock as determined by the Committee, in an amount equal to
-7-
<PAGE>
the amount by which the then Fair Market Value of the shares of Company Stock
subject to the Grantee's outstanding Options exceeds the Exercise Price of the
Options, or (ii) after giving Grantees an opportunity to exercise their
outstanding Options, terminate any or all unexercised Options at such time as
the Committee deems appropriate. Such surrender or termination shall take place
as of the date of the Change of Control or such other date as the Committee may
specify.
(d) Notwithstanding anything in the Plan to the contrary, in the event of
a Change of Control, the Committee shall not have the right to take actions
described in the Plan (including without limitation actions described in
Subsection (c) above) that would make the Change of Control ineligible for
pooling of interests accounting treatment or that would make the Change of
Control ineligible for desired tax treatment if, in the absence of such right,
the Change of Control would qualify for such treatment and the Company intends
to use such treatment with respect to the Change of Control.
10. Requirements for Issuance of Shares
-----------------------------------
(a) The Committee may require that a Grantee execute a stockholder's
agreement, with such terms as the Committee deems appropriate, with respect to
any Company Stock distributed pursuant to this Plan.
(b) No Company Stock shall be issued or transferred in connection with
any grant hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any grant made to any Grantee hereunder on such Grantee's undertaking in writing
to comply with such restrictions on his or her subsequent disposition of such
shares of Company Stock as the Committee shall deem necessary or advisable as a
result of any applicable law, regulation or official interpretation thereof and
certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued under the
Plan will be subject to such stop-transfer orders and other restrictions as may
be applicable under such laws, regulations and other obligations of the Company,
including any requirement that a legend or legends be placed thereon.
11. Amendment and Termination of the Plan
-------------------------------------
(a) Amendment. The Board may amend or terminate the Plan at any time;
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provided, however, that any amendment that increases the aggregate number of
shares of Company Stock that may be issued under the Plan (other than by
operation of Section 3(b)) shall be subject to approval by the stockholders of
the Company, and provided, further, that the Board shall not amend the Plan
without stockholder approval if such approval is required by Section 162(m) of
the Code.
(b) Termination of Plan. The Plan shall terminate on the day immediately
-------------------
preceding
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<PAGE>
the tenth anniversary of its effective date, unless the Plan is terminated
earlier by the Board or unless it is extended by the Board with the approval of
the stockholders.
(c) Termination and Amendment of Outstanding Options. A termination or
------------------------------------------------
amendment of the Plan that occurs after a grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under Section 17(b). The termination of the Plan shall not
impair the power and authority of the Committee with respect to an outstanding
Grant. Whether or not the Plan has terminated, an outstanding Grant may be
terminated or amended under Section 17(b) or may be amended by agreement of the
Company and the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling document. No
------------------
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.
12. Funding of the Plan
-------------------
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any benefits under this Plan. In no event shall
interest be paid or accrued on any grant, including unpaid installments of
Options.
13. Rights of Participants
----------------------
Nothing in this Plan shall entitle any Employee or Non-Employee Director or
other person to any claim or right to be granted an Option under this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any individual any rights to be retained by or in the employ of the Company or
any other employment rights.
14. No Fractional Shares
--------------------
No fractional shares of Company Stock shall be issued or delivered pursuant
to the Plan or any gant. The Committee shall determine whether cash, other
awards or other property shall be issued or paid in lieu of such fractional
shares or whether such fractional shares or any rights thereto shall be
forfeited or otherwise eliminated.
15. Headings
--------
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
16. Effective Date of the Plan.
--------------------------
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<PAGE>
This Plan shall be effective as of September 11, 1996.
17. Miscellaneous
-------------
(a) Substitute Options. The Committee may make a grant of Options to an
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employee of another corporation who becomes an Employee by reason of a corporate
merger, consolidation, acquisition of stock or property, reorganization or
liquidation involving the Company or any of its subsidiaries in substitution for
a stock option granted by such corporation. The terms and conditions of the
substitute grant may vary from the terms and conditions required by the Plan and
from those of the substituted stock incentives. The Committee shall prescribe
the provisions of the substitute Options.
(b) Compliance with Law. The Plan, the exercise of Options and the
-------------------
obligations of the Company to issue or transfer shares of Company Stock with
respect to Options shall be subject to all applicable laws and to approvals by
any governmental or regulatory agency as may be required. With respect to
persons subject to Section 16 of the Securities Exchange Act or 1934, as
amended, after a public offering of Company Stock, it is the intent of the
Company that the Plan and all transactions under the Plan comply with all
applicable provisions of Rule 16b-3 or its successors under such Act. The
Committee may revoke any grant if it is contrary to law or modify a grant to
bring it into compliance with any valid and mandatory government regulation.
The Committee may, in its sole discretion, agree to limit its authority under
this Section.
(c) Ownership of Stock. A Grantee or Successor Grantee shall have no
------------------
rights as a stockholder with respect to any shares of Company Stock covered by a
Option until the shares are issued or transferred to the Grantee or Successor
Grantee on the stock transfer records of the Company.
(d) Governing Law. The validity, construction, interpretation and effect
-------------
of the Plan and Grant Instruments issued under the Plan shall exclusively be
governed by and determined in accordance with the law of the State of Delaware.
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