<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
_______________________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the Quarter ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----
EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission File Number: 0-21240
________________________________
NEOWARE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 23-2705700
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
400 Feheley Drive
King of Prussia, Pennsylvania 19406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(610) 277-8300
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
_________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ___
As of February 13, 1997, there were outstanding 5,764,539 shares of the
Registrant's Common Stock.
Page 1 of 13 pages
Exhibit Index is on page 12
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets:
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations:
Three and Six Months Ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows:
Six Months Ended December 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 818,319 $ 1,452,409
Accounts receivable, net of allowance for doubtful accounts of
$124,086 7,824,177 9,308,731
Inventories 4,186,081 4,035,202
Prepaid expenses and other 736,641 789,179
Deferred income taxes 416,530 416,530
----------- -----------
Total current assets 13,981,748 16,002,051
PROPERTY AND EQUIPMENT, net 747,338 680,859
NOTE RECEIVABLE 700,000 ---
CAPITALIZED AND PURCHASED SOFTWARE, net 1,727,582 1,630,339
DEFERRED INCOME TAXES 13,866 13,866
----------- -----------
$ 17,170,534 $ 18,327,115
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ 3,214,000 $ 3,071,000
Accounts payable 2,671,179 3,796,549
Accrued expenses 267,527 516,148
Deferred revenue 170,221 172,006
----------- -----------
Total current liabilities 6,322,927 7,555,703
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000 shares authorized and
none issued and outstanding -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 5,760,820 shares issued and outstanding 5,761 5,761
Additional paid-in capital 9,168,171 9,168,171
Retained earnings 1,718,516 1,666,951
Deferred compensation (44,841) (69,471)
----------- -----------
Total stockholders' equity 10,847,607 10,771,412
----------- -----------
$ 17,170,534 $ 18,327,115
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
(Unaudited) Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
NET REVENUES $6,980,500 $8,924,802 $12,611,492 $12,380,422
COST OF REVENUES 4,987,662 6,384,870 8,920,002 8,487,435
---------- ---------- ----------- -----------
Gross profit 1,992,838 2,539,932 3,691,490 3,892,987
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 925,336 993,681 1,834,738 1,782,490
General and administrative 541,494 390,917 829,586 717,751
Research and development 441,177 379,975 874,862 638,112
---------- ---------- ----------- -----------
Total operating expenses 1,908,007 1,764,573 3,539,186 3,138,353
---------- ---------- ----------- -----------
Operating income 84,831 775,359 152,304 754,634
INTEREST INCOME (EXPENSE), NET (58,653) 35,933 (72,734) 75,856
---------- ---------- ----------- -----------
Income before income taxes 26,178 811,292 79,570 830,490
INCOME TAXES 9,210 267,313 28,004 274,224
---------- ---------- ----------- -----------
NET INCOME $ 16,968 $ 543,979 $ 51,566 $ 556,266
========== ========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.00 $ 0.09 $ 0.01 $ 0.10
========== ========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.00 $ 0.07 $ 0.01 $ 0.07
========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING IN 5,760,820 5,727,233 5,760,820 5,727,233
BASIC EARNINGS PER SHARE ========== ========== =========== ===========
COMPUTATION
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING IN 5,760,820 7,572,135 5,760,820 7,651,186
DILUTED EARNINGS PER SHARE ========== ========== =========== ===========
COMPUTATION
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
(Unaudited) Six Months Ended
December 31,
----------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,566 $ 556,266
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 213,407 112,758
Amortization of deferred compensation 24,630 26,052
Changes in operating assets and liabilities-
(Increase) decrease in:
Accounts receivable 1,484,554 (1,691,165)
Inventories (150,879) (678,147)
Prepaid expenses and other 52,538 (447,356)
Increase (decrease) in:
Accounts payable (1,125,371) 2,125,218
Accrued expenses (248,621) 27,709
Deferred revenue (1,785) 35,655
----------- -----------
Net cash provided by
operating activities 300,039 66,990
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (173,237) (45,138)
Capitalized software (203,892) (61,167)
----------- -----------
Net cash used in investing activities (377,129) (106,305)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 143,000 -
Increase in note receivable (700,000) -
Exercise of stock options - 727,674
Principal payments on long-term debt - (7,965)
----------- -----------
Net cash used in financing activities (557,000) 719,709
----------- -----------
INCREASE (DECREASE) IN CASH (634,090) 680,394
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,452,409 2,700,298
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 818,319 $ 3,380,692
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
OPERATING ACTIVITIES:
Cash paid for income taxes $ 50,719 $ 8,184
Cash paid for interest $ 83,274 $ 1,043
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. BASIS OF PRESENTATION:
----------------------
The accompanying unaudited consolidated financial statements of Neoware Systems,
Inc. and Subsidiaries (the "Company") have been prepared in conformity with
generally accepted accounting principles. The interim financial information,
while unaudited, reflects all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position and operating results for the interim periods presented. The results
of operations for the three and six month periods ended December 31, 1997 are
not necessarily indicative of the results expected for the full year. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K filed with the Securities and Exchange Commission.
2. MAJOR CUSTOMERS :
-----------------
Net revenues from two customers represented 22% and 14% of total net revenues
for the three month period ended December 31, 1997 and 16% and 21% of net
revenues for the six month period then ended. Net revenues from three customers
represented 26%, 20% and 13% of total net revenues for the three month period
ended December 31,1996 and 19%, 15% and 10% of net revenues for the six-month
period then ended. At December 31, 1997, the Company had receivables from its
two major customers totaling approximately $5,351,000.
3. INVENTORIES:
------------
Inventories are stated at the lower of cost or market (first-in, first-out
method) and consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---------------- --------------
<S> <C> <C>
Purchased components and subassemblies $2,021,027 $1,566,161
Work-in-process 398,150 301,565
Finished goods 1,766,904 2,167,476
---------- ----------
$4,186,081 $4,035,202
========== ==========
</TABLE>
<PAGE>
4. NOTE RECEIVABLE:
----------------
In October 1997, the Company merged Information Technology Consulting, Inc., a
wholly-owned subsidiary, into The Reohr Group, Inc. ("Reohr") in exchange for a
2% stock interest in Reohr and the reimbursement of $1 million of expenses
incurred by the Company in connection with its efforts to make certain
acquisitions in the information technology consulting and staffing field. Of the
total reimbursement, $300,000 was paid in cash and the remaining $700,000 is due
on the earlier of three years or upon the completion of the initial public
offering of Reohr. The note bears interest at 8% per annum. Of the total
reimbursement, $292,000 was offset against general and administrative expenses
during the three months ended September 30, 1997 for costs previously incurred
and charged to expense.
5. LINE OF CREDIT:
---------------
The Company has a $5,000,000 revolving line of credit ($1,786,000 available at
December 31, 1997) with a bank which expires on November 30, 1998. Borrowings
under the line are at the bank's prime rate. Under the line, the Company is
required to maintain specified ratios of working capital and debt to net worth,
as defined.
6. EARNINGS PER SHARE
------------------
Effective December 31, 1997 the Company adopted SFAS No. 128, "Earnings per
Share", which supersedes APB Opinion No. 15, "Earnings per Share". SFAS 128
requires dual presentation of basic and diluted earnings per share (EPS) for
complex capital structures on the face of the income statement. Basic EPS is
computed by dividing income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from
the exercise or conversion of securities into common stock, such as stock
options. For the three and six month periods ended December 31, 1996 the
weighted average number of shares outstanding for purposes of calculating
diluted earnings per share included 1,844,902 and 1,923,953 shares,
respectively, attributable to stock options. In accordance with the provisions
of SFAS 128, EPS for prior periods have been restated.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The Company provides thin client computers and related software that are
designed to integrate and deliver information to the desktop cost effectively in
network-centric environments. The Company's @workStation and NeoStation
thin client combine a variety of windowed-display, graphical user interface and
communications industry standards to provide the user seamless and transparent
access to all information, including text, graphics, audio and video data, on
any type of network. The Company has licensed Netscape Navigator(TM), Citrix's
ICA(TM) and Sun Microsystems, Inc.'s Java(TM) technology that it has
incorporated into its products to provide cost-effective access to information
and applications within the corporate enterprise and on the Internet.
The Company's current strategy is to become a leader in the emerging market
for thin client computers by focusing on expanding its software products and its
thin client computer hardware. The Company also plans to continue to seek to
develop strategic partnerships, and acquire strategic technologies, products or
businesses complementary to its current business. The Company sells its products
in North America directly to end users and through distributors, resellers,
system integrators and OEMs. International sales are generally made through
distributors.
In August 1996, the Company formed a new subsidiary, Information Technology
Consulting, Inc. ("ITC"), for the purpose of acquiring companies in the
computer services field, including information technology staffing companies and
client-server consulting companies. In January 1997 the Company announced that
ITC entered into a definitive agreement to acquire the business of Global
Consulting Group ("Global"), an information technology staffing and consulting
company, subject to the consummation by ITC of a public offering of its stock.
In March 1997 the Company announced that ITC entered into a definitive agreement
to acquire the business of The Reohr Group, Inc. ("Reohr"), an information
technology staffing and consulting company, subject to the consummation by ITC
of a public offering of its stock.
In October 1997, the Company merged ITC with Reohr and Global. Under the
merger, ITC and Global merged into Reohr, and Neoware received stock that
represents a 2% ownership of Reohr. The Company was also reimbursed for the
expenses incurred by the Company and ITC in connection with ITC's efforts to
make these acquisitions, $300,000 of which was paid in cash. The remainder of
the expenses were reimbursed by a $700,000 note from Reohr that is repayable on
the earlier of three years or the consummation of an initial public offering of
Reohr. The note bears interest at 8% per annum.
In February 1997, the Company formed a new subsidiary, Bridging Data
Technology, Inc. ("BDT"). BDT has acquired and further developed a software
product, SmartBridge(TM), which utilizes the "intelligent bridging" approach to
upgrading programs and data for Year 2000 compliance. Neoware holds a majority
ownership stake in BDT, which is based in Atlanta, GA. The SmartBridge product
implements an on-site automated bridge building "factory" that creates
intelligent bridge modules. These modules allow the uncoupling of applications
and data, enabling conversions to take place quickly and with minimal impact to
system performance.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of operations as a percentage of net
revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Profit 28.5% 28.5% 29.2% 31.4%
Operating expenses:
Sales and marketing 13.2 11.1 14.5 14.4
General and administrative 7.8 4.4 6.6 5.8
Research and development 6.3 4.3 6.9 5.1
---- ---- ---- ----
Operating income 1.2 8.7 1.2 6.1
Interest income (expense), net (0.8) 0.4 (0.6) 0.6
---- ---- ----
Income before taxes 0.4 9.1 0.6 6.7
Income taxes 0.1 3.0 0.2 2.2
---- ---- ---- ----
Net Income 0.3% 6.1% 0.4% 4.5%
==== ==== ==== ====
</TABLE>
Net revenues for the three months ended December 31, 1997 decreased to
$6,980,500 from $8,924,802 for the comparable period in the prior fiscal year.
For the six months ended December 31, 1997, net revenues increased to
$12,611,492, an increase of 2% from $12,380,422 for the comparable period in the
prior fiscal year. The decrease in net revenues for the three months ended
December 31, 1997 versus the comparable period in the prior year was
attributable to the timing of the receipt of certain large orders during the
second quarter of fiscal 1997. The Company's revenues for the current year
represent shipments of its line of thin client computers. Revenues for the six
months ended December 31, 1996 represent the initial shipments of its thin
client computer line and revenues earned from licensing agreements for its netOS
software for thin client computers. The Company is subject to significant
variances in its quarterly operating results because of the fluctuations in the
timing of the receipt of large orders.
The Company's gross profit as a percentage of net revenues was 28.5% for
the three months ended December 31, 1997 and 1996. The gross profit as a
percentage of net revenues decreased to 29.2% for the six months ended December
31, 1997 from 31.4% for the comparable period in the prior fiscal year. The
change in gross profit percentage for the six months ended December 31, 1997 was
a result of the Company deriving substantially less revenue from software
licensing as well as an increase in the percentage of sales through third party
sales channels. The Company's thin client computer gross profit
<PAGE>
margin was substantially unchanged from the prior year. The Company anticipates
that gross margin percentage will vary from quarter to quarter depending on the
mix of business, including the mix of hardware and software revenues. The gross
profit margin also varies in response to competitive market conditions as well
as periodic fluctuations in the cost of memory and other significant components.
The market in which the Company competes remains very competitive, and although
the Company intends to continue its efforts to reduce the cost of its products,
there can be no certainty that the Company will not be required to reduce prices
of its products without compensating reductions in the cost to produce its
products in order to increase its market share or to meet competitors' price
reductions.
For the three and six months ended December 31, 1997 net income decreased
to $16,968 and $51,566, respectively, from $543,979 and $556,266 for the
comparable periods in the prior fiscal year. The decrease in net income for the
three months ended December 31, 1997 was attributable to lower net revenues and
increased operating expenses, including approximately $90,000 of net expenses
related to the Company's investment in BDT. The decline in net income for the
six months ended December 31, 1997 versus the comparable period in the prior
fiscal year was attributable to the Company's continued investment in both sales
and marketing and research and development expenses. In addition, the Company
incurred net expenses of approximately $240,000 related to its investment in BDT
which was offset by the reimbursement for net expenses of approximately $292,000
previously incurred in connection with its investment in ITC. The decline in net
income was also impacted by the increase in net interest expense.
Operating expenses for the three and six months ended December 31, 1997
were $1,908,007 and $3,539,186, respectively, versus $1,764,573 and $3,138,353
for the comparable periods in the prior fiscal year. Research and development
expenses for the three and six months ended December 31, 1997 increased to
$441,177 and $874,862, respectively from $379,975 and $638,112 in the comparable
periods in the prior fiscal year as the Company continued to expand its
investment to develop, adapt or acquire technologies that will expand the market
for its current and future products. Sales and marketing expenses decreased to
$925,336 for the three months ended December 31, 1997 as compared to $993,681
for the comparable period in the prior year and increased to $1,834,738 for the
six months ended December 31, 1997 as compared to $1,782,490 for the comparable
period in the prior year. The increase reflects the cost of additions to the
Company's sales and marketing staff partially offset by reduced advertising
during fiscal 1998. General and administrative expenses increased to $441,177
and $874,862 for the three and six months ended December 31, 1997 versus
$379,975 and $638,112 in the comparable periods in the prior year. General and
administrative expenses for the current year include the addition of the
Company's Chief Executive Officer and the expenses related to BDT partially
offset by the reimbursement of expenses related to ITC.
Net interest expense for the three and six months ended December 31, 1997
was $58,653 and $72,734, respectively, versus net interest income of
$35,933 and $75,856 for the comparable periods in the prior year. The
increased interest cost is attributable to increased line of credit borrowings
required to finance higher inventory and accounts receivable balances.
The effective income tax rates were approximately 35.2% and 33.0% during
fiscal 1998 and 1997, respectively.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had net working capital of approximately
$7,659,000 composed primarily of cash and cash equivalents, accounts receivable
and inventory. The Company's principal sources of liquidity included
approximately $818,000 of cash and cash equivalents and a $5,000,000 bank line
of credit facility, $1,786,000 of which was available as of December 31, 1997.
The bank line of credit expired on December 31, 1997; however, the bank has
continued to provide credit under the same terms while a formal extension and
possible expansion of the line is being negotiated.
Cash and cash equivalents decreased by approximately $634,000 during the
six months ended December 31, 1997, primarily as a result of the purchase of
equipment, increased capitalized software costs and a decrease in accounts
payable and accrued expenses, which was offset by a decrease in accounts
receivable.
The Company generated approximately $300,000 in cash from operating
activities in the six months ended December 31, 1997 compared to generating cash
from operations of approximately $67,000 during the comparable period of fiscal
1997.
The Company expects to fund current operations and other cash expenditures,
as well as any acquisitions, through the use of available cash, cash from
operations, funds available under its credit facility, possible new sources of
debt financing, and the sale of its securities.
YEAR 2000 COMPLIANCE
The Company's management information systems primarily use software
products purchased from commercial sources with minor customization. Updates to
these products are routinely installed by the Company to upgrade the systems and
correct known defaults in the software. All major systems have been reviewed for
Year 2000 issues and, where necessary, upgraded software has been identified and
implementation schedules are in process. There have been no significant
incremental costs identified with updates that specifically address Year 2000
compliance. The Company is also reviewing its products and services for
compliance with Year 2000 requirements. Based on a preliminary review, the
Company's products were determined to be Year 2000 compliant. Notwithstanding
the Year 2000 compliance of the Company's systems and products, there can be no
assurance that the Company will not be adversely affected by the failure of
distributors, suppliers, customers and vendors with which it interacts to become
Year 2000 compliant.
FORWARD-LOOKING STATEMENTS
The foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to certain risks and uncertainties, including, but not
limited to, quarterly fluctuations in operating results, general economic
conditions affecting the demand for computer products, customer acceptance of
the Company's line of thin client computers and related software and the Year
2000 software tools offered by its subsidiary, the timing of significant orders,
increased competition, development, introduction, delivery and customer
acceptance of new products and delays in the receipt of key components. The
Company does not undertake to update any forward-looking statements made herein.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 1997, the Company held its Annual Meeting of Stockholders.
The Stockholders voted to elect six members to the Board of Directors, to amend
the Company's 1995 Stock Option Plan and to ratify the selection of Arthur
Andersen LLP as the Company's independent accountant for the fiscal year ending
June 30, 1998.
Elected to the Board of Directors were Arthur R. Spector (4,506,033 shares
voted for election and 604,364 shares were withheld), Edward C. Callahan
(4,506,333 shares voted for election and 604,064 shares were withheld), Michael
G. Kantrowitz (4,506,333 shares voted for election and 604,064 shares were
withheld), Howard L. Morgan (4,506,333 shares voted for election and 604,064
shares were withheld), John M. Ryan (4,506,333 shares voted for election and
604,064 shares were withheld), and Carl G. Sempier (4,504,833 shares voted for
election and 605,564 shares were withheld).
The selection of Arthur Andersen LLP as the Company's independent
accountant was ratified with 4,542,568 shares voting in favor of ratification,
16,300 shares voting against ratification and 551,529 shares abstaining.
The amendment to the Company's 1995 Stock Option Plan was approved with
1,026,425 shares voting in favor of the proposal, 115,630 shares voting against
the proposal, 576,966 shares abstaining and 3,391,376 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10 1995 Stock Option Plan (as amended on
December 10, 1997)
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
NEOWARE SYSTEMS, INC.
Date: February 17, 1997 By: /s/ EDWARD C. CALLAHAN, JR.
-----------------------------
Edward C. Callahan, Jr., President and
Chief Executive Officer
Date: February 17, 1997 By: /s/ EDWARD T. LACK, JR.
-----------------------
Edward T. Lack, Jr., Vice President of
Finance and Administration (Principal
Financial Officer and Principal
Accounting Officer)
<PAGE>
Exhibit 10
1995 STOCK OPTION PLAN
[Adopted by the Board of Directors on November 29, 1994, as amended through
December 10, 1997]
PART I
DEFINITIONS AND ADMINISTRATIVE MATTERS
--------------------------------------
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.
-----
(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 administer
---------
the Plan.
(d) "Company" means Information Systems Acquisition Corporation, its
-------
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")
<PAGE>
System for such date or the next preceding date that Stock was traded on such
market, or, in the event 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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(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
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Committee may be entitled under any by-law, agreement, vote of the stockholders
or directors, or otherwise.
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 1,500,000, 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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PART II
GRANTS TO EMPLOYEES AND ELIGIBLE INDEPENDENT CONTRACTORS
--------------------------------------------------------
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 53, 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
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<PAGE>
to be purchased. Such notice shall be accompanied by payment in full of the
purchase price, either by 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 54 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.
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<PAGE>
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.
5.7 NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be transferable
------------------------------
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
-----------------------------------------
determined 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
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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.
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
-------------------------------------------------------
termination 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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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 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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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; (ii 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.
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(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 change in
ownership of the Company or other securities or cash or other property
(excluding payments made solely for fractional shares); or
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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.
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.
-12-
<PAGE>
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.
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
-13-
<PAGE>
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-
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