<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
PROJECT SOFTWARE & DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(formerly at 20 University Road
Cambridge, MA. 02138)
(781) 280-2000
(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 [ ]
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 10,043,585 shares of common stock, $.01 par value per share,
as of April 30, 1999.
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PROJECT SOFTWARE & DEVELOPMENT, INC.
10-Q INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets (unaudited) as of March 31, 1999
and September 30, 1998. 3
Consolidated Statements of Operations (unaudited) for the
three and six months ended March 31, 1999 and 1998. 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended March 31, 1999 and 1998. 5
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 37
SIGNATURE 39
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PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, SEPTEMBER 30,
--------- -------------
1999 1998
-------- --------
(IN THOUSANDS,EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,112 $ 28,454
Marketable securities 27,539 38,922
Accounts receivable, trade, less allowance
for doubtful accounts of $2,811 at March 31,
1999 and $2,614 at September 30, 1998, respectively 35,596 30,658
Prepaid expenses 3,386 2,799
Other assets 1,185 1,128
Deferred income taxes 1,500 1,697
-------- --------
Total current assets 100,318 103,658
-------- --------
Marketable securities 12,308 --
Property and equipment, net 9,930 8,823
Computer software costs, net -- 248
Goodwill, net 1,281 1,082
Deferred income taxes 686 671
Other assets 329 38
-------- --------
Total assets $124,852 $114,520
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,467 $ 8,189
Accrued compensation 3,837 5,800
Income taxes payable 3,980 4,063
Deferred revenue 13,981 12,651
Deferred income taxes 187 287
-------- --------
Total current liabilities 32,452 30,990
-------- --------
Deferred income taxes 96 103
Deferred rent 162 144
Deferred revenue 409 615
Equity in minority interest 44 44
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; 1,000,000 authorized,
none issued and outstanding
Common stock, $.01 par value; 15,350,000 authorized;
10,042,948 and 9,982,230 issued for March 31,
1999 and September 30, 1998, respectively 100 100
Additional paid-in capital 51,288 50,410
Retained earnings 40,910 32,330
Accumulated other comprehensive income (609) (216)
-------- --------
Total stockholders' equity 91,689 82,624
-------- --------
Total liabilities and stockholders' equity $124,852 $114,520
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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PROJECT SOFTWARE & DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Software $ 13,470 $ 13,252 $ 27,876 $ 24,395
Support and services 19,440 14,987 38,951 28,954
----------- ---------- ----------- ----------
Total revenues 32,910 28,239 66,827 53,349
----------- ---------- ----------- ----------
Cost of revenues:
Software 1,516 1,225 2,660 1,829
Support and services 9,700 8,034 19,283 14,620
----------- ---------- ----------- ----------
Total cost of revenues 11,216 9,259 21,943 16,449
----------- ---------- ----------- ----------
Gross margin 21,694 18,980 44,884 36,900
Operating expenses:
Sales and marketing 9,460 9,090 20,415 17,171
Product development 3,628 3,085 7,104 5,769
General and administrative 2,515 2,355 5,382 4,695
Charge for purchased in-process
product development -- 9,172 -- 9,172
----------- ---------- ----------- ----------
Total operating expenses 15,603 23,702 32,901 36,807
----------- ---------- ----------- ----------
Income/(loss) from operations 6,091 (4,722) 11,983 93
Interest income 679 665 1,327 1,402
Interest expense (7) (2) (24) (5)
Other income (expense), net (323) (246) (251) (231)
----------- ---------- ----------- ----------
Income/(loss) before income taxes 6,440 (4,305) 13,035 1,259
Provision for income taxes 2,146 1,678 4,455 3,737
----------- ---------- ----------- ----------
Net income/(loss) $ 4,294 $ (5,983) $ 8,580 $ (2,478)
=========== ========== =========== ==========
Net income/(loss) per share, basic $ 0.43 $ (0.60) $ 0.86 $ (0.25)
----------- ---------- ----------- ----------
Net income/(loss) per share, diluted $ 0.42 $ (0.60) $ 0.84 $ (0.25)
----------- ---------- ----------- ----------
Shares used to calculate net income/(loss) per share
Basic 10,033,348 9,911,496 10,017,765 9,888,015
Diluted 10,326,052 9,911,496 10,264,257 9,888,015
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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PROJECT SOFTWARE & DEVELOPMENT, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,580 $ (2,478)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,234 1,941
Loss on sale and disposal of property
and equipment 23 6
Amortization of discount on marketable securities 94 55
Deferred rent 18 51
Deferred taxes 54 88
Charge for purchased in-process product development -- 9,172
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable (5,020) (1,543)
Prepaid expenses (609) (967)
Other assets (774) 184
Accounts payable 1,830 (1,006)
Accrued compensation (1,922) (1,513)
Income taxes payable (56) (1,370)
Deferred revenue 1,322 1,424
-------- --------
Net cash provided by operating activities 5,774 4,044
-------- --------
Cash flows from investing activities:
Acquisitions of business, net of cash 141 (7,464)
Acquisitions of property and equipment (2,825) (2,800)
Additions to computer software costs -- (891)
Purchase of marketable securities (23,553) (59,518)
Sale of marketable securities 22,517 58,666
-------- --------
Net cash used in investing activities (3,720) (12,007)
-------- --------
Cash flows from financing activities:
Payments on bank loans -- (471)
Payments of debenture -- (1,056)
Proceeds from exercise of stock options
including related tax benefit 877 863
-------- --------
Net cash provided by/(used in) financing activities 877 (664)
-------- --------
Effect of exchange rate changes on cash (273) (53)
-------- --------
Net increase/(decrease) in cash and cash equivalents 2,658 (8,680)
Cash and cash equivalents, beginning of period 28,454 25,964
-------- --------
Cash and cash equivalents, end of period $ 31,112 $ 17,285
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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PROJECT SOFTWARE & DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Project Software & Development, Inc. (PSDI) and its majority-owned
subsidiaries (collectively, the "Company"), as of March 31, 1999 and have been
prepared by the Company in accordance with generally accepted accounting
principles for interim reporting and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. All intercompany accounts and transactions have
been eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. The results of operations for the periods
presented herein are not necessarily indicative of the results of operations to
be expected for the entire fiscal year, which ends on September 30, 1999, or for
any other future period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 1998 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 29, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. INCOME PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a dilutive
effect.
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Basic and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
BASIC EPS 03/31/99 03/31/98
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 4,294,147 $(5,982,818)
Weighted average common shares outstanding 10,033,348 9,911,496
Basic income per share $ 0.43 $ (0.60)
DILUTED EPS
- --------------------------------------------------------------------------------------
Net income $ 4,294,147 $(5,982,818)
Weighted average common shares outstanding 10,033,348 9,911,496
Common stock equivalents (1) 292,704
-------------------------------
Total diluted Shares 10,326,052 9,911,496
Diluted income $ 0.42 $ (0.60)
Per share
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
BASIC EPS 03/31/99 03/31/98
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 8,580,396 $(2,478,008)
Weighted average common shares outstanding 10,017,765 9,888,015
Basic income per share $ 0.86 $ (0.25)
DILUTED EPS
- --------------------------------------------------------------------------------------
Net income $ 8,580,396 $(2,478,008)
Weighted average common shares outstanding 10,017,765 9,888,015
Common stock equivalents (1) 246,492
-------------------------------
Total diluted Shares 10,264,257 9,888,015
Diluted income $ 0.84 $ (0.25)
Per share
</TABLE>
(1) Common stock equivalents are not included because they are anti-dilutive.
C. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for financial
statements for
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periods beginning after December 15, 1997. This statement will change the way
companies report annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Company will adopt SFAS 131 for the
current fiscal year ended September 30, 1999. The Company has not yet completed
its analysis of the operating segments it will report on.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for
financial statements for fiscal years beginning after December 15, 1997. SFAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Company will adopt SFAS 132 in the fiscal year ended September 30, 1999. The
Company believes that the provisions of SFAS 132 will not, when adopted, have a
material impact on the Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 133 on accounting for derivative
instruments and hedging activities was issued in June 1998. It is effective for
fiscal years beginning after June 15, 1999, with earlier adoption encouraged.
The new standard requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivatives and whether they qualify for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
The Company will adopt SFAS 133 in the fiscal year ended September 30, 2000. The
Company believes that the provisions of SFAS 133 will not, when adopted, have a
material impact on the Company's consolidated financial statements.
Statement of Position 98-9 ("SOP 98-9") was issued in December 1998. SOP 98-9
amends paragraphs 11 and 12 of SOP 97-2, Software Revenue Recognition, to
require recognition of revenue using the residual method when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting (2) vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the
requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied. Under the residual method,
the arrangement fee is recognized as follows: (1) the total fair value of the
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and
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subsequently recognized in accordance with the relevant sections of SOP 97-2 and
(2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements.
Effective December 15, 1998, SOP 98-9 amends SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the
deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Earlier adoption is permitted as of
the beginning of fiscal years or interim periods for which financial statements
or information have not been issued. Retroactive application of the provisions
of SOP 98-9 is prohibited. Based upon its reading and interpretations of SOP
98-9, the Company believes its current revenue recognition policies and
procedures are materially consistent with SOP 98-9.
Statement of Position 98-1 ("SOP 98-1") provides guidance on accounting for the
costs of computer software developed or obtained for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after December 15,
1998, and should be applied to internal-use computer software costs incurred
those fiscal years for all projects, including those projects in progress upon
initial application of the SOP. The Company adopted SOP 98-1 in the second
quarter of fiscal 1999.
D. COMPUTER SOFTWARE COSTS
There were no internally developed software costs capitalized for the three and
six months ended March 31, 1999, respectively, and $0 and $675,000 for the three
and six months ended March 31, 1998, respectively. Amortization expense was
$113,00 and $135,000 for the three months ended March 31, 1999 and 1998,
respectively, and $248,000 and $158,000 for the six months ended March 31, 1999
and 1998, respectively. Software costs are amortized on a straight-line basis
over the estimated useful or market life of the software (generally, one to two
years).
E. ACQUISITIONS
On December 10, 1998, the Company acquired the shares and assumed net
liabilities of its Italian distributor, Work Management Consulting, s.r.l, for
the sum of $411,000. The transaction was accounted for using the purchase method
of accounting. The resulting goodwill is being amortized on a straight-line
basis over five years. This acquisition was deemed to be immaterial for
presentation of pro forma information.
On February 6, 1998, the Company acquired the stock of The A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash,
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stock and assumed liabilities. The A.R.M. Group Inc. was a privately held
organization that helped businesses solve maintenance and materials management
problems. A.R.M launched the M|Net solution and emerged as a leader in shared
inventory networks over which distributors, manufacturers and purchasers of
MRO ("Maintenance, Repair and Operating") supplies conduct their business. The
Company recorded the acquisition using the purchase method of accounting with
$9.2 million of the purchase price allocated to in-process product development
and charged to the consolidated statement of operations on March 31, 1998, $452
thousand allocated to purchased technology, and $657 thousand allocated to
tangible assets.
F. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest and taxes were as follows:
Six Months Ended
---------------------
(in thousands) 1999 1998
------ ------
Interest........................................ $ 25 $ 4
Income taxes.................................... 4,559 4,113
Acquisitions of businesses were as follows:
Six Months Ended
-------------------
(in thousands) 1999 1998
---- -------
Fair value of assets acquired................... $592 $10,280
Fair value of liabilities assumed............... 729 2,751
Net cash payments............................... 180 6,400
10
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G. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
following is presented in accordance with this statement:
(in thousands)
- --------------------------------------------------------------------------------
SIX SIX
MONTHS MONTHS
ENDED ENDED
03/31/99 03/31/98
- --------------------------------------------------------------------------------
Net income/(loss) $8,580 $(2,478)
- --------------------------------------------------------------------------------
Other comprehensive income, net of tax:
- --------------------------------------------------------------------------------
Unrealized (loss) on securities (17) (404)
Arising during period
- --------------------------------------------------------------------------------
Foreign currency translation adjustment (376) (196)
- --------------------------------------------------------------------------------
Comprehensive income $8,187 $(3,078)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THREE THREE
MONTHS MONTHS
ENDED ENDED
03/31/99 03/31/98
- --------------------------------------------------------------------------------
Net income/(loss) $4,294 $(5,983)
- --------------------------------------------------------------------------------
Other comprehensive income, net of tax:
- --------------------------------------------------------------------------------
Unrealized (loss) on securities (41) (194)
Arising during period
- --------------------------------------------------------------------------------
Foreign currency translation adjustment (412) (140)
- --------------------------------------------------------------------------------
Comprehensive income $3,841 $(6,317)
- --------------------------------------------------------------------------------
H. SUBSEQUENT EVENTS
In April 1999, the Company signed agreements with W.W. Grainger, Inc., a leading
business-to-business provider of MRO supplies and related information in North
America. W.W. Grainger, Inc. will invest $14.5 million (subject to certain
closing conditions) to acquire 500,000 shares of the Company's common stock and
an option to acquire certain shares of common stock, equal to 5% of the
aggregate number of shares outstanding, for a fixed price, of the Company's
wholly-owned subsidiary, MRO.com, Inc. Also, in the three months ended December
1998, the Company concluded a significant e-commerce software license with W.W.
Grainger, Inc. in excess of $2.5 million.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Factors Affecting Future Performance". Readers should
carefully review the risk factors described in other documents that the Company
files from time to time with the Securities and Exchange Commission, including
the Annual Report on Form 10-K filed by the Company on December 29, 1998.
OVERVIEW
The Company develops, markets and supports enterprise asset maintenance
software. Businesses, government agencies and other organizations use MAXIMO to
assist them in maintaining high-value capital assets such as plants, facilities
and production equipment. Through its subsidiary MRO.com, Inc., the Company
complements its enterprise asset maintenance software with an Internet-based
business-to-business e-Commerce network and set of desktop requisition and
on-line procurement software products. The Company's products are designed to
enable customers to reduce downtime, control maintenance expenses, cut spare
parts inventories and costs, improve purchasing efficiency, and more effectively
deploy productive assets, personnel and other resources.
In the second quarter of fiscal 1999, the Company formed a new wholly-owned
subsidiary, MRO.com, Inc. MRO.com, Inc. will provide on-line procurement
solutions for capital intensive industries and the manufacturing and
distribution channels that serve them. These solutions will enable buyers at
companies to efficiently manage the complex balance between both planned and
spot buy procurement activities. MRO.com, Inc. links an on-line community of MRO
("Maintenance, Repair and Operating") suppliers and buyers to a group of
Internet-based procurement products that reduce purchasing and inventory costs.
The buyers, many of which are already using the Company's MAXIMO Enterprise
Asset Management software, will be offered a new set of Internet-based
procurement products as well as a connection to the community of MRO suppliers
being assembled by MRO.com. It is intended that as a result, users will benefit
from reduced purchasing and inventory costs.
The new MRO.com initial product offerings will include the following:
- - mroBuyer: the desktop requisition, workflow and integration gateway software
that allows the buyer to connect to the mro Marketplace, and other open content
intermediaries and place
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orders. mroBuyer will provide order management to transport orders from buyer to
supplier and real time integration technology to integrate with leading
financial systems from SAP, Oracle, and PeopleSoft.
- - mroSupplier: the software that connects the supplier to mroMarketplace,
receives and sends XML-based transactions to and from the mroMarketplace
operations center, and allows suppliers to manage their electronic catalogs.
- - mroMarketplace: the collection of suppliers that have partnered with MRO.com,
Inc. and who are connected to MRO.com, Inc. buyers.
- - mroTransaction Server: the high availability, high bandwidth worldwide network
infrastructure and transaction server that connects buyers and suppliers.
The initial MRO.com, Inc. suite of products will be available in the third
quarter of fiscal 1999. (1)
The Company's revenues are derived primarily from two sources: (i) software
licenses and (ii) fees for services, including support contracts, training and
consulting services and transaction fees for on-line charges to engage in
electronic commerce for MRO supplies. The Company plans to invest significantly
over the next year in its new MRO web-based products and to develop content and
add suppliers to www.mro.com, MRO.com's e-Commerce hub. (1)
ACQUISITIONS
On December 10, 1998, the Company acquired the shares and assumed net
liabilities of its Italian distributor, Work Management Consulting, s.r.l, for
the sum of $411,000. The transaction was accounted for using the purchase method
of accounting. The resulting goodwill is being amortized on a straight-line
basis over five years. This acquisition was deemed to be immaterial for
presentation of pro forma information.
On February 6, 1998, the Company acquired the stock of The A.R.M. Group Inc.,
Ontario, Canada for the sum of $10.3 million in cash, stock and assumed
liabilities. The A.R.M. Group Inc. was a privately held organization that helped
businesses solve maintenance and materials management problems. A.R.M launched
the M|Net solution and emerged as a leader in shared inventory networks over
which distributors, manufacturers and purchasers of MRO supplies conduct their
business. The Company recorded the acquisition using the purchase method of
accounting with $9.2 million of the purchase price allocated to in-process
product development and charged to
- -----------------------------
(1) Forward looking statement
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<PAGE> 14
the consolidated statement of operations on March 31, 1998, $452 thousand
allocated to purchased technology, and $657 thousand allocated to tangible
assets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $13,470 1.6% $13,252
Percentage of total revenues 40.9% 46.9%
Support and services $19,440 29.7% $14,987
Percentage of total revenues 59.1% 53.1%
Total revenues $32,910 16.5% $28,239
The growth in revenues is generated primarily by support and services from the
Company's enterprise asset management product, MAXIMO. A significant portion of
the Company's revenues are derived from operations outside of the United States.
Revenues from sales outside the United States increased 16.5% to $16.2 million
or 49.4% of revenues for the three months ended March 31, 1999, compared to
$13.9 million or 49.1% of revenues for the three months ended March 31, 1998.
The increase in the percentage of revenues generated outside the U.S. for the
three months ended March 31, 1999 compared to the three months ended March 31,
1998 can be attributed to the Company's continued global expansion, which in the
first quarter of fiscal 1999 included the acquisition of its Italian
distributor, the incorporation of a wholly-owned owned subsidiary in the
People's Republic of China and the opening of a regional headquarters in Hong
Kong.
Software licenses for the three months ended March 31, 1999 increased slightly
to 1.6% to $13.4 million from $13.2 million while MAXIMO client/server software
licenses grew 4.9%. Software licenses as a percentage of revenues decreased to
40.9% in the three months ended March 31, 1999 from 46.9% in the three months
ended March 31, 1998. While the Company experienced a slowing growth rate in
MAXIMO software licenses, it did not experience a decline. The Company cautions
that the enterprise software application market in general is showing declining
revenues due to cautious information technology spending due to the year 2000
issues. (1)
- -----------------------------
(1) Forward looking statement
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Support and services revenues increased 29.7% over the prior quarter. Consulting
services grew 33.8% for the three months ended March 31, 1999 compared to the
three months ended March 31, 1998 and continue to be a large percentage of total
revenues due to additional service demands in connection with large scale
implementations of the Company's MAXIMO product. The Company also attributes
some of the growth in services to the preference of companies outsourcing
enterprise software application implementations so that its internal Information
Systems ("IS") departments can concentrate on Year 2000 issues. Support services
have grown 25.1% for the three months ended March 31, 1999 compared to the three
months ended March 31, 1998. The increase in the percentage of support revenues
is in direct relation to the increase in software license revenues and a high
renewal rate for MAXIMO maintenance contracts. Currently, in excess of 90% of
all domestic MAXIMO customers renew their maintenance contracts.
COST OF REVENUES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $ 1,516 23.8% $1,225
Percentage of software licenses 11.3% 9.2%
Support and services $ 9,700 20.7% $8,034
Percentage of support and services 49.9% 53.6%
Total cost of revenues $11,216 21.1% $9,259
Percentage of total revenues 34.1% 32.8%
Cost of software revenues consists of software purchased for resale, royalties
paid to vendors of third party software, the amortization of capitalized
software, the cost of software product packaging and media, and certain employee
costs related to software duplication, packaging and shipping. The increase in
the cost of software revenues is due primarily to software purchased for resale,
production materials and royalties paid to third party vendors.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
Company. The Company utilizes the services of these higher cost third-party
consultants in order to meet the heavy services demand and backlog. The cost of
support and services as a percentage of support and services revenues decreased
to 49.9% from 53.6% for the three months ended March 31, 1999 and 1998,
respectively. The decrease as a percentage of revenues is attributable to growth
in support revenues without a
15
<PAGE> 16
proportionate increase in support personnel, combined with timing of realizing
third party consulting expenses in relation to the recognition of services
revenue. The Company realizes the cost of third party consulting expenses
according to when the service is performed. However, revenue on fixed fee
contracts cannot be recorded until a percentage of the contract has been
completed or an acceptance milestone has been met.
OPERATING EXPENSES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Sales and marketing $9,460 4.1% $9,090
Percentage of total revenues 28.7% 32.2%
Product development $3,628 17.6% $3,085
Percentage of total revenues 11.0% 10.9%
General and administrative $2,515 6.8% $2,355
Percentage of total revenues 7.6% 8.3%
In-Process Product Development N/A (100%) $9,172
Percentage of total revenues N/A 32.5%
The increase in sales and marketing expenses for the three months ended March
31, 1999 is primarily due to increases in sales and marketing personnel, costs
for global expansion and sales commissions based on revenue growth. The decrease
as a percentage of revenues for the three months ended March 31, 1999 is
primarily attributable to increases in revenue growth without a commensurate
increase in sales and marketing expenses.
The increase in product development expenses for the three months ended March
31, 1999 is attributable to an increase in salary related expenses due to the
hiring of additional personnel. There were no internally developed software
costs capitalized for the three months ended March 31, 1999 and 1998,
respectively.
The Company will be expending development dollars on its electronic commerce
product for MRO supply chain management. (1) The Company will continue to make
investments in a new MAXIMO Java-based web application component architecture
including a mobile application suite of products. (1) The Company will continue
to invest in client/server MAXIMO including application-programming interfaces
to enterprise resource planning application software products developed by
Oracle, PeopleSoft, Baan and SAP. (1)
- -----------------------------
(1) Forward looking statement
16
<PAGE> 17
The increase in general and administrative expenses for the three months ended
March 31, 1999 is primarily due to the hiring of additional general and
administrative personnel and related benefits and other expenses to support the
global expansion of the Company. The decrease as a percentage of revenues for
the three months ended March 31, 1999 is primarily attributable to increases in
revenue growth without a commensurate increase in general and administrative
expenses.
In connection with the The A.R.M. Group Inc. acquisition, the Company acquired
in-process product development of $9.2 million. The Company determined that
certain aspects of the acquired technology had not reached technological
feasibility and had no alternative future use. The Company reached this
conclusion based on information prepared by a third party. The Company expensed
the portion of the purchase price allocable to such in-process product
development in the three months ended March 31, 1998.
NON-OPERATING EXPENSES
Three CHANGE % Three
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Interest income $ 679 2.1% $ 665
Interest (expense) $ (7) 250.0% $ (2)
Other income (expense) $(323) 31.3% $(246)
Interest income for the period ended March 31, 1999 is attributable to interest
earned on cash equivalents from cash flow generated from operations including
accounts receivable collections. The days sales outstanding were 98 days for the
quarter ended March 31, 1999 compared to 82 days for the quarter ended March 31,
1998. The increase is primarily due to both the geographic distribution of
revenues and timing of invoicing. The Company has established a target of 90 to
95 days for its quarterly days sales outstanding.(1)
The increase in other income (expense) is primarily attributable to expenses
related to exchange rate fluctuations in Latin America and Asia Pacific.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 33.3% for the three months ended March 31,
1999. The Company's effective tax rate before a one time non-deductible charge
for purchased in-process product development was 34.4% for the three months
ended March 31, 1998. The Company anticipates that its fiscal 1999 effective tax
rate will not exceed 35%. (1)
- -----------------------------
(1) Forward looking statement
17
<PAGE> 18
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31, 1998
REVENUES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $27,876 14.3% $24,395
Percentage of total revenues 41.7% 45.7%
Support and services $38,951 34.5% $28,954
Percentage of total revenues 58.3% 54.3%
Total revenues $66,827 25.3% $53,349
The growth in revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's revenues
are derived from operations outside the United States. Revenues from sales
outside the United States increased 32.1% to $32.9 million or 49.3% of revenues
for the six months ended March 31, 1999, compared to $24.9 million or 47% of
revenues for the six months ended March 31, 1998. The increase in the percentage
of revenues generated outside the U.S. for the six months ended March 31, 1999
compared to the six months ended March 31, 1998 can be attributed to the
Company's continued global expansion, which in the first quarter of fiscal 1999
included the acquisition of its Italian distributor, the incorporation of a
wholly-owned subsidiary in the People's Republic of China and the opening of a
regional headquarters in Hong Kong.
Software licenses for the six months ended March 31, 1999 increased 14.3% to
$27.8 million from $24.3 million. Contributing to this increase was a
significant e-Commerce license concluded with W.W. Grainger, Inc. in December
1998. The Company recognized in excess of $2.5 million for this license. MAXIMO
client/server software licenses grew 6.5%. Software licenses as a percentage of
revenues have decreased to 41.7% in the six months ended March 31, 1999 from
45.7% in the six months ended March 31, 1998. While the Company experienced a
slowing growth rate in MAXIMO software licenses, it did not experience a
decline. The Company cautions that the enterprise software application market in
general is showing declining revenues due to cautious information technology
spending due to the year 2000 issues. (1)
- -----------------------------
(1) Forward looking statement
18
<PAGE> 19
Support and services revenues have increased 34.5% over the comparable period.
Consulting services grew 41.3% for the six months ended March 31, 1999 compared
to the six months ended March 31, 1998 and continue to be a large percentage of
total revenues due to additional service demands in connection with large scale
implementations of the Company's MAXIMO product. The Company also attributes
some of the growth in services to the preference of companies outsourcing
enterprise software application implementations so that its internal IS
departments can concentrate on Year 2000 issues. Support services have grown
24.3% for the six months ended March 31, 1999 compared to the six months ended
March 31, 1998. The increase in the percentage of support revenues is in direct
relation to the increase in software license revenues and a high renewal rate
for MAXIMO maintenance contracts. Currently, in excess of 90% of all domestic
MAXIMO customers renew their maintenance contracts.
COST OF REVENUES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Software licenses $ 2,660 45.4% $ 1,829
Percentage of software licenses 9.5% 7.5%
Support and services $19,283 31.9% $14,620
Percentage of support and services 49.5% 50.5%
Total cost of revenues $21,943 33.4% $16,449
Percentage of total revenues 32.8% 30.8%
Cost of software revenues consists of software purchased for resale, royalties
paid to vendors of third party software, the amortization of capitalized
software, the cost of software product packaging and media, and certain employee
costs related to software duplication, packaging and shipping. The increase in
the cost of software revenues is due primarily to software purchased for resale,
royalties paid to third party vendors, production materials and amortization of
capitalized software.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services is attributable to the hiring of employees and the
extensive use of third-party consultants contracted to perform services for the
Company. The Company utilizes the services of these higher cost third-party
consultants in order to meet the heavy services demand and backlog. The cost of
support and services as a percentage of support and services revenues decreased
to 49.5% from 50.5% for the three months ended March 31, 1999 and 1998,
respectively. The decrease as a percentage of revenues is attributable to growth
in support revenues without a
19
<PAGE> 20
proportionate increase in support personnel, combined with timing of realizing
third party consulting expenses in relation to the recognition of services
revenue. The Company realizes the cost of third party consulting expenses
according to when the service is performed. However, revenue on fixed fee
contracts cannot be recorded until a percentage of the contract has been
completed or an acceptance milestone has been met.
OPERATING EXPENSES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Sales and marketing $20,415 18.9% $17,171
Percentage of total revenues 30.5% 32.2%
Product development $ 7,104 23.1% $ 5,769
Percentage of total revenues 10.6% 10.8%
General and administrative $ 5,382 14.6% $ 4,695
Percentage of total revenues 8.1% 8.8%
In-Process Product Development N/A $ 9,172
Percentage of total revenues N/A (100%) 17.2%
The increase in sales and marketing expenses for the six months ended March 31,
1999 is primarily due to increases in sales and marketing personnel, costs for
global expansion and sales commissions based on revenue growth. Also,
contributing to this increase is higher costs for advertising expenses to
promote global expansion and products. The decrease as a percentage of revenues
for the three months ended March 31, 1999 is primarily attributable to increases
in revenue growth without a commensurate increase in sales and marketing
expenses.
The increase in product development expenses for the six months ended March 31,
1999 is attributable to an increase in salary related expenses due to the hiring
of additional personnel. There were no software costs capitalized for the six
months ended March 31, 1999 and 1998, respectively.
The Company will be expending development dollars on its electronic commerce
product for MRO supply chain management. (1) The Company will continue to make
investments in a new MAXIMO Java-based web application component architecture
including a mobile application suite of products. (1) The Company will continue
to invest in client/server MAXIMO including application-programming interfaces
to enterprise resource planning application software products developed by
Oracle, PeopleSoft, Bann and SAP. (1)
- -----------------------------
(1) Forward looking statement
20
<PAGE> 21
The increase in general and administrative expenses for the six months ended
March 31, 1999 is primarily due to the hiring of additional general and
administrative personnel and related benefits and other expenses to support the
global expansion of the Company. The decrease as a percentage of revenues for
the six months ended March 31, 1999 is primarily attributable to increases in
revenue growth without a commensurate increase in general and administrative
expenses.
In connection with the A.R.M. Group Inc. acquisition, the Company acquired
in-process product development of $9.2 million. The Company determined that
certain aspects of the acquired technology had not reached technological
feasibility and had no alternative future use. The Company reached this
conclusion based on information prepared by a third party. The Company expensed
the portion of the purchase price allocable to such in-process product
development in the six months ended March 31, 1998.
NON-OPERATING EXPENSES
Six CHANGE % Six
Months Months
Ended Ended
(in thousands) 03/31/99 03/31/98
- --------------------------------------------------------------------------------
Interest income $1,327 (5.3)% $1,402
Interest(expense) $ (24) 380.0% $ (5)
Other income (expense) (251) 8.7% $ (231)
Interest income for the period ended March 31, 1999 is attributable to interest
earned on cash equivalents from cash flow generated from operations including
accounts receivable collections.
The increase in other income (expense) is primarily attributable to expenses
related to exchange rate fluctuations in Latin America and Asia Pacific.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.2% for the six months ended March 31,
1999. The Company's effective tax rate before a one time non-deductible charge
for purchased in-process product development was 35.8% for the six months ended
March 31, 1998. The income tax expense provided during 1998 reflects the
nondeductible nature of certain acquisition-related charges of The A.R.M. Group,
Inc. The Company anticipates that its fiscal 1999 effective tax rate will not
exceed 35%. (1)
- -----------------------------
(1) Forward looking statement
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents and marketable
securities of approximately $70.9 million and working capital of $67.9 million.
Cash generated by operations for the six months ended March 31, 1999 was $5.8
million, primarily attributable to net income and an increase in accounts
payable, offset by an increase in receivables as a result of the geographic
distribution of revenues and timing of invoicing.
Cash used in investing activities totaled $3.7 million, primarily for the
purchase of marketable securities and the purchase of property and equipment.
Cash generated by financing activities was $877 thousand, primarily from
proceeds received from exercises of employee stock options.
As of March 31, 1999, the Company's principal commitment consisted primarily of
an office lease for its headquarters. Under the terms of the lease agreement,
upon termination of the lease the Company has the right to extend the lease for
an additional six year term for an agreed upon fixed cost. The Company leases
its facilities and certain equipment under non-cancelable operating lease
agreements that expire at various dates through November 2003.
In April 1999, the Company signed agreements with W.W. Grainger, Inc., a leading
business-to-business provider of MRO supplies and related information in North
America. W.W. Grainger, Inc. will invest $14.5 million (subject to certain
closing conditions) to acquire 500,000 shares of the Company's common stock and
an option to acquire certain shares of common stock, equal to 5% of the
aggregate number of shares outstanding, for a fixed price, of the Company's
wholly-owned subsidiary, MRO.com, Inc.
The Company may use a portion of its cash to acquire businesses, products and
technologies complementary to its business. (1) The Company also plans on making
significant investments over the next year in its new MRO.com web-based products
and to develop content and add suppliers to www.mro.com, MRO.com's e-Commerce
hub.
The Company believes that its current cash balances combined with cash flow from
operations will be sufficient to meet its working capital and capital
expenditure requirements through at least September 30, 1999. (1)
- -----------------------------
(1) Forward looking statement
22
<PAGE> 23
YEAR 2000
"The information contained under this heading constitutes a 'Year 2000 Readiness
Disclosure' under the Year 2000 Information and Readiness Disclosure Act."
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
Management has initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program is to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company has begun to assess the readiness
of its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company utilizes other third party software products, network
equipment and telecommunications products. Failure of any critical technology
components to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems. There can be no guarantee that the systems of other
companies will be timely converted, or that a failure to convert by another
company would not have a material adverse effect on the Company. The Company
currently estimates that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000. (1) There can be no assurances
that as the Company continues its program of reviewing internal systems that the
costs will not exceed $100,000. The Company has begun to develop a contingency
plan based on the final results gathered from its suppliers and third parties.
The Company plans to finalize this plan by end of September 1999.
The Company has evaluated its software products and determined that the current
versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, and 3.0.3 will continue to
operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully
compliant. Customers must take the steps described in the Company's year 2000
readiness documentation to address the issues or the customers must upgrade to
MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 and allow adequate time for conversion of
data. MAXIMO releases prior to MAXIMO Release 3.0.2 must be upgraded from the
user's existing version to MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 in order to be
year 2000 compliant. Upgrades will be provided free of charge. MAXIMO
- -----------------------------
(1) Forward looking statement
23
<PAGE> 24
ADvantage 4.0 will continue to operate properly into the Year 2000. Customers
using prior versions of ADvantage must be upgraded to ADvantage 4.0 and allow
adequate time for conversion of data in order to be year 2000 compliant.
Upgrades will be provided free of charge. The Company's electronic commerce
product, M|net, is currently being tested for year 2000 compliance. Testing is
scheduled to be completed by the end of June 1999. The Company's product
PROJECT/2 is no longer sold but the Company does offer support for this product.
The Company will release an upgrade of this product targeted for the fourth
quarter of fiscal 1999 that will enable this product to run after January 1,
2000 and handle Year 2000 and leap year calculations correctly when used in
accordance with the Company's year 2000 readiness documentation. MAXIMO
Scheduler 4.0 and 3.0 and P/X Version 2.2.0 are currently being tested for
compliance. Testing is scheduled to be completed by the end of June 1999. The
Company estimates that the cost to upgrade all of its products to be year 2000
enabled will be approximately $500,000.
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states adopted the euro as
their common national currency. Thereafter, until January 1, 2002, the
transition period, either the euro or a participating country's present currency
will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated
bills and coins will be issued, and by July 1, 2002, only the euro will be used.
A significant number of the Company's customers are located, or transact
business with, or have operations in participating European Union countries. As
a result, the computer systems or software used by these companies may need to
be upgraded to comply with data storage and computational euro requirements. In
the first fiscal quarter of 1999, the Company released a new English language
client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates,
converts and reports euro currency. In the second quarter of fiscal 1999, the
Company released primary language versions of MAXIMO 4.0.1 in Brazilian
Portuguese, Dutch, French, German, Latin American Spanish, and Swedish. The
amount of development dollars spent on the euro release will not have a material
adverse effect on the Company's results of operations or financial condition.(1)
The Company has initiated a program to determine what, if any, internal systems
need to be replaced to comply with the requirements for the adoption of the
euro.
- -----------------------------
(1) Forward looking statement
24
<PAGE> 25
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
assumptions, risks and uncertainties. Certain public documents of the Company
and oral statements made by authorized officers, directors, employees, agents
and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the following and other
assumptions, risks and uncertainties. Forward-looking information requires
management of the Company to make assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and future operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may become
inaccurate. Accordingly, actual results and the Company's Implementation of its
plans and operations may differ materially from forward-looking statements made
by or on behalf of the Company. The following discussion identifies certain
important factors that could affect the Company's actual results and actions and
could cause such results and actions to differ materially from any
forward-looking statements made by or on behalf of the Company that related to
such results and actions.
Other factors, which are not identified herein, could also have such an effect.
RAPID TECHNOLOGICAL CHANGE
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements. The Company's success depends upon its ability to continue to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance. In particular, the Company believes that it must
continue to respond quickly to users' needs for broad functionality and to
advances in hardware and operating systems. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could result in a loss of competitiveness and revenues. There can be no
assurance that the Company will be successful in developing and marketing new
products or product enhancements, or that the Company will not experience
significant delays in developing such new products or product enhancements. Such
delays could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that new products and product
enhancements developed by the Company will achieve market acceptance.
25
<PAGE> 26
DEPENDENCE ON MAXIMO
The Company's revenues are primarily attributable to the licensing of its MAXIMO
client/server product, introduced in 1991, and to related services and support.
Revenues from licenses of MAXIMO and related services and support accounted for
approximately 93.8% of the Company's total revenues in fiscal 1998. The
Company's financial performance in fiscal 1999 depends on continued market
acceptance of MAXIMO. The Company believes that continued market acceptance of
MAXIMO will largely depend on its ability to enhance and broaden the
capabilities of MAXIMO, by, among other things, developing additional
application modules for MAXIMO, versions of MAXIMO and by developing and
incorporating into the MAXIMO product technologies that are emerging in
connection with the Internet. Any factor adversely affecting sales of MAXIMO,
such as delays in development, significant software flaws, incompatibility with
significant hardware platforms, operating systems or databases, increased
competition or negative evaluations of the products, would have a material
adverse effect on the Company's business and financial results.
The Company made the English language version of MAXIMO Release 4.0 generally
available in March 1998 for new clients. In the fourth quarter of the fiscal
year ended 1998, the Company released primary language versions of MAXIMO 4.0 in
Brazilian Portuguese, Dutch, French, German, Japanese, Latin American Spanish,
and Swedish. The failure of MAXIMO 4.0 to achieve market acceptance would have a
material adverse effect on the Company's business and financial results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. The Company's
revenues and income from operations typically grow at a lower rate or decline in
the first quarter of each fiscal year, compared to the fourth quarter of the
preceding fiscal year. In addition, revenues are typically higher in the fourth
quarter than in other quarters of the year. The Company believes that these
quarterly patterns are partly attributable to the Company's sales commission
policies, which compensate members of the Company's direct sales force for
meeting or exceeding annual quotas. In addition, the Company's quarterly
revenues and operating results have fluctuated historically, due to the number
and timing of product introductions and enhancements, the budgeting and
purchasing cycles of customers, the timing of product shipments and the timing
of marketing and product development expenditures. The Company typically
realizes a significant portion of its revenue from sales of software licenses in
the last two weeks of a quarter, frequently even in the last days of a quarter.
Large software license contracts may have a significant impact on
26
<PAGE> 27
'
revenues for any quarter and could, therefore, result in significant
fluctuations in quarterly revenues and operating results. Accordingly, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
The Company generally ships its products upon receipt of orders and maintains no
significant product backlog. As a result, revenues from license fees in any
quarter are substantially dependent on orders booked and shipped in that
quarter. A delay in or loss of orders can cause significant variations in
operating results. A significant portion of the Company's operating expenses are
fixed in the short term, and planned expenditures are based primarily on sales
forecasts. Accordingly, if revenues do not meet the Company's expectations in
any given quarter, operating results may be materially adversely affected.
COMPETITION
The market for applications software is intensely competitive and rapidly
changing. While the Company believes that it has competed effectively to date,
competition in its industry is likely to intensify as current competitors expand
their product lines and new companies enter the market. To remain successful in
the future, the Company must respond promptly and effectively to the challenges
of technological change, evolving standards and its competitors' innovations by
continually enhancing its own products, services and support offerings, as well
as its marketing programs. There can be no assurance that the Company will
continue to be able to compete successfully in the future.
The market for asset maintenance software is fragmented by geography, by
hardware platform and by industry orientation, and is characterized by a large
number of competitors including both independent software vendors and certain
enterprise resource planning vendors. Independent Software vendors include
Datastream, Inc. and Indus Group. MAXIMO also competes with integrated
enterprise resource planning systems which are provided by several large
vendors, such as SAP and JD Edwards and others, and which include maintenance
modules. Currently, the Company's client/server versions of MAXIMO compete with
products of a number of large vendors some of which have traditionally provided
maintenance software running on mainframes and minicomputers and are now
offering systems for use in the client/server environment. MAXIMO also
encounters competition from vendors of low cost maintenance management systems
designed initially for use by a single user or limited number of users as
vendors of these products upgrade their functionality to enter the client/server
market.
The MRO supply chain management business using electronic commerce has many
diverse competitors offering a wide range of differing products, services and
technologies. The Company expects competition to intensify as current
competitors expand their product offerings and new competitors enter the market.
In
27
<PAGE> 28
addition, the market for electronic procurement solutions is relatively new
and underdeveloped. While the Company believes that electronic commerce products
and technologies complement the Company's existing products, there can be no
assurance that the Company will be able to compete successfully in this market.
Many of the Company's enterprise asset management competitors are also entering
the MRO e-commerce market. The current potential competitors include, Ariba,
Clarus, Commerce One, Concur, Connect, Harbinger, IBM, Intellisys, Microsoft,
Netscape, Oracle, PeopleSoft, SAP and others.
Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, the Company could be at a competitive disadvantage.
INTERNATIONAL OPERATIONS
A significant portion of the Company's total revenues are derived from
operations outside the United States. The Company derived 45.7%, 43.8%, and
40.5% of its total revenue from sales outside the United States in fiscal years
1998, 1997, and 1996, respectively. The Company expects that international
revenues will continue to be a significant percentage of total revenues. The
Company expects international revenues to continue to grow in absolute dollars
during 1999, and accordingly, continues to invest heavily in international
infrastructure, global product functionality and translated versions of
financial and other software products. In the event international expansion
and/or product globalization efforts are not successful, the Company's business
operating results and financial condition may be adversely affected. This
international business is subject to various risks common to international
activities, including exposure to currency fluctuations, greater difficulty in
collecting accounts receivable, political and economic instability, the greater
difficulty of administering business abroad and the need to comply with a wide
variety of foreign import and United States export laws and regulatory
requirements.
A significant portion of the Company's total revenue is derived from
international operations that are conducted in foreign currencies. Changes in
the values of these foreign currencies relative to the United States dollar have
in the past adversely affected, and may in the future affect, the Company's
results of operations and financial position. Gains and losses on translation to
United States dollars and settlement of receivables from international
subsidiaries may contribute to fluctuations in the Company's results of
operations. To date, the Company has not engaged in currency hedging
transactions. The Company may in the future undertake currency hedging, although
there can be no assurance that hedging transactions, if entered into, would
materially reduce the effects of fluctuations in foreign currency exchange rates
on the Company's results of
28
<PAGE> 29
operations. The Company experienced lower than anticipated revenue growth rates
in the Asia Pacific region during 1998 in part due to the economic difficulties
that have occurred throughout this region. There can be no assurances that the
economy of this region will recover in the near future or that the Company's
growth rates in this geographic region will return to the previous levels if the
recovery occurs.
DEPENDENCE ON THIRD PARTIES
The client/server versions of MAXIMO operate with the Oracle, SQLServer, and
SQLBase database management systems. Introduction and increased market
acceptance of database management systems with which the Company's products do
not operate could adversely affect the market for the Company's products.
The Company has entered into nonexclusive license agreements with Centura
Software Corporation, Scribe Technologies, Incorporated, Cognos Corporation,
Netronic Software GmbH, HSB Reliability Technologies Corporation, Intelligent
Labeling Technologies, Incorporated, WebLogic, Incorporated, Marimba, Inc., and
Intermat, Inc. pursuant to which the Company incorporates into its products
software providing certain application development, user interface, business
intelligence, content and graphics capabilities developed by these companies. If
the Company were unable to renew these licenses, or if any of such vendors were
to become unable to support and enhance its products, the Company could be
required to devote additional resources to the enhancement and support of these
products or to acquire or develop software providing equivalent capabilities,
which could cause delays in the development and introduction of products
incorporating such capabilities.
PRODUCT DEVELOPMENT: INTERNET
The Company is currently developing a Java-based component architect software
application to incorporate into the MAXIMO product technologies emerging in
conjunction with the Internet. Internet technologies and applications generally
are developing and gaining acceptance rapidly in the market. MRO supply chain
management using electronic commerce is a nascent market with many standards and
technologies remaining to be developed. Accordingly, developing technologies
pose risks to the Company. The Company believes that electronic commerce
products and technologies complement the Company's existing products. There can
be no assurance that the Company will successfully anticipate trends in this
market, that the Company will be successful in Internet technology development
or acquisition efforts or that the Company's Internet applications, if
developed, will achieve market acceptance.
If Internet usage continues to grow rapidly, its infrastructure may not be able
to support customer and user demands and its
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performance and reliability may decline. If outages or delays on the Internet
occur frequently or increase in frequency, overall Internet usage including
usage of the Company's products and services could grow more slowly or decline.
The Company is dependent upon improvements being made to the entire Internet as
well as to its individual customers' networking infrastructures to alleviate
overloading and congestion. If these improvements are not made, the ability of
the Company's customers to utilize the Company's solution will be hindered, and
the Company's business, operating results and financial condition may suffer.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon proprietary technology. The Company
currently has no patents and protects its technology primarily through
copyrights, trademarks, trade secrets and employee and third party nondisclosure
agreements. The Company's software products are sometimes licensed to customers
under "shrink wrap" licenses included as part of the product packaging.
Although, in larger sales, the Company's shrink-wrap licenses may be accompanied
by specifically negotiated agreements signed by the licensee, in many cases its
shrink-wrap licenses are not negotiated with or signed by individual licensees.
Certain provisions of the Company's shrink-wrap licenses, including provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program, may be unenforceable under the laws of certain jurisdictions.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or development by others of similar technology. Although the Company
believes that its products and technology do not infringe on any existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future.
GENERAL ECONOMIC RISK FACTORS
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation will not adversely
affect the Company's financial results in the future.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain key executive officers and technical
employees, the loss of one or more of who could have an adverse impact on the
future operations of the Company. The Company continues to hire a significant
number of additional sales, services and technical personnel. Competition for
hiring of such personnel in the software industry is intense, and the Company
from time to time experiences difficulty in locating candidates with the
appropriate qualifications within
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the desired geographic locations, or with certain industry specific domain
expertise. It is widely believed that the technology industry is at or beyond a
condition of full employment. The Company does not have employment contracts
with, and does not maintain key person life insurance policies on, any
personnel. In addition, the Company may need to hire additional skilled
personnel to support the continued growth of its business. There can be no
assurance that the Company will be able to retain its existing personnel or
attract additional qualified employees.
CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS
As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products, or technologies and to enter into
joint ventures and strategic alliances with other companies. There can be no
assurance that the Company would be successful in overcoming the risks
associated or problems encountered in connection with such business
combinations, investments, or joint ventures, or that such transactions will not
materially adversely affect the Company's business, financial condition, or
operating results.
POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE
Fiscal 1998 was marked by significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock").
Factors such as announcements of technological innovations or new products by
the Company, its competitors and other third parties, as well as quarterly
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to continue to
fluctuate significantly. In addition, the stock market in general has recently
experienced substantial price and volume fluctuations, which have particularly
affected the market prices of many software companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations also may adversely affect the market price of the Common Stock.
LITIGATION RISKS
The Company is subject to the normal risks of litigation with respect to its
business operation.
YEAR 2000
"The information contained under this heading constitutes a 'Year 2000 Readiness
Disclosure' under the Year 2000 Information and Readiness Disclosure Act."
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<PAGE> 32
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain computer programs
that have date sensitive software and use two digits only may recognize a date
using "00" as the year 1900 rather than the year 2000.
Management has initiated a program to prepare the Company's financial,
manufacturing and other critical systems and applications for the year 2000. The
focus of the program is to identify affected software and hardware, develop a
plan to correct that software or hardware in the most effective manner and
implement and monitor that plan. The Company has begun to assess the readiness
of its significant suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company utilizes other third party software products, network
equipment and telecommunications products. Failure of any critical technology
components to operate properly in the Year 2000 may have an adverse impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems. There can be no guarantee that the systems of other
companies will be timely converted, or that a failure to convert by another
company would not have a material adverse effect on the Company. The Company
currently estimates that the costs associated with preparing internal systems
for the Year 2000 should not exceed $100,000. There can be no assurances that as
the Company continues its program of reviewing internal systems that the costs
will not exceed $100,000. The Company has begun to develop a contingency plan
based on the final results gathered from its suppliers and third parties. The
Company plans to finalize this plan by end of September 1999.
The Company has evaluated its software products and determined that the current
versions of MAXIMO Release 4.0.0, 4.0.1, 4.0.2, and 3.0.3 will continue to
operate properly into the Year 2000. MAXIMO version 3.0.2 is not fully
compliant. Customers must take the steps described in the Company's year 2000
readiness documentation to address the issues or the customers must upgrade to
MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 and allow adequate time for conversion of
data. MAXIMO releases prior to MAXIMO Release 3.0.2 must be upgraded from the
user's existing version to MAXIMO Release 4.0.1, 4.0.2, or 3.0.3 in order to be
year 2000 compliant. Upgrades will be provided free of charge. MAXIMO ADvantage
4.0 will continue to operate properly into the Year 2000. Customers using prior
versions of ADvantage must be upgraded to ADvantage 4.0 and allow adequate time
for conversion of data in order to be year 2000 compliant. Upgrades will be
provided free of charge. The Company's electronic commerce product, M|net, is
currently being tested for year 2000 compliance. Testing is scheduled to be
completed by the end of June 1999. The Company's product PROJECT/2 is no longer
sold but the Company does offer support for this product. The Company will
release an upgrade of this product targeted for the fourth quarter of fiscal
1999 that will enable this product to run after
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January 1, 2000 and handle Year 2000 and leap year calculations correctly when
used in accordance with the Company's year 2000 readiness documentation. MAXIMO
Scheduler 4.0 and 3.0 and P/X Version 2.2.0 are currently being tested for
compliance. Testing is scheduled to be completed by the end of June 1999. The
Company estimates that the cost to upgrade all of its products to be year 2000
enabled will be approximately $500,000.
The Company does not believe that the advent of the Millennium has caused any
positive or negative impact on revenues from the Company's software products
during fiscal 1998. While the Company has experienced customer requests to
replace non-compliant Year 2000 applications, it also believes that certain
market segments have deferred procuring asset maintenance systems while they
complete the implementation of ERP systems. The Company cautions that there may
be a slow down in the future in the enterprise application market due to
cautious information technology spending due to the year 2000 issues. The
Company will continue to monitor the potential impact of the arrival of the
Millennium on its software revenues.
EURO COMPLIANCE
On January 1, 1999, eleven European Union member states adopted the euro as
their common national currency. Thereafter, until January 1, 2002, the
transition period, either the euro or a participating country's present currency
will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated
bills and coins will be issued, and by July 1, 2002, only the euro will be used.
A significant number of the Company's customers are located, or transact
business with, or have operations in participating European Union countries. As
a result, the computer systems or software used by these companies may need to
be upgraded to comply with data storage and computational euro requirements. In
the first fiscal quarter of 1999, the Company released a new English language
client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates,
converts and reports euro currency. In the second quarter of fiscal 1999, the
Company released primary language versions of MAXIMO 4.0.1 in Brazilian
Portuguese, Dutch, French, German, Latin American Spanish, and Swedish. The
amount of development dollars spent on the euro release will not have a material
adverse effect on the Company's results of operations or financial condition.
The Company has initiated a program to determine what, if any, internal systems
need to be replaced to comply with the requirements for the adoption of the
euro.
ACCOUNTING POLICIES THAT MAY HAVE AN ADVERSE EFFECT
Statement of Position 98-9 ("SOP 98-9") was issued in December 1998. SOP 98-9
amends paragraphs 11 and 12 of SOP 97-2, Software Revenue Recognition, to
require recognition of revenue using the residual method when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a
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multiple-element arrangement that is not accounted for using long-term contract
accounting (2) vendor-specific objective evidence of fair value does not exist
for one or more of the delivered elements in the arrangement, and (3) all
revenue-recognition criteria in SOP 97-2 other than the requirement for
vendor-specific objective evidence of the fair value of each delivered element
of the arrangement are satisfied. Under the residual method, the arrangement fee
is recognized as follows: (1) the total fair value of the undelivered elements,
as indicated by vendor-specific objective evidence, is deferred and subsequently
recognized in accordance with the relevant sections of SOP 97-2 and (2) the
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered elements.
Effective December 15, 1998, SOP 98-9 amends SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the
deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Earlier adoption is permitted as of
the beginning of fiscal years or interim periods for which financial statements
or information have not been issued. Retroactive application of the provisions
of SOP 98-9 is prohibited. Based upon its reading and interpretations of SOP
98-9, the Company believes its current revenue recognition policies and
procedures are materially consistent with SOP 98-9.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company will have no obligation to release publicly any revision or update
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
THE COMPANY DOES NOT HAVE ANY MATERIAL RISKS UNDER THIS ITEM.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting in lieu of the Annual Meeting of
Stockholders on March 24, 1999. At the Special Meeting the stockholders
of the Company voted to approve the following actions by the following
votes:
1. To elect Norman E. Drapeau Jr. and Richard P. Fishman as Class
III Directors of the company for a term of three years.
No. of Shares/Votes
-----------------------------------
For Authority Withheld
--------- ------------------
Norman E. Drapeau, Jr. 7,297,051 267,239
Richard P. Fishman 7,295,455 268,835
2. To approve the Company's 1999 Equity Incentive Plan.
No. of Shares/Votes
-------------------
For 4,996,053
Against 2,539,567
Abstain 28,670
3. To approve the amendments to the Company's 1994 Incentive and
Nonqualified Stock Option Plan.
No. of Shares/Votes
-------------------
For 5,985,517
Against 1,552,853
Abstain 25,920
4. To approve the proposal to ratify the selection of
PricewaterhouseCoopers LLP as the Company's independent
accountants.
No. of Shares/Votes
-------------------
For 7,559,749
Against 1,371
Abstain 3,170
In addition, Robert L. Daniels, Paul D. Birch, Alan L. Stanzler, and
Stephen B. Sayre continue to serve on the Company's Board of Directors
after the Special Meeting.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement on
Form S-1, Registration No. 33-76420, and incorporated herein by
reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996, File No. 0-23852 and incorporated herein by
reference)
3.3 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (which is
attached as Exhibit A to the Rights Agreement included as Exhibit 4 (b)
to the Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
4. Instruments defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock of the Company (included
as Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization of
the Company (included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and incorporated
herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project
Software & Development, Inc. and BankBoston, N.A. as Rights Agent
(included as Exhibit 4 (a) to the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (included as
Exhibit 4 (b) to the Company's Current Report on Form 8-K
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dated February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
10. Material Contracts
10.1 1999 Equity Incentive Plan, as approved by the stockholders of
the Company by written consent dated March 24, 1999
10.2 Amended and Restated 1994 Incentive and Nonqualified Stock
Option Plan, as approved by the stockholders of the Company
by written consent dated March 24, 1999
27. Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended March 31, 1999, the Company filed a
current report on Form 8-K related to the resignation of William G. Nelson on
January 11, 1999 from the Company's Board of Directors.
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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 thereunto duly authorized.
PROJECT SOFTWARE & DEVELOPMENT, INC.
Date: May 14, 1999 By: /s/ Paul D. Birch
------------ ----------------------------------------
Paul D. Birch
Authorized Officer
Executive Vice President Finance &
Administration, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
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<PAGE> 40
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996 File No. 0-23852 and
incorporated herein by reference)
3.3 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (which is attached as Exhibit A to the Rights
Agreement included as Exhibit 4 (b) to the Company's Current
Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference)
4.1 Specimen certificate for the Common Stock of the Company
(included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and
incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization
of the Company (included as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-76420,
and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project
Software & Development, Inc. and BankBoston, N.A. as Rights
Agent (included as Exhibit 4 (a) to the Company's Current
Report on Form 8-K dated February 2, 1998, File No. 0-23852,
and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Project Software &
Development, Inc. (included as Exhibit 4 (b) to the Company's
Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998,
File No. 0-23852, and incorporated herein by reference)
10.1. 1999 Equity Incentive Plan, as approved by the stockholders of
the Company by written consent dated March 24, 1999
10.2 Amended and Restated 1994 Incentive and Nonqualified Stock
Option Plan, as approved by the stockholders of the Company by
written consent dated March 24, 1999
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
APPENDIX A
PROJECT SOFTWARE & DEVELOPMENT, INC.
1999 EQUITY INCENTIVE PLAN
1. INTRODUCTION: PURPOSES
(a) This 1999 Equity Incentive Plan (the "1999 Plan" or "the Plan")
supersedes the 1994 Incentive and Nonqualified Stock Option Plan (the "1994
Plan") of Project Software & Development, Inc. (the "Company"). Options granted
under the 1994 Plan prior to the approval of the 1999 Plan shall continue to be
governed by the terms of the 1994 Plan as in effect immediately prior to the
date of such approval.
(b) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to benefit from increases in value of the stock of
the Company through the granting of (i) Incentive Stock Options, (ii)
Nonstatutory Stock Options, (iii) Stock Bonuses, (iv) rights to purchase
Restricted Stock, (v) Stock Appreciation Rights, and (vi) other awards based
upon the Company's Common Stock on such terms and conditions as the Board of
Directors of the Company (the "Board") may determine.
(c) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company and
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company.
(d) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c)
hereof, be either (i) Options granted pursuant to Sections 6 and 7 hereof,
including Incentive Stock Options and Nonstatutory Stock Options, (ii) Stock
Bonuses or rights to purchase restricted stock granted pursuant to Section 8
hereof, (iii) Stock Appreciation Rights granted pursuant to Section 9 hereof or
(iv) other stock based awards granted pursuant to Section 10 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and shall be in such form as required pursuant to
Sections 6 and 7 hereof, and a separate certificate will be issued for shares
purchased upon exercise of each type of Option.
2. DEFINITIONS AND RULES OF INTERPRETATION
(a) Definitions.
For the purposes of the Plan, in addition to the definitions set forth
above, the following terms shall have the respective meanings set forth below:
(i) "Affiliate" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined
in Sections 424(e) and (f) respectively, of the Code.
(ii) "Board" means the Board of Directors of the Company.
(iii) "Change in Control" means the occurrence of any one of the
following events:
(a) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) becomes a "beneficial owner" (as such term
is defined in Rule 13d-3 promulgated under the Exchange Act) (other than
the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company), directly
or indirectly, of securities of the Company representing fifty percent
(50%) or more of the combined voting power of the Company's then
outstanding securities; or
(b) persons who constitute the Company's Board immediately prior to
any tender offer, proxy contest, consent solicitation, business
combination, merger or similar transaction cease to constitute
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at least a majority of the Board as a result of such tender offer, proxy
contest, merger or similar transaction; or
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation or other entity,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than
fifty percent (50%) of the combined voting power of the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
(iv) "Change in Stock" means any change in the Company Common Stock
subject to the Plan, or subject to any Stock Award, without receipt of
consideration by the Company (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend, stock
split, spin-off, split-up, spin-out, dividend in property other than cash,
liquidating dividend, combination of shares, exchange of shares, change in
corporate structure or other transaction not involving the receipt of
consideration by the Company); provided however, that the conversion of any
convertible securities of the Company shall not be treated as a
"transaction not involving the receipt of consideration by the Company."
(v) "Code" means the Internal Revenue Code of 1986, as amended.
(vi) "Committee" means the Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.
(vii) "Company" means Project Software & Development, Inc. a
corporation organized under the laws of Massachusetts.
(viii) "Company Common Stock" means the common stock of the Company,
par value $.01 per share
(ix) "Concurrent Stock Appreciation Right" or "Concurrent Right" means
a right granted pursuant to subsection 9(b)(ii) hereof.
(x) "Consultant" means any person, including an advisor, engaged by
the Company, or an Affiliate to render consulting services and who is
compensated for such services, provided that the term "Consultant" shall
not include a Director acting solely in his capacity as such.
(xi) "Continuous Status as an Employee or Consultant" means the
employment or relationship as Consultant is not interrupted or terminated
by the Company or any Affiliate. The Committee, in its sole discretion, may
determine whether Continuous Status as an Employee, or Consultant shall be
considered interrupted in the case of any leave of absence approved by the
Board, including sick leave, military leave, or any other personal leave;
provided, however, that for purposes of Incentive Stock Options and Stock
Appreciation Rights appurtenant thereto, any such leave may not exceed
ninety (90) days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(xii) "Director" means a member of the Board.
(xiii) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(xiv) "Employee" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as
a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(xv) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(xvi) "Fair Market Value" means, the closing sales price as of the
date of grant for Company Common Stock (or the closing bid, if no sales
were reported) as quoted on the Nasdaq National Market
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or any similar organization or if Company Common Stock is listed on any
national securities exchange, as quoted on such national securities
exchange, as applicable, as reported in the Wall Street Journal or other
source as the Board deems reliable, and if Company Common Stock is not
traded on the Nasdaq National Market or any similar organization or on any
national securities exchange, the value as determined in good faith by the
Committee, based on the information available to it.
(xvii) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(xviii) "Independent Stock Appreciation Right" or "Independent Right"
means a right granted under subsection 9(b)(iii) hereof.
(xix) "Non-Employee Director" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary,
does not receive compensation (directly or indirectly) from the Company or
its parent or subsidiary for services rendered as a Consultant or in any
capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K (or
any successor regulation of similar import) promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any
other transaction as to which disclosure would be required under Item
404(a) of Regulation S-K (or any successor regulation of similar import),
and is not engaged in a business relationship as to which disclosure would
be required under Item 404(b) of Regulation S-K (or any successor
regulation of similar import); or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3 of the Exchange Act.
(xx) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(xxi) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(xxii) "Option" means a stock option granted pursuant to the Plan.
(xxiii) "Option Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an
individual Option grant. Each Option Agreement shall be subject to the
terms and conditions of the Plan.
(xxiv) "Optionee" means an Employee, Director or Consultant who holds
an outstanding Option.
(xxv) "Outside Director" means for any given date of grant a Director
who either (i) is not then a current employee of the Company or an
"affiliated corporation" (within the meaning of Treasury regulations
promulgated under Section 162(m) of the Code), is not a former employee of
the Company or an "affiliated corporation" receiving compensation from the
Company or such affiliated corporation for prior services (other than
benefits under a tax qualified pension plan) during the then current
taxable year, was not an officer of the Company or an "affiliated
corporation" at any time (other than as its Clerk or Assistant Clerk), and
is not then currently receiving direct or indirect remuneration from the
Company or an "affiliated corporation" for services in any capacity other
than as a Director, and (ii) is otherwise considered an "outside director"
for purposes of Section 162(m) of the Code.
(xxvi) "Plan" or "1999 Plan" mean this 1999 Equity Incentive Plan.
(xxvii) "Plan Year" means the calendar year.
(xxiii) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3.
(xxix) "Securities Act" means the Securities Act of 1933, as amended.
(xxx) "Stock Appreciation Right" means any of the various types of
rights which may be granted under Section 9 hereof.
(xxxi) "Stock Award" means any right granted under the Plan, including
any Option, any stock bonus, any right to purchase restricted stock, and
any Stock Appreciation Right.
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(xxxii) "Stock Award Agreement" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions
of an individual Stock Award grant. Each Stock Award Agreement shall be
subject to the terms and conditions of the Plan.
(xxxiii) "Stock Bonus" means any stock bonus of the type which may be
granted under Section 8 hereof.
(xxxiv) "Tandem Stock Appreciation Right" or "Tandem Right" means a
right granted under subsection 9(b)(i) hereof.
The foregoing terms are not the exclusive definitions as used in the Plan
and reference is made to other capitalized terms defined in the context of their
first use herein.
(b) Rules of Interpretation.
(i) The headings and subheadings used herein or in any Option or other
instrument evidencing a Stock Award are solely for convenience of reference and
shall not constitute a part of the Plan or such document or affect the meaning,
construction or effect of any provision thereof.
(ii) All definitions set forth herein shall apply to the singular as well
as the plural form of such defined term, and all references to the masculine
gender shall include reference to the feminine or neuter gender and visa versa,
as the context may require.
(iii) References to "including" means including without limiting the
generality of any description preceding such term.
(iv) Unless otherwise expressly stipulated, any reference in the Plan to
any statute, act, regulation or specific provision thereof shall also extend to
any amendment, restatement or other modification to such statute, act,
regulation or specific provision thereof or any successor statute, act,
regulation or provision of similar import.
(v) Unless otherwise expressly provided, any reference in the Plan to any
specific provision of any statute or act shall include any regulations
promulgated thereunder from time to time and interpretations thereof as may be
applicable to the Plan.
3. ADMINISTRATION
(a) Administration of the Plan shall be delegated to a committee composed
of not fewer than two (2) members (the "Committee"), all of the members of which
Committee shall be Non-Employee Directors and Outside Directors. The Committee
shall have, in connection with the administration of the Plan, the powers set
forth in the Plan, subject, however, to such resolutions, not inconsistent with
the provisions of the Plan, as may be adopted from time to time by the Board.
The Board may abolish the Committee at any time and revisit in the Board the
administration of the Plan. The Board shall have the authority to correct any
defect, omission or inconsistency in the Plan and to amend the Plan as provided
in Section 16. The Board shall have the authority to appoint the Committee and
to fill any vacancy created on the Committee by reason of the death, resignation
or removal of any member thereof by appointing an eligible successor.
Notwithstanding anything in this Section 3 to the contrary, at any time the
Board or the Committee may delegate to a committee of one or more members of the
Board the authority to grant Stock Awards to eligible persons who are not then
subject to Section 16 of the Exchange Act and to eligible persons with respect
to whom the Company does not wish to comply with Section 162(m) of the Code.
(b) The Committee shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how Stock Awards shall be
granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a Stock Bonus, a right to purchase restricted
stock, a Stock Appreciation Right, another stock-based award or a
combination of the foregoing; the provisions of each Stock Award granted
(which need not be identical), including the time or times when a person
shall be permitted to receive stock pursuant to a Stock Award; whether a
person shall be permitted to
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receive stock upon exercise of an Independent Stock Appreciation Right; and
the number of shares with respect to which Stock Awards shall be granted to
each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Committee, in the exercise of this power, may correct
any defect, omission or inconsistency in any Stock Award Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the
Stock Award Agreement fully effective.
(iii) To amend any Stock Award.
(iv) Generally, to exercise such powers and to perform such acts as
the Committee deems necessary or expedient to promote the best interests of
the Company and which are not in conflict with the provisions of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 15 hereof relating to adjustments
upon Changes in Stock, the number of shares of stock that may be issued pursuant
to Stock Awards under the Plan shall be equal to 925,000 shares of Company
Common Stock. If any Stock Award shall for any reason expire or otherwise
terminate without having been exercised in full, the Company Common Stock not
purchased shall again become available for issuance under the Plan.
Notwithstanding the foregoing, shares of Company Common Stock subject to Stock
Appreciation Rights exercised in accordance with Section 8 hereof shall not be
available for subsequent issuance under the Plan.
(b) The Company Common Stock subject to the Plan may consist in whole or in
part of authorized but unissued shares or treasury shares. Subject to Section
4(a) hereof, no more than one hundred thousand (100,000) shares of Company
Common Stock may be subject to Stock Bonus or restricted stock purchase.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Other Stock Awards may be granted to
Employees, Directors or Consultants, provided, however, that Stock Awards may be
granted to Non-Employee Directors only as provided in Section 7(a).
(b) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) Company Common Stock possessing more than ten
percent (10%) of the total combined voting power of all classes of capital stock
of the Company or of any of its Affiliates unless the exercise price of such
Incentive Stock Option is at least one hundred ten percent (110%) of the Fair
Market Value of such Company Common Stock at the date of grant and the Incentive
Stock Option is not exercisable after the expiration of five (5) years from the
date of grant.
(c) No person shall be eligible to be granted Stock Awards covering more
than one hundred thousand (100,000) shares of Company Common Stock in any Plan
Year.
6. OPTION PROVISIONS.
Each Option Agreement shall be in such form and shall contain such terms
and conditions as the Committee shall deem appropriate. The provisions of
separate Option Agreements need not be identical, but each Option Agreement
shall include (through incorporation of provisions hereof by reference in the
Option Agreement or otherwise) the substance of each of the following provisions
except as otherwise specifically provided elsewhere in the Plan:
(a) Term. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) Price. Subject to subsection 5(b) hereof, the exercise price of
each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Company Common Stock subject to the
Option on the date the Option is granted. The exercise price of each
Nonstatutory Stock Option shall be set by the Committee at the time each
Option is granted.
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(c) Consideration. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either: (i) in cash at the time the Option is exercised, or
(ii) at the discretion of the Committee, either at the time of the grant or
exercise of the Option, (A) by delivery to the Company of other Common
Stock of the Company, (B) according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock of the Company) with the person to
whom the Option is granted or to whom the Option is transferred pursuant to
subsection 6(d) hereof, or (C) in any other form of legal consideration
that may be acceptable to the Committee on terms determined by the
Committee.
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be
interest under the deferred payment arrangement.
(d) Transferability. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the
Incentive Stock Option is granted only by such person. A Nonstatutory Stock
Option may be transferable to the extent specified in the Option Agreement,
in which case the Option may be transferred upon such terms and conditions
as are set forth in the Option Agreement, as the Committee shall determine
in its sole discretion, including (without limitation) pursuant to a
"domestic relations order" within the meaning of such rules, regulations or
interpretation of the Securities and Exchange Commission as are applicable
for purposes of Section 16 of the Exchange Act, or to family members, or to
trusts or other entities maintained for the benefit of family members.
Notwithstanding the foregoing, the person to whom an Option is granted may,
by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
Optionee, shall thereafter be entitled to exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to
time during each of such installment periods, the Option may become
exercisable ("vest") with respect to some or all of the shares allotted to
that period, and may be exercised with respect to some or all of the shares
allotted to such period and/or any prior period as to which the Option
became vested but was not fully exercised. The Option may be subject to
such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the
Committee may deem appropriate. During the remainder of the term of the
Option (if its term extends beyond the end of the installment periods), the
Option may be exercised from time to time with respect to any shares then
remaining subject to the Option. The provisions of this subsection 6(e) are
subject to any Option provisions governing the minimum number of shares as
to which an Option may be exercised.
(f) Termination of Employment or Relationship as a Consultant. In the
event an Optionee's Continuous Status as an Employee or Consultant
terminates (other than upon the Optionee's death or Disability), the
Optionee may exercise his or her Option, but only within such period of
time ending on the earlier of (i) the date three (3) months after
termination of the Optionee's Continuous Status as an Employee or
Consultant (or such longer (but only in the case of a Nonstatutory Stock
Option) or shorter period of time specified in the Option Agreement), or
(ii) the expiration of the Option's term, and only to the extent that the
Optionee was entitled to exercise it at the date of termination (but in no
event later than the expiration of the term of such Option as set forth in
the Option Agreement). If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become
available for issuance under the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified in the Option
Agreement, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the
Plan.
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(g) Disability of Optionee. In the event an Optionee's Continuous
Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option, but
only within such period of time ending on the earlier of (i) the date
twelve (12) months following such termination (or such longer or shorter
period of time as specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement).
If, at the date of termination, the Optionee is not entitled to exercise
his or her entire Option, the shares covered by the unexercisable portion
of the Option shall revert to the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified herein, the
Option shall terminate, and the shares covered by such Option shall revert
to and again become available for issuance under the Plan.
(h) Death of Optionee. In the event of the death of an Optionee
during, or within a period specified in the Option Agreement after the
termination of, the Optionee's Continuous Status as an Employee or
Consultant, the Option may be exercised by the Optionee's estate, by a
person who acquired the right to exercise the Option by bequest or
inheritance, or by a person designated to exercise the Option upon the
Optionee's death pursuant to subsection 6(d) hereof, but only within the
period ending on the earlier of (i) the date twelve (12) months following
the date of death (or such longer or shorter period specified in the Option
Agreement) or (ii) the expiration of the term of such Option as set forth
in the Option Agreement. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become
available under the Plan. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available
for issuance under the Plan.
(i) Early Exercise. The Option Agreement may, but need not, include a
provision whereby the Optionee may elect at any time while an Employee,
Director or Consultant to exercise the Option as to any part or all of the
shares subject to the Option prior to the full vesting of the Option. If
such a provision is included in an Option Agreement, the Option Agreement
shall also contain provisions establishing a vesting schedule for the
purchased shares and a right of the Company to repurchase any unvested
shares or, as a condition to the exercise of the relevant Option, requiring
the Optionee to enter into an agreement with the Company establishing such
vesting and such rights.
(j) Withholding. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such Option by any of
the following means or by a combination of such means: (1) tendering a cash
payment; (2) authorizing the Company to withhold shares from the shares of
the Common Stock otherwise issuable to the participant as a result of the
exercise of the Option; or (3) delivering to the Company owned and
unencumbered shares of the Common Stock of the Company.
(k) Re-Load Options. Without in any way limiting the authority of the
Committee to make or not to make grants of Options hereunder, the Committee
shall have the authority (but not an obligation) to include as part of any
Option Agreement a provision entitling the Optionee to a further Option (a
"Re-Load Option") in the event the Optionee exercises the Option evidenced
by the Option Agreement, in whole or in part, by surrendering other shares
of Company Common Stock in accordance with the Plan and the terms and
conditions of the Option Agreement. Any such Re-Load Option (i) shall be
for a number of shares equal to the number of shares surrendered as part or
all of the exercise price of such Option, (ii) shall have an expiration
date which is the same as the expiration date of the Option the exercise of
which gave rise to such Re-Load Option; and (iii) shall have an exercise
price which is equal to one hundred percent (100%) of the Fair Market Value
of the Company Common Stock subject to the Re-Load Option on the date of
exercise of the original Option or, in the case of a Re-Load Option which
is an Incentive Stock Option and which is granted to a 10% stockholder (as
described in subsection 5(c) hereof), shall have an exercise price which is
equal to one hundred ten percent (110%) of the Fair Market Value of the
Company Common Stock subject to the Re-Load Option on the date of exercise
of the original Option and shall have a term which is no longer than five
(5) years.
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Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Committee may designate at the time of the grant of the
original Option, provided, however, that the designation of any Re-Load Option
as an Incentive Stock Option shall be subject to the one hundred thousand dollar
($100,000) annual limitation on exercisability of Incentive Stock Options
described in subsection 13(d) hereof and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares under subsection 4(a) hereof
and shall be subject to such other terms and conditions as the Committee may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of the Options.
7. OPTION GRANTS TO NON-EMPLOYEE DIRECTORS.
(a) Each Non-Employee Director, including Non-Employee Directors elected to
the Board at the meeting of the Company's stockholders at which this Plan is
approved (the "Approval Meeting"), upon first joining the Board, will
automatically be granted a Nonstatutory Stock Option to purchase 9,000 shares of
Company Common Stock with an exercise price equal to the Fair Market Value of
the Common Stock on the date of grant. Notwithstanding the preceding sentence,
in the event a Non-Employee Director joins the Board after the second Tuesday in
February in a given year such Non-Employee Director will receive a Nonstatutory
Stock Option for a number of shares equal to 9,000 multiplied by N/12 where "N"
is the number of months remaining between the date of election of such
Non-Employee Director and the next second Tuesday in February. In addition, each
Non-Employee Director who continues to serve as a director following any annual
meeting of stockholders of the Company or special meeting in lieu thereof at
which Directors are elected, including the Approval Meeting, will automatically
be granted, immediately following such meeting of stockholders, a Nonstatutory
Stock Option to purchase 9,000 shares of Company Common Stock at an exercise
price equal to the Fair Market Value of the Company Common Stock on the date of
grant. All Options granted under this Section 7(a) shall vest in full on the
date of grant and will expire on the date which is five years from the date of
grant.
(b) The Committee shall adopt such provisions, in its sole discretion, as
to the time, any limitations or restrictions and the manner of the exercise or
vesting of Nonstatutory Stock Options granted under this Section 7 in respect of
the matters set forth under the provisions of Subsections 6(d), (j) and (k)
hereof.
8. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each Stock Bonus or restricted stock purchase agreement related to a Stock
Award shall be in such form and shall contain such terms and conditions as the
Committee shall deem appropriate. The terms and conditions of Stock Bonus or
restricted stock purchase agreements may change from time to time, and the terms
and conditions of separate agreements need not be identical, but each Stock
Bonus or restricted stock purchase agreement shall include (through
incorporation of provisions herein by reference in the agreement or otherwise)
the substance of each of the following provisions as appropriate:
(a) Purchase Price. The purchase price under each restricted stock
purchase agreement shall be such amount as the Committee shall determine
and designate in such agreement. Notwithstanding the foregoing, the
Committee may determine that eligible participants in the Plan may be
granted a Stock Award pursuant to a Stock Bonus agreement in consideration
for past services actually rendered to the Company for its benefit.
(b) Transferability. Except as otherwise provided elsewhere in the
Plan, no rights under a Stock Bonus or restricted stock purchase agreement
shall be assignable by any participant under the Plan, either voluntarily
or by operation of law, except by will or by the laws of descent and
distribution, and shall be exercisable during the lifetime of the person to
whom the rights are granted only by such person. The person to whom the
Stock Award is granted, may, by delivering written notice to the Company,
in a form satisfactory to the Company, designate a third party who, in the
event of the death of such person, shall thereafter be entitled to exercise
the rights held by such person under the Stock Bonus or restricted stock
purchase agreement.
(c) Consideration. The purchase price of stock acquired pursuant to a
Stock Award in the form of a stock purchase agreement shall be paid either:
(i) in cash at the time of purchase; (ii) at the discretion
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of the Committee, according to a deferred payment or other arrangement with
the person to whom the stock is sold; or (iii) in any other form of legal
consideration that may be acceptable to the Committee in its discretion;
including delivery of a promissory note of the Optionee to the Company on
terms determined by the Committee. Notwithstanding the foregoing, the
Committee may grant a Stock Award pursuant to a Stock Bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.
(d) Vesting. Shares of Company Common Stock sold or awarded under the
Plan may, but need not, be subject to a repurchase option in favor of the
Company in accordance with a vesting schedule to be determined by the
Committee.
(e) Termination of Employment or Relationship as a Consultant. In the
event a Participant's Continuous Status as an Employee or Consultant
terminates, the Company may repurchase or otherwise reacquire any or all of
the shares of Company Common Stock held by that person which have not
vested as of the date of termination under the terms of the Stock Bonus or
restricted stock purchase agreement between the Company and such person.
9. STOCK APPRECIATION RIGHTS.
(a) The Committee shall have full power and authority, exercisable in its
sole discretion, to grant Stock Appreciation Rights to Employees or Consultants
to the Company or its Affiliates under the Plan. Each such right shall entitle
the holder to a distribution based on the appreciation in the Fair Market Value
per share of a designated amount of Company Common Stock.
(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(i) Tandem Stock Appreciation Rights. Tandem Rights will be granted
appurtenant to an Option and will require the holder to elect between the
exercise of the underlying Option for shares of Company Common Stock and
the surrender, in whole or in part, of such Option for an appreciation
distribution equal to the excess of (A) the Fair Market Value (on the date
of Option surrender) of vested shares of Company Common Stock purchasable
under the surrendered Option over (B) the aggregate exercise price payable
for such shares.
(ii) Concurrent Stock Appreciation Rights. Concurrent Rights will be
granted appurtenant to an Option and may apply to all or any portion of the
shares of Company Common Stock subject to the underlying Option and will be
exercised automatically at the same time the Option is exercised for those
shares. The appreciation distribution to which the holder of such
concurrent right shall be entitled upon exercise of the underlying Option
shall be in an amount equal to such portion as shall be determined by the
Board or the Committee at the time of grant of the excess of (A) the
aggregate Fair Market Value (at date of exercise) of the vested shares
purchased under the underlying Option with such concurrent rights over (B)
the aggregate exercise price paid for those shares.
(iii) Independent Stock Appreciation Rights. Independent Rights may
be granted independently of any Option and will entitle the holder upon
exercise to an appreciation distribution equal in amount to the excess of
(A) the aggregate Fair Market Value (at date of exercise) of a number of
shares of Company Common Stock equal to the number of vested share
equivalents exercised at such time (as described in subsection 8(c)(iii))
hereof over (B) the aggregate Fair Market Value of such number of shares of
Company Common Stock at the date of grant.
(c) The terms and conditions applicable to each Tandem Right, Concurrent
Right and Independent Right shall be as follows:
(i) TANDEM RIGHTS:
A. Tandem Rights may be tied to either Incentive Stock Options or
Nonstatutory Stock Options. Each such right shall, except as
specifically set forth below, be subject to the same terms and
conditions applicable to the particular Option to which it pertains. If
Tandem Rights are granted appurtenant to an Incentive Stock Option, they
shall satisfy any applicable Treasury Regulations so as not to
disqualify such Option as an Incentive Stock Option under the Code.
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B. The appreciation distribution payable on the exercised Tandem
Right shall be in cash in an amount equal to the excess of (i) the Fair
Market Value (on the date of the Option surrender) of the number of
shares of Company Common Stock covered by that portion of the
surrendered Option in which the Optionee is vested over (ii) the
aggregate exercise price payable for such vested shares.
(ii) CONCURRENT RIGHTS:
A. Concurrent Rights may be tied to any or all of the shares of
Company Common Stock subject to any Incentive Stock Option or
Nonstatutory Stock Option grant made under the Plan. A Concurrent Right
shall, except as specifically set forth below, be subject to the same
terms and conditions applicable to the particular option grant to which
it pertains.
B. A Concurrent Right shall be automatically exercised at the same
time as the underlying Option is exercised with respect to the
particular shares of Company Common Stock to which the Concurrent Right
pertains.
C. The appreciation distribution payable on an exercised
Concurrent Right shall be in cash in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of grant
of the excess of (i) the aggregate Fair Market Value (on the date the
Option is exercised) of the vested shares of Company Common Stock
purchased under the underlying Option which have Concurrent Rights
appurtenant to them over (ii) the aggregate exercise price paid for such
shares.
(iii) INDEPENDENT RIGHTS:
A. Independent Rights shall, except as specifically set forth
below, be subject to the same terms and conditions applicable to
Nonstatutory Stock Options as set forth in Section 6 hereof. They shall
be denominated in share equivalents.
B. The appreciation distribution payable on the exercised
Independent Right shall be in cash in an amount equal to the excess of
(I) the aggregate Fair Market Value (on the date of the exercise of the
Independent Right) of a number of shares of Company Common Stock equal
to the number of share equivalents in which the holder is vested under
such Independent Right, and with respect to which the holder is
exercising the Independent Right on such date, over (II) the aggregate
Fair Market Value (on the date of the grant of the Independent Right) of
such number of shares of Company Common Stock.
(iv) TERMS APPLICABLE TO TANDEM RIGHTS, CONCURRENT RIGHTS AND
INDEPENDENT RIGHTS:
A. To exercise any outstanding Tandem, Concurrent or Independent
Right, the holder must provide written notice of exercise to the Company
in compliance with the provisions of the instrument evidencing such
right.
B. If a Tandem, Concurrent, or Independent Right is granted to an
individual who is at the time subject to Section 16(b) of the Exchange
Act (a "Section 16(b) Insider"), then the instrument of grant shall
incorporate all the terms and conditions at the time necessary to assure
that the subsequent exercise of such right shall qualify for the
safe-harbor exemption from short-swing profit liability provided by Rule
16b-3.
C. Except as otherwise provided in this Section 9, no limitation
shall exist on the aggregate amount of cash payments the Company may
make under the Plan in connection with the exercise of Tandem,
Concurrent or Independent Rights.
10. OTHER STOCK-BASED AWARDS.
The Committee shall have the right to grant other Awards based upon Company
Common Stock having such terms and conditions as the Committee may determine,
including the grant of shares based upon certain conditions and grant of
securities convertible into Company Common Stock.
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11. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at any
time and from time to time, with the consent of the affected holders of Options
and/or Stock Appreciation Rights, (i) the repricing of any outstanding Options
and/or any Stock Appreciation Rights under the Plan and the grant in
substitution therefor of new Options and/or Stock Appreciation Rights under the
Plan covering the same or different numbers of shares of Company Common Stock,
but having an exercise price per share not less than eighty five percent (85%)
of the Fair Market Value (one hundred percent (100%)) of the Fair Market Value
in the case of an Incentive Stock Option or, in the case of an Incentive Stock
Option granted to a 10% stockholder (as described in subsection 5(c) hereof, not
less than one hundred ten percent (110%) of the Fair Market Value) per share of
Company Common Stock on the new grant date.
(b) Shares of Company Common Stock subject to an Option or Stock
Appreciation Right canceled under this Section 11 shall continue to be counted
against the maximum award of Options and Stock Appreciation Rights permitted to
be granted to a person pursuant to subsection 5(c) hereof. The repricing of an
Option and/or Stock Appreciation Right under this Section 11, resulting in a
reduction of the exercise price, shall be deemed to be a cancellation of the
original Option and/or Stock Appreciation Right and the grant of a substitute
Option and/or Stock Appreciation Right; in the event of such repricing, both the
original and the substituted Options and Stock Appreciation Rights shall be
counted against the maximum awards of Options and Stock Appreciation Rights
permitted to be granted to a person pursuant to subsection 5(c) hereof. The
provisions of this subsection 11(b) shall be applicable only to the extent
required by Section 162(m) of the Code.
12. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of Company Common Stock required to satisfy
such Stock Awards up to the number of shares of Company Common Stock authorized
under the Plan.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of Company Common Stock under the Stock Awards; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act or any securities law of any state either the Plan, any Stock
Award or any stock issued or issuable pursuant to any such Stock Award. The
Company shall not be required to sell or issue any shares under any Stock Award
if the issuance of such shares shall constitute a violation by the holder of the
Stock Award or by the Company of any provision of any law or regulation of any
governmental authority. In the event the shares of Company Common Stock issuable
on exercise of Stock Award are not registered under the Securities Act, the
Company may imprint upon any certificate representing shares so issued any
legend which counsel for the Company considers necessary or advisable to comply
with the Securities Act and with applicable state securities laws. The Company
may, but shall in no event be obligated to, register any securities covered
hereby pursuant to the Securities Act; and in the event any shares are so
registered the Company may remove any legend on certificates representing such
shares.
13. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Company Common Stock pursuant to Stock Awards
shall constitute general funds of the Company.
14. MISCELLANEOUS.
(a) The Committee shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(b) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) hereof shall be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares of
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Company Common Stock subject to such Option unless and until such person has
satisfied all requirements for exercise of the Option pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Director, Consultant, Optionee,
or other holder of Stock Awards any right to continue in the employ of the
Company or any Affiliate (or to continue acting as a Director or Consultant) or
shall affect the right of the Company or any Affiliate to terminate the
employment or relationship as a Director or Consultant of any Employee,
Director, Consultant or Optionee, with or without cause.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of Company Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year under all plans of the Company and its Affiliates exceeds one hundred
thousand dollars ($100,000), the Options or portions thereof which exceed such
limit (according to the order in which they were granted) shall be treated as
Nonstatutory Stock Options.
15. ADJUSTMENTS UPON CHANGE IN STOCK.
In the event of any Change in Stock, the Plan will be appropriately
adjusted in the class(es) and maximum number of shares subject to the Plan
pursuant to subsection 4(a) hereof and the maximum number of shares subject to
Options and Stock Awards pursuant to subsection 5(c) hereof, and the outstanding
Stock Awards will be appropriately adjusted in the class(es) and number of
shares and price per share of stock subject to such outstanding Stock Awards.
Such adjustments shall be made by the Committee, the determination of which
shall be final, binding and conclusive.
16. VESTING AND PAYMENT UPON CHANGE IN CONTROL.
(a) After a merger of one or more corporations with or into the Company or
after a consolidation of the Company and one or more corporations in which the
stockholders of the Company immediately prior to such merger or consolidation
own after such merger or consolidation shares representing at least fifty
percent (50%) of the voting power of the Company or the surviving or resulting
corporation, as the case may be, each holder of an outstanding Option shall, at
no additional cost, be entitled upon exercise of such Option to receive in lieu
of the shares of Company Common Stock as to which such Option was exercisable
immediately prior to such event, the number and class of shares of stock or
other securities, cash or property (including, without limitation, shares of
stock or other securities of another corporation or Company Common Stock) to
which such holder would have been entitled pursuant to the terms of the
agreement of merger or consolidation if, immediately prior to such merger or
consolidation, such holder had been the holder of record of a number of shares
of Company Common Stock equal to the number of shares for which such Option
shall be so exercised.
(b) Upon and following the occurrence of a Change of Control, the time for
exercise of each unvested installment of any then outstanding Option or Stock
Appreciation Right shall be accelerated, so that:
(i) immediately upon such Change of Control, if the Optionee or the
holder is then an employee or consultant of the Company twenty-five percent
(25%) of any such unvested installment shall be exercisable;
(ii) on the date that is nine months after such Change in Control, if
the Optionee or the holder is then an employee or consultant of the Company
one third (33'%) of any installment of such Option or Stock Appreciation
Right that has not yet vested in accordance with its original terms or by
virtue of this Section 16 shall become exercisable;
(iii) on the date that is eighteen months after such Change in
Control, if the Optionee or the holder is then an employee or consultant of
the Company fifty percent (50%) of any installment of such Option or Stock
Appreciation Right that has not yet vested in accordance with its original
terms or by virtue of this Section 16 shall become exercisable; and
(iv) on the second anniversary of such Change in Control, if the
Optionee or the holder is then an employee or consultant of the Company any
remaining installment of such Option or Stock Appreciation
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Right that has not yet vested in accordance with its original terms or by
virtue of this Section 16 shall become exercisable.
The foregoing clauses (i) through (iv) are intended to provide for vesting
that is in addition to, and not in lieu of, the vesting schedule originally
provided in any Option or Stock Appreciation Right outstanding at the time of a
Change in Control, and, except to the extent accelerated by such clauses, each
such Option or Stock Appreciation Right shall continue to vest in accordance
with its original terms.
(c) Upon the occurrence of a Change of Control, the restrictions and
conditions contained in any Stock Bonus granted to a then current Employee or
Consultant or restricted stock purchase agreement related to a Stock Award to
which a then current Employee or Consultant is a party shall automatically be
appropriately modified so that under the terms thereof additional shares of
Company Common Stock vest in a manner essentially equivalent to the additional
vesting provided for in Section 16(b) for Options and Stock Appreciation Rights.
The determination of the Committee as to such modifications shall be final,
binding and conclusive.
The foregoing subparagraph (c) is intended to provide for vesting that is
in addition to, and not in lieu of, the vesting schedule originally provided in
any Stock Bonus or restricted stock purchase agreement related to a Stock Award
outstanding at the time of a Change in Control, and, except to the extent
accelerated by such clauses, each such Stock Bonus or restricted stock purchase
agreement related to a Stock Award shall continue to vest in accordance with its
original terms.
(d) If the Company is merged with or into or consolidated with another
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation; or
if the Company is liquidated, or sells or otherwise disposes of substantially
all of its assets to another corporation while unexercised Options remain
outstanding under the Plan, then either in such event:
(i) subject to the provisions of clause (iii) below, after the
effective date of such merger, consolidation, liquidation, sale or
disposition, as the case may be, each holder of an outstanding Option shall
be entitled, upon exercise of such Option, to receive, in lieu of the
shares of Company Common Stock as to which such Option was exercisable
immediately prior to such event, the number and class of shares of stock or
other securities, cash or property (including, without limitation, shares
of stock or other securities of another corporation or common stock) to
which such holder would have been entitled pursuant to the terms of the
merger, consolidation, liquidation, sale or disposition if, immediately
prior to such event, such holder had been the holder of a number of shares
of Company Common Stock equal to the number of shares as to which such
Option shall be so exercised;
(ii) the Committee may accelerate the time for exercise of some or all
unexercised and unexpired Options or Stock Appreciation Rights so that from
and after a date prior to the effective date of such merger, consolidation,
liquidation, sale or disposition, as the case may be, specified by the
Committee such accelerated Options or Stock Appreciation Rights shall be
exercisable in full; or
(iii) all outstanding Options and Stock Appreciation Rights,
respectively, may be cancelled by the Committee as of the effective date of
any such merger, consolidation, liquidation, sale or disposition provided
that (x) notice of such cancellation shall be given to each holder of an
Option or Stock Appreciation Right, respectively, and (y) each holder of an
Option or Stock Appreciation Right shall have the right to exercise such
Option or Stock Appreciation Right to the extent that the same is then
exercisable or, if the Committee shall have accelerated the time for
exercise of all unexercised and unexpired Options or Stock Appreciation
Rights, respectively, in full during the 10-day period preceding the
effective date of such merger, consolidation, liquidation, sale or
disposition.
(e) If, within two years following a Change in Control, the employment of
any Optionee who immediately prior to such Change in Control was employed by the
Company as an Officer (each such Optionee being hereafter referred to as a
"Designated Executive") shall be terminated by the Company other than for cause,
or shall be terminated by the Designated Executive for Good Reason, then in such
event all
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unvested Options, Stock Appreciation Rights, Stock Bonuses and other Stock
Awards held by such Designated Executive at the date of such termination shall
thereupon immediately become exercisable in full. For purposes of this
paragraph, "Good Reason" for termination by a Designated Executive of his
employment shall be deemed to have existed only if (i) within two years after a
Change in Control, the Company, or any successor entity then employing the
Designated Executive, shall materially diminish the responsibilities and
authority of the Designated Executive or, shall materially reduce the rate of
compensation of the Designated Executive (including by way of a change in the
method of determining the eligibility of such Designated Executive to earn bonus
or incentive compensation), in either case as compared with his responsibilities
and authority or rate of compensation, as the case may be, in effect immediately
prior to such Change in Control, and (ii) within thirty (30) days following such
diminution or reduction the Designated Executive shall resign from his
employment by the Company or such successor entity.
(f) If, within two years following a Change in Control, a Non-Employee
Director is terminated or resigns from the Board of Directors for Good Reason,
then in such event all unvested Options held by such Non-Employee Director at
the date of such resignation shall thereupon immediately become exercisable in
full. For purposes of this paragraph, "Good Reason" for resignation by a
Non-Employee Director shall be deemed to have existed only if (i) within two
years after a Change in Control, the Company, or any successor entity, shall
materially diminish the responsibilities and authority of the Non-Employee
Director or shall materially reduce the rate of compensation of the Non-Employee
Director, in either case as compared with his responsibilities and authority or
rate of compensation, as the case may be, in effect immediately prior to such
Change in Control, and (ii) within thirty (30) days following such diminution or
reduction the Non-Employee Director shall resign from his position as a
Director.
17. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 14 hereof relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder approval is necessary for
the Plan to satisfy the requirements of Section 422 of the Code, Rule 16b-3, or
the listing or eligibility for quotation requirements of the Nasdaq National
Market or any similar organization or of any national securities exchange upon
which shares of Company Common Stock are listed or eligible for trading.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it into
compliance therewith.
(d) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be altered or impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.
(e) The Committee at any time, and from time to time, may amend the terms
of any one or more Stock Awards; provided, however, that the rights and
obligations under any Stock Award shall not be altered or impaired by any such
amendment unless (i) the Company requests the consent of the person to whom the
Stock Award was granted and (ii) such person consents in writing.
18. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on March 4, 2009. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
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(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with consent of the person to whom the Stock Award was granted.
19. LOCK-UP AGREEMENT.
The Committee may in its discretion specify upon granting an Option that
upon request of the Company or the underwriters managing any underwritten
offering of the Company's securities, the Optionee shall agree in writing that
for a period of time (not to exceed 180 days) from the effective date of any
registration of securities of the Company, the Optionee will not sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any shares issued pursuant to the exercise of such Option, without the prior
written consent of the Company or such underwriters, as the case may be.
20. GOVERNING LAW.
The provisions of the Plan and all Stock Awards made hereunder shall be
governed by and interpreted in accordance with the internal laws of the
Commonwealth of Massachusetts without regard to any applicable conflicts of law
principles thereof.
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EXHIBIT 10.2
APPENDIX B
PROJECT SOFTWARE & DEVELOPMENT, INC.
1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
SECTION 1. PURPOSE
This Amended and Restated 1994 Incentive and Nonqualified Stock Option Plan
(the "Plan") of Project Software & Development, Inc. (the "Company"), is
designed to provide additional incentive to executives and other key employees
of the Company, and any parent or subsidiary of the Company, and to certain
other individuals providing services to or acting as directors of the Company or
any such parent or subsidiary. The Company intends that this purpose will be
effected by the granting of incentive stock options ("Incentive Stock Options")
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and nonqualified stock options ("Nonqualified Options") under the Plan
which afford such executives, key employees or other individuals an opportunity
to acquire or increase their proprietary interest in the Company through the
acquisition of shares of its Common Stock. The Company intends that Incentive
Stock Options issued under the Plan will qualify as "incentive stock options" as
defined in Section 422 of the Code and the terms of the Plan shall be
interpreted in accordance with this intention. As used in the Plan the terms
"parent" and "subsidiary" shall have the respective meanings set forth in
Section 424 of the Code.
SECTION 2. ADMINISTRATION
2.1 The Committee. The Plan shall be administered by a Committee (the
"Committee") consisting of at least two "Outside Directors." As used herein, the
term "Outside Director" means any director of the Company who (i) is not an
employee of the Company or of an "affiliated group," as such term is defined in
Section 1504(a) of the Code, which includes the Company (an "Affiliate"), (ii)
is not a former employee of the Company or any Affiliate who is receiving
compensation for prior services (other than benefits under a tax-qualified
retirement plan) during the Company's or any Affiliate's taxable year, (iii) has
not been an officer of the Company or any Affiliate (other than as its Clerk or
Assistant Clerk) and (iv) does not receive remuneration from the Company or any
Affiliate, either directly or indirectly, in any capacity other than as a
director. None of the members of the Committee shall be an officer or other
employee of the Company. It is the intention of the Company that the Plan shall
be administered by "Non-Employee Directors" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934 as amended (the "1934 Act"), but the
authority and validity of any act taken or not taken by the Committee shall not
be affected if any person administering the Plan is not a disinterested person.
Except as specifically reserved to the Board of Directors of the Company (the
"Board") under the terms of the Plan, the Committee shall have full and final
authority to operate, manage and administer the Plan on behalf of the Company.
Action by the Committee shall require the affirmative vote of a majority of
all members thereof.
2.2 Powers of the Committee. Subject to the terms and conditions of the
Plan, the Committee shall have the power:
(a) To determine from time to time the persons eligible to receive
options and the options to be granted to such persons under the Plan and to
prescribe the terms, conditions, restrictions, if any, and provisions
(which need not be identical) of each option granted under the Plan to such
persons;
(b) To construe and interpret the Plan and options granted thereunder
and to establish, amend, and revoke rules and regulations for
administration of the Plan. In this connection, the Committee may correct
any defect or supply any omission, or reconcile any inconsistency in the
Plan, or in any option agreement, in the manner and to the extent it shall
deem necessary or expedient to make the Plan fully effective. All decisions
and determinations by the Committee in the exercise of this power shall be
final and binding upon the Company and optionees;
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(c) To make, in its sole discretion, changes to any outstanding option
granted under the Plan, including:
(i) to reduce the exercise price, (ii) to accelerate the vesting schedule
or (iii) to extend the expiration date; and
(d) Generally, to exercise such powers and to perform such acts as are
deemed necessary or expedient to promote the best interests of the Company
with respect to the Plan.
SECTION 3. STOCK
3.1 Stock to be Issued. The stock subject to the options granted under
the Plan shall be shares of the Company's authorized but unissued common stock,
$.01 par value (the "Common Stock"), or shares of the Company's Common Stock
held in treasury. The total number of shares that may be issued pursuant to
options granted under the Plan shall not exceed an aggregate of 1,800,000 shares
of Common Stock; provided, however, that the class and aggregate number of
shares which may be subject to options granted under the Plan shall be subject
to adjustment as provided in Section 8 hereof.
3.2 Expiration, Cancellation or Termination of Option. Whenever any
outstanding option under the Plan expires, is cancelled or is otherwise
terminated (other than by exercise), the shares of Common Stock allocable to the
unexercised portion of such option may again be the subject of options under the
Plan, and shares of Common Stock issuable under options that expire, are
cancelled or are otherwise terminated shall not count against the limitation on
grants set forth in Section 3.3 hereof.
3.3 Limitation on Grants. In no event may any Plan participant be granted
options with respect to more than 150,000 shares of Common Stock in any calendar
year.
SECTION 4. ELIGIBILITY
4.1 Persons Eligible. Incentive Stock Options under the Plan may be
granted only to officers and other employees of the Company or any parent or
subsidiary of the Company. Nonqualified Options may be granted to officers or
other employees of the Company or any parent or subsidiary of the Company, and
to members of the Board and consultants or other persons who render services to
the Company or any such parent or subsidiary (regardless of whether they are
also employees), provided, however, that options may be granted to members of
the Board who are not employees of the Company or any such parent or subsidiary
("Outside Directors") only as provided in Section 4.4.
4.2 Greater-Than-Ten-Percent Stockholders. Except as may otherwise be
permitted by the Code or other applicable law or regulation, no Incentive Stock
Option shall be granted to an individual who, at the time the option is granted,
owns (including ownership attributed pursuant to Section 425 of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary (a "greater-than-ten-percent
stockholder"), unless such Incentive Stock Option provides that (i) the purchase
price per share shall not be less than one hundred ten percent of the fair
market value of the Common Stock at the time such option is granted, and (ii)
that such option shall not be exercisable to any extent after the expiration of
five years from the date it is granted.
4.3 Maximum Aggregate Fair Market Value. The aggregate fair market value
(determined at the time the option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by any
optionee during any calendar year (under the Plan and any other plans of the
Company or any parent or subsidiary for the issuance of incentive stock options)
shall not exceed $100,000 (or such greater amount as may from time to time be
permitted with respect to incentive stock options by the Code or any other
applicable law or regulation).
4.4 Option Grants to Outside Directors.
(a) Grant of Options Upon Election to Board. Each Outside Director
joining the Board at or subsequent to the meeting of the Company's
stockholders at which this Section 4.4(a) in this form is approved (the
"Approval Meeting") shall automatically be granted, upon such Outside
Director so joining the Board, an initial Nonqualified Option to purchase
12,000 shares of Common Stock. Such
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Nonqualified Option shall vest and become exercisable in three equal annual
installments cumulatively beginning on the first anniversary of the date
the option was granted. Notwithstanding the preceding sentence, the initial
Nonqualified Option granted to any Outside Director joining the Board after
May 1, 1998, including the initial Nonqualified Option granted to each of
Alan Stanzler and Stephen Sayre, shall vest in three equal installments,
one-third on the first anniversary of the date of grant, one-third on the
second anniversary of the date of grant and one-third immediately prior to
the meeting of stockholders at which such Outside Director's initial term
of office as a Director will expire in accordance with the Company's
By-Laws.
(b) Grant of Options Upon Re-Election to Board or Continuation on the
Board. Each Outside Director who is re-elected by the stockholders of the
Company to the Board at or subsequent to the Approval Meeting shall
automatically be granted, immediately following the meeting of stockholders
at which such Outside Director is re-elected, a Nonqualified Option to
purchase 4,000 shares of Common Stock. In addition, each Outside Director
whose term of office does not expire at any annual meeting of stockholders
or special meeting in lieu thereof subsequent to the Approval Meeting and
who shall remain an Outside Director after such meeting shall automatically
be granted, immediately following such meeting, a Nonqualified Option to
purchase 4,000 shares of Common Stock. Each Nonqualified Option described
in this Section 4.4(b) shall vest and become exercisable in full on the
last day of December in the year in which the Nonqualified Option was
granted.
(c) Purchase Price. The purchase price per share of Common Stock
under each Nonqualified Option granted pursuant to this Section 4.4 shall
be equal to the fair market value of the Common Stock on the date the
Nonqualified Option is granted, such fair market value to be determined in
accordance with the provisions of Section 6.3(b).
(d) Expiration. Each Nonqualified Option granted to an Outside
Director under this Section 4.4 shall expire on the fifth anniversary of
the date of grant.
SECTION 5. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE
5.1 Termination of Employment. Except as may be otherwise expressly
provided herein, options shall terminate on the earlier of:
(a) the date of expiration thereof;
(b) immediately upon the termination of the optionee's employment with
or performance of services for the Company (or any parent or subsidiary of
the Company) by the Company (or any such parent or subsidiary) for cause
(as determined by the Company or such parent or subsidiary); or
(c) thirty days after the date of termination of the optionee's
employment with or performance of services for the Company (or any parent
or subsidiary of the Company) by the Company (or any such parent or
subsidiary) without cause or voluntarily by the optionee; provided,
however, that Nonqualified Options granted to persons who are not employees
of the Company (or any parent or subsidiary of the Company) need not,
unless the Committee determines otherwise, be subject to the provisions set
forth in clauses (b) and (c) above.
An employment relationship between the Company (or any parent or subsidiary
of the Company) and the optionee shall be deemed to exist during any period in
which the optionee is employed by the Company (or any such parent or
subsidiary). Whether authorized leave of absence, or absence on military or
government service, shall constitute termination of the employment relationship
between the Company (or any parent or subsidiary of the Company) and the
optionee shall be determined by the Committee at the time thereof.
As used herein, "cause" shall mean (x) any material breach by the optionee
of any agreement to which the optionee and the Company (or any parent or
subsidiary of the Company) are both parties, (y) any act or omission to act by
the optionee which may have a material and adverse effect on the business of the
Company (or any such parent or subsidiary) or on the optionee's ability to
perform services for the Company (or any such parent or subsidiary), including,
without limitation, the commission of any crime (other than ordinary
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traffic violations), or (z) any material misconduct or material neglect of
duties by the optionee in connection with the business or affairs of the Company
(or any such parent or subsidiary) or any affiliate of the Company (or any such
parent or subsidiary).
5.2 Death or Retirement of Optionee. In the event of the death of the
holder of an option that is subject to clause (b) or (c) of Section 5.1 above
prior to termination of the optionee's employment with or performance of
services for the Company (or any parent or subsidiary of the Company) and before
the date of expiration of such option, such option shall terminate on the
earlier of such date of expiration or one year following the date of such death.
After the death of the optionee, his executors, administrators or any person or
persons to whom his option may be transferred by will or by the laws of descent
and distribution, shall have the right, at any time prior to such termination,
to exercise the option to the extent the optionee was entitled to exercise such
option at the time of his death.
If, before the date of the expiration of an option that is subject to
clause (b) or (c) of Section 5.1 above, the optionee shall be retired in good
standing from the Company for reasons of age or disability under the then
established rules of the Company, the option shall terminate on the earlier of
such date of expiration or ninety (90) days after the date of such retirement.
In the event of such retirement, the optionee shall have the right prior to the
termination of such option to exercise the option to the extent to which he was
entitled to exercise such option immediately prior to such retirement.
SECTION 6. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall be in writing and shall contain such terms,
conditions, restrictions, if any, and provisions as the Committee shall from
time to time deem appropriate. Such provisions or conditions may include,
without limitation, restrictions on transfer, repurchase rights, or such other
provisions as shall be determined by the Committee; provided, however, that such
additional provisions shall not be inconsistent with any other term or condition
of the Plan and such additional provisions shall not cause any Incentive Stock
Option granted under the Plan to fail to qualify as an incentive option within
the meaning of Section 422 of the Code. The shares of stock issuable upon
exercise of an option by any executive officer, director or beneficial owner of
more than ten percent of the Common Stock of the Company may not be sold or
transferred (except that such shares may be issued upon exercise of such option)
by such officer, director or beneficial owner for a period of six months
following the grant of such option.
Option agreements need not be identical, but each option agreement by
appropriate language shall include the substance of all of the following
provisions:
6.1 Expiration of Option. Notwithstanding any other provision of the Plan
or of any option agreement, each option shall expire on the date specified in
the option agreement, which date shall not, in the case of an Incentive Stock
Option, be later than the tenth anniversary (fifth anniversary in the case of a
greater-than-ten-percent stockholder) of the date on which the option was
granted or as specified in Section 5 of this Plan.
6.2 Exercise. Each option may be exercised, so long as it is valid and
outstanding, from time to time in part or as a whole, subject to any limitations
with respect to the number of shares for which the option may be exercised at a
particular time and to such other conditions as the Committee in its discretion
may specify upon granting the option.
6.3 Purchase Price. The purchase price per share under each option shall
be determined by the Committee at the time the option is granted; provided,
however, that the option price of any Incentive Stock Option shall not, unless
otherwise permitted by the Code or other applicable law or regulation, be less
than the fair market value of the Common Stock on the date the option is granted
(110% of the fair market value in the case of a greater-than-ten-percent
stockholder) and the option price of any Nonqualified Option shall not be less
than 85% of the fair market value of the Common Stock on the date the option is
granted. For the purpose of the Plan the fair market value of the Common Stock
shall be (i) in the case of the Nonqualified Options granted to Outside
Directors in connection with the Company's initial public offering, the initial
public offering price and (ii) in all other cases, the closing price per share
on the date of grant of the option as reported by a nationally recognized stock
exchange, or, if the Common Stock is not listed on such an exchange, as reported
by the National Association of Securities Dealers Automated Quotation System
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("Nasdaq") National Market System or, if the Common Stock is not listed on the
Nasdaq National Market System, the mean of the bid and asked prices per share on
the date of grant of the option or, if the Common Stock is not traded
over-the-counter, the fair market value as determined by the Committee.
6.4 Transferability of Options. Options shall not be transferable by the
optionee otherwise than by will or under the laws of descent and distribution,
and shall be exercisable, during his lifetime, only by the optionee; provided,
however, the Committee in its discretion may establish such rules and procedures
as it may deem appropriate to permit the transferability of Nonqualified
Options.
6.5 Rights of Optionees. No optionee shall be deemed for any purpose to
be the owner of any shares of Common Stock subject to any option unless and
until the option shall have been exercised pursuant to the terms thereof, and
the Company shall have issued and delivered certificates representing such
shares to the optionee.
6.6 Certain Rights of the Company. The Committee may in its discretion
provide upon the grant of any option hereunder that the Company shall have an
option to repurchase upon such terms and conditions as determined by the
Committee all or any number of shares purchased upon exercise of such option or
a right of first refusal in connection with subsequent transfer of any or all of
such shares. The repurchase price per share payable by the Company shall be such
amount or be determined by such formula as is fixed by the Committee at the time
the option for the shares subject to repurchase is granted. In the event the
Committee shall grant options subject to the Company's repurchase option or
right of first refusal, the certificates representing the shares purchased
pursuant to such option shall carry a legend satisfactory to counsel for the
Company referring to the Company's repurchase option or right of first refusal.
6.7 "Lockup" Agreement. The Committee may in its discretion specify upon
granting an option that upon request of the Company or the underwriters managing
any underwritten offering of the Company's securities, the optionee shall agree
in writing that for a period of time (not to exceed 180 days) from the effective
date of any registration of securities of the Company, the optionee will not
sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any shares issued pursuant to the exercise of such option,
without the prior written consent of the Company or such underwriters, as the
case may be.
SECTION 7. METHOD OF EXERCISE; PAYMENT OF PURCHASE PRICE
7.1 Method of Exercise. Any option granted under the Plan may be
exercised by the optionee by delivering to the Company on any business day a
written notice specifying the number of shares of Common Stock the optionee then
desires to purchase and specifying the address to which the certificates for
such shares are to be mailed (the "Notice"), accompanied by payment for such
shares.
7.2 Payment of Purchase Price. Payment for the shares of Common Stock
purchased pursuant to the exercise of an option shall be made either by (i) cash
or check equal to the option price for the number of shares specified in the
Notice, or (ii) with the consent of the Committee, other shares of Common Stock
which (a) either have been owned by the optionee for more than six (6) months on
the date of surrender or were not acquired, directly or indirectly, from the
Company, and (b) have a fair market value on the date of surrender not greater
than the aggregate option price of the shares as to which such option shall be
exercised, (iii) with the consent of the Committee, delivery of such
documentation as the Committee and the broker, if applicable, shall require to
effect an exercise of the option and delivery to the Company of the sale or loan
proceeds required to pay the option price, (iv) with the consent of the
Committee, such other consideration which is acceptable to the Committee and
which has a fair market value equal to the option price of such shares, or (v)
with the consent of the Committee, a combination of (i), (ii), (iii), (iv)
and/or (v). For the purpose of the preceding sentence, the fair market value per
share of Common Stock so delivered to the Company shall be determined in the
manner specified in Section 6.3. As promptly as practicable after receipt of the
Notice and accompanying payment, the Company shall deliver to the optionee
certificates for the number of shares with respect to which such option has been
so exercised, issued in the optionee's name; provided, however, that such
delivery shall be deemed effected for all purposes when the Company or a stock
transfer agent of the Company shall have deposited such certificates in the
United States mail, addressed to the optionee, at the address specified in the
Notice.
B-5
<PAGE> 6
SECTION 8. CHANGES IN COMPANY'S CAPITAL STRUCTURE
8.1 Rights of Company. The existence of outstanding options shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize, without limitation, any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of Common
Stock, or any issue of bonds, debentures, preferred or prior preference stock or
other capital stock ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
8.2 Recapitalizations, Stock Splits and Dividends. If the Company shall
effect a subdivision or consolidation of shares or other capital readjustment,
the payment of a stock dividend, or other increase or reduction of the number of
shares of the Common Stock outstanding, in any such case without receiving
compensation therefor in money, services or property, then (i) the number,
class, and price per share of shares of stock subject to outstanding options
hereunder shall be appropriately adjusted in such a manner as to entitle an
optionee to receive upon exercise of an option, for the same aggregate cash
consideration, the same total number and class of shares as he would have
received as a result of the event requiring the adjustment had he exercised his
option in full immediately prior to such event; (ii) the number and class of
shares with respect to which options may be granted under the Plan; and (iii)
the number and class of shares set forth in Sections 3.3 and 4.4 shall be
adjusted by substituting for the total number of shares of Common Stock then
reserved for issuance under the Plan that number and class of shares of stock
that the owner of an equal number of outstanding shares of Common Stock
immediately prior to the event requiring adjustment would own as the result of
such event.
8.3 Merger without Change of Control. After a merger of one or more
corporations with or into the Company or after a consolidation of the Company
and one or more corporations in which the stockholders of the Company
immediately prior to such merger or consolidation own after such merger or
consolidation shares representing at least fifty percent (50%) of the voting
power of the Company or the surviving or resulting corporation, as the case may
be, each holder of an outstanding option shall, at no additional cost, be
entitled upon exercise of such option to receive in lieu of the shares of Common
Stock as to which such option was exercisable immediately prior to such event,
the number and class of shares of stock or other securities, cash or property
(including, without limitation, shares of stock or other securities of another
corporation or Common Stock) to which such holder would have been entitled
pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, such holder had been the
holder of record of a number of shares of Common Stock equal to the number of
shares for which such option shall be so exercised.
8.4 Change of Control.
(a) Upon the occurrence of a Change of Control (as defined below) the time
for exercise of each unvested installment of any then outstanding option shall
be accelerated, such that:
(i) immediately upon such Change of Control, twenty-five percent (25%)
of any such unvested installment shall be exercisable;
(ii) on the date that is nine months after such Change in Control, one
third (33'%) of any installment of such option that has not yet vested in
accordance with its original terms or by virtue of this Section 8.4 shall
become exercisable;
(iii) on the date that is eighteen months after such Change in
Control, fifty percent (50%) of any installment of such option that has not
yet vested in accordance with its original terms or by virtue of this
Section 8.4 shall become exercisable; and
(iv) on the second anniversary of such Change in Control, any
remaining installment of such option that has not yet vested in accordance
with its original terms or by virtue of this Section 8.4 shall become
exercisable.
The foregoing clauses (i) through (iv) are intended to provide for vesting
that is additive to, and not in lieu of, the vesting schedule originally
provided in any option outstanding at the time of a Change in Control,
B-6
<PAGE> 7
and, except to the extent accelerated by such clauses, each such option shall
continue to vest in accordance with its original terms.
(b) If the Company is merged with or into or consolidated with another
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation; or
if the Company is liquidated, or sells or otherwise disposes of substantially
all of its assets to another corporation while unexercised options remain
outstanding under the Plan, then either in such event:
(i) subject to the provisions of clause (iii) below, after the
effective date of such merger, consolidation, liquidation, sale or
disposition, as the case may be, each holder of an outstanding option shall
be entitled, upon exercise of such option, to receive, in lieu of the
shares of Common Stock as to which such option was exercisable immediately
prior to such event, the number and class of shares of stock or other
securities, cash or property (including, without limitation, shares of
stock or other securities of another corporation or common stock) to which
such holder would have been entitled pursuant to the terms of the merger,
consolidation, liquidation, sale or disposition if, immediately prior to
such event, such holder had been the holder of a number of shares of Common
Stock equal to the number of shares as to which such option shall be so
exercised;
(ii) the Committee may accelerate the time for exercise of some or all
unexercised and unexpired options so that from and after a date prior to
the effective date of such merger, consolidation, liquidation, sale or
disposition, as the case may be, specified by the Committee such
accelerated options shall be exercisable in full; or
(iii) all outstanding options may be cancelled by the Committee as of
the effective date of any such merger, consolidation, liquidation, sale or
disposition provided that (x) notice of such cancellation shall be given to
each holder of an option and (y) each holder of an option shall have the
right to exercise such option to the extent that the same is then
exercisable or, if the Committee shall have accelerated the time for
exercise of all unexercised and unexpired options, in full during the
10-day period preceding the effective date of such merger, consolidation,
liquidation, sale or disposition.
(c) If, within two years following a Change in Control, the employment of
any optionee who immediately prior to such Change in Control was employed by the
Company in a capacity designated by the Board of Directors of the Company as
that of an "executive officer" within the meaning of Rule 16a-1(f) promulgated
under the 1934 Act (each such optionee being hereafter referred to as a
"Designated Executive") shall be terminated by the Company other than for cause,
or shall be terminated by the Designated Executive for good reason, then in such
event all unvested, unexercised and unexpired options held by such Designated
Executive at the date of such termination shall thereupon immediately become
exercisable in full. For purposes of this paragraph, "good reason" for
termination by a Designated Executive of his employment shall be deemed to have
existed only if (i) within two years after a Change in Control, the Company, or
any successor entity then employing the Designated Executive, shall materially
diminish the responsibilities and authority of the Designated Executive or,
shall materially reduce the rate of compensation of the Designated Executive
(including by way of a change in the method of determining the eligibility of
such Designated Executive to earn bonus or incentive compensation), in either
case as compared with his responsibilities and authority or rate of
compensation, as the case may be, in effect immediately prior to such Change in
Control, and (ii) within thirty (30) days following such diminution or reduction
the Designated Executive shall resign from his employment by the Company or such
successor entity.
(d) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the 1934 Act) becomes a "beneficial owner" (as such term is defined in
Rule 13d-3 promulgated under the 1934 Act) (other than the Company, any
trustee or other fiduciary holding securities under an employee benefit
plan of the Company, or any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company), directly or indirectly, of
B-7
<PAGE> 8
securities of the Company representing fifty percent (50%) or more of the
combined voting power of the Company's then outstanding securities; or
(ii) persons who, as of March 1, 1997, constituted the Company's Board
(the "Incumbent Board") cease for any reason, including, without
limitation, as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board, provided that
any person becoming a director of the Company subsequent to March 1, 1997
whose election was approved by, or who was nominated with the approval of,
at least a majority of the directors then comprising the Incumbent Board
shall, for purposes of this Plan, be considered a member of the Incumbent
Board; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation or other entity,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
(e) Notwithstanding anything in the Plan to the contrary, upon the
occurrence of a Change of Control (as defined), each then outstanding option
held by an Outside Director of the Company shall become immediately vested and
exercisable.
8.5 Adjustments to Common Stock Subject to Options. Except as
hereinbefore expressly provided, the issue by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, for cash
or property, or for labor or services, either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock then subject to
outstanding options.
8.6 Miscellaneous. Adjustments under this Section 8 shall be determined
by the Committee, and such determinations shall be conclusive. No fractional
shares of Common Stock shall be issued under the Plan on account of any
adjustment specified above.
SECTION 9. GENERAL RESTRICTIONS
9.1 Investment Representations. The Company may require any person to
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
9.2 Compliance with Securities Laws. The Company shall not be required to
sell or issue any shares under any option if the issuance of such shares shall
constitute a violation by the optionee or by the Company of any provision of any
law or regulation of any governmental authority. In addition, in connection with
the Securities Act of 1933, as now in effect or hereafter amended (the "Act"),
upon exercise of any option, the Company shall not be required to issue such
shares unless the Committee has received evidence satisfactory to it to the
effect that the holder of such option will not transfer such shares except
pursuant to a registration statement in effect under such Act or unless an
opinion of counsel satisfactory to the Company has been received by the Company
to the effect that such registration is not required. Any determination in this
connection by the Committee shall be final, binding and conclusive. In the event
the shares issuable on exercise of an option are not registered under the Act,
the Company may imprint upon any certificate
B-8
<PAGE> 9
representing shares so issued the following legend or any other legend which
counsel for the Company considers necessary or advisable to comply with the Act
and with applicable state securities laws:
The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws of
any State and may not be pledged, hypothecated, sold or otherwise
transferred except upon such registration or upon receipt by the
Corporation of an opinion of counsel satisfactory to the Corporation, in
form and substance satisfactory to the Corporation, that registration is
not required for such sale or transfer.
The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Act; and in the event any shares are
so registered the Company may remove any legend on certificates representing
such shares. The Company shall not be obligated to take any other affirmative
action in order to cause the exercise of an option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority.
9.3 Employment Obligation. The granting of any option shall not impose
upon the Company (or any parent or subsidiary of the Company) any obligation to
employ or continue to employ any optionee; and the right of the Company (or any
such parent or subsidiary) to terminate the employment of any officer or other
employee shall not be diminished or affected by reason of the fact that an
option has been granted to him/her.
9.4 Withholding Tax. Whenever under the Plan shares of Common Stock are
to be delivered upon exercise of an option, the Company shall be entitled to
require as a condition of delivery that the optionee remit an amount sufficient
to satisfy all federal, state and other governmental withholding tax
requirements related thereto.
SECTION 10. AMENDMENT OR TERMINATION OF THE PLAN
The Board of Directors may modify, revise or terminate this Plan at any
time and from time to time, except that (i) the class of persons eligible to
receive options and the aggregate number of shares issuable pursuant to this
Plan shall not be changed or increased, other than by operation of Section 8
hereof, without the consent of the stockholders of the Company and (ii) the
provisions of Section 4.4 shall not be amended more than once every six (6)
months, other than to comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, or the rules thereunder.
SECTION 11. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to the stockholders of the Company for approval shall be
construed as creating any limitations on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the Plan,
and such arrangements may be either applicable generally or only in specific
cases.
SECTION 12. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective upon its adoption by the Board of
Directors. No option may be granted under the Plan after the tenth anniversary
of the effective date. The Plan shall terminate (i) when the total amount of
Common Stock with respect to which options may be granted shall have been issued
upon the exercise of options or (ii) by action of the Board of Directors
pursuant to Section 10 hereof, whichever shall first occur.
SECTION 13. TERMINATION OF THE PLAN
The Plan shall terminate upon the approval by the Company's shareholders of
the Company's 1999 Equity Incentive Plan (the "1999 Plan"). Upon such
termination date:
(a) No further options shall be granted under the Plan.
(b) All options under the Plan outstanding on the date of termination
shall continue to be governed by the terms and conditions of the Plan,
including provisions added by amendments to the Plan approved by the
Company's stockholders at the Company's 1999 Annual Meeting of Stockholders
or special meeting in lieu thereof.
B-9
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