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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
ONTRAK SYSTEMS, INC.
- - - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/ / Fee computed on table below per Exchange Act
Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid: $125.00
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously.Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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PRELIMINARY COPY
[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 21, 1996
TO THE SHAREHOLDERS:
The 1996 Annual Meeting of Shareholders of OnTrak Systems, Inc., a
California corporation (the "Company"), will be held at the Company's principal
executive offices at 1010 Rincon Circle, San Jose, California, on Thursday,
November 21, 1996, at 10:00 a.m., for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are duly elected and qualified. Management's nominees for
director are James W. Bagley, Michael C. Child, Jerauld J. Cutini, Richard
J. Elkus, Jr., and Gary Hultquist.
2. To authorize the Company to change the Company's state of
incorporation from California to Delaware.
3. To approve the adoption of the Company's 1996 Equity Incentive Plan
and the reservation of 2,000,000 shares of Common Stock for issuance
thereunder.
4. To ratify the selection of Price Waterhouse LLP as independent
accountants of the Company for the current fiscal year.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on September 27, 1996,
are entitled to notice of and to vote at the meeting. The stock transfer books
will not be closed.
All shareholders are cordially invited to attend the meeting in person.
Whether or not you plan to attend the meeting, please mark, sign, date and
return the enclosed proxy as promptly as possible in the envelope enclosed for
that purpose. Any shareholder attending the meeting may vote in person even if
he or she previously has returned a proxy.
By Order of the Board of Directors
San Jose, California
, 1996
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PRELIMINARY COPY
ONTRAK SYSTEMS, INC.
1010 RINCON CIRCLE
SAN JOSE, CALIFORNIA 95131
------------------------
PROXY STATEMENT
---------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of OnTrak Systems, Inc., a
California corporation (the "Company"), for use at the Annual Meeting of
Shareholders to be held on Thursday, November 21, 1996 at 10:00 a.m., local
time, or at any adjournment thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting
will be held at the Company's principal executive offices at 1010 Rincon Circle,
San Jose, California. The telephone number at the Company's principal executive
offices is (408) 577-1010.
These proxy solicitation materials were mailed on or about , 1996
to all shareholders entitled to vote at the Annual Meeting.
RECORD DATE
Shareholders of record at the close of business on September 27, 1996 are
entitled to notice of, and to vote at, the Annual Meeting. At the record date,
shares of the Company's Common Stock, no par value, were issued and
outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date or by
attending the Annual Meeting and voting in person.
VOTING
The shares represented by the proxies received will be voted as you direct.
If you give no direction, the shares will be voted as recommended by the Board
of Directors.
Every shareholder voting for the election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of shares held by such
shareholder, or distribute the shareholder's votes on the same principle among
as many candidates as the shareholder may select, up to the number of directors
to be elected. However, no shareholder shall be entitled to cumulate votes
unless the name of the candidate or candidates for whom such votes are proposed
to be cast has been placed in nomination prior to the voting and the
shareholder, or any other shareholder, has given notice at the Annual Meeting
prior to the voting of the intention to cumulate the shareholder's votes. On all
other matters, each share of Common Stock has one vote.
Abstentions and broker "non-votes" as to any matter (indicating a lack of
authority to vote on such matter) will each be counted as present for purposes
of determining the presence of a quorum. Abstentions will have the same effect
as a negative vote. Broker non-votes, on the other hand, will have no effect on
the outcome of the vote on any matters except the proposal to reincorporate in
Delaware, as to which a broker non-vote will have the same effect as a negative
vote.
SOLICITATION
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the proxy
and any additional soliciting materials sent to shareholders.
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The Company has retained the services of the First National Bank of Boston to
aid in the solicitation of proxies, deliver proxy materials to brokers,
nominees, fiduciaries and other custodians for distribution to beneficial owners
of stock and to solicit proxies therefrom. The First National Bank of Boston
will be reimbursed for all reasonable out-of-pocket expenses in connection with
the distribution of proxy materials. The Company has also retained Corporate
Investor Communications, Inc., to assist in the solicitation of proxies for a
fee of $4,000 and reimbursement of certain expenses. In addition, the Company
may reimburse brokerage firms and other persons representing beneficial owners
of shares for their expenses incurred in forwarding solicitation materials to
such beneficial owners. Proxies may also be solicited by certain of the
Company's directors, officers and regular employees, without additional
compensation, personally or by telephone, telegram or other means. Except as
described above, the Company does not currently intend to solicit proxies other
than by mail.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Shareholder proposals intended to be considered at the Annual Meeting of
Shareholders for the fiscal year ended June 30, 1997 must be received by the
Company no later than , 1997. Such proposals may be included in next
year's proxy statement if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission ("SEC").
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NOMINEES
A board of five directors will be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the five nominees named below, all of whom are currently directors of the
Company. The Company is not aware of any nominee who will be unable or will
decline to serve as a director. In the event that any such nominee is unable or
declines to serve as a director at the time of the Annual Meeting, the proxies
will be voted for any nominee who shall be designated by the present Board of
Directors to fill the vacancy. In the event that additional persons are
nominated for election as directors, the proxy holders intend to vote all
proxies received by them in such a manner in accordance with cumulative voting
as will assure the election of as many of the nominees listed below as possible,
and, in such event, the specific nominees to be voted for will be determined by
the proxy holders. In no event will the proxy holders vote proxies for more than
five nominees. The five candidates receiving the highest number of affirmative
votes of the shares voting at the Annual Meeting will be elected directors of
the Company. The term of office of each person elected as a director will
continue until the next Annual Meeting of Shareholders or until such time as his
or her successor has been duly elected and qualified.
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The names of the Company's nominees for director and certain information
about them are set forth below.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- - - -------------------------------- --- ------------------------------------------------------ -----------
<S> <C> <C> <C>
James W. Bagley (1)............. 57 Chairman of the Board of Directors and Chief Executive 1996
Officer of the Company
Jerauld J. Cutini............... 37 Executive Vice President, Sales and Marketing, and 1990
Secretary of the Company
Michael C. Child (1)(2)......... 41 Managing Director, TA Associates, Inc. 1994
(a venture capital firm)
Richard J. Elkus, Jr. (2)....... 61 Vice Chairman of the Board and Executive Vice 1996
President of Tencor Instruments
Gary Hultquist (1).............. 53 Managing Director of Hultquist Capital, Inc. (a 1995
financial services and consulting company)
</TABLE>
- - - ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Mr. Bagley has served as Chairman of the Board and Chief Executive Officer
of the Company since June 1996. Prior to joining OnTrak, Mr. Bagley was employed
by Applied Materials, Inc. for 15 years in various management positions, most
recently as Vice Chairman of the Board of Directors. He joined Applied Materials
in 1981 as Senior Vice President, was Chief Operating Officer from 1987 through
October 1995, served as President from December 1987 to December 1993 and was
appointed Vice Chairman of the Board of Directors in December 1993. Mr. Bagley
was employed by Texas Instruments before he joined Applied Materials. Mr. Bagley
is also a director of Tencor Instruments, Teradyne, Inc. and Kulicke and Soffa
Industries, Inc.
Mr. Cutini joined the Company in August 1990 as Vice President of Sales. He
has served as a director of the Company since November 1990. He served as the
Company's Chief Financial Officer from November 1990 until September 1992. He
became Secretary in September 1992, and became Executive Vice President, Sales
and Marketing in November 1994. From February 1989 to August 1990, Mr. Cutini
was Senior Sales Engineer for Applied Materials, Inc. From September 1988 to
February 1989, Mr. Cutini was Western Regional Sales Manager for Solitec, Inc.,
a semiconductor equipment company. From May 1981 to September 1988, Mr. Cutini
was employed by Silicon Valley Group, Inc., in various positions in customer
service and sales.
Mr. Child has served as a director of the Company since November 1994. Mr.
Child has been employed by TA Associates, Inc., a venture capital firm, or it
predecessor, since July 1982, has been a partner of affiliated venture funds
since January 1986 and is currently a Managing Director of TA Associates, Inc.
Mr. Child is also a director of Ultratech Stepper, Inc., a semiconductor
equipment company, and Sonic Solutions, a professional audio company.
Mr. Elkus has served as a director of the Company since August 1996. He has
been Vice Chairman of the Board and Executive Vice President of Tencor
Instruments since February 1994. Mr. Elkus was one of the founders of Prometrix
Corporation, which was acquired by Tencor in February 1994. Mr. Elkus was the
Chairman of the Board and Chief Executive Officer of Prometrix from 1983 until
February 1994.
Mr. Hultquist has served as a director of the Company since April 1995.
Since September 1995, Mr. Hultquist has served as Managing Director of Hultquist
Capital, Inc., a financial services and consulting firm which specialized in
advising technology-based companies. From April 1988 until September 1995, he
served as President and Chief Executive Officer of Bridgemere Capital, Inc., a
financial services and consulting company which specialized in advising
technology-based companies.
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Mr. Hultquist served as Chief Operating Officer of Bridgemere from November
1986 until April 1988. Prior to joining Bridgemere, Mr. Hultquist practiced law
for 18 years, including service in the US Army.
There are no family relationships among directors or executive officers of
the Company.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held 8 meetings during the year ended
June 30, 1996. The Board of Directors has an Audit Committee and a Compensation
Committee. The Board of Directors has no standing nominating committee or
committee performing similar functions. During the year ended June 30, 1996, no
director attended fewer than 75% of the aggregate of (i) all meetings of the
Board of Directors (held during the period in which such director served) and
(ii) all meetings of committees of the Board on which such director served.
The Audit Committee of the Board of Directors currently consists of Messrs.
Bagley, Child, and Hultquist. The Audit Committee recommends the engagement of
independent auditors, consults with the independent auditors regarding the scope
of annual audits and reviews the Company's system of internal accounting
controls. The Audit Committee held 4 meetings during the year ended June 30,
1996.
The Compensation Committee of the Board of Directors currently consists of
Messrs. Child and Elkus. The Compensation Committee makes recommendations to the
Board regarding executive compensation and related matters and also has sole and
exclusive responsibility to administer the Company's 1992 Stock Option Plan. The
Compensation Committee held one meeting during the year ended June 30, 1996, and
acted by written consent without a meeting on fourteen occasions.
PROPOSAL NO. 2
REINCORPORATION IN DELAWARE
INTRODUCTION
The Board of Directors believes that the best interests of the Company and
its shareholders will be served by changing the state of incorporation of the
Company from California to Delaware (the "Reincorporation Proposal" or the
"Proposed Reincorporation"). As discussed below, the principal reasons for
reincorporation are the greater flexibility of Delaware corporate law, the
substantial body of case law interpreting that law and the increased ability of
the Company to attract and retain qualified directors. Shareholders are urged to
read the following sections of this Proxy Statement carefully, including the
related exhibits, before voting on the Reincorporation Proposal. THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE PROPOSED
REINCORPORATION.
The Reincorporation Proposal will be effected by merging the Company into a
wholly-owned subsidiary of the Company, which was incorporated for this purpose.
Throughout the Proxy Statement, the term "OnTrak California" refers to the
existing California corporation, and the term "OnTrak Delaware" refers to the
new Delaware corporation, which is the proposed successor to OnTrak California.
Upon completion of the merger, OnTrak California will cease to exist, and OnTrak
Delaware will continue to operate the business of the Company under the name
OnTrak Systems, Inc.
Pursuant to the Agreement and Plan of Merger, which will be substantially in
the form attached hereto as Exhibit A (the "Merger Agreement"), each outstanding
share of OnTrak California Common Stock will automatically be converted into one
share of OnTrak Delaware Common Stock, $0.0001 par value, upon the effective
date of the merger. Each stock certificate representing issued and outstanding
shares of OnTrak California Common Stock will continue to represent the same
number of shares of Common Stock of OnTrak Delaware. IT WILL NOT BE NECESSARY
FOR SHAREHOLDERS TO EXCHANGE THEIR EXISTING STOCK CERTIFICATES FOR STOCK
CERTIFICATES OF ONTRAK DELAWARE. However, shareholders may exchange their
certificates if they so choose. The Common Stock of OnTrak California is listed
for trading on the Nasdaq National Market, and after the
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merger OnTrak Delaware's Common Stock will continue to be traded on the Nasdaq
National Market without interruption under the same symbol ("ONTK") as the
shares of OnTrak California Common Stock were traded on such system prior to the
merger.
Under California law, the affirmative vote of a majority of the outstanding
shares of Common Stock of OnTrak California is required for approval of the
Merger Agreement and the other terms of the Proposed Reincorporation. See "Vote
Required for the Reincorporation Proposal." The Proposed Reincorporation has
been approved by OnTrak California's Board of Directors, which unanimously
recommends a vote in favor of the proposal. If approved by the shareholders, it
is anticipated that the merger will become effective as soon as practicable
following the Annual Meeting of Shareholders (the "Effective Date"). However,
pursuant to the Merger Agreement, the merger may be abandoned or the Merger
Agreement may be amended by the Board of Directors (except that the principal
terms may not be amended without shareholder approval) either before or after
shareholder approval has been obtained and prior to the Effective Date of the
Proposed Reincorporation if, in the opinion of the Board of Directors of either
company, circumstances arise which make either action advisable.
Shareholders of OnTrak California will have no dissenters' rights of
appraisal with respect to the Reincorporation Proposal. See "Significant
Differences Between the Corporation Laws of California and Delaware--Appraisal
Rights."
The discussion set forth below is qualified in its entirety by reference to
the Merger Agreement, the Certificate of Incorporation of OnTrak Delaware (the
"Certificate of Incorporation") and the Bylaws of OnTrak Delaware, which will be
substantially in the forms attached hereto as Exhibits A, B and C, respectively.
APPROVAL BY SHAREHOLDERS OF THE PROPOSED REINCORPORATION WILL CONSTITUTE
APPROVAL OF THE MERGER AGREEMENT, THE CERTIFICATE OF INCORPORATION AND THE
BYLAWS OF ONTRAK DELAWARE, WHICH WILL BE SUBSTANTIALLY IN THE FORMS SET FORTH AS
EXHIBITS A, B AND C TO THIS PROXY STATEMENT.
PRINCIPAL REASONS FOR THE PROPOSED REINCORPORATION
FLEXIBILITY OF DELAWARE LAW. For many years Delaware has followed a policy
of encouraging incorporation in that state and, in furtherance of that policy,
has been a leader in adopting, construing and implementing comprehensive,
flexible corporate laws responsive to the legal and business needs of
corporations organized under its laws. Many corporations have initially chosen
Delaware for their state of incorporation or have subsequently changed their
corporate domicile to Delaware in a manner similar to that proposed by the
Company. Because of Delaware's prominence as the state of incorporation for many
major corporations, both the legislature and courts in Delaware have
demonstrated an ability and a willingness to act quickly and effectively to meet
changing business needs. The Delaware courts have developed considerable
expertise in dealing with corporate issues, and a substantial body of case law
has developed construing Delaware law and establishing public policies with
respect to corporate legal affairs.
ATTRACTION AND RETENTION OF QUALIFIED DIRECTORS. Both California and
Delaware law permit a corporation to include a provision in its certificate of
incorporation which reduces, limits or eliminates the monetary liability of
directors for breaches of fiduciary duty in certain circumstances. The
increasing frequency of claims and litigation directed against directors and
officers has greatly expanded the risks facing directors and officers of
corporations in exercising their respective duties. The amount of time and money
required to respond to such claims and to defend such litigation can be
substantial. It is the Company's desire to reduce such risks to its directors
and officers and to limit situations in which monetary damages can be recovered
against directors so that the Company may continue to attract and retain
qualified directors who might otherwise be unwilling to serve because of the
increased risks involved.
In accordance with current California law, OnTrak California's Articles of
Incorporation include a provision which limits director liability in certain
circumstances. In general, however, the ability to limit liability may be
somewhat broader under Delaware law, and Delaware case law is also more
developed to
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provide guidance in this regard. It should be noted, however, that neither
California nor Delaware law permits a corporation to limit or eliminate the
liability of its directors for intentional misconduct, bad faith conduct or any
transaction from which the director derives an improper personal benefit. In
addition, liability for violations of federal laws such as the federal
securities laws may not be subject to any such limitations. See "Significant
Differences Between the Corporation Laws of California and Delaware--
Indemnification and Limitation of Liability."
In addition, Delaware law permits a corporation to adopt a number of
measures, through amendment of the corporate charter or bylaws or otherwise,
designed to reduce a corporation's vulnerability to unsolicited takeover
attempts. The Board of Directors has no present intention following the Proposed
Reincorporation to amend the Certificate of Incorporation or Bylaws to include
additional provisions which might deter an unsolicited takeover attempt.
However, in the discharge of its fiduciary obligations to shareholders, the
Board of Directors has evaluated the Company's vulnerability to potential
unsolicited bids to acquire the Company on unfavorable terms. In the process of
this evaluation, the Board of Directors has considered, or may consider in the
future, certain anti-takeover strategies which may enhance the Board's ability
to negotiate with an unsolicited bidder.
POSSIBLE DISADVANTAGES
Despite the unanimous belief of the Board of Directors that the
Reincorporation Proposal is in the best interests of OnTrak California and its
shareholders, it should be noted that Delaware law has been criticized by some
commentators on the grounds that it does not afford minority shareholders the
same substantive rights and protections as are available in a number of other
states. For a comparison of shareholders' rights and the powers of management
under Delaware and California law, see "Significant Differences Between the
Corporation Laws of California and Delaware." The Reincorporation Proposal,
however, does not include certain changes to the Company's Articles of
Incorporation and Bylaws permitted by Delaware law which may reduce shareholder
participation in important corporate decisions. See "The Charters and Bylaws of
OnTrak California and OnTrak Delaware."
NO CHANGE IN THE NAME, BOARD MEMBERS, BUSINESS, MANAGEMENT, LOCATION OF
PRINCIPAL FACILITIES OR EMPLOYEE PLANS OF THE COMPANY
The Reincorporation Proposal will effect only a change in the legal domicile
of the Company and other changes of a legal nature, certain of which are
described in this Proxy Statement. The Proposed Reincorporation will NOT result
in any change in the name, business, management, fiscal year, location of the
principal facilities, assets or liabilities of the Company. The five directors
who are elected at the Annual Meeting of Shareholders will become the directors
of OnTrak Delaware. All employee benefit, stock option and stock purchase plans
of OnTrak California will be continued by OnTrak Delaware, and each option or
right issued pursuant to any such plan will automatically be converted into an
option or right to purchase the same number of shares of OnTrak Delaware Common
Stock, at the same price per share, upon the same terms, and subject to the same
conditions, as set forth in such plan. Shareholders should note that approval of
the Reincorporation Proposal will also constitute approval of the assumption of
these plans by OnTrak Delaware. OnTrak California's other officer and employee
benefit arrangements will also be continued by OnTrak Delaware upon the terms,
and subject to the conditions, currently in effect. As noted above, after the
merger, the shares of Common Stock of OnTrak Delaware will continue to be
traded, without interruption, on the Nasdaq National Market under the same
symbol ("ONTK") as the shares of Common Stock of OnTrak California were traded
prior to the merger.
THE CHARTERS AND BYLAWS OF ONTRAK CALIFORNIA AND ONTRAK DELAWARE
The provisions of the OnTrak Delaware Certificate of Incorporation and
Bylaws are similar to those of the OnTrak California Articles of Incorporation
and Bylaws in most respects. Delaware law does permit the implementation of
certain provisions in a corporation's certificate of incorporation or bylaws
which would alter some of the rights of shareholders and the powers of
management of a California company. Although the Board of Directors of OnTrak
California has no current plan to implement these changes,
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certain changes could be implemented in the future by amendment of the
Certificate of Incorporation of OnTrak Delaware following stockholder approval,
and certain changes could be implemented by amendment of the Bylaws of OnTrak
Delaware without stockholder approval. For a discussion of such changes, see
"Significant Differences Between the Corporation Laws of California and
Delaware." This discussion of the Certificate of Incorporation and Bylaws of
OnTrak Delaware is qualified by reference to Exhibits B and C hereto,
respectively.
AUTHORIZED STOCK. The Articles of Incorporation of OnTrak California
authorize thirty million (30,000,000) shares of Common Stock, no par value, and
three million (3,000,000) shares of undesignated Preferred Stock, no par value.
The proposed Certificate of Incorporation of OnTrak Delaware authorizes OnTrak
Delaware to issue thirty million (30,000,000) shares of Common Stock, $0.0001
par value, as well as three million (3,000,000) shares of undesignated Preferred
Stock, $0.0001 par value.
NUMBER OF DIRECTORS. The Bylaws of OnTrak California authorize the
directors to fix the number of directors within a range from four to seven, with
the number of directors currently set at five. The Bylaws of OnTrak Delaware
will also authorize the directors to fix the number of directors within a range
from four to seven, with the number of directors set at five. In contrast to the
Bylaws of OnTrak California, however, the Bylaws of OnTrak Delaware provide that
the range, as well as the exact number, of directors may be changed by the Board
of Directors without further shareholder approval. See "Significant Differences
Between the Corporation Laws of California and Delaware--Size of the Board of
Directors."
MONETARY LIABILITY OF DIRECTORS. The Articles of Incorporation of OnTrak
California and the Certificate of Incorporation of OnTrak Delaware both provide
for the elimination of personal monetary liability of directors to the fullest
extent permissible under the laws of each corporation's respective state of
incorporation. The provision eliminating monetary liability of directors set
forth in the Certificate of Incorporation of OnTrak Delaware is potentially more
expansive, in that it incorporates future amendments to Delaware law with
respect to the elimination of such liability.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND DELAWARE
The General Corporation Laws of California and Delaware differ in many
respects. While not all of such differences are summarized in this Proxy
Statement, a number of the principal differences which could materially affect
the rights of shareholders are discussed below.
SIZE OF THE BOARD OF DIRECTORS. Under California law, although changes in
the number of directors must in general be approved by a majority of the
outstanding shares, the Board of Directors may fix the exact number of directors
within a stated range set forth in the articles of incorporation or bylaws, if
that stated range has been approved by the shareholders. Delaware law permits
the Board of Directors alone to change the authorized number, or the range, of
directors by amendment to the bylaws, unless the directors are not authorized to
amend the bylaws or the number of directors is fixed in the certificate of
incorporation (in which case a change in the number of directors may be made
only by an amendment to the certificate of incorporation approved by the
stockholders). The Certificate of Incorporation of OnTrak Delaware provides that
the number of directors shall be as specified in the Bylaws and authorizes the
Board of Directors to make, alter, amend or repeal the Bylaws. The Board of
Directors of OnTrak Delaware may therefore change the authorized range, as well
as the exact number, of directors. If the Reincorporation Proposal is approved,
the five directors of OnTrak California who are elected at the Annual Meeting of
Shareholders will continue as directors of OnTrak Delaware after the Proposed
Reincorporation is consummated.
CUMULATIVE VOTING. Under California law, if any shareholder gives notice of
his or her intention to cumulate votes for the election of directors, any other
shareholder of the corporation is also entitled to cumulate his or her votes at
such election. Under Delaware law, cumulative voting in the election of
directors is not mandatory. THE CERTIFICATE OF INCORPORATION OF ONTRAK DELAWARE
DOES NOT PROVIDE FOR CUMULATIVE VOTING, SO THAT UNLESS THE CERTIFICATE OF
INCORPORATION OF ONTRAK DELAWARE IS AMENDED FOLLOWING THE PROPOSED
REINCORPORATION TO SPECIFY CUMULATIVE VOTING (WHICH MAY BE DONE ONLY WITH
STOCKHOLDER APPROVAL),
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STOCKHOLDERS OF ONTRAK DELAWARE WILL HAVE NO CUMULATIVE VOTING RIGHTS. The
elimination of cumulative voting would limit the ability of minority
stockholders to obtain representation on the Board of Directors.
CLASSIFIED BOARD OF DIRECTORS. A classified board is one on which a certain
number of the directors, but not all, are elected on a rotating basis each year.
California law prohibits a classified board of directors unless the corporation
is a "listed corporation." A "listed corporation" is a corporation whose shares
are either (i) listed on the New York or American Stock Exchanges or (ii)
designated for trading on the Nasdaq National Market and held by at least 800
shareholders. OnTrak California's Articles of Incorporation and Bylaws do not
provide for a classified board of directors. Delaware law permits, but does not
require, a classified board of directors, with staggered terms under which
one-half or one-third of the directors are elected for terms of two or three
years, respectively. This method of electing directors makes changes in the
composition of the board of directors, and thus a change in control of a
corporation, a lengthier and more difficult process. The OnTrak Delaware
Certificate of Incorporation and Bylaws do not provide for a classified board of
directors. The establishment of a classified board following the Proposed
Reincorporation would require the approval of the stockholders of OnTrak
Delaware.
POWER TO CALL SPECIAL MEETINGS OF SHAREHOLDERS. Under California law, a
special meeting of shareholders may be called by the board of directors, the
chairman of the board, the president, the holders of shares entitled to cast not
less than ten percent of the votes at such meeting and such additional persons
as are authorized by the articles of incorporation or the bylaws. Under Delaware
law, a special meeting of stockholders may be called by the board of directors
or by any other person authorized to do so in the certificate of incorporation
or the bylaws. Although permitted to do so, the Bylaws of OnTrak Delaware do not
eliminate the right of stockholders to call a special meeting of stockholders;
instead, the Bylaws of OnTrak Delaware provide that special meetings of
stockholders may be called by the board of directors, the chairman of the board,
the president, or the holders of shares entitled to cast not less than ten
percent of the votes at such meeting to call a special meeting of stockholders.
Following the Proposed Reincorporation, the Board of Directors of OnTrak
Delaware could (although it has no current intention to do so) amend the Bylaws
to limit or eliminate the right of stockholders to call a special meeting of
stockholders. Any such limitation could make it more difficult for stockholders
to initiate action that is opposed by the Board of Directors.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS. In the last several
years, a number of states (but not California) have adopted special laws
designed to make certain kinds of "unfriendly" corporate takeovers, or other
transactions involving a corporation and one or more of its significant
shareholders, more difficult. Under Section 203 of the Delaware General
Corporation Law ("Section 203"), certain "business combinations" with
"interested stockholders" of Delaware corporations are subject to a three-year
moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the time
that such person becomes an interested stockholder. With certain exceptions, an
interested stockholder is a person or group who or which owns 15% or more of the
corporation's outstanding voting stock (including any rights to acquire stock
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only), or is an affiliated associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or such
subsidiary to the interested stockholder (except for transfers in a conversion
or exchange or a pro rata distribution or certain other transactions, none of
which increase the interested stockholder's proportionate ownership of any class
or series of the corporation's or such subsidiary's
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stock); or any receipt by the interested stockholder (except proportionately as
a stockholder), directly or indirectly, of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation or a
subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the time at which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the time such person becomes an interested stockholder, the board approves
the business combination and it is also approved at a stockholder meeting by
sixty-six and two-thirds percent (66 2/3%) of the voting stock not owned by the
interested stockholder.
Section 203 applies only to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, are quoted on an
interdealer quotation system such as Nasdaq (as is OnTrak California, and as
OnTrak Delaware would be) or are held of record by more than 2,000 stockholders.
However, a Delaware corporation may elect not to be governed by Section 203 by a
provision in its original certificate of incorporation or an amendment thereto
or to the bylaws, which amendment must be approved by a majority of the shares
entitled to vote and, in the case of a bylaw amendment, may not be further
amended by the board of directors. OnTrak Delaware does not intend to elect not
to be governed by Section 203; therefore, Section 203 will apply to OnTrak
Delaware.
The Company believes that Section 203 will have the effect of encouraging
any potential acquiror to negotiate with the Company's Board of Directors.
Section 203 should also discourage certain potential acquirors unwilling to
comply with its provisions.
REMOVAL OF DIRECTORS. Under California law, any director or the entire
board of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual
director may be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the director under
cumulative voting. Under Delaware law, a director of a corporation that does not
have a classified board of directors or cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding shares entitled
to vote. In the case of a Delaware corporation having cumulative voting, if less
than the entire board is to be removed, a director may not be removed without
cause unless the shares voted against such removal would not be sufficient to
elect the director under such cumulative voting procedures. A director of a
corporation with a classified board of directors may be removed only for cause,
unless the certificate of incorporation otherwise provides. The Certificate of
Incorporation of OnTrak Delaware does not provide for cumulative voting or for a
classified board of directors. Consequently, any director may be removed from
office at any time with or without cause upon the affirmative vote of the
holders of a majority of the then outstanding voting stock.
FILLING VACANCIES ON THE BOARD OF DIRECTORS. Under California law, any
vacancy on the board of directors, other than one created by removal of a
director, may be filled by the board. If the number of directors is less than a
quorum, a vacancy may be filled by the unanimous written consent of the
remaining directors in office, or the affirmative vote of a majority of the
remaining directors at a meeting. A vacancy created by removal of a director may
be filled by the board only if so authorized by a corporation's articles of
incorporation or by a bylaw approved by the corporation's shareholders. OnTrak
California's Bylaws do not permit directors to fill vacancies created by removal
of a director. Under Delaware law, vacancies and newly created directorships may
be filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or bylaws.
The Bylaws of OnTrak Delaware provide, consistent with the Bylaws of OnTrak
California, that any vacancy resulting from the removal of a director by the
stockholders of OnTrak Delaware may only be filled by the stockholders.
Following the Proposed Reincorporation, the Board of Directors of OnTrak
Delaware could
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(although it has no current intention to do so) amend the Bylaws to provide that
directors may fill any vacancy created by the removal of a director by the
stockholders.
LOANS TO OFFICERS AND EMPLOYEES. Under California law, the directors of a
California corporation are authorized to approve loans or guaranties to or on
behalf of officers (whether or not such officers are directors) if the board
determines that such loans or guaranties may reasonably be expected to benefit
the corporation. Under Delaware law, a corporation, its officers or other
employees may make loans to, guarantee the obligations of or otherwise assist
its officers or other employees and those of its subsidiaries (including
directors who are also officers or employees) when such action, in the judgment
of the directors, may reasonably be expected to benefit the corporation.
INDEMNIFICATION AND LIMITATION OF LIABILITY. California and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit a
corporation to adopt a provision in its articles of incorporation or certificate
of incorporation eliminating the liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty of care. There are nonetheless certain differences between the laws of the
two states respecting indemnification and limitation of liability.
The Articles of Incorporation of OnTrak California eliminate the liability
of directors to the corporation to the fullest extent permissible under
California law. California law does not permit the elimination of monetary
liability where such liability is based on: (i) intentional misconduct or
knowing and culpable violation of law; (ii) acts or omissions that a director
believes contrary to the best interests of the corporation or its shareholders,
or that involve the absence of good faith on the part of the director; (iii)
receipt of an improper personal benefit; (iv) acts or omissions that show
reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing a
director's duties should be aware of a risk of serious injury to the corporation
or its shareholders; (v) acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
corporation and its shareholders; (vi) interested transactions between the
corporation and a director in which a director has a material financial
interest; or (vii) liability for improper distributions, loans or guarantees.
The Certificate of Incorporation of OnTrak Delaware also eliminates the
liability of directors to the fullest extent permissible under Delaware law, as
such law exists currently or as it may be amended in the future. Under Delaware
law, such a provision may not eliminate or limit director monetary liability
for: (i) breaches of the director's duty of loyalty to the corporation or its
stockholders; (ii) acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law; (iii) the payment of unlawful dividends
or unlawful stock repurchases or redemptions; or (iv) transactions in which the
director received an improper personal benefit. Such a limitation of liability
provision also may not limit a director's liability for violation of, or
otherwise relieve OnTrak Delaware or its directors from the necessity of
complying with, federal or state securities laws or affect the availability of
nonmonetary remedies such as injunctive relief or rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (i) no
indemnification may be made without court approval when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines that person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that the court so determines, and (ii) no indemnification may
be made without court approval in respect of amounts paid or expenses incurred
in settling or otherwise disposing of a threatened or pending action or in
respect of amounts incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
Indemnification is permitted by California law only for acts taken in good
faith and believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action.
California law requires indemnification when the
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individual has successfully defended the action on the merits (as opposed to
Delaware law which requires indemnification relating to any successful defense,
whether on the merits or otherwise).
Delaware law generally permits indemnification of expenses (including
attorneys' fees) incurred in the defense or settlement of a derivative or
third-party action, provided there is a determination by a majority vote of the
disinterested directors even though less than a quorum, by independent legal
counsel or by stockholders that the person seeking indemnification acted in good
faith and in a manner reasonably believed to be in or (in contrast to California
law) not opposed to the best interests of the corporation. Without court
approval, however, no indemnification may be made in respect of any derivative
action in which such person is adjudged liable for negligence or misconduct in
the performance of his or her duty to the corporation. Delaware law also
requires indemnification of expenses when the individual being indemnified has
successfully defended the action on the merits or otherwise.
California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements, bylaws
or other corporate action beyond that specifically authorized by statute. The
Articles of Incorporation of OnTrak California include such a provision.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. As a
result, Delaware law permits the indemnification agreements such as those
entered into by OnTrak California with its officers and directors, and such
agreements will be assumed by OnTrak Delaware upon completion of the Proposed
Reincorporation.
The indemnification and limitations of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of OnTrak California taken prior to the Proposed Reincorporation.
INSPECTION OF SHAREHOLDERS' LIST. Both California and Delaware law allow
any shareholder to inspect a corporation's shareholders' list for a purpose
reasonably related to such person's interest as a shareholder. California law
provides, in addition, an absolute right to inspect and copy the corporation's
shareholders' list to persons holding an aggregate of 5% or more of a
corporation's voting shares, or shareholders holding an aggregate of 1% or more
of such shares who have filed a Schedule 14B with the Securities and Exchange
Commission relating to the election of directors. Delaware law does not provide
for any such absolute right of inspection, and no such right is granted under
the Certificate of Incorporation or Bylaws of OnTrak Delaware.
DIVIDENDS AND REPURCHASES OF SHARES. California law dispenses with the
concepts of par value of shares as well as statutory definitions of capital,
surplus and the like. The concepts of par value, capital and surplus are
retained under Delaware law.
Under California law, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses and
deferred charges) would be at least equal to 1 1/4 times its liabilities (not
including deferred taxes, deferred income and other deferred credits), and the
corporation's current assets would be at least equal to its current liabilities
(or 1 1/4 times its current liabilities if the average pre-tax and pre-interest
expense earnings for the preceding two fiscal years were less than the average
interest expense for such years). Under California law, there are exceptions to
the foregoing rules for repurchases of shares in connection with certain
rescission actions or pursuant to certain employee stock plans.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally
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provides that a corporation may redeem or repurchase its shares only if such
redemption or repurchase would not impair the capital of the corporation.
To date, the Company has not paid cash dividends on its capital stock. It is
the current policy of the Board of Directors to retain earnings for use in the
Company's business, and therefore, the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.
SHAREHOLDER VOTING. Both California and Delaware law generally require that
the holders of a majority in voting power of the outstanding shares of stock of
both acquiring and target corporations entitled to vote approve statutory
mergers. Delaware law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if (i) the merger agreement does not amend the
existing certificate of incorporation, (ii) each share of the surviving
corporation outstanding before the merger is an identical outstanding or
treasury share after the merger, and (iii) the number of shares to be issued by
the surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to the merger. California law contains a similar
exception to its voting requirements for reorganizations where shareholders or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent entity.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding. By contrast, Delaware law
generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation which adversely
affects a specific class or series of shares.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than 50% but less than 90% of such common stock or its affiliate
unless all of the holders of such common stock consent to the transaction. This
provision of California law may have the effect of making a "cash-out" merger by
a majority shareholder more difficult to accomplish. Delaware law has no
comparable provision.
California law also provides that, except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is made
by an interested party (generally, a controlling or managing party of the target
corporation), an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to shareholders.
This fairness opinion requirement does not apply to a corporation which does not
have shares held of record by at least 100 persons, or to a transaction which
has been qualified under California state securities laws. Furthermore, if a
tender of shares or vote is sought pursuant to an interested party's proposal
and a later proposal is made by another party at least ten days prior to the
date of acceptance of the interested party proposal, the shareholders must be
informed of the later offer and be afforded a reasonable opportunity to withdraw
any vote, consent or proxy, or to withdraw any tendered shares. Again, Delaware
law has no comparable provision.
INTERESTED DIRECTOR TRANSACTIONS. Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable solely because of such
interest provided that certain conditions, such as obtaining the required
approval and fulfilling the requirements of good faith and full disclosure, are
met. With certain exceptions, the conditions are similar under California and
Delaware law. Under California and Delaware law, (i) either the shareholders or
the board of directors must approve any such contract or transaction after full
disclosure of the material facts, and in the case of board approval the contract
or transaction must also be "just and reasonable" (in California) or "fair" (in
Delaware) to the corporation, or (ii) the contract or transaction must have been
just and reasonable or fair, as applicable, to the corporation at the time it
was
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approved. In the latter case, California law explicitly places the burden of
proof on the interested director. Under California law, if shareholder approval
is sought, the interested director is not entitled to vote his shares at a
shareholder meeting with respect to any action regarding such contract or
transaction. If board approval is sought, the contract or transaction must be
approved by a majority vote of a quorum of the directors, without counting the
vote of any interested directors (except that interested directors may be
counted for purposes of establishing a quorum). Under Delaware law, if board
approval is sought, the contract or transaction must be approved by a majority
of the disinterested directors (even though less than a majority of a quorum).
Therefore, certain transactions that the Board of Directors of OnTrak California
might not be able to approve because of the number of interested directors, or
the exclusion of interested director shares, could be approved by a majority of
the disinterested directors of OnTrak Delaware, although less than a majority of
a quorum, or by a majority of all voting shares, which might not include a
majority of the disinterested shares. The Company is not aware of any plans to
propose any transaction involving directors of the Company which could not be so
approved under California law but could be so approved under Delaware law.
VOTING BY BALLOT. California law provides that the election of directors
may proceed in the manner described in a corporation's bylaws. OnTrak
California's Bylaws provide that the election of directors at a shareholders'
meeting may be by voice vote or ballot, unless prior to such vote a shareholder
demands voting by ballot, in which case such vote must be by ballot. Under
Delaware law, the right to vote by written ballot may be restricted if so
provided in the certificate of incorporation. The Bylaws of OnTrak Delaware
provide that election need not be by ballot, but the Certificate of
Incorporation of OnTrak Delaware, consistent with OnTrak California's Bylaws,
provides that if a stockholder specifically demands election of directors by
ballot (or if the Bylaws provide that elections shall be by ballot) then
elections shall be held by ballot. Stockholders of OnTrak Delaware may therefore
continue to demand election by ballot, unless and until the Certificate of
Incorporation is amended, which would require a majority stockholder vote. It
may be more difficult for a stockholder to contest the outcome of a vote which
has not been conducted by written ballot.
SHAREHOLDER DERIVATIVE SUITS. California law provides that a shareholder
bringing a derivative action on behalf of a corporation need not have been a
shareholder at the time of the transaction in question, provided that certain
tests are met. Under Delaware law, a stockholder may only bring a derivative
action on behalf of the corporation if the stockholder was a stockholder of the
corporation at the time of the transaction in question or his or her stock
thereafter devolved upon him or her by operation of law. California law also
provides that the corporation or the defendant in a derivative suit may make a
motion to the court for an order requiring the plaintiff shareholder to furnish
a security bond. Delaware does not have a similar bonding requirement.
APPRAISAL RIGHTS. Under both California and Delaware law, a shareholder of
a corporation participating in certain major corporate transactions may, under
varying circumstances, be entitled to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transaction. Under Delaware law, unless the certificate of incorporation
otherwise provides, such appraisal rights are not available (i) with respect to
the sale, lease or exchange of all or substantially all of the assets of a
corporation, (ii) with respect to a merger or consolidation by a corporation the
shares of which are either listed on a national securities exchange or are held
of record by more than 2,000 holders if such stockholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange or held of record by more than 2,000
holders, plus cash in lieu of fractional shares, or any combination thereof, or
(iii) to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met.
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The limitations on the availability of appraisal rights under California law
are different from those under Delaware law. Shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System (as are the shares of OnTrak California) generally do not
have such appraisal rights unless the holders of at least 5% of the class of
outstanding shares claim the right or unless the corporation or any law
restricts the transfer of such shares. Appraisal rights are unavailable,
however, if the shareholders of a corporation or the corporation itself, or
both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity. In
general, California law affords appraisal rights in sale of assets
reorganizations.
AS A CONSEQUENCE OF THE FOREGOING, APPRAISAL OR DISSENTERS' RIGHTS ARE NOT
AVAILABLE TO SHAREHOLDERS OF ONTRAK CALIFORNIA WITH RESPECT TO THE
REINCORPORATION PROPOSAL.
DISSOLUTION. Under California law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's board of directors, and this right may not be
modified by the articles of incorporation. Under Delaware law, unless the board
of directors approves the proposal to dissolve, the dissolution must be approved
by stockholders holding 100% of the total voting power of the corporation. Only
if the dissolution of a Delaware corporation is initiated by the board of
directors may it be approved by a simple majority of the corporation's
stockholders. In the event of such a board-initiated dissolution, Delaware law
allows a Delaware corporation to include in its certificate of incorporation a
supermajority voting requirement in connection with dissolutions. OnTrak
Delaware's Certificate of Incorporation contains no such supermajority voting
requirement, however, and a majority of shares voting at a meeting at which a
quorum is present would be sufficient to approve a dissolution of OnTrak
Delaware which had previously been approved by its Board of Directors.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
Under Section 2115 of the California General Corporation Law, certain
foreign corporations (i.e. corporations not organized under California law) are
placed in a special category if they have characteristics of ownership and
operation which indicate that they have significant contacts with California. So
long as a Delaware or other foreign corporation is in this special category, and
it does not qualify for one of the statutory exemptions, it is subject to a
number of key provisions of the California General Corporation Law applicable to
corporations incorporated in California. Among the more important provisions are
those relating to the election and removal of directors, cumulative voting,
prohibition of classified boards of directors, standards of liability and
indemnification of directors, distributions, dividends and repurchases of
shares, shareholder meetings, approval of certain corporate transactions,
dissenters' and appraisal rights and inspection of corporate records. See
"Significant Differences Between the Corporation Laws of California and
Delaware" above.
Exemptions from Section 2115 are provided for corporations whose shares are
listed on a major national securities exchange or are traded in the Nasdaq
National Market and which have 800 or more shareholders of record. Following the
Proposed Reincorporation, the Common Stock of OnTrak Delaware will be traded on
the Nasdaq National Market, and held beneficially by more than 800 stockholders
as of the record date of its most recent annual meeting and, accordingly, OnTrak
Delaware will be exempt from Section 2115.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain federal income tax consequences to
holders of OnTrak California Common Stock who receive OnTrak Delaware Common
Stock in exchange for their OnTrak California Common Stock as a result of the
Proposed Reincorporation. The discussion does not address all the tax
consequences of the Proposed Reincorporation that may be relevant to particular
OnTrak California shareholders, such as dealers in securities, holders of stock
options or those OnTrak California
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shareholders who acquired their shares upon the exercise of stock options. In
view of the varying nature of such tax consequences, each shareholder is urged
to consult its own tax advisor as to the specific tax consequences to it of the
Proposed Reincorporation, including the applicability of federal, state, local
or foreign tax laws.
The Company has not requested a ruling from the Internal Revenue Service
(the "IRS") with respect to the federal income tax consequences of the Proposed
Reincorporation under the Internal Revenue Code of 1986, as amended (the
"Code"). The Company will, however, receive an opinion from its legal counsel
substantially to the effect that: (i) the Proposed Reincorporation will
constitute a tax-free reorganization under Section 368(a) of the Code; (ii) no
gain or loss will be recognized by holders of Common Stock of OnTrak California
upon receipt of Common Stock of OnTrak Delaware pursuant to the Proposed
Reincorporation; (iii) the aggregate tax basis of the Common Stock of OnTrak
Delaware received by each shareholder will be the same as the aggregate tax
basis of the Common Stock of OnTrak California held by such shareholder at the
time of the Proposed Reincorporation; and (iv) the holding period of the Common
Stock of OnTrak Delaware received by each shareholder of OnTrak California will
include the period for which such shareholder held the Common Stock of OnTrak
California surrendered in exchange therefor, provided that such OnTrak
California stock was held by such shareholder as a capital asset at the time of
the Proposed Reincorporation. Counsel's opinion will be subject to certain
assumptions and qualifications and will be based upon certain representations
made by the management of OnTrak California. Counsel's opinion is not binding
upon the IRS nor does it preclude the IRS from taking a contrary position.
A successful IRS challenge to the tax-free status of the Proposed
Reincorporation would result in a shareholder recognizing gain or loss with
respect to each share of OnTrak California Common Stock surrendered equal to the
difference between that shareholder's basis in such share and the fair market
value, as of the time of the Proposed Reincorporation, of the OnTrak Delaware
Common Stock received in exchange therefor. In such event, a shareholder's
aggregate basis in the shares of OnTrak Delaware Common Stock received in the
exchange would equal such fair market value, and his or her holding period for
such shares would not include the period during which he or she held OnTrak
California Common Stock.
State, local or foreign income tax consequences to shareholders may vary
from the federal tax consequences described above. SHAREHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE EFFECT OF THE REINCORPORATION PROPOSAL UNDER
APPLICABLE FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX OR FRANCHISE TAX LAWS.
The Company should not recognize gain or loss for federal income tax
purposes as a result of the Proposed Reincorporation, and OnTrak Delaware will
succeed without adjustment to the federal income tax attributes of OnTrak
California.
VOTE REQUIRED FOR THE REINCORPORATION PROPOSAL
Approval of the Reincorporation Proposal, which includes approval of the
Merger Agreement, OnTrak Delaware's Certificate of Incorporation and Bylaws, and
approval of the assumption of OnTrak California's employee benefit plans, stock
option plans and stock purchase plan by OnTrak Delaware, requires the
affirmative vote of a majority of the shares of OnTrak California Common Stock
outstanding on the Record Date.
THE BOARD RECOMMENDS A VOTE "FOR" THE PROPOSED REINCORPORATION IN DELAWARE.
THE EFFECT OF AN ABSTENTION OR A BROKER NON-VOTE IS THE SAME AS THAT OF A VOTE
AGAINST THE REINCORPORATION PROPOSAL.
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PROPOSAL NO. 3
APPROVAL OF THE 1996 EQUITY INCENTIVE PLAN
At the Annual Meeting, the shareholders are being asked to approve the
Company's 1996 Equity Incentive Plan (the "1996 Equity Plan") and the
reservation of 2,000,000 shares of Common Stock for issuance thereunder.
Management believes that the availability of additional options to purchase
Common Stock is necessary to attract new employees, and to enable the Company to
continue to provide its employees with equity ownership as an incentive to
contribute to the Company's success. If such shareholder approval is not
obtained, the Company's ability to provide equity incentives to employees will
terminate once the shares reserved under the 1992 Stock Option Plan have been
issued. As of August 31, 1996, only approximately 176,000 shares were available
for future grant under the Company's 1992 Stock Option Plan.
Moreover, the Company recently granted options for 800,000 shares of Common
Stock to James W. Bagley as part of the compensation arrangement that the
Company negotiated with Mr. Bagley to attract him as its new Chairman of the
Board and Chief Executive Officer. See "Executive Compensation-- Employment,
Severance and Change of Control Provisions." If the 1996 Equity Plan is adopted,
the Company intends to grant to Mr. Bagley an option to purchase 800,000 shares
of Common Stock under the 1996 Equity Plan, and the options to purchase 800,000
shares of Common Stock previously granted to Mr. Bagley will be cancelled. The
issuance of options under the 1996 Equity Plan would provide certain tax
benefits to the Company upon the exercise of the options which would not
otherwise be available.
The closing price of the Company's Common Stock reported on The Nasdaq
National Market on August 31, 1996 was $14 5/8 per share.
SUMMARY OF THE 1996 EQUITY INCENTIVE PLAN
Set forth below is a summary of the principal features of the 1996 Equity
Plan. Such summary does not purport to be complete and is qualified in its
entirety by the specific language of the 1996 Equity Plan, a copy of which is
available to any shareholder upon request.
GENERAL
The 1996 Equity Plan allows the granting of stock options, restricted stock
awards, and performance share awards (collectively, "Awards") to eligible
participants in the 1996 Equity Plan. While the Company has no current plans to
grant awards other than stock options, the Board of Directors believes that the
ability to utilize different types of equity compensation vehicles will give it
the flexibility needed to most effectively adapt over time to changes in the
labor market and in equity compensation practices.
PURPOSE
The 1996 Equity Plan is intended to attract, motivate and retain (1)
employees of the Company and its affiliates, (2) consultants who provide
significant services to the Company and its affiliates and (3) directors of the
Company who are not employees of either the Company or any affiliate. The 1996
Equity Plan is also designed to encourage stock ownership by participants,
thereby aligning their interests with those of the Company's shareholders.
ADMINISTRATION
The 1996 Equity Plan will be administered by the Compensation Committee of
the Board of Directors (the "Committee"), except that grants of options to
non-employee directors will be administered by the Board of Directors. The
members of the Committee must qualify as "non-employee directors" under Rule
16b-3 under the Securities Exchange Act of 1934, and as "outside directors"
under Section 162(m) of the Internal Revenue Code (for purposes of qualifying
amounts received under the 1996 Equity Plan as "performance-based compensation"
under Section 162(m)).
16
<PAGE>
Subject to the terms of the 1996 Equity Plan, the Committee has the sole
discretion to determine the employees and consultants who shall be granted
Awards, the size and type of such Awards, and the terms and conditions of such
Awards. The Committee may delegate its authority to grant and administer Awards
to a separate committee appointed by the Committee, but only the Committee may
make Awards to participants who are executive officers of the Company.
Grants of options to non-employee directors will be made by the Board of
Directors, rather than the Committee.
ELIGIBILITY
Employees and consultants of the Company and its affiliates (i.e., any
corporation or other entity controlling, controlled by, or under common control
with the Company) are eligible to be selected to receive one or more Awards. The
actual number of employees and consultants who will receive Awards under the
1996 Equity Plan cannot be determined because selection for participation in the
1996 Equity Plan is in the discretion of the Committee, which will select the
participants and determine the number of shares to be subject to each Award. The
1996 Equity Plan also provides for the grant of stock options to the Company's
non-employee directors, which grants will be determined by the Board of
Directors.
OPTIONS
Each option is evidenced by a stock option agreement between the Company and
the person to whom such option is granted, which sets forth the terms and
conditions of the option. The Committee may grant nonstatutory stock options or
"incentive stock options," which are entitled to favorable tax treatment, or a
combination thereof. The 1996 Equity Plan provides that the number of shares
subject to options that may be granted under the 1996 Equity Plan to any
employee during any fiscal year shall not exceed (i) 800,000 in the case of any
employee who serves as Chief Executive Officer at any time during such fiscal
year or (ii) 300,000 in the case of any other employee. In addition, the value
of the shares subject to all incentive stock options held by an optionee that
become exercisable for the first time during any calendar year may not exceed
$100,000 (determined as of the date of grant). The following terms and
conditions generally apply to all options, unless the stock option agreement
provides otherwise:
EXERCISE OF THE OPTION. The optionee must earn the right to exercise his
option by continuing to work for the Company. The Committee determines when
options granted under the 1996 Equity Plan may be exercisable. An option may be
exercised by written notice of exercise to the Company specifying the number of
full shares of Common Stock to be purchased, together with payment to the
Company of the purchase price. The purchase price of shares purchased upon
exercise of an option may be paid by any of the following means, or by any
combination thereof: (i) cash; (ii) check; (iii) the tender of other shares of
the Company's Common Stock; or (iv) by any other means which the Committee
determines to be consistent with the purpose of the 1996 Equity Plan. Any taxes
to be withheld must be paid by the participant at the time of exercise.
EXERCISE PRICE. The exercise price of options granted under the 1996 Equity
Plan will be determined by the Committee and will generally be 100% of the fair
market value of the Company's Common Stock on the date of grant. Thus, an option
will have value only if the Company's Common Stock appreciates in value after
the date of grant. Where the participant owns stock representing more than 10%
of the total combined voting power of the Company's outstanding capital stock,
the exercise price for an incentive stock option must not be less than 110% of
such fair market value.
TERMINATION OF OPTIONS. Options expire at the times established by the
Committee but generally not later than 10 years after the date of grant (13
years in the event of the optionee's death). However, no options granted under
the 1996 Equity Plan to any participant who owns stock possessing more than 10%
of the total combined voting power of the Company's outstanding capital stock
may have a term exceeding five years from the date of grant. The Committee may
extend the maximum term of any option granted under the 1996 Equity Plan,
subject to the preceding limits.
17
<PAGE>
RESTRICTED STOCK AWARDS
Restricted stock awards are shares of the Company's Common Stock that vest
in accordance with terms established by the Committee. The number of shares of
restricted stock (if any) granted to a participant will be determined by the
Committee, but during any fiscal year of the Company, no participant may be
granted more than 20,000 shares.
In determining the vesting schedule for each award of restricted stock, the
Committee may impose whatever conditions to vesting as it determines to be
appropriate. For example, the Committee may (but is not required to) provide
that restricted stock will vest only if one or more performance goals are
satisfied. In order for the award to qualify as "performance-based" compensation
under Section 162(m) of the Internal Revenue Code (see "Report of the
Compensation Committee of the Board of Directors-- Deductibility of Executive
Compensation"), it must use one or more of the following measures in setting the
performance goals: (1) annual revenue, (2) controllable profits, (3) customer
satisfaction management by objectives, (4) earnings per share, (5) individual
management objectives, (6) net income, (7) new orders, (8) pro forma net income,
(9) return on designated assets, and (10) return on sales. These performance
measures are defined in the 1996 Equity Plan. The Committee may apply the
performance measures on a corporate or business unit basis, as deemed
appropriate in light of the participant's specific responsibilities. The
Committee may, in its discretion, accelerate the time at which any restrictions
lapse or remove any restrictions.
PERFORMANCE SHARE AWARDS
Performance share awards are amounts credited to a bookkeeping account
established for the participant. A performance share has an initial value equal
to the fair market value of a share of the Company's Common Stock on the date of
grant. The number of performance shares (if any) granted to a participant will
be determined by the Committee, but during any fiscal year of the Company, no
participant may be granted more than 150,000 performance shares.
Whether a performance share actually will result in a payment to a
participant will depend upon the extent to which performance goals established
by the Committee are satisfied. The applicable performance goals will be
determined by the Committee. In particular, the 1996 Equity Plan permits the
Committee to use the same performance goals as are discussed above with respect
to restricted stock. The Committee may, in its discretion, waive any performance
goal requirements.
After a performance share award has vested (that is, after the applicable
performance goal or goals have been achieved), the participant will be entitled
to receive a payout of cash, Common Stock, or a combination thereof, as
determined by the Committee. Unvested performance shares will be forfeited upon
the earlier of the recipient's termination of employment or the date set forth
in the award agreement.
NONTRANSFERABILITY OF AWARDS
Awards are not transferable other than by will or the laws of descent and
distribution. However, a participant may designate one or more beneficiaries to
receive any exercisable or vested Awards following his or her death.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the Company's capital structure (whether by
reason of any recapitalization, stock dividend, stock split, combination of
shares or other similar change in corporate structure), appropriate adjustments
shall be made in the number of shares subject to each Award and the per share
exercise price therefor. All obligations of the Company under the 1996 Equity
Plan with respect to Awards granted thereunder shall be binding on any successor
to the Company, whether by purchase, merger, consolidation or otherwise.
18
<PAGE>
AMENDMENT AND TERMINATION OF THE 1996 EQUITY PLAN
The Board of Directors may amend the 1996 Equity Plan at any time or from
time to time or may terminate it without the approval of the shareholders;
provided, however, that shareholder approval will be required for certain
material amendments to the 1996 Equity Plan in accordance with Section 162(m) of
the Code and Rule 16b-3 under the Exchange Act. However, no such action by the
Board of Directors or shareholders may alter or impair any option previously
granted under the 1996 Equity Plan. In any event, the 1996 Equity Plan shall
terminate in November 2006.
ACCOUNTING TREATMENT
Under current accounting rules, option grants or stock issuances to
employees and directors with exercise or issue prices equal to the fair market
value of the shares on the grant or issue date will not result in any direct
charge to the Company's reported earnings. However, outstanding options may have
to be taken into account in the calculation of earnings per share on a
fully-diluted basis. In addition, FASB 123, a new accounting standard which the
Company will adopt in fiscal 1997, will require pro forma statements and
footnote disclosure to the Company's financial statements indicating the impact
which the options granted under the Company's option plans would have upon the
Company's reported earnings were the value of those options at the time of grant
treated as compensation expense.
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS
Section 422 of the Code provides favorable federal income tax treatment for
"incentive stock options." When an option granted under the 1996 Equity Plan
qualifies as an incentive stock option, the optionee does not recognize income
for federal income tax purposes upon grant or exercise of the incentive stock
option (unless the alternative minimum tax applies as discussed below). The
Company is not allowed a deduction for federal income tax purposes as a result
of the exercise of the incentive stock option regardless of the applicability of
the alternative minimum tax. Upon a sale of the shares (assuming that the sale
occurs no sooner than two years after the grant of the option and one year after
the receipt of the shares by the optionee), any gain or loss will be treated as
long-term capital gain or loss for federal income tax purposes.
The favorable federal income tax consequences described above will not apply
to the extent the optionee disposes of the shares acquired within one year of
the date of exercise or two years of the date of grant of the option
(hereinafter a "disqualifying disposition"). In the event of a disqualifying
disposition, the optionee generally will recognize ordinary income in the year
of disposition equal to the amount by which the fair market value of the stock
at the date of exercise exceeds the exercise price. Any additional gain will be
long-term or short-term gain, depending on how long the optionee has held the
stock. A different rule for measuring income upon a disqualifying disposition
may apply if the optionee is also an officer, director or 10% shareholder of the
Company.
ALTERNATIVE MINIMUM TAX FOR NON-CORPORATE TAXPAYERS
The excess of the stock's fair market value over the exercise price of an
incentive stock option, which is generally not subject to tax at the time of
exercise, is treated as an item of income in determining an individual
taxpayer's alternative minimum tax liability. In determining alternative minimum
tax liability in subsequent years, however, the optionee will be entitled to
increase the basis of the stock by the amount of this income adjustment.
Furthermore, if there is a disqualifying disposition of the stock in the year of
exercise, the alternative minimum taxable income adjustment will be limited to
the gain on the sale.
NONSTATUTORY STOCK OPTIONS
Options granted under the 1996 Equity Plan that do not qualify as incentive
stock options are considered "nonstatutory" stock options and will not qualify
for any special tax benefits to the optionee.
19
<PAGE>
Because the Company's stock options are not deemed to have a readily
ascertainable value, the optionee will not recognize any taxable income at the
time he or she is granted a nonstatutory stock option. However, upon exercise of
a nonstatutory stock option, the optionee will recognize ordinary income
measured by the excess of the then fair market value of the shares over the
option price. Upon a sale of the shares by the optionee, any difference between
the sale price and the exercise price, to the extent not recognized as ordinary
income, will be treated as capital gain or loss.
The income recognized by the optionee will be treated as wage compensation
and will be subject to federal and state income tax and F.I.C.A. withholding by
the Company out of the current earnings paid to the optionee.
RESTRICTED STOCK/PERFORMANCE SHARE AWARDS
Upon receipt of restricted stock or a performance share, the participant
will not have taxable income unless he or she elects to be taxed. Absent such
election, upon vesting the participant will recognize ordinary income equal to
the fair market value of the shares at such time.
COMPANY TAX DEDUCTIONS
The Company generally will be allowed a tax deduction to the extent and in
the year that compensation income is recognized by the optionee upon the
exercise of nonstatutory stock options, provided the Company has withheld income
taxes in accordance with the law. The Company receives no deduction in
connection with the exercise of an incentive stock option. In the event of a
disqualifying disposition, however, the Company will be allowed a deduction for
the amount of income recognized by the optionee with respect to his exercise for
the tax year of the Company in which the disqualifying disposition occurs. Code
Section 162(m) contains special rules regarding the federal income tax
deductibility of compensation paid to the Company's Chief Executive Officer and
to each of the other four most highly compensated executive officers. The
general rule is that annual compensation paid to any of these specific
executives will be deductible only to the extent that it does not exceed $1
million. However, the Company can preserve the deductibility of certain
compensation in excess of $1 million if it complies with conditions imposed by
the Section 162(m) rules, including (1) the establishment of a maximum number of
shares with respect to which Awards may be granted to any one employee during a
specified time period, and (2) for restricted stock and performance
units/shares, inclusion in the 1996 Equity Plan of performance goals which must
be achieved prior to payment. The 1996 Equity Plan has been designed to permit
the Committee to grant Awards which satisfy the requirements of Section 162(m).
The foregoing summary of the effect of current federal income taxation upon
optionees and the Company with respect to the grant of Awards, and the purchase
and subsequent disposition of shares of Common Stock, under the 1996 Equity Plan
does not purport to be complete, and reference is made to the applicable
provisions of the Code. The foregoing summary also does not reflect provisions
of the income tax laws of any state or foreign jurisdiction in which optionees
may reside, and does not address prospective estate, gift and other tax
consequences of acquiring stock under the 1996 Equity Plan.
NEW PLAN BENEFITS
No stock option grants have been made to date under the 1996 Equity Plan. If
the shareholders approve this proposal, Mr. Bagley will receive an option grant
for 800,000 shares of Common Stock, and the options to purchase 800,000 shares
of Common Stock previously granted to Mr. Bagley will be cancelled. The option
grant will have an exercise price per share equal to $17.25, the exercise price
of an option previously granted to Mr. Bagley. As discussed above, all employees
of the Company, including executive officers, will be eligible to receive Awards
and non-employee directors will be eligible to receive option grants under the
1996 Equity Plan. As of August 31, 1996, there were approximately 330 employees
of the Company.
20
<PAGE>
REQUIRED VOTE
The affirmative vote of the holders of a majority of the shares of Common
Stock present or represented by proxy and entitled to vote at the Annual Meeting
is required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum.
Abstentions will have the same effect as a negative vote. Broker non-votes, on
the other hand, will have no effect on the outcome of the vote.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
APPROVAL OF THE 1996 EQUITY INCENTIVE PLAN.
PROPOSAL NO. 4
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Price Waterhouse LLP as the independent
accountants of the Company for the current fiscal year. The selection of the
independent accountants is being submitted to the shareholders for ratification
at the Annual Meeting. In the event that ratification by the shareholders of the
selection of Price Waterhouse LLP as the Company's independent accountants is
not obtained, the Board of Directors will reconsider such selection.
Price Waterhouse LLP has audited the Company's financial statements since
1992. Its representatives are expected to be present at the Annual Meeting, will
have the opportunity to make a statement if they so desire, and will be
available to respond to appropriate questions.
The ratification of the selection of Price Waterhouse LLP will require the
affirmative vote of not less than a majority of the shares of the Company's
Common Stock represented and voting at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP.
OTHER BUSINESS
The Company currently knows of no other matters to be submitted at the
Annual Meeting. If any other matters properly come before the Annual Meeting, it
is the intention of the persons named in the enclosed form of Proxy to vote the
shares they represent as the Board of Directors may recommend.
21
<PAGE>
PRINCIPAL SHAREHOLDERS AND SHARE OWNERSHIP BY MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of August 31, 1996 (unless otherwise
stated in the footnotes) by: (i) each person (or group of affiliated persons)
who is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each executive
officer named in the tables under "Executive Compensation," and (iv) all
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF
BENEFICIAL OWNER SHARES OWNED(1) PERCENT
- - - ----------------------------------------------------------------------------- ---------------- -----------
<S> <C> <C>
TA Associates Group (2) ..................................................... 1,341,193 17.7%
c/o TA Associates, Inc.
125 High Street,
Suite 2500
Boston, MA 02110
Kenneth J. Smith (3) ........................................................ 681,500 9.0
21617 Villa Maria Court
Cupertino, CA 95014
Jerauld J. Cutini (4) ....................................................... 656,500 8.7
1010 Rincon Circle
San Jose, CA 95131
James W. Bagley (5) ......................................................... 400,000 5.0
1010 Rincon Circle
San Jose, CA95131
Wilbur Krusell (6)........................................................... 290,000 3.8
Patrick C. O'Connor (7)...................................................... 284,035 3.7
Gary Hultquist (8)........................................................... 123,600 1.6
Michael C. Child (9)......................................................... 7,117 *
Richard J. Elkus, Jr......................................................... -- --
Wells Fargo Bank, N.A. (10) ................................................. 562,000 7.4
464 California Street
San Francisco, CA94163
All current directors and executive officers as 1,761,252 21.4
a group (7 persons) (11)...................................................
</TABLE>
- - - ------------------------
* Less than 1% of the outstanding Common Stock.
(1) Except as indicated and pursuant to applicable community property laws, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Includes 914,040 shares of Common Stock owned by Advent VII L.P., 236,701
shares of Common Stock owned by Advent Atlantic and Pacific II L.P., 91,403
shares of Common Stock owned by Advent New York L.P., 85,337 shares of
Common Stock owned by Advent Industrial II L.P., and 13,712 shares of Common
Stock owned by TA Venture Investors Limited Partnership. Advent VII L.P.,
Advent Atlantic and Pacific II L.P., Advent New York L.P. and TA Venture
Investors Limited Partnership are part of an affiliated group of investment
partnerships referred to, collectively, as the TA Associates Group. Mr.
Child, a director of the Company, is a Managing Director of TA Associates,
Inc. which is the sole general partner of TA Associates VII L.P., TA
Associates VI L.P. and TA Associates AAP II
22
<PAGE>
Partners L.P. TA Associates VII L.P. is the sole general partner of Advent
VII L.P. TA Associates VI L.P. is the sole general partner of Advent New
York L.P. and Advent Industrial II L.P. TA Associates AAP II Partners L.P.
is the sole general partner of Advent Atlantic and Pacific II L.P. Mr. Child
is a general partner of TA Venture Investors Limited Partnership. TA
Associates, Inc. exercises sole voting and investment power with respect to
all of the shares held of record by the named investment partnerships, with
the exception of those shares held by TA Venture Investors Limited
Partnership; individually no shareholder, director or officer of TA
Associates, Inc. is deemed to have or share such voting or investment power.
Principals and employees of TA Associates, Inc. (including Mr. Child)
comprise the general partners of TA Venture Investors Limited Partnership.
In such capacity, Mr. Child may be deemed to share voting and investment
power with respect to 13,712 shares held of record by TA Venture Investors
Limited Partnership. Mr. Child disclaims beneficial ownership of such
shares, except to the extent of the 2,117 shares as to which he holds a
pecuniary interest.
(3) Includes (i) 100,000 shares of Common Stock held by Smith OTS Partners, a
California limited partnership, of which Mr. Smith and his wife are the sole
general partners, (ii) 38,000 shares held in the name of Mr. Smith's wife,
and (iii) 12,500 shares underlying stock options which are currently
exercisable or which will become exercisable within 60 days after August 31,
1996.
(4) Includes (i) 52,000 shares of Common Stock held by a trust for the benefit
of Mr. Cutini's children and (ii) 12,500 shares underlying stock options
which are currently exercisable or which will become exercisable within 60
days after August 31, 1996.
(5) Mr. Bagley became Chairman of the Board and Chief Executive Officer on June
1, 1996. Pursuant to an Employment Agreement dated May 17, 1996, Mr. Bagley
was granted options to purchase 800,000 shares of Common Stock, 400,000 of
which are presently exercisable.
(6) Includes 90,000 shares underlying stock options which are currently
exercisable or which will become exercisable within 60 days after August 31,
1996.
(7) Includes (i) 20,000 shares of Common Stock held by trusts for the benefit
of Mr. O'Connor's children and (ii) 35,000 shares underlying stock options
which are currently exercisable or which will become exercisable within 60
days after August 31, 1996.
(8) Represents shares underlying stock options and warrants which are currently
exercisable or which will become exercisable within 60 days after August 31,
1996.
(9) Includes (i) 2,117 shares beneficially owned by Mr. Child through TA
Venture Investors Limited Partnership, all of which shares are included in
the 1,341,193 shares described in footnote (2) above, and (ii) 5,000 shares
underlying stock options which are currently exercisable or which will
become exercisable within 60 days after August 31, 1996.
(10) Based on the Form 13F filed with the SEC to report ownership as of the end
of June 1996.
(11) Includes 666,100 shares underlying stock options and warrants which are
presently exercisable or which will become exercisable within 60 days after
August 31, 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent beneficial owners are
required by SEC regulation to furnish the Company with copies of all reports
they file under Section 16(a). To the Company's knowledge, based solely on its
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were complied with during the period beginning on July 10,
1995 (the date the Company became subject to the reporting requirements of the
Exchange Act) through the end of
23
<PAGE>
its fiscal year on June 30, 1996, except that a report relating to the sale of
stock received upon the exercise of a stock option by Mr. Krusell was filed
late.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company to each person who served as the Company's Chief Executive
Officer during the 1996 fiscal year and each of the Company's other executive
officers whose salary plus bonus for the 1996 fiscal year exceeded $100,000
(collectively, the "Named Officers") for the fiscal years ended June 30, 1994,
1995 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------
NAME AND PRINCIPAL YEAR ENDED ---------------------- NUMBER OF SECURITIES ALL OTHER
POSITION JUNE 30,(1) SALARY BONUS UNDERLYING OPTIONS COMPENSATION(2)
- - - ----------------------------------- ------------- ---------- ---------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
James W. Bagley (3) ............... 1996 $ 11,538 -- 800,000 --
Chairman of the Board and Chief
Executive Officer
Kenneth J. Smith (4) .............. 1996 $ 205,289 $ 100,000 -- $ 32,590(5)
Former President and Chief 1995 172,292 188,000 50,000 34,891
Executive Officer 1994 110,369 94,025 -- 21,995
Jerauld J. Cutini ................. 1996 175,000 100,000 -- 24,522
Executive Vice President, Sales 1995 172,292 188,000 50,000 25,832
and Marketing 1994 112,429 121,525 -- 18,989
Patrick C. O'Connor ............... 1996 160,000 75,000 -- 20,383
Vice President Finance and Chief 1995 138,437 98,000 25,000 11,566
Financial Officer 1994 74,539 53,915 -- 4,469
Wilbur Krusell .................... 1996 146,051 95,000 100,000 15,052
Executive Vice President and 1995 130,961 52,280 25,000 11,462
Chief Technical Officer 1994 110,345 51,150 -- 4,330
</TABLE>
- - - ------------------------
(1) The Company became subject to the reporting requirements of the Exchange Act
on July 10, 1995. The Company provided information concerning executive
compensation for its fiscal years ended June 30, 1994 and 1995 in connection
with the filing of a registration statement pursuant to the Securities Act
of 1933, as amended, in June 1995.
(2) Except as otherwise noted, All Other Compensation includes: (i) the dollar
value of premiums paid on long-term disability and life insurance premiums
for the benefit of the Named Officer; (ii) Company contributions to
executive officers' 401(k) accounts; and (iii) automobile allowance, payment
of tax consulting fees and miscellaneous dues.
(3) Mr. Bagley became an executive officer of the Company on June 1, 1996.
(4) Mr. Smith's employment with the Company as an executive officer terminated
on May 31, 1996.
(5) Includes $7,020 paid in lieu of accrued vacation.
24
<PAGE>
STOCK OPTION GRANTS
The following table contains information concerning stock option grants to
the Named Officers during the fiscal year ended June 30, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATE OF
SECURITIES STOCK PRICE APPRECIATION
UNDERLYING % OF TOTAL OPTIONS EXERCISE OR FOR OPTION TERM
OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION ---------------------------
NAME GRANTED(1) IN FISCAL YEAR (($)/SH)(1) DATE 5%($)(2) 10%($)(2)
- - - --------------------------- ----------- -------------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
James W. Bagley (3)........ 800,000 63.1% $ 17.25 5/17/03 $ 5,617,980 $ 13,092,336
Kenneth J. Smith........... -- -- -- -- -- --
Jerauld J. Cutini.......... -- -- -- -- -- --
Patrick C. O'Connor........ -- -- -- -- -- --
Wilbur Krusell (4)......... 100,000 7.9% $ 21.25 10/23/00 587,097 1,297,334
</TABLE>
- - - ------------------------
(1) Options were granted at the fair market value of the Common Stock on the
date of grant, as determined by the Board of Directors of the Company.
(2) The 5% and 10% assumed annual rates of compounded stock appreciation are
mandated by the rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers.
(3) Options to purchase 400,000 shares are fully vested and exercisable and
options to purchase 400,000 shares will vest and become exercisable in four
equal installments over four years beginning on May 17, 1997. The option has
a term of seven years.
(4) The option vests and becomes exercisable in four equal installments over
four years beginning on October 23, 1996 and has a term of five years.
OPTION EXERCISES AND YEAR-END HOLDINGS
The table below sets forth certain information with respect to the Named
Officers concerning the exercise of options during the fiscal year ended June
30, 1996 and unexercised options held as of the end of such fiscal year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES AGGREGATE OPTIONS AT FY-END AT FY-END($)(1)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - --------------------------------------- ----------- ------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
James W. Bagley........................ -- -- 400,000 400,000 -- --
Kenneth J. Smith....................... -- -- 12,500 37,500 $ 120,625 $ 361,875
Jerauld J. Cutini...................... -- -- 12,500 37,500 120,625 361,875
Patrick C. O'Connor.................... 35,000 $ 464,625 35,000 25,000 560,875 256,250
Wilbur Krusell......................... 10,000 145,750 90,000 225,000 1,442,250 1,858,750
</TABLE>
- - - ------------------------
(1) Based on the fair market value of the option shares at fiscal year-end
($16.25) less the exercise price.
(2) Based on the fair market value of the shares on the exercise date less the
exercise price paid for those shares.
25
<PAGE>
COMPENSATION OF DIRECTORS
Directors do not receive cash compensation for their services as directors,
but are reimbursed for out-of-pocket expenses for attending board meetings.
Directors who are not employees of the Company will also receive periodic option
grants for shares of the Company's Common Stock pursuant to an automatic
nondiscretionary grant mechanism in the Company's 1995 Director Stock Option
Plan (the "Director Option Plan"). The Director Option Plan provides for an
initial grant of options to purchase 15,000 shares of Common Stock to each
non-employee director of the Company upon the effectiveness of the Director
Option Plan or at the time a non-employee is first elected as a Director.
Subsequently, each non-employee director shall automatically be granted an
additional option to purchase 5,000 shares of Common Stock at the next meeting
of the Board of Directors following the annual meeting of shareholders in each
year beginning with the annual meeting held in calendar 1996 if on such date
such non-employee director shall have served on the Board of Directors for at
least six months. The term of such options shall be five years. Any option for
15,000 shares shall become exercisable to the extent of one-third ( 1/3) of the
shares on each of the first three anniversaries of the date of grant. Any option
for 5,000 shares shall become exercisable on the third anniversary of the date
of grant. Upon a merger or dissolution, all outstanding options under the
Director Option Plan will be assumed or replaced with an equivalent option by
the successor corporation, or each optionee will be given 10 days notice of the
merger or dissolution and be given the opportunity to exercise all currently
exercisable options, as well as all options that would become exercisable at the
next succeeding vesting date. All options not so exercised within the 10-day
notice period will expire. In May 1995, Messrs. Child and Hultquist each
received options to purchase 15,000 shares of Common Stock pursuant to the
Director Option Plan, at an exercise price of $7.00 per share. In August 1996,
Mr. Elkus received options to purchase 15,000 shares of Common Stock pursuant to
the 1995 Director Option Plan at an exercise price of $14 5/8 per share. Such
options become exercisable to the extent of one-third ( 1/3) of the shares on
each of the first three anniversaries of the date of grant.
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
The Company and James W. Bagley, its Chairman and Chief Executive Officer,
entered into an Employment Agreement on May 17, 1996. The agreement has a term
of seven years, commencing June 1, 1996. The agreement fixed Mr. Bagley's annual
salary at $100,000, subject to annual discretionary increases. The agreement
also provides for reimbursement of necessary business expenses incurred in
performing services as Chairman and Chief Executive Officer. The agreement
further entitles Mr. Bagley to option grants for an aggregate of 800,000 shares,
of which options to purchase 400,000 shares are fully vested and options to
purchase 400,000 shares will vest in equal increments over a 4-year period
commencing on May 17, 1997, subject to accelerated vesting upon a "change in
control" of the Company and certain other events. In the event Mr. Bagley is
terminated other than for cause, or if he voluntarily terminates his employment
because of a substantial change in his job duties or title or specified acts of
misconduct by the Company, he is entitled under the agreement to receive a
severance payment of $750,000 and all options shall immediately become fully
exercisable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Child and Elkus.
During the fiscal year ended June 30, 1996, the Compensation Committee consisted
of Messrs. Child and Hultquist. The Company has entered into certain
transactions described below with Messrs. Child and Hultquist, or entities with
which they are affiliated.
The Company and certain investors, including investment partnerships
affiliated with TA Associates, Inc. (the "TA Associates Group"), who purchased
shares of the Company's Series A and Series B Preferred Stock in November 1994,
are parties to a Preferred Stock Purchase Agreement (the "Preferred Stock
Purchase Agreement"). Mr. Child, a director of the Company, is a managing
director of TA Associates, Inc. Upon the closing of the offering to the public
of Common Stock in July 1995 (the "Offering"), the Series A Preferred Stock was
automatically converted into 1,789,483 shares of Common Stock. Immediately
following the closing of the Offering, the Series B Preferred Stock was redeemed
for
26
<PAGE>
approximately $3.5 million. Pursuant to the Preferred Stock Purchase Agreement,
the TA Associates Group is entitled to certain rights with respect to
registration under the Securities Act of the Common Stock issuable upon
conversion of the Series A Preferred Stock.
In October 1995, the Company entered into a financial advisory services
agreement with Hultquist Capital, Inc. ("Hultquist Capital"), of which Gary
Hultquist, a director of the Company, is managing director. Pursuant to the
financial advisory services agreement, Hultquist Capital received $10,000 per
month as a consulting fee (the "Consulting Fees") for providing a range of
consulting and financial advisory services to the Company. The agreement also
provided that if the Company engaged Hultquist Capital to provide services in
connection with selected acquisitions by the Company, Hultquist Capital would be
entitled to receive a success fee upon the consummation of the transaction. The
financial advisory services agreement could be terminated at any time with or
without cause and was terminated in February 1996. The agreement with Hultquist
Capital replaced an agreement between the Company and Bridgemere Capital, Inc.
("Bridgemere"), of which Mr. Hultquist served as President, that was in place
until September 1995. In fiscal 1996, the Company paid to Hultquist Capital and
Bridgemere aggregate financial advisory fees of $80,000.
In November 1994, in consideration of services provided to the Company by
Bridgemere in connection with financing activities, including the sale of
Preferred Stock to the TA Associates Group, the Company (i) paid to Bridgemere a
financial advisory fee of $288,000, and (ii) issued to Mr. Hultquist and another
affiliate of Bridgemere, stock purchase warrants (the "Bridgemere Warrants") to
purchase an aggregate of 98,000 shares of Common Stock of the Company at a
purchase price of $3.542 per share. The Bridgemere Warrants expire in November
1997. Holders of the Bridgemere Warrants are entitled to "piggyback"
registration rights with respect to certain registered offerings of securities
by the Company.
In April 1995, the Company granted to Mr. Hultquist options to purchase
50,000 shares of Common Stock under the 1992 Stock Option Plan, at an exercise
price of $6.50 per share, which options vested immediately with respect to
25,000 shares and with respect to the remaining 25,000 shares on the first
anniversary of the date of grant.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Annual compensation of the Company's executive officers is determined by the
Compensation Committee of the Board of Directors (the "Compensation Committee"),
which recommends the amount of salary and bonus to be paid to each executive
officer, subject to ratification by the Board of Directors. The Compensation
Committee is also responsible for administering the 1992 Stock Option Plan (the
"1992 Option Plan"), including the grant of options under such plan. No
directors who are employees or former employees of the Company serve on the
Compensation Committee.
COMPENSATION PHILOSOPHY
The Compensation Committee has two principal objectives in determining
executive compensative policies:
- to attract and retain key executive personnel, and
- to reward executive performance that creates long term value to
shareholders, including earnings per share, thereby aligning the
motivations and incentives of executive officers with the interests of
shareholders.
Accordingly, the Company's overall executive compensation structure is
intended to provide competitive pay levels for the positions, reward individual
performance relative to goals and objectives determined for the executive
position, and reward outstanding contributions to the Company's success,
including overall Company performance and individual executive contribution to
overall Company performance. In
27
<PAGE>
furtherance of such objectives and structure, the Compensation Committee has
adopted the following overriding policies:
- the Company will compensate competitively with other similar companies in
the semiconductor equipment and related industries;
- performance by individual executives, including the achievement of
specific goals and objectives set for the executive and contribution by
the executive to the Company's overall performance, will determine a
significant portion of the compensation for each executive;
- performance-based compensation will be based upon realizable but
challenging objectives; and
- the Company will encourage executive officers to hold substantial,
long-term equity stakes in the Company.
COMPONENTS OF COMPENSATION
BASE SALARY. Base salaries for the executive officers other than James W.
Bagley, the Company's Chief Executive Officer, for fiscal 1996 were determined
on the basis of the policies described above. Salaries will generally be
reviewed annually and will be subject to increases based on the Compensation
Committee's determination that the individual's level of contribution to the
Company has increased since his or her salary had last been reviewed and
increases in competitive pay levels and the cost of living.
EXECUTIVE BONUS PLAN. Bonuses paid to the Named Officers under the
executive bonus plan in fiscal 1996 are set forth above in the Summary
Compensation Table, and were determined in accordance with the compensation
philosophy described above. In conjunction with the hiring of James W. Bagley as
the Company's Chief Executive Officer, the Compensation Committee is developing
a revised executive bonus plan for the current fiscal year. Incentive
compensation under the new plan will be aligned to relate to overall Company
performance, as well as the attainment of specific performance objectives for
each individual executive officer.
STOCK OPTIONS. The Company believes that executive officers, other
corporate officers and key employees should hold substantial, long-term equity
stakes in the Company so that their collective interests will coincide with the
interests of the stockholders. Thus, stock options constitute a significant
portion of the Company's incentive compensation program. At June 30, 1996,
substantially all of the Company's full-time employees held options to purchase
Common Stock. In granting stock options to executive officers, the Compensation
Committee considers numerous objective and subjective factors, such as the
individual's position and responsibilities with the Company, the individual's
future potential to influence the Company's mid- and long-term growth, the
vesting schedule of the options awarded and the number of options previously
granted, with no particular weight being assigned to any one factor. See the
table under "Stock Option Grants," above, for information regarding options to
purchase Common Stock granted to the Named Officers during fiscal 1996.
COMPENSATION AND EMPLOYEE BENEFITS GENERALLY AVAILABLE TO ALL COMPANY
EMPLOYEES. The Company maintains compensation and employee benefits that are
generally available to all Company employees, including medical, dental and life
insurance benefits, the 1995 Stock Purchase Plan, a 401(k) retirement savings
plan, a profit-sharing plan and a flexible benefits plan. The Company's
executive officers are not eligible to participate in the Company's
profit-sharing plan, but instead participate in the executive bonus plan.
28
<PAGE>
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Compensation Committee uses the same factors and criteria described
above in making compensation decisions regarding the Chief Executive Officer.
For fiscal 1996, Kenneth J. Smith, the Company's Chief Executive Officer through
May 31, 1996, received base compensation of $205,289 and a bonus of
approximately 49% of his base compensation. The Compensation Committee believes
this compensation was appropriate considering the Company's significant
achievements in fiscal 1996, including completion of the Company's initial
public offering in July 1995, and growth in revenues and net income of more than
100% from the prior year.
The compensation paid and to be paid to James W. Bagley, the Company's
current Chief Executive Officer, was determined in accordance with an employment
agreement dated May 17, 1996, which was negotiated at arm's length between the
Company and Mr. Bagley and approved and ratified by the Compensation Committee.
The agreement fixed Mr. Bagley's annual salary at $100,000, subject to annual
discretionary increases. The agreement further entitled Mr. Bagley to option
grants for an aggregate 800,000 shares, of which options to purchase 400,000
shares are fully vested and options to purchase 400,000 shares will vest in
equal increments over a 4-year period commencing on May 17, 1997, subject to
accelerated vesting upon a "change in control" and certain other events. In the
event Mr. Bagley is terminated other than for cause, or if he voluntarily
terminates his employment because of a substantial change in his job duties or
title or specified acts of misconduct by the Company, he is entitled to receive
a severance payment of $750,000 and all options will become fully exercisable.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Code. Section 162(m) denies a deduction to any publicly held corporation for
compensation paid to a "covered employee" in a taxable year to the extent that
compensation exceeds $1,000,000. A "covered employee" is defined as the chief
executive officer on the last day of the taxable year or any other individual
whose compensation is required to be reported to shareholders under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), by reason of
being among the four most highly compensated executive officers. Certain
exceptions to the limitation on the deduction of compensation paid to a covered
employee are available for performance-based compensation. The Company believes
that options granted under the 1992 Option Plan and the 1996 Equity Plan will
satisfy the exception for performance-based compensation set forth in Proposed
Treasury Regulation Section 1.162-27. The Company generally intends to structure
the compensation arrangements with its executive officers so that all
compensation paid to such officers is deductible. However, it may decide in a
particular instance that compensation in excess of the deductible amount should
be paid in order to attract or retain a key employee.
COMPENSATION COMMITTEE
Michael C. Child
Richard J. Elkus, Jr.
The Report of the Compensation Committee on Executive Compensation shall not
be deemed to be incorporated by reference as a result of any general
incorporation by reference of this proxy statement or any part thereof in the
Company's Annual Report on Form 10-K.
29
<PAGE>
PERFORMANCE GRAPH
The Company consummated an initial public offering of its Common Stock on
July 10, 1995. Prior to the offering, there was no trading market for the
Company's Common Stock. Set forth below is a graph indicating cumulative total
return at June 30, 1996 on $100 invested, alternatively, in the Company's Common
Stock, the Nasdaq Stock Market and a peer group of ten semiconductor equipment
companies on July 10, 1995 (the date of the Company's initial public offering).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
7/10/1995 6/30/1996
<S> <C> <C>
OnTrak Systems $100.00 $55.56
The NASDAQ Stock Market $100.00 $122.74
Peer Group $100.00 $54.36
</TABLE>
<TABLE>
<CAPTION>
7/10/95 6/30/96
--------- ---------
<S> <C> <C>
OnTrak Systems, Inc. (1)...................................... $ 100.00 $ 55.56
The Nasdaq Stock Market (US).................................. $ 100.00 $ 122.74
Peer Group (2)................................................ $ 100.00 $ 54.36
</TABLE>
- - - ------------------------
(1) No cash dividends have been paid on the Company's Common Stock.
(2) The peer group consists of Applied Materials, Inc., Electroglas, Inc., FSI
International, Inc., Integrated Process Equipment Corporation, KLA
Instruments Corporation, Lam Research Corporation, Novellus Systems, Inc.,
Silicon Valley Group, Inc., Speedfam International, Inc. and Ultratech
Stepper, Inc. The stock of all of the above companies is traded on the
Nasdaq Stock Market.
30
<PAGE>
CERTAIN TRANSACTIONS
As discussed above, the Company has entered into an Employment Agreement
with James W. Bagley. See "Executive Compensation--Employment, Severance and
Change of Control Provisions."
As discussed above, the Company and certain shareholders are parties to a
Preferred Stock Purchase Agreement which provides for registration rights with
respect to shares of the Company's Common Stock owned by them. See "Executive
Compensation--Compensation Committee Interlocks and Insider Participation."
As discussed above, the Company has entered into agreements with firms with
which Gary Hultquist is associated. See "Executive Compensation--Compensation
Committee Interlocks and Insider Participation."
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by the California Corporations
Code. The Company has entered into indemnification agreements with its directors
and officers and certain of its significant shareholders containing provisions
which are in some respects broader than the specific indemnification provisions
contained in the California Corporations Code. The indemnification agreements
may require the Company, among other things, to indemnify such officers,
directors and significant shareholders against certain liabilities that may
arise by reason of their status or service as officers or directors or status as
controlling shareholders (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
officers' and directors' insurance if available on reasonable terms. The Company
maintains insurance covering directors and officers.
Dated: , 1996 THE BOARD OF DIRECTORS
31
<PAGE>
EXHIBIT A
FORM OF
AGREEMENT AND PLAN OF MERGER
OF ONTRAK SYSTEMS, INC.,
A DELAWARE CORPORATION,
AND
ONTRAK SYSTEMS, INC.,
A CALIFORNIA CORPORATION
THIS AGREEMENT AND PLAN OF MERGER dated as of , 1996 (the
"Agreement") is between OnTrak Systems, Inc., a Delaware corporation ("OnTrak
Delaware"), and OnTrak Systems, Inc., a California corporation ("OnTrak
California"). OnTrak Delaware and OnTrak California are sometimes referred to
herein as the "Constituent Corporations."
RECITALS
A. OnTrak Delaware is a corporation duly organized and existing under the
laws of the State of Delaware and has an authorized capital of 30,000,000 shares
of "Common Stock," $0.0001 par value, and 3,000,000 shares of "Preferred Stock,"
$0.0001 par value. As of , 1996, 100 shares of Common Stock were
issued and outstanding, all of which are held by OnTrak California.
B. OnTrak California is a corporation duly organized and existing under the
laws of the State of California and has an authorized capital of 30,000,000
shares of "Common Stock," no par value, and 3,000,000 shares of "Preferred
Stock," no par value. As of , 1996, shares of Common Stock and no
shares of Preferred Stock were issued and outstanding.
C. The Board of Directors of OnTrak California has determined that, for the
purpose of effecting the reincorporation of OnTrak California in the State of
Delaware, it is advisable and in the best interests of OnTrak California that
OnTrak California merge with and into OnTrak Delaware upon the terms and
conditions herein provided.
D. The respective Boards of Directors of OnTrak Delaware and OnTrak
California have approved this Agreement and have directed that this Agreement be
submitted to a vote of their respective stockholders and executed by the
undersigned officers.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, OnTrak Delaware and OnTrak California hereby agree, subject to the
terms and conditions hereinafter set forth, as follows:
I.
MERGER
1.1 MERGER. In accordance with the provisions of this Agreement, the
Delaware General Corporation Law and the California General Corporation Law,
OnTrak California shall be merged with and into OnTrak Delaware (the "Merger"),
the separate existence of OnTrak California shall cease and OnTrak Delaware
shall be, and is herein sometimes referred to as, the "Surviving Corporation,"
and the name of the Surviving Corporation shall be OnTrak Systems, Inc.
1.2 FILING AND EFFECTIVENESS. The Merger shall become effective when the
following actions shall have been completed:
(a) This Agreement and the Merger shall have been adopted and approved
by the stockholders of each Constituent Corporation in accordance with the
requirements of the Delaware General Corporation Law and the California
General Corporation Law;
(b) All of the conditions precedent to the consummation of the Merger
specified in this Agreement shall have been satisfied or duly waived by the
party entitled to satisfaction thereof;
<PAGE>
(c) An executed Certificate of Merger or an executed counterpart of this
Agreement meeting the requirements of the Delaware General Corporation Law
shall have been filed with the Secretary of State of the State of Delaware;
and
(d) An executed Certificate of Merger or an executed counterpart of this
Agreement meeting the requirements of the California General Corporation Law
shall have been filed with the Secretary of State of the State of
California.
The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger."
1.3 EFFECT OF THE MERGER. Upon the Effective Date of the Merger, the
separate existence of OnTrak California shall cease and OnTrak Delaware, as the
Surviving Corporation, (i) shall continue to possess all of its assets, rights,
powers and property as constituted immediately prior to the Effective Date of
the Merger, (ii) shall be subject to all actions previously taken by its and
OnTrak California's Board of Directors, (iii) shall succeed, without other
transfer, to all of the assets, rights, powers and property of OnTrak California
in the manner as more fully set forth in Section 259 of the Delaware General
Corporation Law, (iv) shall continue to be subject to all of its debts,
liabilities and obligations as constituted immediately prior to the Effective
Date of the Merger, and (v) shall succeed, without other transfer, to all of the
debts, liabilities and obligations of OnTrak California in the same manner as if
OnTrak Delaware had itself incurred them, all as more fully provided under the
applicable provisions of the Delaware General Corporation Law and the California
General Corporation Law.
II.
CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
OnTrak Delaware as in effect immediately prior to the Effective Date of the
Merger shall continue in full force and effect as the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.2 BYLAWS. The Bylaws of OnTrak Delaware as in effect immediately prior
to the Effective Date of the Merger shall continue in full force and effect as
the Bylaws of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.3 DIRECTORS AND OFFICERS. The directors and officers of OnTrak Delaware
immediately prior to the Effective Date of the Merger shall be the directors and
officers of the Surviving Corporation until their successors shall have been
duly elected and qualified or until as otherwise provided by law, the
Certificate of Incorporation of the Surviving Corporation or the Bylaws of the
Surviving Corporation.
III.
MANNER OF CONVERSION OF STOCK
3.1 ONTRAK CALIFORNIA COMMON STOCK. Upon the Effective Date of the Merger,
each share of OnTrak California Common Stock, no par value, issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by the Constituent Corporations, the holder of such shares or any
other person, be converted into and exchanged for one fully paid and
nonassessable share of Common Stock, $.0001 par value, of the Surviving
Corporation.
3.2 ONTRAK CALIFORNIA OPTIONS. Upon the Effective Date of the Merger, the
Surviving Corporation shall assume and continue, on the terms provided therein,
the OnTrak Systems, Inc. 401(k) Plan, stock option and stock purchase plans
(including the 1992 Stock Option Plan, as amended, the 1995 Director Stock
Option Plan, and the 1995 Employee Stock Purchase Plan) and all other employee
benefit plans of OnTrak California. Each outstanding and unexercised option to
purchase OnTrak California Common Stock shall become an option to purchase the
Surviving Corporation's Common Stock on the basis of one share of the Surviving
Corporation's Common Stock for each share of OnTrak California Common Stock
2
<PAGE>
issuable pursuant to any such option to purchase on the same terms and
conditions and at an exercise price per share equal to the exercise price
applicable to any such OnTrak California option at the Effective Date of the
Merger.
A number of shares of the Surviving Corporation's Common Stock shall be
reserved for issuance upon the conversion or exercise of options equal to the
number of shares of OnTrak California Common Stock so reserved immediately prior
to the Effective Date of the Merger.
3.3 ONTRAK DELAWARE COMMON STOCK. Upon the Effective Date of the Merger,
each share of Common Stock, $.0001 par value, of OnTrak Delaware issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by OnTrak Delaware, the holder of such shares or any other person, be
cancelled and returned to the status of authorized but unissued shares.
3.4 EXCHANGE OF CERTIFICATES. After the Effective Date of the Merger, each
holder of an outstanding certificate representing shares of OnTrak California
Common Stock may, at such stockholder's option, surrender the same for
cancellation to The First National Bank of Boston, as exchange agent (the
"Exchange Agent"), and each such holder shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of shares of the
Surviving Corporation's Common Stock into which the surrendered shares were
converted as herein provided. Until so surrendered, each outstanding certificate
theretofore representing shares of OnTrak California Common Stock shall be
deemed for all purposes to represent the number of shares of the Surviving
Corporation's Common Stock into which such shares of OnTrak California Common
Stock were converted in the Merger.
The registered owner on the books and records of the Surviving Corporation
or the Exchange Agent of any such outstanding certificate shall, until such
certificate shall have been surrendered for transfer or conversion or otherwise
accounted for to the Surviving Corporation or the Exchange Agent, have and be
entitled to exercise any voting and other rights with respect to and to receive
dividends and other distributions upon the shares of Common Stock of the
Surviving Corporation represented by such outstanding certificate as provided
above.
Each certificate representing Common Stock of the Surviving Corporation so
issued in the Merger shall bear the same legends, if any, with respect to the
restrictions on transferability as the certificates of OnTrak California so
converted and given in exchange therefor, unless otherwise determined by the
Board of Directors of the Surviving Corporation in compliance with applicable
laws.
If any certificate for shares of OnTrak Delaware stock is to be issued in a
name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the person requesting
such transfer pay to the Exchange Agent any transfer or other taxes payable by
reason of the issuance of such new certificate in a name other than that of the
registered holder of the certificate surrendered or establish to the
satisfaction of OnTrak Delaware that such tax has been paid or is not payable.
IV.
GENERAL
4.1 COVENANTS OF ONTRAK DELAWARE. OnTrak Delaware covenants and agrees
that it will, on or before the Effective Date of the Merger:
(a) Qualify to do business as a foreign corporation in the State of
California and in connection therewith irrevocably appoint an agent for
service of process as required under the provisions of Section 2105 of the
California General Corporation Law;
(b) File any and all documents with the California Franchise Tax Board
necessary for the assumption by OnTrak Delaware of all of the franchise tax
liabilities of OnTrak California; and
(c) Take such other actions as may be required by the California General
Corporation Law.
3
<PAGE>
4.2 FURTHER ASSURANCES. From time to time, as and when required by OnTrak
Delaware or by its successors or assigns, there shall be executed and delivered
on behalf of OnTrak California such deeds and other instruments, and there shall
be taken or caused to be taken by it such further and other actions, as shall be
appropriate or necessary in order to vest or perfect in or conform of record or
otherwise by OnTrak Delaware the title to and possession of all the property,
interests, assets, rights, privileges, immunities, powers, franchises and
authority of OnTrak California and otherwise to carry out the purposes of this
Agreement, and the officers and directors of OnTrak Delaware are fully
authorized in the name and on behalf of OnTrak California or otherwise to take
any and all such action and to execute and deliver any and all such deeds and
other instruments.
4.3 ABANDONMENT. At any time before the Effective Date of the Merger, this
Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either OnTrak California or OnTrak
Delaware, or of both, notwithstanding the approval of this Agreement by the
shareholders of OnTrak California or by the sole stockholder of OnTrak Delaware,
or by both.
4.4 AMENDMENT. The Boards of Directors of the Constituent Corporations may
amend this Agreement at any time prior to the filing of this Agreement (or
certificate in lieu thereof) with the Secretary of State of the State of
Delaware, provided that an amendment made subsequent to the adoption of this
Agreement by the stockholders of either Constituent Corporation shall not: (1)
alter or change the amount or kind of shares, securities, cash, property and/or
rights to be received in exchange for or on conversion of all or any of the
shares of any class or series thereof of such Constituent Corporation, (2) alter
or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (3) alter or change any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class or series thereof of such Constituent
Corporation.
4.5 REGISTERED OFFICE. The registered office of the Surviving Corporation
in the State of Delaware is located at 1013 Centre Road, in the City of
Wilmington, Delaware 19805, County of New Castle, and The Prentice-Hall
Corporation System, Inc. is the registered agent of the Surviving Corporation at
such address.
4.6 AGREEMENT. Executed copies of this Agreement will be on file at the
principal place of business of the Surviving Corporation at 1010 Rincon Circle,
San Jose, California 95131 and copies thereof will be furnished to any
stockholder of either Constituent Corporation, upon request and without cost.
4.7 GOVERNING LAW. This Agreement shall in all respects be construed,
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware and, so far as applicable, the merger provisions of the
California General Corporation Law.
4.8 COUNTERPARTS. In order to facilitate the filing and recording of this
Agreement, the same may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, this Agreement, having first been approved by
resolutions of the Boards of Directors of OnTrak Delaware and OnTrak California,
is hereby executed on behalf of each of such two corporations and attested by
their respective officers thereunto duly authorized.
ATTEST: ONTRAK SYSTEMS, INC.,
a Delaware corporation
---------------------------- ----------------------------
By:
JERAULD J. CUTINI, SECRETARY JAMES W. BAGLEY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
ATTEST: ONTRAK SYSTEMS, INC.,
a California corporation
---------------------------- ----------------------------
By:
JERAULD J. CUTINI, SECRETARY JAMES W. BAGLEY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
5
<PAGE>
EXHIBIT B
CERTIFICATE OF INCORPORATION
OF
ONTRAK SYSTEMS, INC.
The undersigned, for purposes of incorporating and organizing a corporation
under the General Corporation Law of the State of Delaware, does hereby certify
as follows:
FIRST: The name of the corporation (which is hereinafter referred to as the
"Corporation") is OnTrak Systems, Inc.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
Zip Code 19805. The name of its registered agent at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware (the "GCL").
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Thirty-Three Million (33,000,000),
consisting of Three Million (3,000,000) shares of Preferred Stock, $.0001 par
value (hereinafter referred to as "Preferred Stock"), and Thirty Million
(30,000,000) shares of Common Stock, $.0001 par value (hereinafter referred to
as "Common Stock").
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to provide for the issuance of
shares of Preferred Stock in one or more series and, by filing a certificate
pursuant to the applicable law of the State of Delaware (hereinafter referred to
as "Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, determination
of the following:
(a) The designation of the series, which may be by distinguishing number,
letter or title.
(b) The number of shares of the series, which number the Board of Directors
may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding). If the number of shares of any series is so decreased, then
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the Preferred Stock Designation originally fixing the
number of shares of such series.
(c) The dividend rate on the shares of that series, whether dividends shall
be cumulative, and, if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series.
(d) Whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights.
(e) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for adjustment of
the conversion rate in such events as the Board of Directors shall determine.
(f) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates.
(g) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund.
<PAGE>
(h) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation, and the
relative rights of priority, if any, of payment of shares of that series.
(i) Any other relative rights, preferences and limitations of that series.
FIFTH: The name of the incorporator of the Corporation is Patrick C.
O'Connor, whose mailing address is c/o OnTrak Systems, Inc., 1010 Rincon Circle,
San Jose, California 95131.
SIXTH: In furtherance of, and not in limitation of, the powers conferred by
law, the Board of Directors of the Corporation is expressly authorized and
empowered to make, adopt, amend and repeal the Bylaws of the Corporation,
subject to the power of the stockholders of the Corporation entitled to vote
with respect thereto to adopt, alter, amend and repeal Bylaws made by the Board
of Directors.
SEVENTH: The number of directors of the Corporation shall be fixed by the
Bylaws of the Corporation and may be increased or decreased from time to time in
such a manner as may be prescribed by the Bylaws.
EIGHTH: The election of directors of the Corporation need not be by written
ballot unless a stockholder demands election by written ballot at a meeting of
stockholders and before voting begins or unless the Bylaws of the Corporation
shall so provide.
NINTH: A director of the Corporation shall not be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the GCL as the same exists or may hereafter be
amended. Neither any amendment, modification or repeal of the foregoing
sentence, nor the adoption of any provision inconsistent with this Article
Ninth, shall adversely affect any right or protection of a director of the
Corporation under this Article Ninth in respect of any act or omission occurring
prior to the time of such amendment, modification, repeal, or adoption of an
inconsistent provision.
TENTH: The Corporation reserves the right at any time and from time to time
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation or a Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by
applicable law, and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article
Tenth; PROVIDED, HOWEVER, that any amendment or repeal of Article Ninth of this
Certificate of Incorporation shall not adversely affect any right or protection
existing hereunder in respect of any act or omission occurring prior to such
amendment or repeal; and PROVIDED, FURTHER that no Preferred Stock Designation
shall be amended after the issuance of any shares of the series of Preferred
Stock created thereby, except in accordance with the terms of such Preferred
Stock Designation and the requirements of applicable law.
ELEVENTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
TWELFTH: The powers of the incorporator are to terminate upon the filing of
this Certificate of Incorporation with the Secretary of State of the State of
Delaware. The name and mailing address of the person who is to serve as the
initial director of the Corporation until the first annual meeting of
stockholders of the Corporation, or until his successor is elected and
qualified, is:
Patrick C. O'Connor
c/o OnTrak Systems, Inc.
1010 Rincon Circle
San Jose, CA 95131
2
<PAGE>
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed on this day of ,
1996.
--------------------------------------
Patrick C. O'Connor, Incorporator
3
<PAGE>
EXHIBIT C
BYLAWS
OF
ONTRAK SYSTEMS, INC.,
A DELAWARE CORPORATION
<PAGE>
BYLAWS OF
ONTRAK SYSTEMS, INC.,
A DELAWARE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
ARTICLE I CORPORATE OFFICES.................................................................................... 1
1.1 Registered Office........................................................................... 1
1.2 Other Offices............................................................................... 1
ARTICLE II MEETINGS OF STOCKHOLDERS............................................................................ 1
2.1 Place of Meetings........................................................................... 1
2.2 Annual Meetings............................................................................. 1
2.3 Special Meetings............................................................................ 1
2.4 Notice of Stockholders' Meetings............................................................ 1
2.5 Manner of Giving Notice; Affidavit of Notice................................................ 1
2.6 Quorum...................................................................................... 1
2.7 Adjourned Meeting; Notice................................................................... 2
2.8 Conduct of Business......................................................................... 2
2.9 Voting...................................................................................... 2
2.10 Waiver of Notice............................................................................ 2
2.11 Stockholder Action by Written Consent Without a Meeting..................................... 2
2.12 Record Date for Stockholder Notice.......................................................... 3
2.13 Proxies..................................................................................... 3
2.14 List of Stockholders Entitled to Vote....................................................... 3
2.15 Conduct of Business......................................................................... 3
ARTICLE III DIRECTORS.......................................................................................... 4
3.1 Powers...................................................................................... 4
3.2 Number of Directors......................................................................... 4
3.3 Election, Qualification and Term of Office of Directors..................................... 4
3.4 Resignation and Vacancies................................................................... 4
3.5 Place of Meetings; Meetings by Telephone.................................................... 5
3.6 Regular Meetings............................................................................ 5
3.7 Special Meetings; Notice.................................................................... 5
3.8 Quorum...................................................................................... 5
3.9 Waiver of Notice............................................................................ 5
3.10 Board Action by Written Consent Without a Meeting........................................... 5
3.11 Fees and Compensation of Directors.......................................................... 5
3.12 Approval of Loans to Officers............................................................... 6
3.13 Removal of Directors........................................................................ 6
ARTICLE IV COMMITTEES.......................................................................................... 6
4.1 Committees of Directors..................................................................... 6
4.2 Committee Minutes........................................................................... 7
4.3 Meetings and Action of Committees........................................................... 7
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
ARTICLE V OFFICERS............................................................................................. 7
<S> <C> <C> <C>
5.1 Officers.................................................................................... 7
5.2 Appointment of Officers..................................................................... 7
5.3 Subordinate Officers........................................................................ 7
5.4 Removal and Resignation of Officers......................................................... 7
5.5 Vacancies in Offices........................................................................ 7
5.6 Chairman of the Board....................................................................... 7
5.7 President................................................................................... 8
5.8 Vice Presidents............................................................................. 8
5.9 Secretary................................................................................... 8
5.10 Chief Financial Officer..................................................................... 8
5.11 Assistant Secretary......................................................................... 8
5.12 Assistant Treasurer......................................................................... 9
5.13 Authority and Duties of Officers............................................................ 9
5.14 Representation of Shares of Other Corporations.............................................. 9
ARTICLE VI INDEMNIFICATION..................................................................................... 9
6.1 Right to Indemnification.................................................................... 9
6.2 Prepayment of Expenses...................................................................... 9
6.3 Claims...................................................................................... 9
6.4 Nonexclusivity of Rights.................................................................... 9
6.5 Other Sources............................................................................... 10
6.6 Amendment or Repeal......................................................................... 10
6.7 Other Indemnification and Prepayment of Expenses............................................ 10
ARTICLE VII RECORDS AND REPORTS................................................................................ 10
7.1 Maintenance and Inspection of Records....................................................... 10
7.2 Inspection by Directors..................................................................... 10
7.3 Annual Statement to Stockholders............................................................ 10
ARTICLE VIII GENERAL MATTERS................................................................................... 11
8.1 Checks...................................................................................... 11
8.2 Execution of Corporate Contracts and Instruments............................................ 11
8.3 Stock Certificates; Partly Paid Shares...................................................... 11
8.4 Special Designation on Certificates......................................................... 11
8.5 Lost Certificates........................................................................... 11
8.6 Construction; Definitions................................................................... 12
8.7 Dividends................................................................................... 12
8.8 Fiscal Year................................................................................. 12
8.9 Seal........................................................................................ 12
8.10 Transfer of Stock........................................................................... 12
8.11 Stock Transfer Agreements................................................................... 12
8.12 Registered Stockholders..................................................................... 12
ARTICLE IX AMENDMENTS.......................................................................................... 12
</TABLE>
ii
<PAGE>
BYLAWS
OF
ONTRAK SYSTEMS, INC.,
A DELAWARE CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE. The registered office of the corporation shall be
in the City of Wilmington, County of New Castle, State of Delaware. The name of
the registered agent of the corporation at such location is The Prentice-Hall
Corporation System, Inc.
1.2 OTHER OFFICES. The board of directors may at any time establish other
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any
place, within or outside the State of Delaware, designated by the board of
directors. In the absence of any such designation, stockholders' meetings shall
be held at the registered office of the corporation.
2.2 ANNUAL MEETINGS. The annual meeting of stockholders shall be held each
year on a date and at a time designated by the board of directors. At the
meeting, directors shall be elected and any other proper business may be
transacted.
2.3 SPECIAL MEETINGS. A special meeting of the stockholders may be called
at any time by the board of directors, the chairman of the board, the president,
or by one or more stockholders holding shares in the aggregate entitled to cast
not less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the board
of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president or the
secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
who called the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after the receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings of
stockholders shall be in writing and shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder entitled to
vote at such meeting. The notice shall specify the place, date, and hour of the
meeting, and in the case of a special meeting, the purpose or purposes for which
the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice of any
meeting of stockholders, if mailed, is given when deposited in the United States
mail, postage prepaid, directed to the stockholder at his address as it appears
on the records of the corporation. An affidavit of the secretary or an assistant
secretary or of the transfer agent of the corporation that the notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
2.6 QUORUM. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders,
<PAGE>
then either (i) the chairman of the meeting or (ii) the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At such adjourned meeting
at which a quorum is present or represented, any business may be transacted that
might have been transacted at the meeting as originally noticed.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws or of the Certificate of
Incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of the question.
2.7 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time
or place, unless these bylaws otherwise require, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken. At the adjourned meeting the corporation may
transact any business that might have been transacted at the original meeting.
If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
2.8 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of business.
2.9 VOTING. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.12 of these bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners of stock and to voting trusts and other voting
agreements). Voting at meetings of stockholders need not be by written ballot
and, unless otherwise required by law, need not be conducted by inspectors of
election unless so determined by the holders of shares of stock having a
majority of the votes which could be cast by the holders of all outstanding
shares of stock entitled to vote thereon which are present in person or by proxy
at such meeting.
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder. At all meetings of stockholders for the election of
directors a plurality of the votes cast shall be sufficient to elect.
2.10 WAIVER OF NOTICE. Whenever notice is required to be given under any
provision of the General Corporation Law of Delaware or of the certificate of
incorporation or these bylaws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless
otherwise provided in the certificate of incorporation, any action required by
this article to be taken at any annual or special meeting of stockholders of the
corporation, or any action that may be taken at any annual or special meeting of
such stockholders, may be taken without a meeting, without prior notice, and
without a vote if a consent in writing, setting forth the action so taken, is
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is
2
<PAGE>
consented to is such as would have required the filing of a certificate under
any section of the General Corporation Law of Delaware if such action had been
voted on by stockholders at a meeting thereof, then the certificate filed under
such section shall state, in lieu of any statement required by such section
concerning any vote of stockholders, that written notice and written consent
have been given as provided in Section 228 of the General Corporation Law of
Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by a
written proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic or facsimile transmission or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(c) of the General Corporation Law of
Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. Such list shall presumptively determine the identify
of the stockholders entitled to vote at the meeting and the number of shares
held by each of them.
2.15 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders
shall determine the order of business and the procedures at the meeting,
including such matters as the regulation of the manner of voting and the conduct
of business.
3
<PAGE>
ARTICLE III
DIRECTORS
3.1 POWERS. Subject to the provisions of the General Corporation Law of
Delaware and any limitation in the certificate of incorporation or these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
3.2 NUMBER OF DIRECTORS. The board of directors shall consist of not less
than four (4) nor more than seven (7) members, with the exact number thereof to
be determined by resolution of the board of directors. The exact number of
directors shall initially be five (5), until changed by a resolution of the
board of directors or by an amendment to this bylaw.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. Except as
provided in Section 3.4 of these bylaws, directors shall be elected at each
annual meeting of stockholders to hold office until the next annual meeting.
Directors need not be stockholders unless so required by the certificate of
incorporation or these bylaws, wherein other qualifications for directors may be
prescribed. Each director, including a director elected to fill a vacancy, shall
hold office until his successor is elected and qualified or until his earlier
resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES. Any director may resign at any time upon
written notice to the attention of the secretary of the corporation. When one or
more directors so resigns and the resignation is effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this section in the filling
of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any increase in
the authorized number of directors elected by all of the stockholders having the
right to vote as a single class may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series thereof
are entitled to elect one or more directors by the provisions of the certificate
of incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or any executor, administrator, trust or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent (10%) of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
4
<PAGE>
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The board of directors of
the corporation may hold meetings, both regular and special, either within or
outside the State of Delaware. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 REGULAR MEETINGS. Regular meetings of the board of directors may be
held at such times and at such places as shall from time to time be determined
by the board, and if so determined notices thereof need not be given.
3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the
board, the president, or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
facsimile, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by facsimile, it shall be delivered personally or
by telephone or to the facsimile telephone number at least twenty-four (24)
hours before the time of the holding of the meeting. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the office of the director who the person giving the notice has reason
to believe will promptly communicate it to the director. The notice need not
specify the purpose or the place of the meeting, if the meeting is to be held at
the principal executive office of the corporation.
3.8 QUORUM. At all meetings of the board of directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board of directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE. Whenever notice is required to be given under any
provision of the General Corporation Law of Delaware or of the certificate of
incorporation or these bylaws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor other purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise
restricted by the certificate of incorporation or these bylaws, any action
required or permitted to be taken at any meeting of the board of directors, or
of any committee thereof, may be taken without a meeting if all members of the
board or committee, as the case may be, consent thereto in writing and the
writing or writings are filed with the minutes of proceedings of the board or
committee.
3.11 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by
the certificate of incorporation or these bylaws, the board of directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance of each meeting of the board of
directors
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and may be paid a fixed sum for attendance at each meeting of the board of
directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
3.12 APPROVAL OF LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a director of the corporation or its subsidiaries, whenever, in the judgment
of the directors, such loan, guaranty or assistance may reasonably be expected
to benefit the corporation. The loan, guaranty or other assistance may be with
or without interest and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, by the
certificate of incorporation or by these bylaws, any director or the entire
board of directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors;
provided, however, that, so long as shareholders of the corporation are entitled
to cumulative voting, if less than the entire board is to be removed, no
director may be removed without cause if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election of
the entire board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS. The board of directors may, by resolution
passed by a majority of the whole board, designate one or more committees, with
each committee to consist of one or more of the directors of the corporation.
The board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors or in the bylaws of the
corporation, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority to (i) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designation
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), (ii) adopt an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease
or exchange of all or substantially all of the corporation's property and
assets, (iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
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4.2 COMMITTEE MINUTES. Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees
shall be governed by, and held and taken in accordance with, the provisions of
Article III of these bylaws, Section 3.5 (place of meetings and meetings by
telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and
notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10
(action without a meeting), with such changes in the context of those bylaws as
are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS. The officers of the corporation shall be a president, a
secretary, and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more vice
presidents, one or more assistant vice presidents, one or more assistant
secretaries, and one or more assistant treasurers, and any such other officers
as may be appointed in accordance with the provisions of Section 5.3 of these
bylaws. Any number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Sections 5.3
or 5.5 of these bylaws, shall be appointed by the board of directors, subject to
the rights, if any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS. The board of directors may appoint, or empower
the president to appoint, such other officers and agents as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these bylaws or as
the board of directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of
an officer under any contract of employment, any officer may be removed, either
with or without cause, by an affirmative vote of the majority of the board of
directors at any regular or special meeting of the board or, except in the case
of an officer chosen by the board of directors, by any officer upon whom such
power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
5.6 CHAIRMAN OF THE BOARD. The chairman of the board, or the president if
there is no chairman of the board, shall preside at all meetings of the
stockholders and of the board of directors. The chairman of the board or the
president, as the case may be, shall be responsible for the general management
of the affairs of the corporation and shall perform all duties incidental to his
office which may be required by law and all such other duties as are properly
required of him by the board of directors. Except where by law the signature of
the president is required, the chairman of the board shall possess the same
power as the president to sign all certificates, contracts, and other
instruments of the corporation which may be authorized by the board of
directors. The chairman or the president, as the case may be, shall make reports
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to the board of directors and the stockholders, and shall perform all such other
duties as are properly required of him by the board of directors. The chairman
or the president shall see that all orders and resolutions of the board of
directors and of any committee thereof are carried into effect.
5.7 PRESIDENT. The president shall act in a general executive capacity and
oversee the administration and operation of the corporation's business and
general supervision of its policies and affairs. The president shall, in the
absence of or because of the inability to act of the chairman of the board,
perform all duties of the chairman of the board and preside at all meetings of
stockholders and of the board of directors. The president may sign, alone or
with the secretary, or an assistant secretary, or any other proper officer of
the corporation authorized by the board of directors, certificates, contracts,
and other instruments of the corporation as authorized by the board of
directors.
5.8 VICE PRESIDENTS. In the absence or disability of the president, the
vice presidents, if any, in order of their rank as fixed by the board of
directors or, if not ranked, a vice president designated by the board of
directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors, these bylaws, the president or the chairman of the board.
5.9 SECRETARY. The secretary shall keep or cause to be kept, at the
principal executive office of the corporation or such other place as the board
of directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall be the
treasurer of the corporation. The chief financial officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY. The assistant secretary, or, if there is more
than one, the assistant secretaries in the order determined by the stockholders
or board of directors (or if there be no such determination, then in the order
of their election) shall, in the absence of the secretary or in the event of his
or her inability or refusal to act, perform the duties and exercise the powers
of the secretary and shall perform such other duties and have such other powers
as may be prescribed by the board of directors or these bylaws.
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5.12 ASSISTANT TREASURER. The assistant treasurer, or, if there is more
than one, the assistant treasurers, in the order determined by the stockholders
or board of directors (or if there be no such determination, then in the order
of their election), shall, in the absence of the chief financial officer or in
the event of his or her inability or refusal to act, perform the duties and
exercise the powers of the chief financial officer and shall perform such other
duties and have such other powers as may be prescribed by the board of directors
or these bylaws.
5.13 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing
authority and duties, all officers of the corporation shall respectively have
such authority and perform such duties in the management of the business of the
corporation as may be designated from time to time by the board of directors or
the stockholders.
5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the
board, the president, the chief financial officer, the secretary of this
corporation, or any other person authorized by the board of directors or the
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VI
INDEMNIFICATION
6.1 RIGHT TO INDEMNIFICATION. The corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person (an "Indemnitee") who was or is
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he or she, or a person for whom he or
she is the legal representative, is or was a director of the corporation or,
while a director or officer of the corporation, is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or nonprofit
entity, including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees) reasonably
incurred by such Indemnitee. Notwithstanding the preceding sentence, except as
otherwise provided in Section 6.3, the corporation shall be required to
indemnify an Indemnitee in connection with a proceeding (or part thereof)
commenced by such Indemnitee only if the commencement of such proceeding (or
part thereof) by the Indemnitee was authorized by the board of directors of the
corporation.
6.2 PREPAYMENT OF EXPENSES. The corporation shall pay the expenses
(including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided, however, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article VI or otherwise.
6.3 CLAIMS. If a claim for indemnification or payment of expenses under
this Article VI is not paid in full within sixty days after a written claim
therefor by the Indemnitee has been received by the corporation, the Indemnitee
may file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action the corporation shall have the burden of proving that
the Indemnitee is not entitled to the requested indemnification or payment of
expenses under applicable law.
6.4 NONEXCLUSIVITY OF RIGHTS. The rights conferred on any Indemnitee by
this Article VI shall not be exclusive of any other rights which such Indemnitee
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, these bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
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6.5 OTHER SOURCES. The corporation's obligation, if any, to indemnify or
to advance expenses to any Indemnitee who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any amount
such Indemnitee may collect as indemnification or advancement of expenses from
such other corporation, partnership, joint venture, trust, enterprise or
nonprofit enterprise.
6.6 AMENDMENT OR REPEAL. Any repeal or modification of the foregoing
provisions of this Article VI shall not adversely affect any right or protection
hereunder of any Indemnitee in respect of any act or omission occurring prior to
the time of such repeal or modification.
6.7 OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES. This Article VI
shall not limit the right of the corporation, to the extent and in the manner
permitted by law, to indemnify and to advance expenses to persons other than
Indemnitees when and as authorized by appropriate corporate action.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS. The corporation shall, either
at its principal executive office or at such place or places as designated by
the board of directors, keep a record of its stockholders listing their names
and addresses and the number and class of shares held by each stockholder, a
copy of these bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent in the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine
the corporation's stock ledger, a list of its stockholders, and its other books
and records for a purpose reasonably related to his position as a director. The
Court of Chancery is hereby vested with the exclusive jurisdiction to determine
whether a director is entitled to the inspection sought. The Court may summarily
order the corporation to permit the director to inspect any and all books and
records, the stock ledger, and the stock list and to make copies or extracts
therefrom. The Court may, in its discretion, prescribe any limitations or
conditions with reference to the inspection, or award such other and further
relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS. The board of directors shall present
at each annual meeting, and at any special meeting of the stockholders when
called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
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ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS. From time to time, the board of directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The board of
directors, except as otherwise provided in these bylaws, may authorize any
officer or officers, or agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation; such authority
may be general or confined to specific instances. Unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of the corporation
shall be represented by certificates, provided that the board of directors of
the corporation may provide by resolution or resolutions that some or all of any
or all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
certificate is surrendered to the corporation. Notwithstanding the adoption of
such a resolution by the board of directors, every holder of stock represented
by certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the corporation by
the chairman or vice-chairman of the board of directors, or the president or
vice president, and by the chief financial officer or an assistant treasurer, or
the secretary or an assistant secretary of the corporation representing the
number of shares registered in certificate form. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
The corporation may issue the whole or any part of its shares as partly paid
and subject to call for the remainder of the consideration to be paid therefor.
Upon the face or back of each stock certificate issued to represent any such
partly paid shares, upon the books and records of the corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be
paid therefor and the amount paid thereon shall be stated. Upon the declaration
of any dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the corporation is authorized
to issue more than one class of stock or more than one series of any class, then
the powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights shall be set forth in full or summarized on the face of back of the
certificate that the corporation shall issue to represent such class or series
of stock; provided, however, that, except as otherwise provided in Section 202
of the General Corporation Law of Delaware, in lieu of the foregoing
requirements there may be set forth on the face or back of the certificate that
the corporation shall issue to represent such class or series of stock a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new
certificates for shares shall be issued to replace a previously issued
certificate unless the latter is surrendered to the corporation and cancelled at
the same time. The corporation may issue a new certificate of stock or
uncertificated shares in
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the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the
general provisions, rules of construction, and definitions in the Delaware
General Corporation Law shall govern the construction of these bylaws. Without
limiting the generality of this provision, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
8.7 DIVIDENDS. The directors of the corporation, subject to any
restrictions contained in (i) the General Corporation Law of Delaware or (ii)
the corporation's certificate of incorporation, may declare and pay dividends
upon the shares of its capital stock. Dividends may be paid in cash, in
property, or in shares of the corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR. The fiscal year of the corporation shall be fixed by
resolution of the board of directors and may be changed by the board of
directors.
8.9 SEAL. The corporation may adopt a corporate seal, which shall be
adopted and which may be altered by the board of directors, and may use the same
by causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
8.10 TRANSFER OF STOCK. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS. The corporation shall have power to enter
into and perform any agreement with any number of stockholders of any one or
more classes of stock of the corporation to restrict the transfer of shares of
stock of the corporation of any one or more classes owned by such stockholders
in any manner not prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner, shall be entitled to
hold liable for calls and assessments the person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of another person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
ONTRAK SYSTEMS, INC., A DELAWARE CORPORATION
CERTIFICATE BY SECRETARY OF ADOPTION BY BOARD OF DIRECTORS
The undersigned hereby certifies that he is the duly elected, qualified, and
acting Secretary of OnTrak Systems, Inc., a Delaware corporation, and that the
foregoing bylaws, comprising ( ) pages, were adopted as the
Bylaws of the corporation as of , 1996, by the Board of Directors
of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal as of the day of , 1996.
- - - ------------------------------
, Secretary
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ONTRAK SYSTEMS, INC.
1996 EQUITY INCENTIVE PLAN
ONTRAK SYSTEMS, INC. hereby adopts the OnTrak Systems, Inc. 1996 Equity
Incentive Plan, effective as of November 21, 1996, as follows:
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 BACKGROUND AND EFFECTIVE DATE. The Plan permits the grant of
Nonstatutory Stock Options, Incentive Stock Options, Restricted Stock, and
Performance Shares. The Plan is effective as of November 21, 1996, subject
to ratification by an affirmative vote of the holders of a majority of the
Shares which are present in person or by proxy and entitled to vote at the
1996 Annual Meeting of Stockholders. Awards may be granted prior to the
receipt of such vote, but such grants shall be null and void if such vote is
not in fact received.
1.2 PURPOSE OF THE PLAN. The Plan is intended to attract, motivate, and
retain (1) employees of the Company and its Affiliates, (2) consultants who
provide significant services to the Company and its Affiliates, and (3)
directors of the Company who are not employees of either the Company or any
Affiliate. The Plan also is designed to encourage stock ownership by
Participants, thereby aligning their interests with those of the Company's
shareholders.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 "1934 ACT" means the Securities Exchange Act of 1934, as amended.
Reference to a specific section of the 1934 Act or regulation thereunder shall
include such section or regulation, any valid regulation promulgated under such
section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such section or regulation.
2.2 "AFFILIATE" means any corporation or any other entity (including, but
not limited to, partnerships and joint ventures) controlling, controlled by, or
under common control with the Company.
2.3 "ANNUAL REVENUE" means the Company's or a business unit's net sales
for the Fiscal Year, determined in accordance with generally accepted accounting
principles;
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provided, however, that prior to the Fiscal Year, the Committee shall determine
whether any significant item(s) shall be excluded or included from the
calculation of Annual Revenue with respect to one or more Participants.
2.4 "AWARD" means, individually or collectively, a grant under the Plan
of Nonstatutory Stock Options, Incentive Stock Options, Restricted Stock, or
Performance Shares.
2.5 "AWARD AGREEMENT" means the written agreement setting forth the terms
and provisions applicable to each Award granted under the Plan.
2.6 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.
2.7 "CODE" means the Internal Revenue Code of 1986, as amended. Reference
to a specific section of the Code or regulation thereunder shall include such
section or regulation, any valid regulation promulgated under such section, and
any comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.
2.8 "COMMITTEE" means the committee appointed by the Board (pursuant to
Section 3.1) to administer the Plan.
2.9 "COMPANY" means OnTrak Systems, Inc., a California corporation, or any
successor thereto. With respect to the definitions of the Performance Goals,
the Committee may determine that "Company" means OnTrak Systems, Inc. and its
consolidated subsidiaries.
2.10 "CONSULTANT" means any consultant, independent contractor, or other
person who provides significant services to the Company or its Affiliates, but
who is neither an Employee nor a Director.
2.11 "CONTROLLABLE PROFITS" means as to any Fiscal Year, a business unit's
Annual Revenue minus (a) cost of sales, (b) research, development, and
engineering expense, (c) marketing and sales expense, (d) general and
administrative expense, (e) extended receivables expense, and (f) shipping
requirement deviation expense.
2.12 "CUSTOMER SATISFACTION MBOS" means as to any Participant, the
objective and measurable individual goals set by a "management by objectives"
process and approved by the Committee, which goals relate to the satisfaction of
external or internal customer requirements.
2.13 "DIRECTOR" means any individual who is a member of the Board of
Directors of the Company.
2.14 "DISABILITY" means a permanent and total disability within the meaning
of Code Section 22(e)(3), provided that in the case of Awards other than
Incentive Stock
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Options, the Committee in its discretion may determine whether a permanent and
total disability exists in accordance with uniform and non-discriminatory
standards adopted by the Committee from time to time.
2.15 "EARNINGS PER SHARE" means as to any Fiscal Year, the Company's Net
Income or a business unit's Pro Forma Net Income, divided by a weighted average
number of common shares outstanding and dilutive common equivalent shares deemed
outstanding.
2.16 "EMPLOYEE" means any employee of the Company or of an Affiliate,
whether such employee is so employed at the time the Plan is adopted or becomes
so employed subsequent to the adoption of the Plan.
2.17 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended. Reference to a specific section of ERISA or regulation thereunder
shall include such section or regulation, any valid regulation promulgated under
such section, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such section or regulation.
2.18 "EXERCISE PRICE" means the price at which a Share may be purchased by
a Participant pursuant to the exercise of an Option.
2.19 "FAIR MARKET VALUE" means the last quoted per share selling price for
Shares on the relevant date, or if there were no sales on such date, the
arithmetic mean of the highest and lowest quoted selling prices on the nearest
day before and the nearest day after the relevant date, as determined by the
Committee. Notwithstanding the preceding, for federal, state, and local income
tax reporting purposes, fair market value shall be determined by the Committee
(or its delegate) in accordance with uniform and nondiscriminatory standards
adopted by it from time to time.
2.20 "FISCAL YEAR" means the fiscal year of the Company.
2.21 "GRANT DATE" means, with respect to an Award, the date that the Award
was granted.
2.22 "INCENTIVE STOCK OPTION" means an Option to purchase Shares which is
designated as an Incentive Stock Option and is intended to meet the requirements
of Section 422 of the Code.
2.23 "INDIVIDUAL MBOS" means as to a Participant, the objective and
measurable goals set by a "management by objectives" process and approved by the
Committee (in its discretion).
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2.24 "NET INCOME" means as to any Fiscal Year, the income after taxes of
the Company for the Fiscal Year determined in accordance with generally accepted
accounting principles provided that prior to the Fiscal Year, the Committee
shall determine whether any significant item(s) shall be included or excluded
from the calculation of Net Income with respect to one or more Participants.
2.25 "NEW ORDERS" means as to any Fiscal Year, the firm orders for a
system, product, part, or service that are being recorded for the first time as
defined in the Company's Order Recognition Policy.
2.26 "NONEMPLOYEE DIRECTOR" means a Director who is not an employee of
either the Company or of any Affiliate.
2.27 "NONSTATUTORY STOCK OPTION" means an option to purchase Shares which
is not intended to be an Incentive Stock Option.
2.28 "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option.
2.29 "PARTICIPANT" means an Employee, Consultant, or Nonemployee Director
who has an outstanding Award.
2.30 "PERFORMANCE GOALS" means the goal(s) (or combined goal(s)) determined
by the Committee (in its discretion) to be applicable to a Participant with
respect to an Award. As determined by the Committee, the Performance Goals
applicable to an Award may provide for a targeted level or levels of achievement
using one or more of the following measures: (a) Annual Revenue, (b)
Controllable Profits, (c) Customer Satisfaction MBOs, (d) Earnings Per Share,
(e) Individual MBOs, (f) Net Income, (g) New Orders, (h) Pro Forma Net Income,
(i) Return on Designated Assets, and (j) Return on Sales. The Performance Goals
may differ from Participant to Participant and from Award to Award.
2.31 "PERFORMANCE SHARE" means an Award granted to a Participant pursuant
to Section 7.
2.32 "PERIOD OF RESTRICTION" means the period during which the transfer of
Shares of Restricted Stock are subject to restrictions and, therefore, the
Shares are subject to a substantial risk of forfeiture. As provided in
Section 6, such restrictions may be based on the passage of time, the
achievement of target levels of performance, or the occurrence of other events
as determined by the Committee, in its discretion.
2.33 "PLAN" means the OnTrak Systems, Inc. 1996 Equity Incentive Plan, as
set forth in this instrument and as hereafter amended from time to time.
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2.34 "PRO FORMA NET INCOME" means as to any business unit for any Fiscal
Year, the Controllable Profits of such business unit, minus allocations of
designated corporate expenses.
2.35 "RESTRICTED STOCK" means an Award granted to a Participant pursuant to
Section 6.
2.36 "RETIREMENT" means, in the case of an Employee, a Termination of
Service by reason of the Employee's retirement at or after his or her normal
retirement date. With respect to a Consultant, no Termination of Service shall
be deemed to be on account of "Retirement." With respect to a Nonemployee
Director, "Retirement" means termination of service on the Board at or after age
65.
2.37 "RETURN ON DESIGNATED ASSETS" means as to any Fiscal Year, the Pro
Forma Net Income of a business unit, divided by the average of beginning and
ending business unit designated assets, or Net income of the Company,divided by
the average of beginning and ending designated corporate assets.
2.38 "RETURN ON SALES" means as to any Fiscal Year, the percentage equal to
the Company's Net Income or the business unit's Pro Forma Net Income divided by
the Company's or the business unit's Annual Revenue.
2.39 "RULE 16b-3" means Rule 16b-3 promulgated under the 1934 Act, and any
future regulation amending, supplementing or superseding such regulation.
2.40 "SECTION 16 PERSON" means a person who, with respect to
the Shares, is subject to Section 16 of the 1934 Act.
2.41 "SHARES" means the shares of Common Stock of the Company.
2.42 "SUBSIDIARY" means any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2.43 "TERMINATION OF SERVICE" means (a) in the case of an Employee, a
cessation of the employee-employer relationship between an employee and the
Company or an Affiliate for any reason, including, but not by way of limitation,
a termination by resignation,
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discharge, death, Disability, Retirement, or the disaffiliation of an Affiliate,
but excluding any such termination where there is a simultaneous reemployment by
the Company or an Affiliate; and (b) in the case of a Consultant, a cessation of
the service relationship between a Consultant and the Company or an Affiliate
for any reason, including, but not by way of limitation, a termination by
resignation, discharge, death, Disability, or the disaffiliation of an
Affiliate, but excluding any such termination where there is a simultaneous
re-engagement of the consultant by the Company or an Affiliate.
SECTION 3
ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Committee. The
Committee shall consist of not less than two (2) Directors. The members of the
Committee shall be appointed from time to time by, and shall serve at the
pleasure of, the Board of Directors. The Committee shall be comprised solely of
Directors who both are (a) "non-employee directors" under Rule 16b-3, and (b)
"outside directors" under Section 162(m) of the Code.
3.2 AUTHORITY OF THE COMMITTEE. It shall be the duty of the Committee
to administer the Plan in accordance with the Plan's provisions. The
Committee shall have all powers and discretion necessary or appropriate to
administer the Plan and to control its operation, including, but not limited
to, the power to (a) determine which Employees and Consultants shall be
granted Awards, (b) prescribe the terms and conditions of the Awards (other
than the Options granted to Nonemployee Directors), (c) interpret the Plan
and the Awards, (d) adopt such procedures and subplans as are necessary or
appropriate to permit participation in the Plan by Employees, Consultants and
Directors who are foreign nationals or employed outside of the United States,
(e) adopt rules for the administration, interpretation and application of the
Plan as are consistent therewith, and (f) interpret, amend or revoke any such
rules.
3.3 DELEGATION BY THE COMMITTEE. The Committee, in its sole discretion
and on such terms and conditions as it may provide, may delegate all or any part
of its authority and powers under the Plan to one or more directors or officers
of the Company; provided, however, that the Committee may not delegate its
authority and powers (a) with respect to Section 16 Persons, or (b) in any way
which would jeopardize the Plan's qualification under Section 162(m) of the Code
or Rule 16b-3.
3.4 NONEMPLOYEE DIRECTOR OPTIONS. Notwithstanding any contrary
provision of this Section 3, the Board shall administer grants of Options to
Nonemployee Directors, and the Committee shall exercise no discretion with
respect to grants of Options to Nonemployee Directors. In the Board's
administration of Options granted to Nonemployee Directors, the Board shall
have all of the authority and discretion otherwise granted to the Committee
with respect to the administration of the Plan.
3.5 DECISIONS BINDING. All determinations and decisions made by the
Committee, the Board, and any delegate of the Committee pursuant to the
provisions of
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the Plan shall be final, conclusive, and binding on all persons, and shall be
given the maximum deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3,
the total number of Shares available for grant under the Plan shall not exceed
2,000,000. Shares granted under the Plan may be either authorized but unissued
Shares or treasury Shares.
4.2 LAPSED AWARDS. If an Award is settled in cash, or is cancelled,
terminates, expires, or lapses for any reason, any Shares subject to such
Award again shall be available to be the subject of an Award.
4.3 ADJUSTMENTS IN AWARDS AND AUTHORIZED SHARES. In the event of any
merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, share combination, or other change in
the corporate structure of the Company affecting the Shares, the Committee
shall adjust the number and class of Shares which may be delivered under the
Plan, the number, class, and price of Shares subject to outstanding Awards,
and the numerical limits of Sections 5.1, 6.1, and 7.1, in such manner as the
Committee (in its sole discretion) shall determine to be appropriate to
prevent the dilution or diminution of such Awards. In the case of Options
granted to Nonemployee Directors, the foregoing adjustments shall be made by
the Board, and any such adjustments also shall apply to future grants.
Notwithstanding the preceding, the number of Shares subject to any Award
always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Employees and Consultants at any time and from time
to time as determined by the Committee in its sole discretion, and Options
may be granted to Nonemployee Directors at any time and from time to time as
determined by the Board in its sole discretion. The Committee, in its sole
discretion, shall determine the number of Shares subject to each Option,
provided that during any Fiscal Year, the employee who serves as Chief
Executive Officer of the Company shall not be granted Options covering more
than 800,000 Shares and no other Participant shall be granted Options
covering more than 300,000 Shares. The Committee may grant Incentive Stock
Options, Nonstatutory Stock Options, or a combination thereof.
5.2 AWARD AGREEMENT. Each Option shall be evidenced by an Award Agreement
that shall specify the Exercise Price, the expiration date of the Option, the
number of Shares to which the Option pertains, any conditions to exercise of the
option, and such other terms and conditions as the Committee, in its discretion,
shall determine. The
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Award Agreement shall also specify whether the Option is intended to be an
Incentive Stock Option or a Nonstatutory Stock Option.
5.3 EXERCISE PRICE. Subject to the provisions of this Section 5.3, the
Exercise Price for each Option shall be determined by the Committee in its sole
discretion.
5.3.1 NONSTATUTORY STOCK OPTIONS. In the case of a Nonstatutory
Stock Option, the Exercise Price shall be not less than one hundred percent
(100%) of the Fair Market Value of a Share on the Grant Date.
5.3.2 INCENTIVE STOCK OPTIONS. In the case of an Incentive Stock
Option, the Exercise Price shall be not less than one hundred percent (100%) of
the Fair Market Value of a Share on the Grant Date; provided, however, that if
on the Grant Date, the Employee (together with persons whose stock ownership is
attributed to the Employee pursuant to Section 424(d) of the Code) owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any of its Subsidiaries, the Exercise Price shall be not
less than one hundred and ten percent (110%) of the Fair Market Value of a Share
on the Grant Date.
5.3.3 SUBSTITUTE OPTIONS. Notwithstanding the provisions of
Sections 5.3.1 and 5.3.2, in the event that the Company or an Affiliate
consummates a transaction described in Section 424(a) of the Code (e.g., the
acquisition of property or stock from an unrelated corporation), persons who
become Employees or Consultants on account of such transaction may be granted
Options in substitution for options granted by their former employer. If such
substitute options are granted, the Committee, in its sole discretion and
consistent with Section 424(a) of the Code, may determine that such substitute
Options shall have an exercise price less than one hundred percent (100%) of the
Fair market Value of the Shares on the Grant Date.
5.4 EXPIRATION OF OPTIONS.
5.4.1 EXPIRATION DATES. Each Option shall terminate no later than
the first to occur of the following events:
(a) The date for termination of the Option set forth in
the written Award Agreement; or
(b) The expiration of ten (10) years from the Grant Date; or
(c) The expiration of one (1) year from the date of the
Optionee's Termination of Service for a reason other than the Optionee's death,
Disability or Retirement; or
(d) The expiration of three (3) years from the date of the
Optionee's Termination of Service by reason of Disability; or
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(e) The expiration of three (3) years from the date of the
Optionee's Retirement (except as provided in Section 5.8.2 regarding Incentive
Stock Options).
5.4.2 DEATH OF OPTIONEE. Notwithstanding Section 5.4.1, if an
Optionee dies prior to the expiration of his or her Options, the Committee, in
its discretion, may provide that his or her Options shall be exercisable for up
to three (3) years after the date of death.
5.4.3 COMMITTEE DISCRETION. Subject to the limits of
Sections 5.4.1 and 5.4.2, the Committee, in its sole discretion, (a) shall
provide in each Award Agreement when each Option expires and becomes
unexercisable, and (b) may, after an Option is granted, extend the maximum term
of the Option (subject to Section 5.8.4 regarding Incentive Stock Options).
5.5 EXERCISABILITY OF OPTIONS. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall determine in its sole discretion. After an Option is
granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option. However, in no event may any Option granted to a
Section 16 Person be exercisable until at least six (6) months following the
Grant Date (or such shorter period as may be permissible while maintaining
compliance with Rule 16b-3).
5.6 PAYMENT. Options shall be exercised by the Participant's delivery of
a written notice of exercise to the Chief Financial Officer of the Company (or
its designee), setting forth the number of Shares with respect to which the
Option is to be exercised, accompanied by full payment for the Shares.
Upon the exercise of any Option, the Exercise Price shall be payable
to the Company in full in cash or its equivalent. The Committee, in its sole
discretion, also may permit exercise (a) by tendering previously acquired Shares
having an aggregate Fair Market value at the time of exercise equal to the total
Exercise Price, or (b) by any other means which the Committee, in its sole
discretion, determines to both provide legal consideration for the Shares, and
to be consistent with the purposes of the Plan.
As soon as practicable after receipt of a written notification of
exercise and full payment for the Shares purchased, the Company shall deliver to
the Participant (or the Participant's designated broker), Share certificates
(which may be in book entry form) representing such Shares.
5.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option as it
may deem advisable, including, but not limited to, restrictions related to
applicable Federal securities laws, the requirements of any national securities
exchange or system upon which Shares are then listed or traded, or any blue sky
or state securities laws.
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5.8 CERTAIN ADDITIONAL PROVISIONS FOR INCENTIVE STOCK OPTIONS.
5.8.1 EXERCISABILITY. The aggregate Fair Market Value (determined
on the Grant Date(s)) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by any Employee during any calendar
year (under all plans of the Company and its Subsidiaries) shall not exceed
$100,000.
5.8.2 TERMINATION OF SERVICE. No Incentive Stock Option may be
exercised more than three (3) months after the Participant's Termination of
Service for any reason other than Disability or death, unless (a) the
Participant dies during such three-month period, and (b) the Award Agreement or
the Committee permits later exercise. No Incentive Stock Option may be
exercised more than one (1) year after the Participant's termination of
employment on account of Disability, unless (a) the Participant dies during such
one-year period, and (b) the Award Agreement or the Committee permit later
exercise.
5.8.3 COMPANY AND SUBSIDIARIES ONLY. Incentive Stock Options may
be granted only to persons who are employees of the Company or a Subsidiary on
the Grant Date.
5.8.4 EXPIRATION. No Incentive Stock Option may be exercised
after the expiration of ten (10) years from the Grant Date; provided, however,
that if the Option is granted to an Employee who, together with persons whose
stock ownership is attributed to the Employee pursuant to Section 424(d) of the
Code, owns stock possessing more than 10% of the total combined voting power of
all classes of the stock of the Company or any of its Subsidiaries, the Option
may not be exercised after the expiration of five (5) years from the Grant Date.
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SECTION 6
RESTRICTED STOCK
6.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted stock to Employees and Consultants in such amounts as the Committee,
in its sole discretion, shall determine. The Committee, in its sole discretion,
shall determine the number of Shares to be granted to each Participant, provided
that during any Fiscal Year, no Participant shall receive more than 20,000
Shares of Restricted Stock.
6.2 RESTRICTED STOCK AGREEMENT. Each Award of Restricted Stock shall be
evidenced by an Award Agreement that shall specify the Period of Restriction,
the number of Shares granted, and such other terms and conditions as the
Committee, in its sole discretion, shall determine. Unless the Committee
determines otherwise, Shares of Restricted Stock shall be held by the Company as
escrow agent until the restrictions on such Shares have lapsed.
6.3 TRANSFERABILITY. Except as provided in this Section 6, Shares of
Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the end of the applicable Period of Restriction.
However, in no event may the restrictions on Restricted Stock granted to a
Section 16 Person lapse prior to six (6) months following the Grant Date (or
such shorter period as may be permissible while maintaining compliance with
Rule 16b-3).
6.4 OTHER RESTRICTIONS. The Committee, in its sole discretion, may impose
such other restrictions on Shares of Restricted Stock as it may deem advisable
or appropriate, in accordance with this Section 6.4.
6.4.1 GENERAL RESTRICTIONS. The Committee may set restrictions
based upon the achievement of specific performance objectives (Company-wide,
divisional, or individual), applicable Federal or state securities laws, or any
other basis determined by the Committee in its discretion.
6.4.2 SECTION 162(M) PERFORMANCE RESTRICTIONS. For purposes of
qualifying grants of Restricted Stock as "performance-based compensation" under
Section 162(m) of the Code, the Committee, in its discretion, may set
restrictions based upon the achievement of Performance Goals. The Performance
Goals shall be set by the Committee on or before the latest date permissible to
enable the Restricted Stock to qualify as "performance-based compensation" under
Section 162(m) of the Code. In granting Restricted Stock which is intended to
qualify under Code Section 162(m), the Committee shall follow any procedures
determined by it from time to time to be necessary or appropriate to ensure
qualification of the Restricted Stock under Code Section 162(m) (e.g., in
determining the Performance Goals).
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6.4.3 LEGEND ON CERTIFICATES. The Committee, in its discretion,
may legend the certificates representing Restricted Stock to give appropriate
notice of such restrictions. For example, the Committee may determine that some
or all certificates representing Shares of Restricted Stock shall bear the
following legend:
"The sale or other transfer of the shares of stock represented by
this certificate, whether voluntary, involuntary or by operation of
law, is subject to certain restrictions on transfer as set forth in
the OnTrak Systems, Inc. 1996 Equity Incentive Plan, and in a
Restricted Stock Agreement. A copy of the Plan and such Restricted
Stock Agreement may be obtained from the Secretary of OnTrak Systems,
Inc."
6.5 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this
Section 6, Shares of Restricted Stock covered by each Restricted Stock grant
made under the Plan shall be released from escrow as soon as practicable after
the last day of the Period of Restriction. The Committee, in its discretion,
may accelerate the time at which any restrictions shall lapse, and remove any
restrictions; provided, however, that the Period of Restriction on Shares
granted to a Section 16 Person may not lapse until at least six (6) months after
the Grant Date (or such shorter period as may be permissible while maintaining
compliance with Rule 16b-3). After the restrictions have lapsed, the
Participant shall be entitled to have any legend or legends under Section 6.4.3
removed from his or her Share certificate, and the Shares shall be freely
transferable by the Participant.
6.6 VOTING RIGHTS. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares, unless the Committee determines otherwise.
6.7 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock shall be entitled to receive all
dividends and other distributions paid with respect to such Shares unless
otherwise provided in the Award Agreement. If any such dividends or
distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and forfeitability as the Shares of Restricted
Stock with respect to which they were paid.
With respect to Restricted Stock granted to a Section 16 Person, any
dividend or distribution that constitutes a "derivative security" or an "equity
security" under Section 16 of the 1934 Act shall be subject to a Period of
Restriction equal to the longer of: (a) the remaining Period of Restriction on
the Shares of Restricted Stock with respect to which the dividend or
distribution is paid; or (b) six (6) months.
6.8 RETURN OF RESTRICTED STOCK TO COMPANY. On the date set forth in the
Award Agreement, the Restricted Stock for which restrictions have not lapsed
shall revert to the Company and again shall become available for grant under the
Plan.
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SECTION 7
PERFORMANCE SHARES
7.1 GRANT OF PERFORMANCE SHARES. Performance Shares may be granted to
Employees and Consultants at any time and from time to time, as shall be
determined by the Committee, in its sole discretion. The Committee shall
have complete discretion in determining the number of Performance Shares
granted to each Participant, provided that during any Fiscal Year no
Participant shall receive more than 150,000 Performance Shares.
7.2 VALUE OF PERFORMANCE SHARES. Each Performance Share shall have an
initial value equal to the Fair Market Value of a Share on the Grant Date.
7.3 PERFORMANCE OBJECTIVES AND OTHER TERMS. The Committee shall set
performance objectives in its discretion which, depending on the extent to
which they are met, will determine the number or value of Performance Shares
that will be paid out to the Participants. The time period during which the
performance objectives must be met shall be called the "Performance Period."
Performance Periods of Awards granted to Section 16 Persons shall, in all
cases, exceed six (6) months in length (or such shorter period as may be
permissible while maintaining compliance with Rule 16b-3). Each Award of
Performance Shares shall be evidenced by an Award Agreement that shall
specify the Performance Period, and such other terms and conditions as the
Committee, in its sole discretion, shall determine.
7.3.1 GENERAL PERFORMANCE OBJECTIVES. The Committee may set
performance objectives based upon the achievement of Company-wide, divisional,
or individual goals, applicable Federal or state securities laws, or any other
basis determined by the Committee in its discretion.
7.3.2 SECTION 162(M) PERFORMANCE OBJECTIVES. For purposes of
qualifying grants of Performance Shares as "performance-based compensation"
under Section 162(m) of the Code, the Committee, in its discretion, may
determine that the performance objectives applicable to Performance Shares
shall be based on the achievement of Performance Goals. The Performance Goals
shall be set by the Committee on or before the latest date permissible to
enable the Performance Shares to qualify as "Performance-based compensation"
under Section 162(m) of the Code. In Granting Performance shares which are
intended to qualify under Code Section 162(m), the Committee shall follow any
procedures determined by it from time to time to be necessary or appropriate
to ensure qualification of the Performance Shares under Code Section 162(m)
(e.g., in determining the Performance Goals).
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7.4 EARNING OF PERFORMANCE SHARES. After the applicable Performance
Period has ended, the holder of Performance Shares shall be entitled to
receive a payout of the number of Performance Shares earned by the
Participant over the Performance Period, to be determined as a function of
the extent to which the corresponding performance objectives have been
achieved. After the grant of a Performance Share, the Committee, in its sole
discretion, may reduce or waive any performance objectives for such
Performance Share; provided, however, that Performance Periods of Awards
granted to Section 16 Persons shall not be less than six (6) months (or such
shorter period as may be permissible while maintaining compliance with Rule
16b-3).
7.5 FORM AND TIMING OF PAYMENT OF PERFORMANCE SHARES. Payment of earned
Performance Shares shall be made as soon as practicable after the expiration
of the applicable Performance Period. The Committee, in its sole discretion,
may pay earned Performance Shares in the form of cash, in Shares (which have
an aggregate Fair Market Value equal to the value of the earned Performance
Shares at the close of the applicable Performance Period) or in a combination
thereof.
7.6 CANCELLATION OF PERFORMANCE SHARES. On the date set forth in the
Award Agreement, all unearned or unvested Performance Shares shall be
forfeited to the Company, and again shall be available for grant under the
Plan.
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SECTION 8
MISCELLANEOUS
8.1 DEFERRALS. The Committee, in its sole discretion, may permit a
Participant to defer receipt of the payment of cash or the delivery of Shares
that would otherwise be due to such Participant under an Award. Any such
deferral elections shall be subject to such rules and procedures as shall be
determined by the Committee in its sole discretion.
8.2 NO EFFECT ON EMPLOYMENT OR SERVICE. Nothing in the Plan shall
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Service. Employment with the Company and its
Affiliates is on an at-will basis only.
8.3 PARTICIPATION. No Employee or Consultant shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to
be selected to receive a future Award.
8.4 INDEMNIFICATION. Each person who is or shall have been a member of
the Committee, or of the Board, shall be indemnified and held harmless by the
Company against and from (a) any loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may
be a party or in which he or she may be involved by reason of any action
taken or failure to act under the Plan or any Award Agreement, and (b) from
any and all amounts paid by him or her in settlement thereof, with the
Company's approval, or paid by him or her in satisfaction of any judgment in
any such claim, action, suit, or proceeding against him or her, provided he
or she shall give the Company an opportunity, at its own expense, to handle
and defend the same before he or she undertakes to handle and defend it on
his or her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's Articles of Incorporation or Bylaws, by
contract, as a matter of law, or otherwise, or under any power that the
Company may have to indemnify them or hold them harmless.
8.5 SUCCESSORS. All obligations of the Company under the Plan, with
respect to Awards granted hereunder, shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or
indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business or assets of the Company.
8.6 BENEFICIARY DESIGNATIONS. If permitted by the Committee, a
Participant under the Plan may name a beneficiary or beneficiaries to whom
any vested but unpaid Award shall be paid in the event of the Participant's
death. Each such designation shall revoke all prior designations by the
Participant and shall be effective
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only if given in a form and manner acceptable to the Committee. In the absence
of any such designation, any vested benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate and, subject to
the terms of the Plan and of the applicable Award Agreement, any unexercised
vested Award may be exercised by the administrator or executor of the
Participant's estate.
8.7 NONTRANSFERABILITY OF AWARDS. No Award granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will, by the laws of descent and distribution, or to the
limited extent provided in Section 8.6. All rights with respect to an Award
granted to a Participant shall be available during his or her lifetime only
to the Participant.
8.8 NO RIGHTS AS STOCKHOLDER. Except to the limited extent provided in
Sections 6.6 and 6.7, no Participant (nor any beneficiary) shall have any of
the rights or privileges of a stockholder of the Company with respect to any
Shares issuable pursuant to an Award (or exercise thereof), unless and until
certificates representing such Shares shall have been issued, recorded on the
records of the Company or its transfer agents or registrars, and delivered to
the Participant (or beneficiary).
SECTION 9
AMENDMENT, TERMINATION, AND DURATION
9.1 AMENDMENT, SUSPENSION, OR TERMINATION. The Board, in its sole
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. However, if and to the extent required to maintain the
Plan's qualification under Rule 16b-3, any such amendment shall be subject to
stockholder approval. The amendment, suspension, or termination of the Plan
shall not, without the consent of the Participant, alter or impair any rights
or obligations under any Award theretofore granted to such Participant. No
Award may be granted during any period of suspension or after termination of
the Plan.
9.2 DURATION OF THE PLAN. The Plan shall commence on the date specified
herein, and subject to Section 9.1 (regarding the Board's right to amend or
terminate the Plan), shall remain in effect thereafter. However, without
further stockholder approval, no Incentive Stock Option may be granted under
the Plan after November 21, 2006.
SECTION 10
TAX WITHHOLDING
10.1 WITHHOLDING REQUIREMENTS. Prior to the delivery of any Shares or
cash pursuant to an Award (or exercise thereof), the Company shall have the
power and the right to deduct or withhold, or require a Participant to remit to
the Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required to be withheld with
respect to such Award (or exercise thereof).
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10.2 WITHHOLDING ARRANGEMENTS. The Committee, in its sole discretion and
pursuant to such procedures as it may specify from time to time, may permit a
Participant to satisfy such tax withholding obligation, in whole or in part by
(a) electing to have the Company withhold otherwise deliverable Shares, or (b)
delivering to the Company already-owned shares having a Fair Market Value equal
to the amount required to be withheld. The amount of the withholding
requirement shall be deemed to include any amount which the Committee agrees may
be withheld at the time the election is made not to exceed the amount determined
by using the maximum Federal, state or local marginal income tax rates
applicable to the Participant with respect to the Award on the date that the
amount of tax to be withheld is to be determined. The Fair Market Value of the
Shares to be withheld or delivered shall be determined as of the date that the
taxes are required to be withheld.
SECTION 11
LEGAL CONSTRUCTION
11.1 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
11.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
11.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
11.4 SECURITIES LAW COMPLIANCE. With respect to Section 16 Persons,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3. To the extent any provision of the Plan, Award
Agreement or action by the Committee fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Committee.
11.5 GOVERNING LAW. The Plan and all Award Agreements shall be construed
in accordance with and governed by the laws of the State of California.
11.6 CAPTIONS. Captions are provided herein for convenience only, and
shall not serve as a basis for interpretation or construction of the Plan.
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EXECUTION
IN WITNESS WHEREOF, OnTrak Systems, Inc., by its duly authorized officer,
has executed the Plan on the date indicated below.
ONTRAK SYSTEMS, INC.
Dated: __________, 1996 By:_______________________________
Name:_____________________________
Title:____________________________
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PRELIMINARY COPY
PROXY FOR 1996 ANNUAL MEETING OF SHAREHOLDERS
OF
ONTRAK SYSTEMS, INC.
The undersigned hereby appoints James W. Bagley and Jerauld J. Cutini,
and each of them, with full power of substitution, proxy for the undersigned to
vote all shares of Common Stock of OnTrak Systems, Inc. (the "Company") that the
undersigned is entitled to vote at the Annual Meeting of Shareholders of the
Company to be held on November 21, 1996, at the Company's principal executive
offices at 1010 Rincon Circle, San Jose, California, at 10:00 a.m. local time,
or any adjournment thereof.
WHETHER NOR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE
URGED TO SIGN AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR
SHARES MAY BE REPRESENTED AT THE MEETING.
1. ELECTION OF DIRECTORS:
( ) FOR ( ) WITHHELD FOR ALL
NOMINEES: James W. Bagley, Michael C. Child, Jerauld J. Cutini, Richard J.
Elkus, Jr., and Gary Hultquist.
- - - --------------------------------------------------------------------------------
For all nominees except as noted above.
2. PROPOSAL TO AUTHORIZE the Company to change the Company's state of
incorporation from California to Delaware.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. PROPOSAL TO APPROVE the adoption of the Company's 1996 Equity Incentive
Plan and the reservation of 2,000,000 shares of Common Stock for issuance
thereunder.
FOR ( ) AGAINST ( ) ABSTAIN ( )
4. PROPOSAL TO RATIFY the selection of Price Waterhouse LLP as the independent
auditors of the Company for the current fiscal year.
FOR ( ) AGAINST ( ) ABSTAIN ( )
5. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
<PAGE>
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2,
3 AND 4. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder.
Please sign exactly as the name appears hereon. Joint owners should
each sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
Date: ______________, 1996
________________________________________
Signature
_________________________________________
Signature
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