-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ar3lynaQTr7D3boO9O4wV9Td026RLBTqcKQotmJI26zT/P5DSjwkL36dJ1hbymDh yzmR6WaMUw6BoGqhkBkEhg== 0000891618-96-000460.txt : 19960625 0000891618-96-000460.hdr.sgml : 19960625 ACCESSION NUMBER: 0000891618-96-000460 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFORMATION STORAGE DEVICES INC /CA/ CENTRAL INDEX KEY: 0000932980 STANDARD INDUSTRIAL CLASSIFICATION: 3674 IRS NUMBER: 770197173 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25502 FILM NUMBER: 96565007 BUSINESS ADDRESS: STREET 1: 2045 HAMILTON AVE CITY: SAN JOSE STATE: CA ZIP: 95125 BUSINESS PHONE: 4084281400 MAIL ADDRESS: STREET 1: 2045 HAMILTON AVE CITY: SAN JOSE STATE: CA ZIP: 95125 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 1 1996 Q1 Information Storage Devices, Inc. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____ to _____ COMMISSION FILE NO. 0-25502 INFORMATION STORAGE DEVICES, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 77-0197173 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2045 HAMILTON AVENUE SAN JOSE, CA 95125 (Address of principal executive offices, including zip code) (408) 369-2400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- As of May 3, 1996, there were outstanding 9,777,433 shares of the Registrant's Common Stock. 1 2 1996 Q1 Information Storage Devices, Inc. INFORMATION STORAGE DEVICES, INC. INDEX
PART I - FINANCIAL INFORMATION Page - - ------------------------------- ---- Item 1. Financial Statements Condensed Balance Sheets at December 31, 1995 and March 31, 1996 ............................................................... 3 Condensed Statements of Operations for the Three Months Ended March 31, 1995 and 1996........................................ 4 Condensed Statements of Cash Flows for the Three Months Ended March 31, 1995 and 1996........................................ 5 Notes to Condensed Financial Statements........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 7 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................. 12 Signatures....................................................................... 12
2 3 1996 Q1 Information Storage Devices, Inc. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS (In thousands)
DECEMBER 31, MARCH 31, 1995 1996 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 29,202 $ 37,608 Short-term investments 45,892 18,637 Accounts receivable, net 7,554 6,940 Inventories 9,809 10,827 Other current assets 1,841 3,390 --------- --------- Total current assets 94,298 77,402 Net property and equipment 5,244 5,463 Patents and other assets, net 1,355 1,785 Long-term investments 4,533 11,011 --------- --------- Total Assets $ 105,430 $ 95,661 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,784 $ 10,530 Current portion of capitalized lease obligations 1,089 1,093 Accrued liabilities 2,312 1,503 Deferred revenue 1,834 1,904 --------- --------- Total current liabilities 15,019 15,030 Long-term Liabilities: Capitalized lease obligations, net of current portion 2,630 2,465 Deferred rent 183 164 Other non-current liabilities 145 145 --------- --------- Total long-term liabilities 2,958 2,774 Shareholders' Equity: Common stock 86,256 78,695 Deferred compensation (116) (208) Retained earnings (deficit) 1,313 (663) Unrealized gain on investments -- 33 --------- --------- Total shareholders' equity 87,453 77,857 Total Liabilities and Shareholders' Equity $ 105,430 $ 95,661 ========= =========
3 4 1996 Q1 Information Storage Devices, Inc. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31, 1995 1996 ---- ---- Net revenues $ 13,005 $ 12,335 Cost of goods sold 8,288 9,427 -------- -------- Gross margin 4,717 2,907 Operating Expenses: Research and development 1,407 4,120 Selling, general and administrative 1,768 2,609 -------- -------- Total operating expenses 3,175 6,729 Income (loss) from operations 1,542 (3,822) Interest and other income, net 133 781 -------- -------- Income (loss) before income taxes 1,675 (3,041) Provision (benefit) for income taxes 586 (1,064) -------- -------- Net income (loss) $ 1,089 $ (1,977) ======== ======== Earnings (loss) per share $ 0.14 $ (0.19) ======== ======== Shares used in computing earnings per share 7,680 10,235
4 5 1996 Q1 Information Storage Devices, Inc. CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1995 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,089 $ (1,977) Adjustments to reconcile net income (loss) to net cash provided by operating activities----- Depreciation and amortization 427 597 Amortization of investment discount -- 36 Compensation costs related to stock and stock option grant 11 49 Provision for allowance for doubtful accounts and returns 55 -- Changes in assets and liabilities ----- Accounts receivable (1,922) 614 Inventories (530) (1,018) Prepaid expenses and other assets 219 (1,530) Accounts payable 962 747 Accrued liabilities and bonuses (155) (716) Other current liabilities -- (92) Deferred revenue 737 69 Deferred rent 66 (19) -------- -------- Net cash provided by (used for) operating activities 959 (3,240) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (141) (620) Change in other assets 16 (467) Purchase of investments (13,682) (16,640) Proceeds from maturities of investments -- 37,395 -------- -------- Net cash provided by (used for) investing activities (13,807) 19,668 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock, net of issuance costs 23,954 236 Repurchase of common stock -- (7,938) Payments on capitalized lease obligations (283) (320) -------- -------- Net cash provided by (used for) financing activities 23,671 (8,022) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 10,823 8,406 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,605 29,202 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,428 $ 37,608 ======== ========
5 6 1996 Q1 Information Storage Devices, Inc. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation: The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 1995. The unaudited condensed financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. 2. Inventories: Inventories consist of material, labor and manufacturing overhead and are stated at the lower of cost (first-in, first-out basis) or market. The components of inventory are as follows (in thousands):
December 31, 1995 March 31, 1996 Work-in-process .......... $ 5,706 $ 7,422 Finished goods ........... 4,103 3,405 ------- ------- $ 9,809 $10,827 ======= =======
3. Earnings (Loss) Per Share: Earnings (loss) per share has been computed using the weighted average number of shares of common stock, and, when dilutive, common equivalent shares from convertible preferred stock and common equivalent shares from stock options outstanding (using the treasury stock method). Pursuant to the Securities and Exchange Commissions Staff Accounting Bulletins, common and common equivalent shares issued during the twelve-month period prior to the Company's initial public offering in 1995 have been included in the 1995 calculation as if they were outstanding for all periods prior to the public offering (using the treasury stock method and the initial offering price). 4. Repurchase of Common Stock: In January 1996, the Company's Board of Directors approved a stock repurchase plan of up to one million shares of common stock. During the quarter ended March 31, 1996, the Company repurchased 835,000 shares on the open market at prices ranging from $8.125 to $12.000 for a total of $7.9 million. 6 7 1996 Q1 Information Storage Devices, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report includes forward looking statements that involve a number of risks and uncertainties. The following includes a discussion of factors that, among other factors, could cause actual results to differ materially. For reference, see "Other Factors That May Affect Operating Results" for discussion of such factors on page 16 of the ISD 1995 Annual Report. OVERVIEW ISD designs, develops, and markets single-chip integrated circuit products for voice recording and playback, using its proprietary ChipCorder high-density multilevel storage technology and its mixed signal expertise. The Company directs its marketing and product development efforts toward the consumer, communications and industrial markets. The Company distributes its products through a direct sales organization and a worldwide network of sales representatives and distributors. The Company was incorporated in California in December 1987 and introduced its first product in February 1991. ISD subcontracts with independent foundries to fabricate the wafers for all of its products. This approach enables the Company to concentrate its resources on the design and test areas, where the Company believes it has the greatest competitive advantage, and eliminates the high cost of owning and operating a semiconductor wafer fabrication facility. The Company depends on these foundries to allocate to the Company a portion of their foundry capacity sufficient to meet the Company's needs, to produce products of acceptable quality and with acceptable manufacturing yields and to deliver those products to the Company on time. The Company has restructured the supply agreement with Samsung, its largest supplier, from a wafer purchasing agreement to a die purchasing agreement; however, there can be no assurance that the company will be able to obtain the required die quantities and to meet customer schedules. Because of the demand for the Company's products and because of long lead times necessary to secure additional foundry capacity, the Company is planning to complete qualification of another foundry supplier by the middle of 1996. Although the Company believes that current capacity is adequate to meet the Company's current anticipated needs, there can be no assurance that the Company will be able to qualify additional foundry capacity or otherwise obtain needed quantities within expected time frames or at all. Moreover, in order to reduce future manufacturing costs, the Company is designing smaller die sizes with smaller geometry processes to increase the number of die produced on each wafer. The Company's ability to remain competitive depends on migrating its manufacturing to smaller geometries, in particular certain of its products to the 0.8 micron geometry. A problem was encountered with such a transition in the first quarter of 1996, resulting in a write-off of in-line product and of a write-down of certain finished goods inventory, as well as a delay in the conversion. Although management believes the problems that delayed the 0.8 micron conversion have been identified and solutions are being implemented, there can be no assurance that the Company's foundries will achieve or maintain acceptable manufacturing yields and process control in the future or that sudden declines in yields will not occur. Failures to improve, or fluctuations in, manufacturing yields and process 7 8 1996 Q1 Information Storage Devices, Inc. controls, particularly at times when the Company is experiencing severe pricing pressures from its customers or its competitors, would have a material adverse effect on the Company's results of operations. RESULTS OF OPERATIONS The following table sets forth, as a percentage of net revenues, each line item in the Company's statements of operations for the periods indicated.
- - --------------------------------------------------------------- Three Months Ended March 31, - - --------------------------------------------------------------- 1995 1996 ---- ---- Net revenues 100.0% 100.0% Cost of net revenues 63.7 76.4 ----- ----- Gross margin 36.3 23.6 ----- ----- Operating expenses: Research and development 10.8 33.4 Sales, general and administrative 13.6 21.2 ----- ----- Total operating expenses 24.4 54.6 ----- ----- Income from operations 11.9 (31.0) Other income (expense), net 1.0 6.4 ----- ----- Income (loss) before income taxes 12.9 (24.6) Provision (benefit) for income taxes 4.5 (8.6) ----- ----- Net income (loss) 8.4% (16.0%) ----- ----- - - ---------------------------------------------------------------
NET REVENUES During the three months ended March 31, 1996, the Company's net revenues were principally derived from the sale of integrated circuits for voice recording and playback. Net revenues for the first quarter of 1996 were $12.3 million or 5% lower than the $13.0 million of net revenues for the first quarter of 1995. Sales to the Company's top ten customers accounted for 89% of net revenues compared to 72% in the first quarter of 1995. During the first quarter of 1996, the top customers were Motorola at 36%, Marubun (the Company's Japanese distributor) at 21% and Sanyo at 10% compared to Sanyo at 15%, Motorola at 10% and Voice It at 10% for the same 8 9 1996 Q1 Information Storage Devices, Inc. period of 1995. The loss of, or significant reduction in purchases, by a current major customer would have a material adverse effect on the Company's financial condition and results of operation if the Company is unable to obtain the orders from new customers to offset such losses or reductions. The overall decrease in net revenues for the three months ending March 31, 1996, was primarily due to a softening in the consumer market for products incorporating the Company's products. The breakdown of net revenues by market segment for the first quarter was 19% consumer, 75% communications, and 6% industrial. During the three months ended March 31, 1995, the breakdown was approximately 55% consumer, 40% communications and 5% industrial. The Company's consumer customers in the first quarter continued purchasing the Company's products primarily for use in personal memo recorders, cameras, photo frames, books, educational toys and novelties. The communications customers represented products consisting primarily of telephone answering machines, cellular phones, pagers and personal handy phones. The failure of new applications or markets to develop or the failure of existing markets to continue to be receptive to the Company's products could have a material adverse effect on the Company's business, financial condition, and results of operations. International sales for the first quarter of 1996 were 56% compared to 64% in the first quarter of 1995. Sales to Asia were 46% in the first quarter of 1996, down from 59% in 1995, and sales to Europe were 10% in the first quarter of 1996, versus 5% in the first quarter of 1995. Japan accounted for 30% of total sales in the first quarter of 1996, up from 21% in the previous year. North American sales were 44% in the first quarter of 1996, up from 36% for the same period last year. The United States accounted for 44% of total sales in the first quarter of 1996. The decrease in sales to Asia in 1996 is a result of the softening in the consumer market, as mentioned above. The increase in sales to North America is a reflection of the continued growth in the communications market. Due to its reliance on export sales and its dependence on foundries outside the United States, the Company is subject to the risks of conducting business internationally, including foreign government regulation and general geopolitical risk such as political and economic instability, potential hostilities, changes in diplomatic and trade relationships, and currency fluctuation, any of which could have a material effect on the Company's financial conditions or results of operations. GROSS MARGIN The Company's gross margin for the first quarter of 1996 was $2.9 million or 23.6% of net revenues. This was a 38% decrease from the $4.7 million gross margin for the first quarter of 1995. Gross margin as a percentage of sales for the first quarter for 1996 decreased by 35%, down from 36.3% for the first quarter of 1995. The reduction in gross margins is the result of a write-off of product in the 0.8_micron line as well as for the write-down in the value of certain finished goods inventory items, resulting from a reduction in the sales price for those items. The reduction in gross margin can also be attributed to the lower new revenues in the first quarter of 1996. The Company is subject to a number of factors which may have an adverse impact on gross margin, including the availability and cost of product from the Company's suppliers, changes in the mix of products sold, and the timing of new product introductions and volume shipments. In addition, the markets for the Company's products are characterized by intense 9 10 1996 Q1 Information Storage Devices, Inc. price competition. To the extent that the Company fails to facilitate its customers' opening of new markets; experiences yield or other production problems or shortages in supply that increase its manufacturing costs, or fails to reduce its manufacturing costs, it would have a material adverse effect on the Company's financial condition and results of operations. RESEARCH AND DEVELOPMENT Research and development expenses were $4.1 million or 33.4% of net revenues in the first quarter of 1996, compared to $1.4 million or 10.8% of net revenues in the same period of 1995. The increase in research and development expenses were primarily due to the write-off of pre-production wafers in the 0.8 micron line as discussed earlier. There were also increased expenses caused by more than a doubling of personnel for new product development and enhancement of existing products. In addition, there were increased expenditures for materials, including wafers and masks, related to such development activities. The Company has also made a significant investment to strengthen its technology capability by the creation of a technology department which is now staffed with six Ph.D.'s. There can be no assurance that new product will be successfully developed or achieve market acceptance, that yield problems will not arise in the future, or that the need to improve product yields might not recur with existing or new products or fabrication processes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $2.6 million or 21.1% of net revenues in the first quarter of 1996, compared to $1.8 million or 13.6% of net revenues in the first quarter of 1995. The increase in selling expenses for the first quarter of 1996 came as a result of the Company's commitment to expanding its marketing efforts with participation in public relations, tradeshows, advertising, web site development, to name a few, and the addition of more sales and marketing personnel. Selling expenses are expected to continue to increase with net revenue growth due to more commissions and additional personnel. The increases in general and administrative costs come from additional professional fees, including legal and accounting, and office rent and insurance. OTHER INCOME, NET Net other income was $0.8 million for the first quarter of 1996 compared to net other income of approximately $0.1 million for the same period of 1995. Net other income for 1996 primarily represents interest income earned on the proceeds of the Company's initial and secondary public offerings of common stock. PROVISION FOR INCOME TAXES The Company recorded an income tax benefit for the first quarter of 1996, using an effective income tax rate of 35%. The benefit is included in other assets in the accompanying balance sheet. The effective tax rate of 35% for the first quarter of 1995 represents applicable statutory rates, partially offset by research and development tax credits and net operating loss carry forwards. 10 11 LIQUIDITY AND CAPITAL RESOURCES The Company has a line of credit with a commercial bank under which the Company may borrow up to $9 million, based on eligible accounts receivable and $7.0 million based on eligible investments, with a term through June 30, 1996. At March 31, 1996, the Company's borrowing base was approximately $12.4 million and there were no borrowings outstanding under this line of credit, but it is being used to guarantee letters of credit. The line of credit does not restrict the Company from paying cash dividends on its capital stock but does require that the Company maintain a ratio of total indebtedness to tangible net worth of not more than 1.25 to 1 and a ratio of current assets to current liabilities of not less than 1.5 to 1. The Company is currently in compliance with all financial covenants in the line of credit agreement. As of March 31, 1996, the amount of unrestricted equity available for distribution as a result of these covenants was $54.9 million. The Company's operating activities used net cash of $3.2 million in the first three months of 1996, primarily due to a loss from operations and an increase in inventory. The Company's repurchase of common stock, discussed in Note 4 to Condensed Financial Statements, also used $7.9 million of net cash. Capital purchases were $0.8 million in the first three months of 1996. The Company's capital equipment needs, including wafer sort and final test equipment, computer hardware and software and other office related items, are currently budgeted at approximately $3.8 million through the end of 1996. The Company has agreements with three capital equipment leasing companies providing aggregate lease lines of $4.0 million of which $3.2 million was available on March 31, 1996. At March 31, 1996, the Company had cash, cash equivalents and short-term investments of $56.2 million, long-term investments (tax free bonds maturing in more than one year) of $11.0 million, and working capital of $62.4 million. The Company believes its existing cash, cash equivalents and short-term investments and its available line of credit and current equipment lease lines, will satisfy the Company's projected working capital and capital expenditure requirements through the next twelve months. To the extent that funds generated from operations are insufficient to meet the Company's capital requirements, and the Company is required to raise additional funds, no assurance can be given that additional financing will be available or, if available, that it will be available on acceptable terms. 11 12 1996 Q1 Information Storage Devices, Inc. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith. Exhibit Number Exhibit Title 10.01 - 1987 Stock Option Plan, as amended, and related documents. 10.02 - 1994 Equity Incentive Plan, as amended, and related documents. 10.03 - 1994 Directors Stock Option Plan, as amended, and related documents. 10.23 - Form of Employment Agreement dated January 19, 1996 between Registrant and all of the Company's Executive Officers and certain key employees. 11.01 - Statement regarding computation of per share earnings. 27.01 - Financial Data Schedule (b) The Company filed a report on Form 8-K during the period ended March 31, 1996 with regard to a Shareholder Rights Plan on January 5, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INFORMATION STORAGE DEVICES, INC. (Registrant) Date: May 10, 1996 Felix J. Rosengarten Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 12 EX-10.01 2 1987 STOCK OPTION PLAN 1 EXHIBIT 10.01 INFORMATION STORAGE DEVICES, INC. 1987 STOCK OPTION PLAN ADOPTED DECEMBER 31, 1987 AS AMENDED THROUGH JANUARY 25, 1996 1. PURPOSE. This Stock Option Plan ("Plan") is established to provide incentives for selected persons to promote the financial success and progress of Information Storage Devices, Inc. (the "Company") by granting such persons options to purchase shares of stock of the Company. 2. ADOPTION AND SHAREHOLDER APPROVAL. This Plan shall become effective on the date that it is adopted by the Board of Directors (the "Board") of the Company. This Plan shall be approved by the unanimous written consent of the shareholders or the affirmative vote at a meeting of the holders of a majority of the outstanding shares of the Company within twelve months before or after the date this Plan is adopted by the Board. 3. TYPES OF OPTIONS AND SHARES. Options granted under this Plan (the "Options") may be either (a) incentive stock options ("ISOs") within the meaning of Section 422A of the Internal Revenue Code of 1986 (the "Code"), or (b) nonqualified stock options ("NQSOs"), as designated at the time of grant. The shares of stock that may be purchased upon exercise of Options granted under this Plan (the "Shares") are shares of the common stock of the Company. 4. NUMBER OF SHARES. The maximum number of Shares that may be issued pursuant to Options granted under this Plan is 3,470,000 Shares, subject to adjustment as provided in this Plan. If any Option is terminated in whole or in part for any reason without being exercised in whole or in part, the Shares thereby released from such Option shall be available for purchase under other Options subsequently granted under this Plan. At all times during the term of this Plan, the Company shall reserve and keep available such number of Shares as shall be required to satisfy the requirements of outstanding Options under this Plan. 5. ADMINISTRATION. This Plan shall be administered by the Board or by a committee of the Board appointed to administer this Plan (the "Committee"). As used in this Plan, references to the Committee shall mean either such Committee or the Board if no committee has been established. The interpretation by the Committee of any of the provisions of this Plan or any Option granted under this Plan shall be final and binding upon the Company and all persons having an interest in any Option or any Shares purchased pursuant to an Option. 6. ELIGIBILITY. Options may be granted only to such employees, officers, directors, consultants and independent contractors of the Company or any Parent, Subsidiary or Affiliate of the Company (as defined below) as the Committee shall select from time to time in its sole discretion ("Optionees"), provided that only employees of the Company or a Parent or Subsidiary of the Company shall be eligible to receive ISOs. An Optionee may be granted more than one Option under this Plan. (a) Grants to Directors. With respect to the grant of Options to persons who are directors, the selection of any director to whom one Option is granted and the determination of the number of Shares which may be purchased shall be made only (i) by the board where a majority 2 of the directors active in the matter are Disinterested Persons (as defined below), or (ii) by, or only in accordance with the recommendation of, a committee of three or more persons having full authority to act in the matter, all of the members of which committee are Disinterested Persons. (b) Definitions. As used in this Plan, the following terms shall have the following meanings: (i) "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the granting of the Option, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (ii) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (iii) "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. (iv) "Disinterested Person" means an administrator of this Plan who is not at the time he exercises discretion in administering this Plan, and has not at any time within one year prior thereto been eligible for selection as a person to whom an Option may be granted under this Plan or to whom stock may be allocated or stock options or stock appreciation rights may be granted pursuant to any other plan of the Company or its Affiliates entitling the participants therein to acquire stock, stock options or stock appreciation rights of the Company or any of its Affiliates. 7. TERMS AND CONDITIONS OF OPTIONS. The Committee shall determine whether each Option is to be an ISO or an NQSO, the number of Shares for which the Option shall be granted, the exercise price of the Option, the periods during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following terms and conditions: (a) Form of Option Grant. Each Option granted under this Plan shall be evidenced by a written Stock Option Grant ("Grant") in such form (which need not be the same for each Optionee) as the Committee shall from time to time approve, which Grant shall comply with and be subject to the terms and conditions of this Plan. (b) Exercise Price. The exercise price of an Option shall be not less than the fair -2- 3 market value of the Shares, at the time that the Option is granted, as determined by the Committee in good faith. The exercise price of any Option granted to a person owning more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten Percent Shareholder") shall not be less than 110% of the fair market value of the Shares at the time of the grant, as determined by the Committee in good faith. (c) Exercise Period. Options shall be exercisable within the times or upon the events determined by the Committee as set forth in the Grant, provided, however, that no Option shall be exercisable after the expiration of ten years from the date the Option is granted, and provided further that no Option granted to a Ten Percent Shareholder shall be exercisable after the expiration of five years from the date the Option is granted. (d) Limitations on ISOs. The aggregate fair market value (determined as of the time an Option is granted) of stock with respect to which ISOs are exercisable for the first time by an optionee during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Parent or Subsidiary of the Company) shall not exceed $100,000. (e) Date of Grant. The date of grant of an Option shall be the date on which the Committee makes the determination to grant such Option unless otherwise specified by the Committee. The Grant representing the Option shall be delivered to the Optionee within a reasonable time after the granting of the Option. 8. EXERCISE OF OPTIONS. (a) Notice. Options may be exercised only by delivery to the Company of a written notice and exercise agreement in a form approved by the Committee, stating the number of Shares being purchased, the restrictions imposed on the Shares and such representations and agreements regarding the Optionee's investment intent and access to information as may be required by the Company to comply with applicable securities laws, together with payment in full of the exercise price for the number of Shares being purchased. (b) Payment. Payment for the Shares may be made (i) in cash (by check), (ii) by surrender of shares of common stock of the Company having a fair market value equal to the exercise price of the Option; (iii) where permitted by applicable law and approved by the Committee in its sole discretion, by tender of a full recourse promissory note having such terms as may be approved by the Committee; or (iv) by any combination of the foregoing where approved by the Committee in its sole discretion. Optionees who are not employees or directors of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares. (c) Withholding Taxes. Prior to issuance of the Shares upon exercise of an -3- 4 Option, the Optionee shall pay or make adequate provision for any federal or state withholding obligations of the Company, if applicable. (d) Limitations on Exercise. Notwithstanding the exercise periods set forth in the Grant, exercise of an Option shall always be subject to the following limitations: (i) An Option shall not be exercisable unless such exercise is in compliance with the Securities Act of 1933, as amended, and all applicable state securities laws, as they are in effect on the date of exercise. (ii) The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent the Optionee from exercising the full number of Shares as to which the Option is then exercisable. 9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee. No Option may be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. 10. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the rights of a shareholder with respect to any Shares subject to an Option until the Option has been validly exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date of exercise, except as provided in this Plan. The Company shall provide to each Optionee a copy of the annual financial statements of the Company, at such time after the close of each fiscal year of the Company as they are released by the Company to its shareholders. 11. ADJUSTMENT OF OPTION SHARES. In the event that the number of outstanding shares of common stock of the Company is changed by a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the capital structure of the Company without consideration, the number of Shares available under this Plan and the number of Shares subject to outstanding Options and the exercise price per share of such Options shall be proportionately adjusted, subject to any required action by the Board or shareholders of the Company and compliance with applicable securities laws; provided, however, that no certificate or scrip representing fractional shares shall be issued upon exercise of any Option and any resulting fractions of a Share shall be ignored. 12. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Option granted under this Plan shall confer on any Optionee any right to continue in the employ of the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate the Optionee's employment at any time, with or without cause. -4- 5 13. COMPLIANCE WITH LAWS. The grant of Options and the issuance of Shares upon exercise of any Options shall be subject to and conditioned upon compliance with all applicable requirements of law, including without limitation compliance with the Securities Act of 1933, as amended, any required approval by the Commissioner of Corporations of the State of California, compliance with all other applicable state securities laws and compliance with the requirements of any stock exchange on which the Shares may be listed. The Company shall be under no obligation to register the Shares with the Securities and Exchange Commission or to effect compliance with the registration or qualification requirement of any state securities laws or stock exchange. 14. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself or its assignee(s) in the Grant (a) a right of first refusal to purchase all Shares that an Optionee (or a subsequent transferee) may propose to transfer to a third party and (b) a right to repurchase all Shares held by an Optionee upon the Optionee's termination of employment or service with the Company or its Parent, Subsidiary or Affiliate of the Company for any reason within a specified time as determined by the Committee at the time of grant at (i) the Optionee's original purchase price (provided that the right to repurchase at such price shall lapse at the rate of at least 20% per year from the date of grant), (ii) the fair market value of such Shares as determined by the Committee in good faith or (iii) a price determined by a formula or other provision set forth in the Grant. 15. CORPORATE TRANSACTIONS. (a) Corporate Transactions. In the event of a Corporate Transaction (as defined in this Section 15(a)), the exercisability of each Option shall be automatically accelerated so that each Option shall, immediately before the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of Shares and may be exercised for all or any portion of such Shares; provided, that an Option shall not be accelerated if and to the extent that such Option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof. The determination of comparability shall be made by the Board or the Committee, and the Board or the Committee's determination shall be final, binding and conclusive. Upon the consummation of a Corporate Transaction, all outstanding Options shall, to the extent not previously exercised or assumed by the successor corporation or its parent, terminate and cease to be exercisable. "Corporate Transaction" means (i) a merger or acquisition in which the Company is not the surviving entity (except for a transaction the principal purpose of which is to change the State in which the Company is incorporated), (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company or (iii) any other corporate reorganization or business combination that is not approved by the Board and in which the beneficial ownership of 50% or more of the Company's outstanding voting stock is transferred. -5- 6 (b) Dissolution. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent that Options have not been previously exercised, such Options will terminate immediately prior to the consummation of such proposed action. (c) Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Option under this Plan in substitution of such other company's Option, or (b) assuming such Option as if it had been granted under this Plan if the terms of such assumed Option could be applied to an Option granted under this Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed Option would have been eligible to be granted an Option under the Plan if the other company had applied the rules of the Plan to such grant. In the event the Company assumes an Option granted by another company, the terms and conditions of such Option shall remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted exercise price. 16. AMENDMENT OR TERMINATION OF PLAN. The Committee may at any time terminate or amend this Plan in any respect (including, but not limited to, any form of Grant, agreement or instrument to be executed pursuant to this Plan); provided, however, that the Committee shall not, without the approval of the shareholders of the Company, increase the total number of Shares available under this Plan (except by operation of the provisions of this Plan) or change the class of persons eligible to receive Options. In any case, no amendment of this Plan may adversely affect any then outstanding Options or any unexercised portions thereof without the written consent of the Optionee. 17. TERM OF PLAN. Options may be granted pursuant to this Plan from time to time within a period of ten years from the date this Plan is adopted by the Board of Directors. 18. DELIVERY OF CERTAIN INFORMATION. In accordance with Section 260.140.46 of the California Commissioner's Rules, the Company shall deliver to Optionees, on at least an annual basis, financial statements of the Company consisting of an income statement and balance sheet. Financial statements need not be audited. This Section 18 does not apply to Optionees who are key employees whose duties in connection with the issuer assure them access to equivalent information. -6- 7 INFORMATION STORAGE DEVICES, INC. STOCK OPTION GRANT Optionee: Address: Total Options Granted: Exercise Price Per Share: Date of Grant: Start Date: Expiration Date: OTC Grant Number: Type of Stock Option (check one): ___ Incentive ___ Nonqualified 1. Grant of Option. Information Storage Devices, Inc., (the "Company"), a California corporation, hereby grants to the optionee named above ("Optionee") an option (this "Option") to purchase the total number of shares of common stock of the Company set forth above (the "Shares") at the exercise price per share set forth above (the "Exercise Price"), subject to all of the terms and conditions of this Grant and the Company's 1987 Stock Option Plan as adopted as of December 31, 1987 (the "Plan"). If designated as an Incentive Stock Option above, this Option is intended to qualify as an "incentive stock option" ("ISO") within the meaning of Section 422A of the Internal Revenue Code of 1986 (the "Code"). 2. Exercise Period of Option. Subject to the terms and conditions of the Plan and this Grant, this Option shall become exercisable as to 25% of the Shares one year after the Start Date, provided that Optionee has remained continually employed by the Company during such one year period, and as to 2.083% of the total number of Shares for each full month, over the 3 year period commencing on the date that is one year after the Start Date, that the Optionee remains continually employed by the Company; provided, however, that this Option shall expire on the Expiration Date set forth above and must be exercised, if at all, on or before the Expiration Date. 3. Restrictions on Exercise. Exercise of this Option is subject to the following limitations: -7- 8 (a) This Option may not be exercised unless such exercise is in compliance with the Securities Act of 1933, as amended, and all applicable state securities laws, as they are in effect on the date of exercise. (b) This Option may not be exercised more often than quarterly, as to then exercisable portions of this Option. -8- 9 4. Termination of Option. Except as provided below in this Section, this Option shall terminate and may not be exercised if Optionee ceases to be employed by the Company or any Parent or Subsidiary of the Company (or in the case of a nonqualified stock option, an Affiliate of the Company). Optionee shall be considered to be employed by the Company if Optionee is an officer, director or full-time employee of the Company, or any Parent, Subsidiary or Affiliate of the Company or if the Board of Director determines that Optionee is rendering substantial services as a part-time employee, consultant or independent contractor to the Company or any Parent, Subsidiary or Affiliate of the Company. The Board of Directors of the Company shall have discretion to determine whether Optionee has ceased to be employed by the Company or any Parent, Subsidiary or Affiliate of the Company and the effective date on which such employment terminated (the "Termination Date"). (a) If Optionee ceases to be employed by the Company or any Parent, Subsidiary or Affiliate of the Company for any reason except death or disability, this Option, to the extent (and only to the extent) that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee within three months after the Termination Date, but in any event no later than the Expiration Date. (b) If Optionee's employment with the Company or any Parent, Subsidiary or Affiliate of the Company is terminated because of the death of Optionee or disability of Optionee within the meaning of Section 22(e)(3) of the Code, this Option, to the extent that it is exercisable by Optionee on the Termination Date, may be exercised by Optionee (or Optionee's legal representative) within twelve months after the Termination Date, but in any event no later than the Expiration Date. (c) Nothing in the Plan or this Grant shall confer on Optionee any right to continue in the employ of the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Optionee's employment at any time, with or without cause. 5. Manner of Exercise. (a) This Option shall be exercisable by delivery to the Company of an executed written Notice and Agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company, which shall set forth Optionee's election to exercise this Option, the number of Shares being purchased, any restrictions imposed on the Shares and such other representations and agreements regarding Optionee's investment intent and access to information as may be required by the Company to comply with applicable securities laws. (b) Such Notice and Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased (i) in cash (by check); (ii) by surrender of Shares of Common Stock of the Company having a fair market value equal to the Exercise Price; (iii) where permitted by applicable law, by tender of a full recourse promissory note having such -9- 10 terms as the Board of Directors or the committee thereof that administers the Plan may approve; or (iv) by any combination thereof. (c) Prior to the issuance of the Shares upon exercise of this Option, Optionee must pay or make adequate provision for any applicable federal or state withholding obligations of the Company. (d) Provided that such notice and payment are in form and substance satisfactory to counsel for the Company, the Company shall issue the Shares registered in the name of Optionee or Optionee's legal representative. 6. Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the date of this grant, and (2) the date one year after transfer of such Shares to the Optionee upon exercise of the ISO, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee. 7. Compliance with Laws and Regulations. The issuance and transfer of Shares shall be subject to compliance by the Company and the Optionee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company's common stock may be listed at the time of such issuance or transfer. Optionee understands that the Company is under no obligation to register or qualify the Shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance. 8. Nontransferability of Option. This Option may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, successors and assigns of the Optionee. 9. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal and California tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability or California income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as a tax preference item for federal income tax purposes and may -10- 11 subject the Optionee to the alternative minimum tax in the year of exercise. (b) Exercise of Nonqualified Stock Option. If this Option does not qualify as an ISO, there may be a regular federal income tax liability and a California income tax liability upon the exercise of the Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. The Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (c) Disposition of Shares. If the Shares are held for at least six months in the case of a nonqualified option and twelve months in the case of an ISO after the date of the transfer of the Shares pursuant to the exercise of this Option (and, in the case of an ISO, are disposed of at least two years after the Date of Grant), any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. If Shares pur chased under an ISO are disposed of within such one year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. 10. Interpretation. Any dispute regarding the interpretation of this agreement shall be submitted by Optionee or the Company forthwith to the Company's Board of Directors or the committee thereof that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or committee shall be final and binding on the Company and on Optionee. 11. Entire Agreement. The Plan and the Notice and Agreement attached as Exhibit A are incorporated herein by reference. This Grant, the Plan and the Notice and Agreement constitute the entire agreement of the parties and supersede all prior undertakings and agreements with respect to the subject matter hereof. INFORMATION STORAGE DEVICES, INC. By: ----------------------------- Name: ----------------------------- Title: ----------------------------- Date signed: ----------------------- -11- 12 12 13 ACCEPTANCE Optionee hereby acknowledges receipt of a copy of the Plan, represents that Optionee has read and understands the terms and provisions thereof, and accepts this Option subject to all the terms and conditions of the Plan and this Grant. Optionee acknowledges that there may be adverse tax consequences upon exercise of this Option or disposition of the Shares and that Optionee should consult a tax adviser prior to such exercise or disposition. -------------------------------- Optionee -13- 14 Exhibit A INFORMATION STORAGE DEVICES, INC. STOCK OPTION EXERCISE NOTICE AND AGREEMENT I, an Optionee under the Company's 1987 Stock Option Plan, hereby elect to purchase the number of shares of Common Stock as set forth below: Optionee Number of Shares Purchased: Social Security Number: Purchase Price per Share: Address: Aggregate Purchase Price: _____________________________ Date of Stock Option Grant: Type of Option: [ ] Incentive Stock Option Exact Name of Title to Shares: [ ] Nonqualified Stock Option Optionee hereby delivers to the Company the Aggregate Purchase Price, to the extent permitted in the Option as follows (check as applicable and complete): [ ] in cash (by check) in the amount of $__________________, receipt of which is acknowledged by the Company; [ ] by delivery of ___________ fully-paid, nonassessable and vested shares of the Common Stock of the Company owned by Optionee for at least six (6) months prior to the date hereof (and which have been paid for within the meaning of SEC Rule 144), or obtained by Optionee in the open public market, and owned free and clear of all liens, claims, encumbrances or security interests, valued at the current fair market value of $_________ per share; or [ ] by tender of a full recourse promissory note in the principal amount of $__________________. Market Standoff Agreement. Optionee, if requested by the Company and an underwriter of Common Stock (or other securities) of the Company, agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by Optionee during the period requested by the managing underwriter following the effective date of a registration statement of the Company filed under the 1933 Act or the Securities Exchange Act of 1934, provided that all officers and directors of the Company are required to enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or other securities) subject to the foregoing restriction until the end of such period. Tax Consequences. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF THE SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. Entire Agreement. The Plan and Option are incorporated herein by reference. This Exercise Notice and Agreement, the Plan and the Option constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and is governed by California law except for that body of law pertaining to conflict of laws. Date: Signature of Optionee -14- 15 16 16 SPOUSE'S CONSENT I acknowledge that I have read the Stock Option Exercise Notice and Agreement (the "Agreement") and that I know its contents. I am aware that by the Agreement's provisions my spouse (the "Optionee") agrees to sell the Number of Shares Purchased (as provided for in the Agreement and hereinafter referred to as "Shares"), including any community property interest I may have, on the occurrence of certain events. I hereby consent to the sale, approve the provisions of the Agreement and agree that these Shares and any interest I may have in them are subject to the provisions of the Agreement. I will take no action at any time to hinder operation of the Agreement on these Shares or any interest I may have on them. Spouse of Optionee __________________________________ Date:__________________ __________________________________ Date:__________________ Optionee's Name -17- EX-10.02 3 1994 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.02 INFORMATION STORAGE DEVICES, INC. 1994 EQUITY INCENTIVE PLAN As Adopted September 12, 1994 As Amended through January 25, 1996 1. PURPOSE. The purpose of the Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent, Subsidiaries and Affiliates, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to the Plan shall be 2,000,000 Shares. Any shares issuable upon exercise of options granted pursuant to the 1987 Stock Option Plan (the "Prior Plan") that expire or become unexercisable for any reason without having been exercised in full, shall no longer be available for distribution under the Prior Plan, but shall be available for distribution under this Plan. Subject to Sections 2.2 and 18, Shares shall again be available for grant and issuance in connection with future Awards under the Plan that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option, (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price, or (c) are subject to an Award that otherwise terminates without Shares being issued. 2.2 Adjustment of Shares. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under the Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards shall be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share shall not be issued but shall either be paid in cash at Fair Market Value or shall be rounded up to the nearest Share, as determined by the Committee. 3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent, Subsidiary or Affiliate of the Company; provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No person shall be eligible to receive more than 500,000 Shares at any time during the term of this Plan pursuant to the grant of Awards hereunder. A person may be granted more than one Award under the Plan. 4. ADMINISTRATION. 4.1 Committee Authority. The Plan shall be administered by the Committee or the Board acting as the Committee. Subject to the general purposes, terms and conditions of the Plan, and to the direction of the Board, the Committee shall have full power to implement and carry out the Plan. The Committee shall have the authority to: 2 (a) construe and interpret the Plan, any Award Agreement and any other agreement or document executed pursuant to the Plan; (b) prescribe, amend and rescind rules and regulations relating to the Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination, in tandem with, in replacement of, or as alternatives to, other Awards under the Plan or any other incentive or compensation plan of the Company or any Parent, Subsidiary or Affiliate of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of the Plan. 4.2 Committee Discretion. Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under the Plan to Participants who are not Insiders of the Company. 4.3 Exchange Act Requirements. If two or more members of the Board are Outside Directors, the Committee shall be comprised of at least two members of the Board, all of whom are Outside Directors and Disinterested Persons. The Company will take appropriate steps to comply with the disinterested administration requirements of Section 16(b) of the Exchange Act, which shall consist of the appointment by the Board of a Committee consisting of not less than two members of the Board, each of whom is a Disinterested Person. 5. OPTIONS. The Committee may grant Options to eligible persons and shall determine whether such Options shall be Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: -2- 3 5.1 Form of Option Grant. Each Option granted under the Plan shall be evidenced by an Award Agreement which shall expressly identify the Option as an ISO or NQSO ("Stock Option Agreement"), and be in such form and contain such provisions (which need not be the same for each Participant) as the Committee shall from time to time approve, and which shall comply with and be subject to the terms and conditions of the Plan. 5.2 Date of Grant. The date of grant of an Option shall be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of the Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options shall be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date the Option is granted, and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten Percent Shareholder") shall be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for the exercise of Options to become exercisable at one time or from time to time, periodically or otherwise, in such number or percentage as the Committee determines. 5.4 Exercise Price. The Exercise Price shall be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that (i) the Exercise Price of an ISO shall be not less than 100% of the Fair Market Value of the Shares on the date of grant and (ii) the Exercise Price of any ISO granted to a Ten Percent Shareholder shall not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of the Plan. 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option shall always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement), but in any event, no later than the expiration date of the Options. (b) If the Participant is terminated because of death or Disability (or the Participant dies within three (3) months of such termination), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's -3- 4 legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement), but in any event no later than the expiration date of the Options. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under the Plan or under any other incentive stock option plan of the Company or any Affiliate, Parent or Subsidiary of the Company) shall not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, the Options for the first $100,000 worth of Shares to become exercisable in such calendar year shall be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year shall be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of the Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit shall be automatically incorporated herein and shall apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of Participant, impair any of Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered shall be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of the Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in the Plan, no term of the Plan relating to ISOs shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee shall determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares shall be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to the Plan shall be evidenced by an Award Agreement ("Restricted Stock Purchase Agreement") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. The offer of Restricted Stock shall be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase -4- 5 Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer shall terminate, unless otherwise determined by the Committee. 6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award shall be determined by the Committee and shall be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price shall be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of the Plan. 6.3 Restrictions. Restricted Stock Awards shall be subject to such restrictions as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine. 7. STOCK BONUSES. 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent, Subsidiary or Affiliate of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent, Subsidiary or Affiliate of the Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent, Subsidiary or Affiliate and/or individual performance factors or upon such other criteria as the Committee may determine. 7.2 Terms of Stock Bonuses. The Committee shall determine the number of Shares to be awarded to the Participant and whether such Shares shall be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee shall determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "Performance Period") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee shall determine. -5- 6 7.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant shall be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee shall determine otherwise. 8. PAYMENT FOR SHARE PURCHASES. 8.1 Payment. Payment for Shares purchased pursuant to the Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; provided, further, that the portion of the Purchase Price equal to the par value of the Shares, if any, must be paid in cash. (d) by waiver of compensation due or accrued to Participant for services rendered; (e) by tender of property; (f) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from Participant and a broker-dealer that is a member of the National Association of Securities Dealers (a "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from Participant and a NASD Dealer whereby Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or -6- 7 (g) by any combination of the foregoing. 8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under the Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. 9.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under the Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under the Plan, payments in satisfaction of Awards are to be made in cash, such payment shall be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by a Participant to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Committee and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, then except as provided below, the election shall be irrevocable as to the particular Shares as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Committee; (d) if the Participant is an Insider and if the Company is subject to Section 16(b) of the Exchange Act: (1) the election may not be made within six (6) months of the date of grant of the Award, except as otherwise permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the election to use stock withholding must be irrevocably made at least six (6) months prior to the Tax Date (although such election may be revoked at any time at least six (6) months prior to the Tax Date) or (B) the exercise of the Option or election to use stock withholding must be made in the ten (10) day period beginning on the third day following the release of the Company's quarterly or annual summary statement of sales or earnings; and (e) in the event that the Tax Date is deferred until six (6) months after the delivery of Shares under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the exercise occurs, but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 10. PRIVILEGES OF STOCK OWNERSHIP. -7- 8 10.1 Voting and Dividends. No Participant shall have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant shall be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company shall be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant shall have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 12. 10.2 Financial Statements. The Company shall provide financial statements to each Participant prior to such Participant's purchase of Shares under the Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company shall not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under the Plan, and any interest therein, shall not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award shall be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant. 12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement (a) a right of first refusal to purchase all Shares that a Participant (or a subsequent transferee) may propose to transfer to a third party, and/or (b) a right to repurchase a portion of or all Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date and the date Participant purchases Shares under the Plan, for cash or cancellation of purchase money indebtedness, at: (A) with respect to Shares that are "Vested" (as defined in the Award Agreement), the higher of: (l) Participant's original Purchase Price, or (2) the Fair Market Value of such Shares on Participant's Termination Date, provided, that such right of repurchase (i) must be exercised as to all such "Vested" Shares unless a Participant consents to the Company's repurchase of only a portion of such "Vested" Shares and (ii) terminates when the Company's securities become publicly traded; or (B) with respect to Shares that are not "Vested" (as defined in the Award Agreement), at the Participant's original Purchase Price, provided, that the right to repurchase at the original Purchase Price lapses at the rate of at least 20% per year over 5 years from the date the Shares were purchased (or from the date of grant of options in the case of Shares obtained pursuant to a Stock Option Agreement and Stock Option Exercise Agreement), and if the right to repurchase is assignable, the assignee must pay the Company, upon assignment of the right to repurchase, cash equal to the excess of the Fair Market Value of the Shares over the original Purchase Price. 13. CERTIFICATES. All certificates for Shares or other securities delivered under the Plan shall be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed. 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock -8- 9 powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under the Plan shall be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company shall have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant shall be required to execute and deliver a written pledge agreement in such form as the Committee shall from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a prorata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant shall agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in the Plan, the Company shall have no obligation to issue or deliver certificates for Shares under the Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) completion of any registration or other qualification of such shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company shall have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award granted under the Plan shall confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. 18.1 Corporate Transactions. In the event of a Corporate Transaction (as defined in this Section 18.1), the exercisability of each Option shall be automatically accelerated so that each Option shall, immediately before the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of Shares and may be exercised for all or any portion of such Shares; provided, that an Option shall not be accelerated if and to the extent that such Option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof. The determination of comparability shall be made by the Board or the Committee, and the Board or the Committee's determination shall be final, binding and -9- 10 conclusive. Upon the consummation of a Corporate Transaction, all outstanding Options shall, to the extent not previously exercised or assumed by the successor corporation or its parent, terminate and cease to be exercisable. "Corporate Transaction" means (i) a merger or acquisition in which the Company is not the surviving entity (except for a transaction the principal purpose of which is to change the State in which the Company is incorporated), (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company or (iii) any other corporate reorganization or business combination that is not approved by the Board and in which the beneficial ownership of 50% or more of the Company's outstanding voting stock is transferred. 18.2 Dissolution. In the event of the proposed dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent that Options have not been previously exercised, such Options will terminate immediately prior to the consummation of such proposed action. 18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Option under this Plan in substitution of such other company's Option, or (b) assuming such Option as if it had been granted under this Plan if the terms of such assumed Option could be applied to an Option granted under this Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed Option would have been eligible to be granted an Option under the Plan if the other company had applied the rules of the Plan to such grant. In the event the Company assumes an Option granted by another company, the terms and conditions of such Option shall remain unchanged (except that the Exercise Price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND SHAREHOLDER APPROVAL. The Plan shall become effective on the closing of the first registration of the Company's Common Stock for sale to the public under the Securities Act (the "Effective Date"). The Plan shall be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date the Plan is adopted by the Board. Upon the Effective Date, the Board may grant Awards pursuant to the Plan; provided, however, that: (a) no Option may be exercised prior to initial shareholder approval of the Plan; (b) no Option granted pursuant to an increase in the number of Shares approved by the Board shall be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval is not obtained within the time period provided herein, all Awards granted hereunder shall be canceled, any Shares issued pursuant to any Award shall be canceled and any purchase of Shares hereunder shall be rescinded. After the Company becomes subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval. 20. TERM OF PLAN. The Plan will terminate ten (10) years from the date the Plan is adopted by the Board or, if earlier, the date of shareholder approval. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend the Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to the Plan; provided, however, that the Board shall not, without the approval of the shareholders of the Company, amend the Plan in any manner that requires such shareholder approval pursuant to -10- 11 the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board, the submission of the Plan to the shareholders of the Company for approval, nor any provision of the Plan shall be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in the Plan, the following terms shall have the following meanings: "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. "Award" means any award under the Plan, including any Option, Restricted Stock or Stock Bonus. "Award Agreement" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the committee appointed by the Board to administer the Plan, or if no committee is appointed, the Board. "Company" means Information Storage Devices, Inc., a corporation organized under the laws of the State of California, or any successor corporation. "Disability" means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. "Disinterested Person" means a director who has not, during the period that person is a member of the Committee and for one year prior to service as a member of the Committee, been granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any Parent, Subsidiary or Affiliate of the Company, except in accordance with the requirements set forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the SEC. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Price" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. -11- 12 "Fair Market Value" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the last trading day prior to the date of determination as reported in The Wall Street Journal; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the last trading day prior to the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the last trading day prior to the date of determination as reported by The Wall Street Journal; or (d) if none of the foregoing is applicable, by the Board in good faith. "Insider" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "Outside Director" means any director who is not (a) a current employee of the Company or any Parent, Subsidiary or Affiliate of the Company, (b) a former employee of the Company or any Parent, Subsidiary or Affiliate of the Company who is receiving compensation for prior services (other than benefits under a tax-qualified pension plan), (c) a current or former officer of the Company or any Parent, Subsidiary or Affiliate of the Company or (d) currently receiving compensation for personal services in any capacity, other than as a director, from the Company or any Parent, Subsidiary or Affiliate of the Company; provided, however, that at such time as the term "Outside Director", as used in Section 162(m) is defined in regulations promulgated under Section 162(m) of the Code, "Outside Director" shall have the meaning set forth in such regulations, as amended from time to time and as interpreted by the Internal Revenue Service. "Option" means an award of an option to purchase Shares pursuant to Section 5. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under the Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Participant" means a person who receives an Award under the Plan. "Plan" means this Information Storage Devices, Inc. 1994 Equity Incentive Plan, as amended from time to time. "Restricted Stock Award" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. -12- 13 "Securities Act" means the Securities Act of 1933, as amended. "Shares" means shares of the Company's Common Stock reserved for issuance under the Plan, as adjusted pursuant to Sections 2 and 15, and any successor security. "Stock Bonus" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Termination" or "Terminated" means, for purposes of the Plan with respect to a Participant, that the Participant has ceased to provide services as an employee, director, consultant, independent contractor or adviser, to the Company or a Parent, Subsidiary or Affiliate of the Company, except in the case of sick leave, military leave, or any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than ninety (90) days, or reinstatement upon the expiration of such leave is guaranteed by contract or statute. The Committee shall have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date"). -13- 14 Information Storage Devices, Inc. Stock Option Agreement NO.___ INFORMATION STORAGE DEVICES, INC. 1994 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is made and entered into as of the date of grant set forth below (the "Date of Grant") by and between Information Storage Devices, Inc., a California corporation (the "Company"), and the participant named below ("Participant"). Capitalized terms not defined herein shall have the meaning ascribed to them in the Company's 1994 Equity Incentive Plan (the "Plan"). PARTICIPANT: ---------------------------- SOCIAL SECURITY NUMBER: ---------------------------- ADDRESS: ---------------------------- ---------------------------- TOTAL OPTION SHARES: ---------------------------- EXERCISE PRICE PER SHARE: ---------------------------- DATE OF GRANT: ---------------------------- VESTING START DATE: ---------------------------- EXPIRATION DATE: ---------------------------- TYPE OF STOCK OPTION (CHECK ONE): [ ] INCENTIVE STOCK OPTION [ ] NONQUALIFIED STOCK OPTION 1. GRANT OF OPTION. The Company hereby grants to Participant an option (the "Option") to purchase the total number of shares of Common Stock of the Company set forth above (the "Shares") at the Exercise Price Per Share set forth above (the "Exercise Price"), subject to all of the terms and conditions of this Agreement and the Plan. If designated as an Incentive Stock Option above, the Option is intended to qualify as an "incentive stock option" ("ISO") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended 1 15 Information Storage Devices, Inc. Stock Option Agreement (the "Code"). 2. EXERCISE PERIOD. 2.1 Exercise Period of Option. This Option becomes exercisable as it vests. Provided Participant continues to provide services to the Company or any Subsidiary, Parent or Affiliate of the Company throughout the specified period, the Option shall become exercisable as to _______________________________________________ until this Option is exercisable with respect to 100% of the Shares. 2 16 Information Storage Devices, Inc. Stock Option Agreement 2.2 Expiration. The Option shall expire on the Expiration Date set forth above and must be exercised, if at all, on or before the Expiration Date. 3. TERMINATION. 3.1 Termination for Any Reason Except Death or Disability. If Participant is Terminated for any reason, except death or Disability, the Option, to the extent (and only to the extent) that it would have been exercisable by Participant on the date of Termination, may be exercised by Participant no later than three (3) months after the date of Termination, but in any event no later than the Expiration Date. 3.2 Termination Because of Death or Disability. If Participant is Terminated because of death or Disability of Participant, the Option, to the extent that it is exercisable by Participant on the date of Termination, may be exercised by Participant (or Participant's legal representative) no later than twelve (12) months after the date of Termination, but in any event no later than the Expiration Date. 3.3 No Obligation to Employ. Nothing in the Plan or this Agreement shall confer on Participant any right to continue in the employ of, or other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company, or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 4. MANNER OF EXERCISE. 4.1 Stock Option Exercise Agreement. To exercise this Option, Participant (or in the case of exercise after Participant's death, Participant's executor, administra tor, heir or legatee, as the case may be) must deliver to the Company an executed stock option exercise agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company from time to time (the "Exercise Agreement"), which shall set forth, inter alia, Participant's election to exercise the Option, the number of Shares being purchased, any restrictions imposed on the Shares and any representations, warranties and agreements regarding Participant's investment intent and access to information as may be required by the Company to comply with applicable securities laws. If someone other than Participant exercises the Option, then such person must submit documentation reasonably acceptable to the Company that such person has the right to exercise the Option. 4.2 Limitations on Exercise. The Option may not be exercised unless such exercise is in compliance with all applicable federal and state securities laws, as they are in effect on the date of exercise. The Option may not be exercised as to fewer than 100 Shares unless it is exercised as to all Shares as to which the Option is then exercisable. 3 17 Information Storage Devices, Inc. Stock Option Agreement 4.3 Payment. The Exercise Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased in cash (by check), or where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares of the Company's Common Stock that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the open public market; and (3) are clear of all liens, claims, encumbrances or security interests; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; provided, further, that the portion of the Purchase Price equal to the par value of the Shares, if any, must be paid in cash. (d) by waiver of compensation due or accrued to Participant for services rendered; (d) by tender of property; (f) provided that a public market for the Company's stock exists, (1) through a "same day sale" commitment from Participant and a broker-dealer that is a member of the National Association of Securities Dealers (a "NASD Dealer") whereby Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company, or (2) through a "margin" commitment from Participant and a NASD -- Dealer whereby Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (e) by any combination of the foregoing. 4 18 Information Storage Devices, Inc. Stock Option Agreement 4.4 Tax Withholding. Prior to the issuance of the Shares upon exercise of the Option, Participant must pay or provide for any applicable federal or state withholding obligations of the Company. If the Committee permits, Participant may provide for payment of withholding taxes upon exercise of the Option by requesting that the Company retain Shares with a Fair Market Value equal to the minimum amount of taxes required to be withheld. In such case, the Company shall issue the net number of Shares to the Participant by deducting the Shares retained from the Shares issuable upon exercise. 4.5 Issuance of Shares. Provided that the Exercise Agreement and payment are in form and substance satisfactory to counsel for the Company, the Company shall 5 19 Information Storage Devices, Inc. Stock Option Agreement issue the Shares registered in the name of Participant, Participant's authorized assignee, or Participant's legal representative, and shall deliver certificates representing the Shares with the appropriate legends affixed thereto. 5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option is an ISO, and if Participant sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, and (2) the date one year after transfer of such Shares to Participant upon exercise of the Option, Participant shall immediately notify the Company in writing of such disposition. Participant agrees that Participant may be subject to income tax withholding by the Company on the compensation income recognized by Participant from the early disposition by payment in cash or out of the current wages or other compensation payable to Participant. 6. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of the Option and the issuance and transfer of Shares shall be subject to compliance by the Company and Partici pant with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company's Common Stock may be listed at the time of such issuance or transfer. Participant understands that the Company is under no obliga tion to register or qualify the Shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance. 7. NONTRANSFERABILITY OF OPTION. The Option may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of Participant only by Participant. The terms of the Option shall be binding upon the executors, administrators, successors and assigns of Participant. 8. TAX CONSEQUENCES. Set forth below is a brief summary as of the Date of Grant of some of the federal and California tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PARTICIPANT SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. 8.1 Exercise of ISO. If the Option qualifies as an ISO, there will be no regular federal or California income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as a tax preference item for federal income tax purposes and may subject the Participant to the alternative minimum tax in the year of exercise. 8.2 Exercise of Nonqualified Stock Option. If the Option does not qualify as an ISO, there may be a regular federal and California income tax liability upon the 6 20 Information Storage Devices, Inc. Stock Option Agreement exercise of the Option. Participant will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. The Company will be required to withhold from Participant's compensation or collect from Participant and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 8.3 Disposition of Shares. If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to the exercise of the Option (and, in the case of an ISO, are disposed of more than two years after the Date of Grant), any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. If Shares purchased under an ISO are disposed of within one year of exercise or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. The Company will be required to withhold from Participant's compensation or collect from Participant and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 9. PRIVILEGES OF STOCK OWNERSHIP. Participant shall not have any of the rights of a shareholder with respect to any Shares until Participant exercises the Option and pays the Exercise Price. 10. INTERPRETATION. Any dispute regarding the interpretation of this Agreement shall be submitted by Participant or the Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Participant. 11. ENTIRE AGREEMENT. The Plan is incorporated herein by reference. This Agreement and the Plan constitute the entire agreement of the parties and supersede all prior undertakings and agreements with respect to the subject matter hereof. 12. NOTICES. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Participant shall be in writing and addressed to Participant at the address indicated above or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by rapifax or telecopier. 13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under 7 21 Information Storage Devices, Inc. Stock Option Agreement this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agree ment shall be binding upon Participant and Participant's heirs, executors, administrators, legal representatives, successors and assigns. 14. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 15. ACCEPTANCE. Participant hereby acknowledges receipt of a copy of the Plan and this Agreement. Participant has read and understands the terms and provisions thereof, and accepts the Option subject to all the terms and conditions of the Plan and this Agreement. Participant acknowledges that there may be adverse tax consequences upon exercise of the 8 22 Information Storage Devices, Inc. Stock Option Agreement Option or disposition of the Shares and that Participant should consult a tax advisor prior to such exercise or disposition. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in duplicate by its duly authorized representative and Participant has executed this Agreement in duplicate as of the Effective Date. INFORMATION STORAGE PARTICIPANT DEVICES, INC. By: - - ------------------------------ ---------------------------- (Signature) - - ------------------------------ ---------------------------- (Please print name) (Please print name) - - -------------------------------------- (Please print title) 9 23 Information Storage Devices, Inc. Stock Option Agreement EXHIBIT A STOCK OPTION EXERCISE AGREEMENT 10 24 Exhibit A INFORMATION STORAGE DEVICES, INC. STOCK OPTION EXERCISE AGREEMENT I hereby elect to purchase the number of shares of Common Stock as set forth below: Participant Number of Shares Purchased: Social Security Number: Purchase Price per Share: Address: Aggregate Purchase Price: ___________________________________ Date of Option Agreement: Type of Option: [ ] Incentive Stock Option Exact Name of Title to Shares: [ ] Nonqualified Stock Option Participant hereby delivers to the Company the Aggregate Purchase Price, to the extent permitted in the Option Agreement as follows (check as applicable and complete): [ ] in cash (by check) in the amount of $__________________, receipt of which is acknowledged by the Company; [ ] by cancellation of indebtedness of the Company to Participant in the amount of $_______________________; [ ] by delivery of ___________ fully-paid, nonassessable and vested shares of the common stock of the Company owned by Participant for at least six (6) months prior to the date hereof (and which have been paid for within the meaning of SEC Rule 144), or obtained by Participant in the open public market, and owned free and clear of all liens, claims, encumbrances or security interests, valued at the current Fair Market Value of $_________ per share; [ ] by tender of a full recourse promissory note in the principal amount of $____________________________, secured by a Pledge Agreement of even date herewith; [ ] by the waiver hereby of compensation due or accrued to Participant for services rendered in the amount of $ _______________; [ ] by tender of property in the amount of $______________; [ ] through a "same-day-sale" commitment, delivered herewith, from Participant and the NASD Dealer named therein, in the amount of $___________________; or [ ] through a "margin" commitment, delivered herewith from Participant and the NASD Dealer named therein, in the amount of $____________. Market Standoff Agreement. Participant, if requested by the Company and an underwriter of Common Stock (or other securities) of the Company, agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by Participant during the period requested by the managing underwriter following the effective date of a registration statement of the Company filed under the Exchange Act, provided that all officers and directors of the Company are required to enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or other securities) subject to the foregoing restriction until the end of such period. Tax Consequences. PARTICIPANT UNDERSTANDS THAT PARTICIPANT MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF PARTICIPANT'S PURCHASE OR DISPOSITION OF THE SHARES. PARTICIPANT REPRESENTS THAT PARTICIPANT HAS CONSULTED WITH ANY TAX CONSULTANT(S) PARTICIPANT DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT PARTICIPANT IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. Entire Agreement. The Plan and Option Agreement are incorporated herein by reference. This Exercise Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof, and is governed by California law except for that body of law pertaining to conflict of laws. Date: Signature of Participant 25 SPOUSE'S CONSENT I acknowledge that I have read the Stock Option Exercise Agreement (the "Agreement") and that I know its contents. I am aware that by the Agreement's provisions my spouse (the "Participant") agrees to sell the Number of Shares Purchased (as provided for in the Agreement and hereinafter referred to as "Shares"), including any community property interest I may have, on the occurrence of certain events. I hereby consent to the sale, approve the provisions of the Agreement and agree that these Shares and any interest I may have in them are subject to the provisions of the Agreement. I will take no action at any time to hinder operation of the Agreement on these Shares or any interest I may have on them. Spouse of Participant __________________________________ Date:__________________ ___________________________________ Date:__________________ Participant's Name EX-10.03 4 1994 DIRECTORS STOCK OPTION PLAN 1 EXHIBIT 10.03 INFORMATION STORAGE DEVICES, INC. 1994 DIRECTORS STOCK OPTION PLAN As Adopted September 12, 1994 As Amended Through March 21, 1996 1. Purpose. This 1994 Directors Stock Option Plan (this "Plan") is established to provide equity incentives for nonemployee members of the Board of Directors of Information Storage Devices, Inc. (the "Company"), who are described in Section 6.1 below, by granting such persons options to purchase shares of stock of the Company. 2. Adoption and Shareholder Approval. This Plan shall become effective on the closing of the first registration of the Company's Common Stock for sale to the public under the Securities Act (the "Effective Date"). This Plan shall be approved by the shareholders of the Company, consistent with applicable laws, within twelve (12) months after the date this Plan is adopted by the Board of Directors of the Company (the "Board"). Options ("Options") may be granted under this Plan after the Effective Date provided that, in the event that shareholder approval is not obtained within the time period provided herein, this Plan, and all Options granted hereunder, shall terminate. No Option that is issued as a result of any increase in the number of shares authorized to be issued under this Plan shall be exercised prior to the time such increase has been approved by the shareholders of the Company and all such Options granted pursuant to such increase shall similarly terminate if such shareholder approval is not obtained. So long as the Company is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") the Company will comply with the requirements of Rule 16b-3 with respect to shareholder approval. 3. Types of Options and Shares. Options granted under this Plan shall be nonqualified stock options ("NQSOs"). The shares of stock that may be purchased upon exercise of Options granted under this Plan (the "Shares") are shares of the Common Stock of the Company. 4. Number of Shares. The maximum number of Shares that may be issued pursuant to Options granted under this Plan is 120,000 Shares, subject to adjustment as provided in this Plan. If any Option is terminated for any reason without being exercised in whole or in part, the Shares thereby released from such Option shall be available for purchase under other Options subsequently granted under this Plan. At all times during the term of this Plan, the Company shall reserve and keep available such number of Shares as shall be required to satisfy the requirements of outstanding Options under this Plan. 5. Administration. This Plan shall be administered by the Board or by a committee of not less than two members of the Board appointed to administer this Plan (the "Committee"). As used in this Plan, references to the Committee shall mean either such Committee or the Board if no Committee has been established. The interpretation by the Committee of any of the provisions of this Plan or any Option granted under this Plan shall be final and binding upon the Company and all persons having an interest in any Option or any Shares purchased pursuant to an Option. 6. Eligibility and Award Formula. 2 6.1 Eligibility. Options may be granted only to directors of the Company who are not employees of the Company or any Parent, Subsidiary or Affiliate of the Company, as those terms are defined in Section 17 below (each an "Optionee"). 6.2 Initial Grant. Each Optionee who on or after the Effective Date becomes a member of the Board will automatically be granted an Option for 7,500 Shares (the "Initial Grant"). Initial Grants shall be made on the date such Optionee first joins the Board. 6.3 Succeeding Grants. Each year following the effective date of the amendment to this Plan giving effect hereto ("Amendment Effective Date") on January 1 of such year, if the Optionee is still a member of the Board, the Optionee will automatically be granted an Option for 7,500 Shares (the "Succeeding Grant"). 6.4 Maximum Shares. The maximum number of Shares that may be issued to any one Optionee under this Plan is 30,000. No grant will be made if such grant will cause the number of Shares issued or subject to outstanding Options under this Plan to exceed the number specified in Section 4 above. 7. Terms and Conditions of Options. Subject to the following and to Section 6 above: 7.1 Form of Option Grant. Each Option granted under this Plan shall be evidenced by a written Stock Option Grant ("Grant") in such form (which need not be the same for each Optionee) as the Committee shall from time to time approve, which Grant shall comply with and be subject to the terms and conditions of this Plan. 7.2 Vesting. Options granted under this Plan shall be exercisable as they vest. The date an Optionee receives an Initial Grant or a Succeeding Grant is referred to in this Plan as the "Start Date" for such Option. Each Initial Grant granted prior to the Amendment Effective Date will fully vest as to twenty-five percent (25%) of the Shares at the end of each full year following the Start Date, so long as the Optionee continuously remains a director of the Company. Each Succeeding Grant granted prior to the Amendment Effective Date will vest as to twenty-five percent (25%) of the Shares at the end of each full year following the Start Date, so long as the Optionee continuously remains a director of the Company. Each Initial Grant or Succeeding Grant granted following the Amendment Effective Date will vest ratably at the end of each of the twelve months following the Start Date and will be fully vested on the first anniversary of the Start Date, so long as the Optionee continuously remains a director of the Company until each such first anniversary. 7.3 Exercise Price. The exercise price of an Option shall be the Fair Market Value (as defined in Section 17.4) of the Shares, at the time that the Option is granted. 7.4 Termination of Option. Except as provided below in this Section, each Option shall expire ten (10) years after the Start Date (the "Expiration Date"). The Option shall cease to vest if the Optionee ceases to be a member of the Board. The date on which the Optionee ceases to be a member of the Board shall be referred to as the "Termination Date". An Option may be exercised after the Termination Date only as set forth below: (a) Termination Generally. If the Optionee ceases to be a member of the Board for any reason except death or disability, each Option, to the extent (and only to the extent) that it would have been exercisable by the Optionee on the Termination Date, may be exercised by the Optionee within three (3) months after the Termination Date, but in no event later than the Expiration Date. -2- 3 (b) Death or Disability. If the Optionee ceases to be a member of the Board because of the death of the Optionee or the disability of the Optionee within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), each Option, to the extent (and only to the extent) that it would have been exercisable by the Optionee on the Termination Date, may be exercised by the Optionee (or the Optionee's legal representative) within twelve (12) months after the Termination Date, but in no event later than the Expiration Date. 8. Exercise of Options. 8.1 Notice. Options may be exercised only by delivery to the Company of an exercise agreement in a form approved by the Committee stating the number of Shares being purchased, the restrictions imposed on the Shares and such representations and agreements regarding the Optionee's investment intent and access to information as may be required by the Company to comply with applicable securities laws, together with payment in full of the exercise price for the number of Shares being purchased. 8.2 Payment. Payment for the Shares may be made (a) in cash or by check; (b) by surrender of shares of Common Stock of the Company that have been owned by the Optionee for more than six (6) months (and which have been paid for within the meaning of SEC Rule 144 and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or were obtained by the Optionee in the open public market, having a Fair Market Value equal to the exercise price of the Option; (c) by waiver of compensation due or accrued to the Optionee for services rendered; (d) provided that a public market for the Company's stock exists, through a "same day sale" commitment from the Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (a "NASD Dealer") whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; (e) provided that a public market for the Company's stock exists, through a "margin" commitment from the Optionee and a NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (f) by any combination of the foregoing. 8.3 Withholding Taxes. Prior to issuance of the Shares upon exercise of an Option, the Optionee shall pay or make adequate provision for any federal or state withholding obligations of the Company, if applicable. 8.4 Limitations on Exercise. Notwithstanding the exercise periods set forth in the Grant, exercise of an Option shall always be subject to the following limitations: (a) An Option shall not be exercisable until such time as the Plan or, in the case of Options granted pursuant to an amendment to the number of shares that may be issued pursuant to the Plan, the amendment has been approved by the shareholders of the Company in accordance with Section 15 hereof. (b) An Option shall not be exercisable unless such exercise is in compliance with the Securities Act, and all applicable state securities laws, as they are in effect on the date of exercise. -3- 4 (c) The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent the Optionee from exercising the full number of Shares as to which the Option is then exercisable. 9. Nontransferability of Options. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or by the Optionee's guardian or legal representative, unless otherwise permitted by the Committee. No Option may be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. 10. Privileges of Stock Ownership. No Optionee shall have any of the rights of a shareholder with respect to any Shares subject to an Option until the Option has been validly exercised. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date of exercise, except as provided in this Plan. The Company shall provide to each Optionee a copy of the annual financial statements of the Company, at such time after the close of each fiscal year of the Company as they are released by the Company to its shareholders. 11. Adjustment of Option Shares. In the event that the number of outstanding shares of Common Stock of the Company is changed by a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the capital structure of the Company without consideration, the number of Shares available under this Plan and the number of Shares subject to outstanding Options and the exercise price per share of such Options shall be proportionately adjusted, subject to any required action by the Board or shareholders of the Company and compliance with applicable securities laws; provided, however, that no certificate or scrip representing fractional shares shall be issued upon exercise of any Option and any resulting fractions of a Share shall be rounded up to the nearest Share. 12. No Obligation to Continue as Director. Nothing in this Plan or any Option granted under this Plan shall confer on any Optionee any right to continue as a director of the Company. 13. Compliance With Laws. The grant of Options and the issuance of Shares upon exercise of any Options shall be subject to and conditioned upon compliance with all applicable requirements of law, including without limitation compliance with the Securities Act, compliance with all other applicable state securities laws and compliance with the requirements of any stock exchange or national market system on which the Shares may be listed. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration or qualification requirement of any state securities laws, stock exchange or national market system. l4. Acceleration of Options. In the event of a dissolution or liquidation of the Company, a merger in which the Company is not the surviving corporation, the sale of substantially all of the assets of the Company, or any other transaction which qualifies as a "corporate transaction" under Section 424 of the Code wherein the shareholders of the Company give up all of their equity interest in the Company, the vesting of all options granted pursuant to the Plan will accelerate and the options will become exercisable in full prior to the consummation of such event at such times and on such conditions as the Committee determines. 15. Amendment or Termination of Plan. The Committee may at any time terminate or amend this Plan but not the terms of any outstanding option; provided, however, that the Committee shall not, without the approval of the shareholders of the Company, increase the total number of Shares available under this Plan (except by operation of the provisions of Sections 4 and 11 above) or change the class of persons eligible to -4- 5 receive Options. Further, the provisions in Sections 6 and 7 of this Plan shall not be amended more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act or the rules thereunder. In any case, no amendment of this Plan may adversely affect any then outstanding Options or any unexercised portions thereof without the written consent of the Optionee. 16. Term of Plan. Options may be granted pursuant to this Plan from time to time within a period of ten (10) years from the date this Plan is adopted by the Board. 17. Certain Definitions. As used in this Plan, the following terms shall have the following meanings: 17.1 "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of the granting of the Option, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 17.2 "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Option, each of the corporations other than the last corporation in the unbroken chain 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. 17.3 "AFFILIATE" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. 17.4 "FAIR MARKET VALUE" shall mean, as of any date, the value of a share of the Company's Common Stock determined by the Board in its sole discretion, exercised in good faith; provided, however, that where there is a public market for the Common Stock, the Fair Market Value per share shall be the average of the closing bid and asked prices of the Common Stock on the last trading day prior to the date of determination as reported in The Wall Street Journal (or, if not so reported, as otherwise reported by the Nasdaq Stock Market) or, in the event the Common Stock is listed on a stock exchange or on the Nasdaq National Market, the Fair Market Value per share shall be the closing price on the exchange or on the Nasdaq National Market on the last trading date prior to the date of determination as reported in The Wall Street Journal. -5- 6 Information Storage Devices, Inc. Directors Stock Option Grant INFORMATION STORAGE DEVICES, INC. DIRECTORS NONQUALIFIED STOCK OPTION GRANT Optionee: --------------------------- Address: --------------------------- Total Shares Subject to Option: 7500 --------------------------- Exercise Price Per Share: --------------------------- Date of Grant: --------------------------- Expiration Date: --------------------------- 1. GRANT OF OPTION. Information Storage Devices, Inc., a California corporation (the "Company"), has granted to the optionee named above ("Optionee") an option (this "Option") to purchase the total number of shares of Common Stock of the Company set forth above (collectively, the "Shares") at the exercise price per share set forth above (the "Exercise Price"), subject to all of the terms and conditions of this Grant and the Company's 1994 Directors Stock Option Plan, as amended to the date hereof (the "Plan"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Plan. 2. EXERCISE AND VESTING OF OPTION. Subject to the terms and conditions of the Plan and this Grant, this Option shall be exercisable as it vests. Subject to the terms and conditions of the Plan and this Grant, this Option shall vest as to twenty-five percent (25%) of the Shares at the end of each full year following the date of grant so long as the Optionee continuously remains a member of the Board of Directors of the Company (a "Board Member"). 3. RESTRICTION ON EXERCISE. This Option may not be exercised unless such exercise is in compliance with the 1933 Securities Act, and all applicable state securities laws, as they -1- 7 Information Storage Devices, Inc. Directors Stock Option Grant are in effect on the date of exercise, and the requirements of any stock exchange or national market system on which the Company's Common Stock may be listed at the time of exercise. Optionee understands that the Company is under no obligation to register, qualify or list the Shares with the SEC, any state securities commission or any stock exchange or national market system to effect such compliance. 4. TERMINATION OF OPTION. Except as provided below in this Section, this Option shall terminate and may not be exercised if Optionee ceases to be a Board Member. The date on which Optionee ceases to be a Board Member shall be referred to as the "Termination Date." 4.1 Termination Generally. If Optionee ceases to be a Board Member for any reason except death or disability, this Option, to the extent (and only to the extent) that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee within three (3) months after the Termination Date, but in no event later than the Expiration Date. 4.2 Death or Disability. If Optionee ceases to be a Board Member because of the death of Optionee or the disability of Optionee within the meaning of Section 22(e)(3) of the Code, this Option, to the extent (and only to the extent) that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee (or Optionee's legal representative) within twelve (12) months after the Termination Date, but in no event later than the Expiration Date. 5. MANNER OF EXERCISE. 5.1 Exercise Agreement. This Option shall be exercisable by delivery to the Company of an executed written Directors Stock Option Exercise Agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Committee, which shall set forth Optionee's election to exercise some or all of this Option, the number of Shares being purchased, any restrictions imposed on the Shares and such other representations and agreements as may be required by the Company to comply with applicable securities laws. 5.2 Payment. Payment for the Shares may be made (a) in cash or by check; (b) by surrender of shares of Common Stock of the Company that have been owned by Optionee for more than six (6) months (and which have been paid for within the meaning of SEC Rule 144 and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares) or were obtained by the Optionee in the open public market, having a Fair Market Value equal to the Exercise Price of -2- 8 Information Storage Devices, Inc. Directors Stock Option Grant the Option; (c) by waiver of compensation due or accrued to Optionee for services rendered; (d) provided that a public market for the Company's stock exists, through a "same day sale" commitment from the Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (a "NASD Dealer") whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; (e) provided that a public market for the Company's stock exists, through a "margin" commitment from the Optionee and a NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 5.3 Withholding Taxes. Prior to the issuance of the Shares upon exercise of this Option, Optionee shall pay or make adequate provision for any applicable federal or state withholding obligations of the Company. 5.4 Issuance of Shares. Provided that such notice and payment are in form and substance satisfactory to counsel for the Company, the Company shall cause the Shares to be issued in the name of Optionee or Optionee's legal representative. To enforce any restrictions on Optionee's Shares, the Committee may require Optionee to deposit all certificates, together with stock powers or other instruments of transfer approved by the Committee appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. 6. NONTRANSFERABILITY OF OPTION. During the lifetime of the Optionee, this Option shall be exercisable only by Optionee or by Optionee's guardian or legal representative, unless otherwise permitted by the Committee. No Option may be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. 7. INTERPRETATION. Any dispute regarding the interpretation of this Grant shall be submitted by Optionee or the Company to the Committee that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Committee shall be final and binding on the Company and on Optionee. Nothing in the Plan or this Grant shall confer on Optionee any right to continue as a Board Member. -3- 9 Information Storage Devices, Inc. Directors Stock Option Grant 8. ENTIRE AGREEMENT. The Plan and the Directors Stock Option Exercise Agreement are incorporated herein by this reference. This Grant, the Plan and the Directors Stock Option Exercise Agreement constitute the entire agreement of the parties hereto and supersede all prior undertakings and agreements with respect to the subject matter hereof. INFORMATION STORAGE DEVICES, INC. B y : -------------------------------------------- N a m e : --------------------------------------- T i t l e : ----------------------------------- -4- 10 Information Storage Devices, Inc. Directors Stock Option Grant ACCEPTANCE Optionee hereby acknowledges receipt of a copy of the Plan, represents that Optionee has read and understands the terms and provisions thereof, and accepts this Option subject to all the terms and conditions of the Plan and this Grant. Optionee acknowledges that there may be adverse tax consequences upon exercise of this Option or disposition of the Shares and that Optionee should consult a qualified tax advisor prior to such exercise or disposition. --------------------------------- Optionee -5- 11 EXHIBIT A DIRECTORS STOCK OPTION EXERCISE AGREEMENT 12 Exhibit A INFORMATION STORAGE DEVICES, INC. 1994 DIRECTORS STOCK OPTION PLAN DIRECTORS STOCK OPTION EXERCISE AGREEMENT I hereby elect to purchase the number of shares of common stock as set forth below: Optionee: Number of Shares Purchased: Social Security Number: Purchase Price per Share: Address: Aggregate Purchase Price: Date of Stock Option Grant: Type of Stock Option: Nonqualified Stock Option Exact Name of Title to Shares: Optionee hereby delivers to the Company the Aggregate Purchase Price, to the extent permitted in the Directors Nonqualified Stock Option Grant as follows (check as applicable and complete): [ ] in cash (by check) in the amount of $__________________, receipt of which is acknowledged by the Company; [ ] by delivery of ___________ fully-paid, nonassessable and vested shares of the common stock of the Company owned by Optionee for at least six (6) months prior to the date hereof (and which have been paid for within the meaning of SEC Rule 144), or obtained by Optionee in the open public market, and owned free and clear of all liens, claims, encumbrances or security interests, valued at the current Fair Market Value of $_________ per share; [ ] by the waiver hereby of compensation due or accrued to Optionee for services rendered in the amount of $___________; [ ] through a "same-day-sale" commitment, delivered herewith, from Optionee and the NASD Dealer named therein, in the amount of $___________________; or [ ] through a "margin" commitment, delivered herewith from Optionee and the NASD Dealer named therein, in the amount of $_____________________. Market Standoff Agreement. Optionee agrees in connection with any registration of the Company's securities that, upon the request of the Company or the underwriters managing any public offering of the Company's securities, Optionee will not sell or otherwise dispose of any Shares without the prior written consent of the Company or such underwriters, as the case may be, for such period of time from the effective date of such registration as the Company or the underwriters may specify for the Company's officers and directors. Tax Consequences. OPTIONEE UNDERSTANDS THAT OPTIONEE MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF OPTIONEE'S PURCHASE OR DISPOSITION OF THE SHARES. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH ANY TAX CONSULTANT(S) OPTIONEE DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT OPTIONEE IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. Entire Agreement. The Plan and Directors Nonqualified Stock Option Grant are incorporated herein by reference. This Agreement, the Plan and the Directors Nonqualified Stock Option Grant constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and is governed by California law except for that body of law pertaining to conflict of laws. -1- 13 Date: Signature of Optionee -2- 14 SPOUSE'S CONSENT I acknowledge that I have read the Directors Stock Option Exercise Agreement (the "Agreement") and that I know its contents. I am aware that by the Agreement's provisions my spouse (the "Optionee") agrees to sell the Number of Shares Purchased (as provided for in the Agreement and hereinafter referred to as "Shares"), including any community property interest I may have, on the occurrence of certain events. I hereby consent to the sale, approve the provisions of the Agreement and agree that these Shares and any interest I may have in them are subject to the provisions of the Agreement. I will take no action at any time to hinder operation of the Agreement on these Shares or any interest I may have in them. Spouse of Optionee __________________________________ Date:_________________________ ___________________________________ Date:_________________________ Optionee's Name -3- EX-10.23 5 FORM OF EMPLOYMENT AGREEMENT 1 1996 Q1 Information Storage Devices, Inc. EXHIBIT 10.23 [ISD LETTERHEAD] January 19, 1996 [Employee Name] [Employee Address] Re: Your Employment With Information Storage Devices, Inc. Dear [Name]: {See Attached Schedule} This letter will set forth the binding agreement of employment (the "Agreement"), effective as of January 19, 1996 (the "Effective Date"), between you and Information Storage Devices, Inc., a California corporation ("ISD"). 1. EMPLOYMENT AND DUTIES. During the Employment Term, as defined in Section 3 below, you will serve as {See Attached Schedule} of ISD. You will have such duties and authority as are customary for, and commensurate with such position, including _______________________________, and such other reasonable duties and authority as the Board of Directors of ISD (the "Board") [or the President of ISD] prescribes from time to time. 2. COMPENSATION. (a) Salary. For your services hereunder, ISD will pay as salary to you the amount of ${See Attached Schedule} per month during each of the calendar years of the Employment Term, as defined in Section 3 below, prorated for any year in which this Agreement is in effect for only a portion of the calendar year. Such salary will be paid in conformity with ISD's normal payroll period. Your salary will be reviewed by the Board from time to time at its discretion, and you will receive such salary increases, if any, as the Board in its sole discretion determines. (b) Bonus. In addition to the salary set forth in Section 2(a) hereof, you will be eligible starting in fiscal 1996, for an annual bonus pursuant to a formula, and determined in accordance with criteria, in each case to be established by the Board of Directors and/or its Compensation Committee, which formula and criteria will be communicated to you in writing reasonably in advance of the commencement of the performance period to which such bonus will relate. (c) Other Benefits. You will be entitled to participate in and receive benefits under ISD's standard company benefits plans as in effect from time to time, including medical insurance, sick leave, and vacation time, subject to and on a basis 2 1996 Q1 Information Storage Devices, Inc. consistent with the terms, conditions and overall administration of such plans and ISD policies. (d) Expenses. During the term of your employment hereunder, you will be entitled to receive prompt reimbursement from the ISD for all reasonable business-related expenses incurred by you, in accordance with ISD's policies and procedures as in effect from time to time, provided that you will properly account for such business expenses in accordance with ISD's policy. (e) Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement will be subject to any deductions authorized in writing by you and any deductions and withholdings required by law. 3. TERM OF EMPLOYMENT. (a) Term. This Agreement will continue in full force and effect from and including the Effective Date through and including January 18, 1997, unless sooner terminated or extended as hereinafter provided (the "Employment Term"). (b) Extension of Term. The term hereof may be extended by a written amendment to this Agreement signed by both you and ISD. (c) Early Termination. Your employment with ISD under this Agreement may be terminated by ISD at any time during the Employment Term by [the President or] [DELETE FOR DAVE ANGEL] the Board, for any reason and without cause, upon delivery of written notice by ISD. ISD is not required to give you any advance notice of termination which, in the sole discretion of ISD, may be effective immediately upon delivery of written notice to you. You may terminate this Agreement at any time by giving ISD written notice of your resignation at least 30 days in advance; provided, however, that the Board may determine upon receipt of such notice that the effective date of such resignation will be immediate or some time prior to the expiration of the notice period stated in your written notice to ISD. (d) Termination for Cause. Prior to the expiration of the Employment Term, your employment may be terminated for Cause by the Board, immediately upon delivery of termination notice thereof to you. For these purposes, termination for "Cause" will include, without limitation, termination because of your (i) personal dishonesty, willful misconduct, or breach of fiduciary duty involving personal profit or (ii) willful violation of any felony law, in each case as determined in good faith by the Board after consultation with you to determine the validity of the basis for such termination, or (iii) willful breach by you of a material provision of this Agreement after written notice, in reasonable detail as the alleged breach, has been given to you by the Board and you have had a reasonable opportunity to cure such breach. (e) Termination Due to Death or Disability. Your employment hereunder will terminate immediately upon your death. In the event that by reason of injury, illness or other physical or mental impairment you are (i) completely unable to perform your services 3 1996 Q1 Information Storage Devices, Inc. hereunder for more than two consecutive months, or (ii) unable in the good faith judgment of the Board to perform your services hereunder for 50% or more of the normal working day throughout six consecutive months, then ISD may terminate your employment hereunder at the end of such two-month or six-month period, as applicable, by delivery to you of written notice of such termination. 4. PAYMENTS AND BENEFITS AFTER TERMINATION OF EMPLOYMENT. (a) Termination For Cause, Death or Disability, or Voluntary Termination. Upon termination of your employment by the Company under Section 3(d) hereof ("Termination for Cause"), Section 3(e) hereof ("Termination Due to Death or Disability"), or upon your voluntary termination of employment pursuant to Section 3(c) hereof ("Early Termination"), all salary and benefits hereunder will cease immediately. (b) Involuntary Termination After Corporate Transaction or Change of Control. (i) Definitions. For purposes of this Section 4(b): (A) A "Corporate Transaction" is defined as any corporate reorganization or business combination that is not approved by the Board and in which the beneficial ownership of 50% or more of the Company's outstanding voting stock is transferred. (B) A "Change in Control" will be deemed to occur: (1) when a person or related group of persons, other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with the Company, becomes the beneficial owner (within the meaning of Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934) of 15% or more of the Company's outstanding voting stock pursuant to a tender or exchange offer that the Board does not recommend and that the stockholders of the Company accept; or (2) on the first date within any period of twenty-four (24) consecutive months or less on which there is effected a change in the composition of the Board by reason of a contested election such that a majority of the Board members cease to be comprised of individuals who either (a) have been members of the Board continuously since the beginning of such period or (b) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (2)(a) of this paragraph who were still in office at the time such election or nomination was approved by the Board. (C) The "Post-Transaction Period" is defined as the six-month period commencing on the date of a Change of Control or of the closing or effectiveness of a Corporate Transaction, as applicable, and ending on the same numerical date in such sixth month as the date upon which such Change of Control or closing or effectiveness of the Corporate Transaction occurred in the original month, and if such sixth month period ends in February, and the date within the original month on which such Change of Control occurred or Corporate Transaction closed or completed was the 29th, 30th or 31st 4 1996 Q1 Information Storage Devices, Inc. day of such original month, then counting the last day of February as the 29th, 30th or 31st day of the month as applicable. (D) A "Constructive Termination Event" will be deemed to have occurred if any of the following actions is taken by the Company and such action is not reversed in full by the Company within two weeks after the effective date thereof: (1) your aggregate benefits are [materially] reduced below those in effect immediately prior to the effective date of such Constructive Termination Event, and/or (2) your duties and/or authority within the Company are [materially] decreased following the effective date of such Constructive Termination Event in a way adverse to you, and/or (3) your title is changed to a title that, under customary usage within the semiconductor industry, would be considered to be a lower-level title than your prior title, (4) you are required to perform your employment obligations (other than routine travel consistent with that prior to the effective date of such Constructive Termination Event) at a location more than ___ miles away from your principal place of work for ISD as such place of work was in effect immediately prior to the effective date of such Constructive Termination Event. (ii) Severance Pay For Involuntary Termination Without Cause During Post-Transaction Period. If at any time during the Post-Transaction Period (A) your employment is terminated by the Company without cause, pursuant to Section 3(c) hereof, (but not if your employment is terminated during the Post-Transaction Period for Cause (under Section 3(d) hereof) or by reason of your death or disability (under Section 3(e) hereof), nor if you voluntarily terminate your employment under Section 3(c) hereof except if such voluntary termination is as a result of a Constructive Termination Event), or (B) a Constructive Termination Event occurs and you voluntarily terminate your employment thereafter before such Constructive Termination Event is reversed by the Company as set forth in Section 4(b)(i)(D) hereof, then from and after the date of such termination, you will be paid severance pay by ISD, for a period of six months from and after the date of such termination (prorated for the first and last month of such six-month period if your employment is terminated other than at the end of a calendar month) of 2.5 times the total amount of your annualized salary as in effect immediately prior to such termination or Constructive Termination Event, to be paid in six equal installments each paid on the date you otherwise would have been paid your salary had your employment continued. (c) Bonus, Benefits; Cooperation. In the event of any termination of your employment, for whatever reason, you also will be paid, when otherwise due, any bonus to which you otherwise would be entitled, and to such continuation of your benefits listed in Section 2(c) hereof as may be provided by Company policy or required by law. After any such termination of your employment, except to the extent you are not able to do so by reason of your death or disability, you will cooperate with ISD in providing for the orderly transition of your duties and responsibilities to other individuals, as is reasonably requested by ISD. 5. MISCELLANEOUS. This Agreement contains the entire understanding and sole and entire agreement between the parties with respect to the subject matter hereof, and supersedes any and all prior agreements, negotiations and discussions between the parties 5 1996 Q1 Information Storage Devices, Inc. hereto with respect to the subject matter covered hereby and may only be modified by an agreement in writing signed by ISD and you, and which states the intent of the parties to amend this Agreement. If any provision of this Agreement is held to be invalid or otherwise unenforceable, in whole or in part, the remainder of such provision and the remainder of this Agreement will not be affected thereby and will be enforced to the fullest extent permitted by law. Neither this Agreement nor the rights or obligations hereunder will be assignable by you. ISD may assign this Agreement to any successor of ISD, and upon such assignment any such successor will be deemed substituted for ISD upon the terms and subject to the conditions hereof. This Agreement will be binding upon the successors and assigns of the parties hereof and upon your heirs, executors and administrators. This Agreement has been negotiated and executed in, and will be governed by and construed with the laws of, the State of California. Any notice, request, demand or other communication required or permitted hereunder will be deemed to be properly given when personally served in writing, or when deposited in the United States mail, postage pre-paid, addressed to ISD at the address shown at the beginning of this letter, or to you at the address shown below, or by facsimile upon confirmation of receipt. Each party hereto may change its address by written notice in accordance with this Section 5. Sincerely, ---------------------- David L. Angel President [GENE FLATH CHAIRMAN OF THE BOARD SIGNS FOR DAVE ANGEL] ACCEPTED AND AGREED: - - ---------------------------------------- [Name] Date signed: , 1996 -------- Address: ------------------------------- ------------------------------- ------------------------------- ------------------------------- Facsimile: ------------------------------- 6 1996 Q1 Information Storage Devices, Inc. Schedule of Employment Agreement Terms
Name Position Salary (Section 1) (Section 2(a)) ----------- -------------- David L. Angel President & CEO $14,584 James Brennan Vice President, Advanced $11,700 Development Michael Geilhufe Vice President, Quality and $10,417 Reliability Genda Hu Vice President, Technology $10,417 Scott Owen Chief Operating Officer $13,334 Carl Palmer Vice President, Engineering $10,834 Felix J. Rosengarten Vice President, Finance and $10,834 Administration, CFO Richard Schuppert Director, Manufacturing $ 8,487 Engineering David Sowards Director, Design Engineering $ 8,923 Jenny Twaddle Controller $ 7,219 Alfred Woodhull Vice President, Manufacturing $10,834 Jon Zierk Director, Worldwide Sales $ 7,917
7 1996 Q1 Information Storage Devices, Inc. EXHIBIT 11.01 INFORMATION STORAGE DEVICES, INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, --------- 1995 1996 ---- ---- Net income $ 1,089 $ (1,977) ======== ======== Weighted average common stock outstanding 6,795 10,235 Common stock equivalents: Stock options 759 -- Warrants 126 -- -------- -------- Total shares used in computing net income per share 7,680 10,235 -------- -------- Net income per share $ .14 $ (.19) -------- --------
EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1 37608 18637 7265 (325) 10,827 77,402 9,667 4,204 95,661 15,030 2,465 0 0 78,695 (838) 77,857 12,335 12,335 9,428 9,428 0 0 124 (3,041) (1,064) (1,977) 0 0 0 (1,977) (.19) (.19)
-----END PRIVACY-ENHANCED MESSAGE-----