SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material under Rule 14a-12
SBE, INC.
(Name of Registrant as Specified In Its Charter)
Not applicable
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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SBE, INC.
2305 Camino Ramon, Suite 200
San Ramon, California 94583
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 16, 2004
To The Stockholders Of SBE, Inc:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of SBE, Inc., a
Delaware corporation (the "Company"), will be held on Tuesday, March 16, 2004 at
9:00 a.m. local time at the Company's offices at 2305 Camino Ramon, Suite 200,
San Ramon, California for the following purposes:
(1) To elect two directors to hold office until the 2007 Annual Meeting of
Stockholders and until their successors are elected and duly
qualified.
(2) To approve the Company's 1996 Stock Option Plan, as amended, to
increase the aggregate number of shares of Common Stock reserved for
issuance under such plan by 1,000,000 shares.
(3) To approve the Company's 2001 Non-Employee Director's Stock Option
Plan, as amended, to increase the aggregate number of shares of Common
Stock reserved for issuance under such plan by 200,000 shares.
(4) To approve an amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of Common Stock from
10,000,000 to 25,000,000 shares.
(5) To approve an amendment to the Company's Certificate of Incorporation
to allow stockholders to remove directors without cause.
(6) To ratify the selection of BDO Seidman, LLP as independent auditors of
the Company for its fiscal year ending October 31, 2004.
(7) To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy Statement
accompanying this Notice.
The Board of Directors of the Company has fixed the close of business on
February 4, 2004 as the record date for the determination of stockholders
entitled to notice of and to vote at this Annual Meeting and at any adjournment
or postponement thereof.
By Order of the Board of Directors
/s/ David W Brunton
David W. Brunton
Secretary
San Ramon, California
February 17, 2004
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ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
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2
SBE, INC.
2305 Camino Ramon, Suite 200
San Ramon, California 94583
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
March 16, 2004
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors (the
"Board") of SBE, Inc., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held on Tuesday, March 16, 2004, at 9:00
a.m. local time (the "Annual Meeting"), or at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting. The Annual Meeting will be held at the Company's offices at 2305
Camino Ramon, Suite 200, San Ramon, California. The Company intends to mail this
proxy statement and accompanying proxy card on or about February 17, 2004 to all
stockholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
card and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company may reimburse
persons representing beneficial owners of Common Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or other
regular employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on February 4,
2004 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on February 4, 2004 the Company had outstanding and entitled
to vote 4,988,156 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one vote
for each share held on all matters to be voted upon at the Annual Meeting.
A quorum of stockholders is necessary to hold a valid meeting. A quorum will be
present if a majority of the outstanding shares are represented by votes at the
meeting or by proxy. Votes will be tabulated by the inspector of elections
appointed for the meeting, who will separately tabulate affirmative and negative
votes, abstentions and broker non-votes. Abstentions will be counted towards the
vote total for each proposal, and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether a matter has been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to revoke
it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 2305
Camino Ramon, Suite 200, San Ramon, California, 94583, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy. Furthermore, if the shares are held of record by
a broker, bank or other nominee and the stockholder wishes to vote at the
meeting, the stockholder must obtain from the record holder a proxy issued in
the stockholder's name.
1
STOCKHOLDER PROPOSALS
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2005 annual
meeting of stockholders pursuant to Rule 14a-8 of the Securities Exchange Act of
1934 is October 13, 2004. Stockholders wishing to submit proposals or director
nominations that are not to be included in such proxy statement and proxy must
do so not later than the close of business on the 90th day nor earlier than the
close of business on the 120th day prior to the first anniversary of the
preceding year's annual meeting of stockholders (no earlier than November 16,
2004 and no later than December 16, 2004, as currently scheduled); provided,
however, that in the event that the date of the annual meeting of stockholders
is advanced more than 30 days prior to or delayed by more than 30 days after the
anniversary of the preceding year's annual meeting of stockholders, notice by
the stockholder to be timely must be so delivered not earlier than the close of
business on the 120th day prior to such annual meeting of stockholders or the
10th day following the day on which public announcement of the date of such
meeting is first made. Stockholders wishing to submit any such proposal are also
advised to review Rule 14a-8 under the Securities Exchange Act of 1934 and the
Company's Bylaws, which contain additional requirements with respect to
stockholder proposals and director nominations.
2
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation and Bylaws provide that the Board
will be divided into three classes, each class consisting, as nearly as
possible, of one-third of the total number of directors, with each class having
a three-year term. Vacancies on the Board may be filled only by persons elected
by a majority of remaining directors. A director elected by the Board to fill a
vacancy (including a vacancy created by an increase in the authorized number of
directors) shall serve for the remainder of the full term of the class of
directors in which the vacancy occurred and until such director's successor is
elected and qualified.
The Board is presently composed of six members. There are four directors of the
Company whose term of office expires in 2004: Raimon L. Conlisk; Marion M. (Mel)
Stuckey; John Reardon; and Randall L.-W. Caudill. Mr. Stuckey and Mr. Reardon
have been nominated by the Board for re-election at the Annual Meeting. Dr.
Caudill and Mr. Conlisk have chosen to not stand for re-election and thus will
cease to be directors of the Company upon the election of directors at the
Annual Meeting. Mr. Conlisk and Dr. Caudill were previously elected by the
stockholders. Mr. Stuckey and Mr. Reardon were appointed to the Board in
December 2003 and February 2004, respectively, to fill vacancies created by
increases in the authorized number of directors. If elected at the Annual
Meeting, Mr. Stuckey and Mr. Reardon would each serve until the 2007 annual
meeting and until their successor is elected and has qualified, or until their
earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to VOTE. Shares represented by executed
proxies will be voted, if authority to do so is not withheld, for the election
of the nominee named below. In the event that the nominee should be unavailable
for election as a result of an unexpected occurrence, shares will be voted for
the election of a substitute nominee as management may propose. The person
nominated for election has agreed to serve if elected and management has no
reason to believe that the nominee will be unable to serve.
Set forth below is biographical information for the person nominated and each
person whose term of office as a director will continue after the Annual
Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2007 ANNUAL MEETING
Marion M. (Mel) Stuckey
Mr. Stuckey, 65, was appointed as a director by unanimous vote of the Board on
December 9, 2003. Since 2001, Mr. Stuckey has served as Chief Executive Officer
of CEO Jumpstart LLC, a management consulting firm. From 1983 to 2001, Mr.
Stuckey was the Chairman of the Board and Chief Executive Officer of Fourth
Shift Corporation, a provider of supply chain and customer management software.
From 1978 to 1982, Mr. Stuckey was the President of the CPI subsidiary of
Control Data Corporation. From 1962 to 1978, Mr. Stuckey was the Northern
California and Nevada Manager for IBM Corporation.
John Reardon
Mr. Reardon, 43, was appointed as a director by unanimous vote of the Board on
February 10, 2004. Since 1990, Mr. Reardon has served as President and member of
the Board of Directors of The RTC Group, a technical publishing company. In
1994, Mr. Reardon founded a Dutch corporation, AEE, to mirror the activities of
RTC in the European market. In 1995, Mr. Reardon acquired the assets of James,
Morgan and Associates, an event planning company and in 2001 acquired Annabooks,
LLC, a technical book publisher. In 1999, Mr. Reardon was elected to the Board
of Directors of One Stop Systems, a computing systems and components design and
manufacturing company.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF THE NAMED NOMINEES.
3
DIRECTOR CONTINUING IN OFFICE UNTIL THE 2005 ANNUAL MEETING
Ronald J. Ritchie
Mr. Ritchie, 63, has served as a director since 1997. From October 1999 to date,
Mr. Ritchie has served as president of Ritchie Associates, a business and
management consulting firm. Mr. Ritchie served as Chairman of the Board of VXI
Electronics, Inc., a supplier of power conversion components, from February 1998
until its acquisition by Celestica Inc. in September 1999. Mr. Ritchie was
President and CEO of Akashic Memories Corporation, a firm supplying thin film
hard disk media to manufacturers of disk drive products, from November 1996 to
January 1998. From May 1994 to November 1996, Mr. Ritchie also served as
President of Ritchie Associates. From August 1992 to April 1994, Mr. Ritchie was
President and Chief Operating Officer of Computer Products, Inc., a supplier of
power conversion components and system applications for the computer and
networking industry. Prior to August 1992, Mr. Ritchie held President or senior
executive positions at Ampex Corporation, Canaan Computer Corporation, Allied
Signal Corporation and Texas Instruments. From October 1999 to June 2002, Mr.
Ritchie also served as director of PixTech, Inc., a provider of field emission
displays to worldwide customers, and he served as interim Chief Executive
Officer of PixTech from August 2001 to June 2002.
DIRECTOR CONTINUING IN OFFICE UNTIL THE 2006 ANNUAL MEETING
William B. Heye, Jr.
Mr. Heye, 65, joined the Company in November 1991 as President, Chief Executive
Officer and a member of the Board of Directors. From 1989 to November 1991, he
served as Executive Vice President of Ampex Corporation, a manufacturer of
high-performance scanning recording systems, and President of Ampex Video
Systems Corporation, a wholly-owned subsidiary of Ampex Corporation and a
manufacturer of professional video recorders and editing systems for the
television industry. From 1986 to 1989, Mr. Heye served as Executive Vice
President of Airborn, Inc., a manufacturer of components for the aerospace and
military markets. Prior to 1986, Mr. Heye served in senior management positions
at Texas Instruments, Inc. in the United States and overseas, including Vice
President and General Manager of Consumer Products and President of Texas
Instruments Asia, Ltd.
4
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended October 31, 2003 the Board held seven meetings and
acted by unanimous written consent one time. The Board has an Audit Committee, a
Compensation Committee and a Nominating and Governance Committee.
The Audit Committee of the Board (the "Audit Committee") oversees the accounting
and financial reporting processes of the Company and the audits of the Company's
financial statements, and otherwise assists the Board in fulfilling its
oversight responsibilities by reviewing and reporting to the board on the
integrity of the financial reports and other financial information provided by
the Company to any governmental body or to the public. The Audit Committee also
reviews the qualifications, independence and performance, and approves the terms
of engagement, of the Company's independent auditor, and prepares any reports
required of the Audit Committee under applicable law, the rules and regulations
of the Securities and Exchange Commission or the listing requirements of the
Nasdaq Stock Market ("Nasdaq"). Further, the Audit Committee oversees the
performance of the Company's internal audit function and legal compliance
requirements. The Audit Committee, which consists of three non-employee
directors, Dr. Caudill, Mr. Conlisk and Mr. Ritchie, held six meetings during
fiscal 2003. The Audit Committee recently adopted an updated Audit Committee
Charter, which is attached as Appendix A to these proxy materials. The Audit
Committee Charter can also be accessed on the Internet via the Company's website
at www.sbei.com.
All members of the Company's Audit Committee are independent within the meaning
of the Nasdaq listing standards and the rules of the Securities and Exchange
Commission. All members of the Audit Committee meet Nasdaq's audit committee
financial sophistication requirements. The Company does not have an "audit
committee financial expert" (as defined in the rules of the Securities and
Exchange Commission) serving on the Audit Committee but the Company believes
that the background and financial sophistication of its members are sufficient
to fulfill the duties of the Audit Committee. Nasdaq does not currently require
that audit committees include an "audit committee financial expert." The rules
of the Securities and Exchange Commission and the Nasdaq listing standards
require that the Company maintain an audit committee of at least three
independent directors. At the Annual Meeting, the Company will cease to meet
that requirement. It is anticipated that immediately prior to the Annual
Meeting, Mr. Stuckey will be appointed to the Audit Committee, so that after the
Annual Meeting the Audit Committee will consist of Mr. Ritchie and Mr. Stuckey.
The Nominating Committee (described below) is actively searching for additional
suitable independent director candidates, including candidates for the Audit
Committee.
The Compensation Committee of the Board (the "Compensation Committee")
discharges the Board's responsibilities relating to compensation and benefits of
the Company's executive officers and directors. In carrying out these
responsibilities, the Compensation Committee reviews all components of executive
officer and director compensation for consistency with the Compensation
Committee's compensation philosophy as in effect from time to time. The
Compensation Committee, which consists of three non-employee directors, Dr.
Caudill, Mr. Conlisk and Mr. Ritchie, held one meeting during fiscal 2003.
The Nominating and Governance Committee of the Board (the "Nominating and
Governance Committee") was formed in January 2004 to develop and recommend to
the Board criteria for selecting qualified director candidates, identify
individuals qualified to become Board members, evaluate and select, or recommend
to the Board, director nominees for each election of directors, consider
committee member qualifications, appointment and removal, recommend codes of
conduct and codes of ethics applicable to the Company and provides oversight in
the evaluation of the Board and each committee. The Nominating and Governance
Committee has no formal process for considering director candidates recommended
by stockholders but its policy is to give due consideration to any and all such
candidates. If a stockholder wishes to recommend a director candidate, such
stockholder should mail the name, background and contact information for such
candidate to the Nominating and Governance Committee at the Company's offices at
2305 Camino Ramon, Suite 200, San Ramon, California 24583. The Nominating and
Governance Committee intends to develop a process for identifying and evaluating
all nominees for director, including any recommended by stockholders, and
minimum requirements for nomination. The Nominating and Governance Committee,
which consists of three non-employee directors, Messrs. Conlisk, Ritchie and
Stuckey, was not formed until fiscal 2004 and therefore held no meetings during
fiscal 2003. All members of the Nominating and Governance Committee are
independent (as independence is currently defined in Rule 4200(a)(14) of the
NASD listing standards). The Nominating and Governance Committee has adopted a
written Nominating and Governance Charter that can be accessed on the Internet
via the Company's website at www.sbei.com.
5
During the fiscal year ended October 31, 2003, each Board member attended 75% or
more of the aggregate of the meetings of the Board and of the committees on
which he served, held during the period for which he was a director or committee
member, respectively.
STOCKHOLDER/BOARD COMMUNICATIONS
The Board has not developed a formal process for stockholders to send
communications directly to the Board but stockholders can mail communications to
the Board at the Company's offices at 2305 Camino Ramon, Suite 200, San Ramon,
California 94583. The Board is of the view that this process is sufficient for
allowing stockholders to communicate with the Board.
The Company does not currently have a formal policy regarding Board members'
attendance at annual meetings of stockholders, but historically all members of
the Board have attended such meetings. All members of the Board attended the
2003 annual meeting of stockholders.
CODE OF BUSINESS CONDUCT AND CODE OF ETHICS
In fiscal 2003, the Company established a Code of Business Conduct to help its
officers, directors and employees comply with the law and maintain the highest
standards of ethical conduct. The Code of Business Conduct sets out basic
principles and a methodology to help guide all of the Company's officers,
directors and employees in the attainment of this common goal.
All of the Company's employees must carry out their duties in accordance with
the policies set forth in the Code of Business Conduct and with applicable laws
and regulations. The Code of Business Conduct includes a separate Code of Ethics
that applies specifically to the Company's Chief Executive Officer and senior
financial officers. A copy of the Code of Business Conduct and Code of Ethics
can be accessed on the Internet via the Company's website at www.sbei.com.
6
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ended October 31, 2001, 2002 and
2003, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other [four] most highly compensated executive
officers who earned more than $100,000 in salary and bonus in fiscal 2003 (the
"Named Executive Officers"):
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------------- -----------------
Other Annual Securities All Other
Compensation Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($)(1) Options (#) ($)(2)
--------------------------- ---- ---------- --------- ------ ----------- ------
Mr. William B. Heye, Jr. 2003 $238,028 $0 $4,968 -- $5,100
President and Chief 2002 234,383 1,000 100,000 5,100
Executive Officer 2001 233,861 171,013 (1,425) 35,000 5,100
Mr. Kirk Anderson (3) 2003 110,297 -- 175 -- 3,218
Vice President of 2002 108,598 -- 327 100,000 3,283
Operations 2001 113,522 8,000 339 33,000 3,406
Mr. David W. Brunton (4) 2003 140,000 -- 444 -- 4,200
Vice President, Finance, 2002 140,000 -- 151 170,000 4,200
Chief Financial Officer
Mr. Daniel Grey (5) 2003 200,004 -- 4,051 -- 3,500
Senior Vice President of 2002 200,004 30,000 3,994 100,000 5,100
Sales and Marketing 2001 113,944 37,500 40,159 150,000 --
-----------------
(1) Includes $4,968, $444, $451 and $175 attributable in fiscal 2003 to
Messrs. Heye Brunton, Grey and Anderson, $1,007, $151, $394 and $327
attributable in fiscal 2002 to Messrs. Heye, Brunton, Grey and Anderson
and $2,388, $259 and $339 attributable in fiscal 2001 to Messrs. Heye,
Grey and Anderson, respectively, for premiums paid by the Company for
group term life insurance. Also includes $2,431 paid to the Company by
Mr. Heye in fiscal 2002 for group term life insurance. Also includes
$3,600 attributable in fiscal 2003 and 2002 and $12,500 attributable in
fiscal 2001 to Mr. Grey for automobile allowance. Also includes $25,000
attributable in fiscal 2001 to Mr. Grey for housing allowance. Also
includes $2,400 attributable in fiscal 2001 to Mr. Grey for medical
insurance premiums.
(2) The sum for each Named Executive Officer was paid by the Company as
matching and profit sharing contributions to the Company's Savings and
Investment Plan and Trust.
(3) Mr. Anderson became an executive officer in October 2001.
(4) Mr. Brunton became an executive officer in November 2001
(5) Mr. Grey became an executive officer in May 2001.
7
STOCK OPTION GRANTS
The Company grants options to its executive officers under its 1996 Plan. As of
December 31, 2003, options to purchase a total of 1,006,630 shares were
outstanding under the 1996 Plan and options to purchase 223,964 shares remained
available for grant thereunder.
The following tables show for the fiscal year ended October 31, 2003, certain
information regarding options granted to, exercised by, and held at year end by,
the Named Executive Officers. No options were exercised by the Named Executive
Officers during fiscal 2003.
Stock Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------- -----------------------------------------
Percentage
of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or Base
Options in fiscal Price Per Expiration
Name Granted 2003 Share Date 5% ($) 10% ($)
---- ------- ---- ----- ---- ------ -------
Mr. William B. Heye, Jr. 0 0% --- --- --- ---
Mr. Kirk Anderson 0 0% --- --- --- ---
Mr. David W. Brunton 0 0% --- --- --- ---
Mr. Daniel Grey 0 0% --- --- --- ---
AGGREGATED OPTION EXERCISES IN FISCAL 2003
AND Value of Options At End of Fiscal 2003
Number of Securities Underlying Value of Unexercised
Unexercised Options at FY-End In-the-Money Options at FY-End
(#) (1) ($) (1)
--------------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Mr. William B. Heye, Jr. 250,000 -- $521,600 --
Mr. Kirk Anderson 155,584 1,667 651,758 $4,532
Mr. David W. Brunton 170,000 -- 861,400 --
Mr. Daniel Grey 229,190 13,900 946,662 46,982
---------------
(1) Fair market value of the Company's Common Stock at October 31, 2003
($6.00) minus the exercise price of the options solely to the extent
that options were "in-the-money" as of such date.
8
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS/1/
The Audit Committee has reviewed and discussed the audited financial statements
of the Company for the year ended October 31, 2003. The Committee has also
discussed the audited financial statements with management and BDO Seidman, LLP,
the Company's independent auditors.
The Audit Committee has discussed with BDO Seidman, LLP the matters required to
be discussed by Statements on Auditing Standards No. 61 (Codification of
Statements on Auditing Standards AU ss.380), as modified or supplemented.
The Audit Committee has discussed with BDO Seidman, LLP the auditor's
independence from the Company and its management including the matters in the
written disclosures required by the Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees). The Audit Committee has also
received the letter from BDO Seidman, LLP required by the Independence Standards
Board Standard No. 1.
Based on the foregoing review and discussions with management and BDO Seidman,
LLP, the Audit Committee has recommended to the Board, and the Board approved,
the inclusion of the audited financial statements in the Company's Annual Report
on Form 10-K for the year ended October 31, 2003, to be filed with the
Securities and Exchange Commission. The Audit Committee and the Board also have
recommended, subject to stockholder approval, the selection of the Company's
independent auditors for the year ending October 31, 2004.
Audit Committee Members:
Randall L-W. Caudill
Raimon L. Conlisk
Ronald J. Ritchie
--------
/1/ The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof and irrespective of any general incorporation language in
any such filing.
9
PROPOSAL 2
APPROVAL OF 1996 STOCK OPTION PLAN, AS AMENDED
In July 1987, the Board adopted, and the stockholders subsequently approved, the
Company's 1987 Supplemental Stock Option Plan. This plan was amended and
restated in January 1996 and retitled the 1996 Stock Option Plan (the "1996
Plan"). In December 1997, January 1999, January 2001 and December 2001, the
Board further amended the 1996 Plan and the stockholders subsequently approved
such amendments. In May 2002 and July 2002, the Board further amended the 1996
Plan in connection with the transfer of the Company's Common Stock listing from
the Nasdaq National Market to the Nasdaq SmallCap Market. As a result of such
transfer, the Company became subject to certain California state "blue sky" laws
and regulations that apply to equity incentive plans. The 2002 amendments were
made in an effort to obtain a permit from the California Department of
Corporations that would allow the Company to make equity grants under the 1996
Plan to the same extent as they had been made prior to such transfer. As is
described in Proposal 5 below, such permit has not yet been obtained but the
Company wishes to obtain such permit if Proposal 5 is passed. The 2002
amendments were not subject to stockholder approval. At October 31, 2003, the
aggregate number of shares of the Company's Common Stock authorized for issuance
under the 1996 Plan was 1,730,000 shares.
On October 31, 2003, options (net of canceled or expired options) covering an
aggregate of 956,630 shares of the Company's Common Stock had been granted and
were outstanding under the 1996 Plan, and only 273,964 shares (plus any shares
that might in the future be returned to the 1996 Plan as a result of
cancellations or expiration of options) remained available for future grant
under the 1996 Plan. No shares were issued from this plan in fiscal 2003. A
total of 36,387 shares were granted under the 1996 Plan to non-employee
directors as partial payment of their directors' fees. No options have been
granted to non-employee directors under the 1996 Plan.
In December 2003, the Board approved an amendment to the 1996 Plan, subject to
stockholder approval, to increase the number of shares authorized for issuance
under the 1996 Plan from a total of 1,730,000 shares to 2,730,000 shares.
Although at present the Board has no plans to issue the additional shares
authorized for issuance under the 1996 Plan, the Board adopted this amendment to
ensure that the Company can continue to grant stock options to employees at
levels determined appropriate by the Board and the Compensation Committee.
Stockholders are requested in this Proposal 2 to approve the 1996 Plan, as
amended. The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and entitled to vote at the meeting will be
required to approve the 1996 Plan, as amended.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the 1996 Plan are outlined below:
GENERAL
The 1996 Plan provides for the grant of both incentive and nonstatutory stock
options as well as stock bonus awards. Incentive stock options granted under the
1996 Plan are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Nonstatutory stock options granted under the 1996 Plan are intended not
to qualify as incentive stock options under the Code. See "Federal Income Tax
Information" for a discussion of the tax treatment of incentive and nonstatutory
stock options.
PURPOSE
The 1996 Plan was adopted to provide a means by which selected employees and
non-employee directors of and consultants to the Company and its affiliates
could be given an opportunity to purchase stock in the Company, to assist in
retaining the services of employees holding key positions, to secure and retain
the services of persons capable of filling such positions and to provide
incentives for persons eligible to participate in the plan to exert maximum
efforts for the success of the Company. Approximately 100% of the Company's
approximately 36 employees, non-employee directors and consultants currently
participate in the 1996 Plan. All of the Company's employees, non-employee
directors and consultants are eligible to participate in the 1996 Plan.
10
ADMINISTRATION
The 1996 Plan is administered by the Board. The Board has the power to construe
and interpret the 1996 Plan and, subject to the provisions of the 1996 Plan, to
determine the persons to whom and the dates on which an option and stock bonus
award will be granted, the number of shares to be subject to each option and
stock bonus award, the time or times during the term of each option within which
all or a portion of such option may be exercised, the exercise price, the type
of consideration and other terms of the option and stock bonus award. The Board
is authorized to delegate administration of the 1996 Plan to a committee
composed of not fewer than two members of the Board. The Board has delegated
administration of the 1996 Plan to the Compensation Committee of the Board. As
used herein with respect to the 1996 Plan, the "Board" refers to the
Compensation Committee as well as to the Board of Directors itself. In addition,
the 1996 Plan provides that, in the Board's discretion, directors who grant
options to employees covered under Section 162(m) of the Code generally will be
"outside directors" as defined in Section 162(m). See "Federal Income Tax
Information" below for a discussion of the application of Section 162(m).
ELIGIBILITY
Incentive stock options may be granted under the 1996 Plan only to selected
employees (including officers) of the Company and its affiliates. Selected
employees (including officers), directors and consultants are eligible to
receive nonstatutory stock options and stock bonus award under the 1996 Plan.
While directors who are not employees of or consultants to the Company or to any
affiliate of the Company are eligible to participate in the 1996 Plan, it is the
policy of the Company to grant only stock bonus awards to such directors under
the 1996 Plan.
No incentive stock option may be granted under the 1996 Plan to any person who,
at the time of the grant, owns (or is deemed to own) stock possessing more than
10% of the total combined voting power of the Company or any affiliate of the
Company (defined as a "10% Stockholder"), unless the option exercise price is at
least 110% of the fair market value of the stock subject to the option on the
date of grant, and the term of the option does not exceed five years from the
date of grant. To the extent that the Company is subject to Section 260.140.41
of Title 10 of the California Code of Regulations, no nonstatutory stock option
may be granted under the 1996 Plan to any 10% Stockholder unless the option
exercise price is at least 110% of the fair market value of the stock subject to
the option on the date of grant.
For incentive stock options granted under the 1996 Plan, the aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which such options are exercisable for the first time by an
employee during any calendar year (under all such plans of the Company and its
affiliates) may not exceed $100,000. To the extent that such aggregate fair
market value exceeds $100,000, such incentive stock options will be treated as
nonstatutory stock options.
No person may be granted options under the 1996 Plan during any calendar year to
purchase in excess of 150,000 shares of Common Stock. This limitation permits
the Company under Section 162(m) of the Code to continue to be able to deduct as
a business expense certain compensation attributable to the exercise of options
granted under the 1996 Plan. Section 162(m) denies a deduction to any publicly
held corporation for certain compensation paid to covered employees in a taxable
year to the extent that the compensation exceeds $1,000,000 for any covered
employee, unless certain conditions are satisfied. See "Federal Income Tax
Information" below for a discussion of the application of Section 162(m).
STOCK SUBJECT TO THE 1996 PLAN
If this proposal is approved, an aggregate of 2,730,000 shares of Common Stock
will be authorized for issuance under the 1996 Plan, provided, however, that if
at the time of each grant of options or stock bonus awards under the 1996 Plan,
to the extent the Company is subject to Section 260.140.45 of Title 10 of the
California Code of Regulations, then the total number of securities issuable
upon exercise of all outstanding options under the 1996 Plan, excluding certain
securities, and the total number of shares called for under any stock bonus or
similar plan of the Company shall not exceed 30% of the then outstanding capital
stock of the Company unless a percentage higher than 30% is approved by at least
two-thirds of the outstanding securities entitled to vote. If options granted
under the 1996 Plan expire or otherwise terminate without being exercised, the
Common Stock not purchased pursuant to such options again becomes available for
issuance under the 1996 Plan.
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TERMS OF OPTIONS
The following is a description of the permissible terms of options under the
1996 Plan. Individual option grants may be more restrictive as to any or all of
the permissible terms described below.
EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options under the
1996 Plan may not be less than the fair market value of the Common Stock subject
to the option on the date of the option grant and, in some cases (see
"Eligibility" above), may not be less than 110% of such fair market value. The
exercise price of nonstatutory options under the 1996 Plan may not be less than
85% of the fair market value of the Common Stock subject to the option on the
date of the option grant, and in some cases (see "Eligibility" above), may not
be less than 110% of such fair market value. However, if options were granted
with exercise prices below market value, deductions for compensation
attributable to the exercise of such options could be limited by Section 162(m).
See "Federal Income Tax Information." As of December 31, 2003, the closing price
of the Company's Common Stock as reported on the Nasdaq SmallCap Market was
$6.91 per share.
In the event of a decline in the value of the Company's Common Stock, the Board
has the authority to offer employees the opportunity to replace outstanding
higher priced options, whether incentive or nonstatutory, with new lower priced
options, provided, however, that to the extent the Company is subject to Section
260.140.41 of Title 10 of the California Code of Regulations on the date of any
repricing, the exercise price of the new lower priced options will not be less
than 85% of the fair market value of the Common Stock subject to the option on
the date of the repricing, except that the price shall be 110% of such fair
market value in the case of a 10% Stockholder. The Company has provided that
opportunity to employees in the past. Both the replaced option and the new
option are counted against the 150,000 shares per calendar year limitation.
CONSIDERATION. The exercise price of options granted under the 1996 Plan must be
paid either: (a) in cash at the time the option is exercised; or (b) at the
discretion of the Board, (i) by delivery of other Common Stock of the Company,
(ii) pursuant to a deferred payment arrangement or (iii) in any other form of
legal consideration acceptable to the Board.
OPTION EXERCISE. Options granted under the 1996 Plan may become exercisable in
cumulative increments ("vest") as determined by the Board. Shares covered by
currently outstanding options under the 1996 Plan typically vest at the rate of
1/48th per month (25% per year) with one-year cliff vesting, during the
optionholder's continuous service with the company. Shares covered by options
granted in the future under the 1996 Plan may be subject to different vesting
terms, provided, however, that to the extent that the Company is subject to
Section 260.140.41 of Title 10 of the California Code of Regulations, options
granted to an employee who is not an officer, director or consultant will
provide for vesting of at least 20% per year over five years from the date the
option was granted (subject to reasonable conditions such as continued
employment) and options granted to officers, directors or consultants may be
made fully exercisable (subject to reasonable conditions such as continued
employment) at any time or during any period established by the Company. The
Board has the power to accelerate the time during which an option may be
exercised. In addition, options granted under the 1996 Plan may permit exercise
prior to vesting, but in such event the optionholder may be required to enter
into an early exercise stock purchase agreement that allows the Company to
repurchase shares not yet vested at their exercise price should the optionholder
leave the continuous service of the Company before vesting. To the extent
provided by the terms of an option, an optionholder may satisfy any federal,
state or local tax withholding obligation relating to the exercise of such
option by (i) a cash payment upon exercise, (ii) authorizing the Company to
withhold a portion of the stock otherwise issuable to the optionholder as a
result of the exercise of the option, provided, however, that no shares of
common stock are withheld with a value exceeding the minimum amount of tax
required to be withheld by law (or such lower amount as may be necessary to
avoid variable award accounting), (iii) delivering already-owned stock of the
Company or (iv) a combination of these means.
TERM. The maximum term of options under the 1996 Plan is ten years, except that
in certain cases (see "Eligibility") the maximum term is five years. Options
under the 1996 Plan terminate three months after termination of the
optionholder's continuous service with the Company or any affiliate of the
Company, unless (a) such termination is due to such person's disability, in
which case the option may, but need not, provide that the vested portion of the
option may be exercised at any time within one year of such termination; (b) the
optionholder dies while employed by or serving as a consultant to the Company or
any affiliate of the Company, or within three months after termination of
continuous service, in which case the option may, but need not, provide that the
vested portion of the option may be exercised within eighteen months of the
optionholder's death by the person or persons to whom the rights to such option
pass by will or by the laws of descent and distribution; or (c) the option by
its terms specifically provides otherwise, provided, however, that to the extent
that the Company is subject to Section 260.140.41 of Title 10 of the California
Code of Regulations, the exercise period of the vested portion of the option
shall not be less than six months if termination was caused by death or
disability and, unless termination was for cause, no less than 30 days if
termination was caused by other than death or disability. Individual options by
their terms may provide for exercise within a longer period of time following
termination of continuous service. The option term may also be extended in the
event that exercise of the option within these periods is prohibited for
specified reasons, but in no case will an option be exercisable after its
expiration date.
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TERMS OF STOCK BONUS AWARDS
The terms and conditions of stock bonus awards may change from time to time, and
the terms and conditions of separate stock bonus awards need not be identical,
but each stock bonus award shall include the substance of each of the following
provisions:
CONSIDERATION. A stock bonus award may be awarded in consideration for past
services actually rendered to the Company or an affiliate of the Company for its
benefit. Alternatively cash may be paid for a stock bonus award.
VESTING. Subject to the restrictions described in "Repurchase Limitation" below,
shares of common stock awarded under a stock bonus award may, but need not, be
subject to a share repurchase option in favor of the Company in accordance with
a vesting schedule to be determined by the Board.
TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the limitations
described in "Repurchase Limitation" below, in the event that a 1996 Plan
participant's continuous service with the Company or an affiliate of the Company
terminates, the Company may reacquire any or all of the shares of Common Stock
held by the participant that have not vested as of the date of termination under
the terms of the stock bonus award.
REPURCHASE LIMITATION
The terms of any repurchase option will be specified in the option agreement or
stock bonus agreement. To the extent that the Company is subject to Section
260.140.41 or Section 260.140.42 of Title 10 of the California Code of
Regulations at the time an option grant or stock bonus award is made, any
repurchase option contained in an option agreement or stock bonus agreement
granted to a person who is not an officer, director or consultant of the Company
shall be on the following terms: (i) the right to repurchase shall be at the
original purchase price and shall lapse at the rate of at least 20% of the
shares of Common Stock per year over five years from the date the option or
stock bonus award is granted (without respect to the date the option or stock
bonus award was exercised or became exercisable) and (ii) the right to
repurchase shall be exercised for cash or cancellation of purchase money
indebtedness for the shares of Common Stock within 90 days of termination as an
employee, director or consultant (or in the case of shares of Common Stock
issued upon exercise of options after such date of termination, within 90 days
after the date of the exercise) or such longer period as may be agreed to by the
Company and the participant (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code regarding "qualified small
business stock").
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the 1996 Plan or subject to any
option or stock bonus award granted under the 1996 Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
1996 Plan and options and stock bonus awards outstanding thereunder will be
appropriately adjusted as to the class and the maximum number of shares subject
to such plan, the maximum number of shares that may be granted to an employee
during a calendar year, and the class, number of shares and price per share of
stock subject to such outstanding options and stock bonus awards.
EFFECT OF CERTAIN CORPORATE EVENTS
The 1996 Plan provides that, in the event of a dissolution or liquidation of the
Company, specified type of merger or other corporate reorganization, to the
extent permitted by law, any surviving corporation may assume options and stock
bonus awards outstanding under the 1996 Plan or substitute similar options and
stock bonus awards for those outstanding under the 1996 Plan, or such
outstanding options and stock bonus awards will continue in full force and
effect. In the event that any surviving corporation declines to assume or
continue options and stock bonus awards outstanding under the 1996 Plan, or to
substitute similar options and stock bonus awards, then with respect to
outstanding options and stock bonus awards held by persons then performing
services for the Company as employees, directors or consultants, the vesting of
such options and stock bonus awards will be accelerated in full and the options
shall terminate if not exercised prior to the effective date of the transaction.
The acceleration of an option or stock bonus awards in the event of an
acquisition or similar corporate event may be viewed as an antitakeover
provision, which may have the effect of discouraging a proposal to acquire or
otherwise obtain control of the Company.
13
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the 1996 Plan without stockholder approval or
ratification at any time or from time to time. Unless sooner terminated, the
1996 Plan will terminate on January 17, 2006.
The Board may also amend the 1996 Plan at any time or from time to time.
However, no amendment will be effective unless approved by the stockholders of
the Company within 12 months before or after its adoption by the Board if the
amendment would: (a) modify the requirements as to eligibility for participation
(to the extent such modification requires stockholder approval in order for the
Plan to satisfy Section 422 of the Code, if applicable, or Rule 16b-3 ("Rule
16b-3") of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")); (b) increase the number of shares reserved for issuance under the 1996
Plan; or (c) change any other provision of the 1996 Plan in any other way if
such modification requires stockholder approval in order to comply with Rule
16b-3 of the Exchange Act or satisfy the requirements of Section 422 of the
Code. The Board may submit any other amendment to the 1996 Plan for stockholder
approval, including, but not limited to, amendments intended to satisfy the
requirements of Section 162(m) of the Code regarding the exclusion of
performance-based compensation from the limitation on the deductibility of
compensation paid to certain employees.
RESTRICTIONS ON TRANSFER
Under the 1996 Plan, an incentive stock option or stock bonus award may not be
transferred by the optionholder other than by will or by the laws of descent and
distribution and during the lifetime of the optionholder, may be exercised only
by the optionholder. A nonstatutory stock option may not be transferred except
by will or by the laws of descent and distribution or pursuant to a "domestic
relations order." In any case, the optionholder may designate in writing a third
party who may exercise the option in the event of the optionholder's death. In
addition, shares subject to repurchase by the Company under an early exercise
stock purchase agreement or stock bonus award may be subject to restrictions on
transfer which the Board deems appropriate.
INFORMATION OBLIGATION
To the extent that the Company is subject to Section 260.140.46 of Title 10 of
the California Code of Regulations at the time an option or stock bonus award is
granted, the Company shall deliver financial statements to participants at least
annually. This section does not apply to key employees whose duties in
connection with the Company assure them access to equivalent information.
FEDERAL INCOME TAX INFORMATION
INCENTIVE STOCK OPTIONS. Incentive stock options under the 1996 Plan are
intended to be eligible for the favorable federal income tax treatment accorded
"incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionholder or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the
optionholder's alternative minimum tax liability, if any.
If an optionholder holds stock acquired through exercise of an incentive stock
option for more than two years from the date on which the option is granted and
more than one year from the date on which the shares are transferred to the
optionholder upon exercise of the option, any gain or loss on a disposition of
such stock will be capital gain or loss. Generally, if the optionholder disposes
of the stock before the expiration of either of these holding periods (a
"disqualifying disposition"), at the time of disposition, the optionholder will
realize taxable ordinary income equal to the lesser of (a) the excess of the
stock's fair market value on the date of exercise over the exercise price, or
(b) the optionholder's actual gain, if any, on the purchase and sale. The
optionholder's additional gain, or any loss, upon the disqualifying disposition
will be a capital gain or loss, which will be long-term or short-term capital
gain depending on how long the optionholder holds the stock. Long-term capital
gains currently are generally subject to lower tax rates than ordinary income.
14
To the extent the optionholder recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options granted under the 1996
Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionholder or the Company by reason of
the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionholder normally will recognize taxable ordinary income equal
to the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, the Company is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionholder. Upon disposition of the stock, the optionholder
will recognize a capital gain or loss equal to the difference between the
selling price and the sum of the amount paid for such stock plus any amount
recognized as ordinary income upon exercise of the option. Such gain or loss
will be long-term or short-term capital gain depending on how long the
optionholder holds the stock.
STOCK BONUS AWARDS. Upon the grant of a stock bonus award that is fully vested
on the date of grant, the grantee normally will recognize taxable ordinary
income equal the fair market value of the shares subject to the stock bonus
award on the date of grant less any amount actually paid for the shares.
Generally, with respect to employees, the Company is required to withhold from
regular wages or supplemental wage payments an amount based on the ordinary
income recognized. Subject to the requirement of reasonableness, the provisions
of Section 162(m) of the Code and the satisfaction of a tax reporting
obligation, the Company will generally be entitled to a business expense
deduction equal to the taxable ordinary income realized by the grantee. Upon
disposition of the stock, the grantee will recognize a capital gain or loss
equal to the difference between the selling price and the sum of the amount paid
for such stock plus any amount recognized as ordinary income upon receipt of the
stock bonus award. Such gain or loss will be long-term or short-term capital
gain depending on how long the grantee holds the stock.
Different rules will apply to grantees who receive stock bonus awards subject to
restrictions on transfer or a substantial risk of forfeiture. In this case, the
grantee will not recognize ordinary taxable income until the restrictions or
transfer or the substantial risk of forfeiture lapses, at which point the
grantee will recognize taxable ordinary income equal to the fair market value of
the shares subject to the stock bonus award on the date of the lapse less any
amount actually paid for the shares. The amount of taxable ordinary income
recognized by an employee is subject to income and employment tax withholding
and the Company is eligible for a corresponding deduction subject to the
limitations described above. The grantee who receives a stock bonus award
subject to restrictions on transfer or a substantial risk of forfeiture may make
an election under Section 83(b) of the Code to accelerate the time at which the
grantee will recognize ordinary taxable income from the date the restrictions on
transfer or substantial risk of forfeiture lapses to the time the stock bonus
award is granted. If a Section 83(b) election is made, the grantee recognizes
income on the date of grant of the stock bonus award as described in the
preceding paragraph. The grantee will be taxed on the sale of the shares as
described above.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. Section 162(m) of the Code, which
denies a deduction to any publicly held corporation for compensation paid to
certain employees in a taxable year to the extent that compensation exceeds
$1,000,000 for a covered employee. It is possible that compensation attributable
to stock options and stock bonus awards, when combined with all other types of
compensation received by a covered employee from the Company, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options will qualify as performance-based compensation,
provided that the option is granted by a compensation committee comprised solely
of "outside directors" and either: (i) the option plan contains a per-employee
limitation on the number of shares for which options may be granted during a
specified period, the per-employee limitation is approved by the stockholders,
and the exercise price of the option is no less than the fair market value of
the stock on the date of grant; or (ii) the option is granted (or exercisable)
only upon the achievement (as certified in writing by the compensation
committee) of an objective performance goal established in writing by the
compensation committee while the outcome is substantially uncertain, and the
option is approved by stockholders. Stock bonuses granted under the 1996 Plan
will not qualify as performance-based compensation under the terms of the 1996
Plan but may, nevertheless, qualify as performance-based compensation if certain
conditions are met at the time the stock bonus award is granted.
15
PROPOSAL 3
APPROVAL OF 2001 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN, AS AMENDED
In January 1991, the Board adopted, and the stockholders subsequently approved,
the Company's 1991 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). In January 2001, the Board amended and restated the Directors' Plan and
renamed the Directors' Plan the 2001 Non-Employee Directors' Stock Option Plan
and the stockholders subsequently approved such amendments. In May 2002 and July
2002, the Board further amended the Directors' Plan in connection with the
transfer of the Company's Common Stock listing from the Nasdaq National Market
to the Nasdaq SmallCap Market. As a result of such transfer, the Company became
subject to certain California state "blue sky" laws and regulations that apply
to equity incentive plans. The 2002 amendments were made in an effort to obtain
a permit from the California Department of Corporations that would allow the
Company to make equity grants under the Directors' Plan to the same extent as
they had been made prior to such transfer. As is described in Proposal 5 below,
such permit has not yet been obtained but the Company wishes to obtain such
permit if Proposal 5 is passed. The 2002 amendments were not subject to
stockholder approval. As of October 31, 2003, the aggregate number of shares of
the Company's Common Stock authorized for issuance under the Directors' Plan was
140,000 shares.
On October 31, 2003, options (net of canceled or expired options) covering an
aggregate of 75,000 shares of the Company's Common Stock had been granted under
the Directors' Plan, and 42,750 shares (plus any shares that might in the future
be returned to the plans as a result of cancellations or expiration of options)
remained available for future grant under the Directors' Plan. During the last
fiscal year, under the Directors' Plan, the Company granted to all current
non-employee directors, as a group, options to purchase 15,000 shares at an
exercise price of $0.70 per share. No other shares were issued from this plan in
fiscal 2003.
In December 2003, the Board approved an amendment to the Directors' Plan,
subject to stockholder approval, to increase the number of shares authorized for
issuance under the Directors' Plan from a total of 140,000 shares to 340,000
shares. Although at present the Board has no plans to issue the additional
shares authorized for issuance under the Directors' Plan, the Board adopted this
amendment to ensure that the Company can continue to grant stock options to
non-employee directors at levels determined appropriate by the Board and the
Compensation Committee.
Stockholders are requested in this Proposal 3 to approve the Directors' Plan, as
amended. The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and entitled to vote at the meeting will be
required to approve the Directors' Plan, as amended.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
The essential features of the Directors' Plan, as amended and restated, are
outlined below:
GENERAL
The Directors' Plan provides for non-discretionary grants of nonstatutory stock
options. Options granted under the Directors' Plan are not intended to qualify
as incentive stock options, as defined under Section 422 of the Internal Revenue
Code. See "Federal Income Tax Information" below for a discussion of the tax
treatment of nonstatutory stock options.
PURPOSE
The purpose of the Directors' Plan is to retain the services of persons now
serving as non-employee directors of the Company, to attract and retain the
services of persons capable of serving on the Board and to provide incentives
for such persons to exert maximum efforts to promote the success of the Company.
ADMINISTRATION
16
The Directors' Plan is administered by the Board. The Board has the final power
to construe and interpret the Directors' Plan and options granted under it, and
to establish, amend and revoke rules and regulations for its administration.
SHARES SUBJECT TO THE DIRECTORS' PLAN
If this proposal is approved, an aggregate of 340,000 shares of Common Stock
will be authorized for issuance pursuant to options granted under the Directors'
Plan, provided, however, that if, at the time of each grant of options under the
Directors' Plan, the Company is subject to Section 260.140.45 of Title 10 of the
California Code of Regulations, then the total number of securities issuable
upon exercise of all outstanding options under the Directors' Plan, excluding
certain securities, and the total number of shares called for under any stock
bonus or similar plan of the Company shall not exceed 30% of the then
outstanding capital stock of the Company unless a percentage higher than 30% is
approved by at least two-thirds of the outstanding securities entitled to vote.
If any option expires or terminates, in whole or in part, without having been
exercised in full, the stock not purchased under such option will revert to and
again become available for issuance under the Directors' Plan. The Common Stock
subject to the Directors' Plan may be unissued shares or reacquired shares,
bought on the market or otherwise.
ELIGIBILITY
The Directors' Plan provides that options may be granted only to non-employee
directors of the Company. A "non-employee director" is defined in the Directors'
Plan as a director of the Company who is not otherwise an employee of the
Company or any affiliate. Four of the Company's five current directors (all
except Mr. Heye) are eligible to participate in the Directors' Plan.
TERMS OF OPTIONS
Each option under the Directors' Plan is subject to the following terms and
conditions:
NON-DISCRETIONARY GRANTS. Option grants under the Directors' Plan are
non-discretionary. Each non-employee director who, after the date of stockholder
approval of this Proposal, is elected or appointed to the Board for the first
time receives an option to purchase 15,000 shares of the Company's Common Stock
upon such person's date of initial election or appointment to the Board. In
addition, each non-employee director on April 1 of each year receives an option
to purchase 5,000 shares of Common Stock, provided that if such person has not
been a non-employee director for the entire 12 month period since the preceding
April 1, then the number of shares subject to the option will be reduced pro
rata for each full month prior to the date of grant during which such person did
not serve as a non-employee director.
OPTION EXERCISE. An option granted under the Directors' Plan becomes exercisable
in four equal installments beginning on the first anniversary of the grant of
the option. An option granted under the Directors' Plan after the date of
stockholder approval of this Proposal becomes exercisable in full on the first
anniversary of the grant of the option. The vesting of options granted under the
Directors' Plan is conditioned upon continued service as a director, employee or
consultant of the Company.
EXERCISE PRICE; PAYMENT. The exercise price of options granted under the
Directors' Plan is equal to 100% of the fair market value of the Common Stock
subject to such options on the date of grant, provided, however, that to the
extent that the Company is subject to Section 260.140.41 of Title 10 of the
California Code of Regulations, no option may be granted under the Directors'
Plan to any 10% Stockholder unless the option exercise price is at least 110% of
the fair market value of the stock subject to the option on the date of grant.
The exercise price of options granted under the Directors' Plan may be paid in
any combination of the following methods: (i) by cash or check, (ii) by delivery
of other Common Stock of the Company, pursuant to a same day sale program; (iii)
pursuant to a deferred payment arrangement.
TERM. The term of options granted under the Directors' Plan is 5 years. The term
of options granted under the Directors' Plan after the date of stockholder
approval of this Proposal is 7 years. Options under the Directors' Plan
terminate three months after termination of the optionholder's service unless
such termination is due to the optionholder's disability or death, in which case
an option may be exercised (to the extent the option was exercisable at the time
of the optionholder's disability or death) within 18 months of the
optionholder's death or disability, and in the case of the optionholder's death,
by the person or persons to whom the rights to such option pass by will or by
the laws of descent and distribution.
17
TRANSFERABILITY. Under the Directors' Plan, an option may not be transferred by
the optionholder, except by will or the laws of descent and distribution and, to
the extent provided in the option agreement, to such further extent as permitted
by Section 260.140.41(d) of Title 10 of the California Code of Regulations at
the time of the grant of the option. During the lifetime of an optionholder, an
option may only be exercised by the optionholder.
OTHER PROVISIONS. The option agreement may contain such other terms, provisions
and conditions not inconsistent with the Directors' Plan as may be determined by
the Board.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Directors' Plan or subject to
any option granted under the Directors' Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Directors' Plan and
options outstanding thereunder will be appropriately adjusted as to the class
and the maximum number of shares subject to the plan and the class, number of
shares and price per share of stock subject to outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event the Company dissolves or liquidates, merges or consolidates with
another corporation and is not the surviving corporation, undergoes a reverse
merger in which the Company is the surviving corporation but the shares of the
Company's Common Stock immediately preceding the merger are converted by virtue
of the merger into other property, whether in the form of securities, cash or
otherwise, or undergoes any other capital reorganization in which more than 50%
of the Company's voting shares are exchanged, then the vesting of any
outstanding options under the Directors' Plan held by persons whose continuous
service with the Company as a director, employee or consultant has not
terminated, shall accelerate in full at least 10 days prior to such event.
Outstanding options shall terminate if not exercised prior to the occurrence of
such event.
DURATION, AMENDMENT AND TERMINATION
The Board may amend, suspend or terminate the Directors' Plan at any time or
from time to time. No amendment will be effective unless approved by the
stockholders of the Company to the extent that such approval is necessary to
satisfy the requirements of Rule 16b-3 of the Securities Act of 1934 or any
Nasdaq or securities exchange listing requirements. Subject to stockholder
approval of this Proposal, the Directors' Plan shall terminate in January 2011.
FEDERAL INCOME TAX OBLIGATION
Long-term capital gains currently are generally subject to lower tax rates than
ordinary income or short-term capital gains. The maximum long-term capital gains
rate for federal income tax purposes is currently 20% (18% for capital assets
held more than five years) than while the maximum ordinary income rate and
short-term capital gains rate is effectively 39.6%. Slightly different rules may
apply to optionholders who acquire stock subject to Section 16(b) of the
Exchange Act.
There are no tax consequences to the optionholder or the Company by reason of
the grant of an option under the Directors' Plan. Upon exercise of the option,
the optionholder normally will recognize taxable ordinary income equal to the
excess of the stock's fair market value on the date of exercise over the option
exercise price. If the optionholder becomes an employee, the Company is required
to withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of reasonableness,
Code Section 162(m) and the satisfaction of a tax reporting obligation, the
Company will generally be entitled to a business expense deduction equal to the
taxable ordinary income realized by the optionholder.
Upon the sale or other disposition of the stock received upon exercise of the
option, the optionholder will recognize a capital gain or loss equal to the
difference between the selling price and the sum of the amount paid for such
stock plus any amount recognized as ordinary income upon exercise of the option.
Such gain or loss will be long-term or short-term depending on whether the stock
was held for more than one year.
18
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information with respect to all of the
Company's equity compensation plans in effect as of the end of fiscal 2003:
Number of securities
remaining available for
Number of securities to Weighted-average exercise future issuance under
be issued upon exercise price of outstanding equity compensation plans
of outstanding options, options, warrants (excluding securities
Plan category warrants and rights and rights reflected in column (a))
------------- ------------------- ---------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 1,043,754 $2.88 273,964
Equity compensation plans
not approved by security holders 792,180 $2.64 3,939
------------------- ---------- ------------------------
Total 1,835,934 $2.78 175,717
------------------- ---------- ------------------------
The Company's 1998 Non-Officer Stock Option Plan is the only equity compensation
plan of the Company that was in effect as of October 31, 2003 that was adopted
without the approval of the Company's security holders. A description of this
plan is contained in Note 9 of the footnotes to the Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-K for the year
ended October 31, 2003 (File No. 0-8419).
19
PROPOSAL 4
APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board has adopted, subject to stockholder approval, an amendment to the
Company's Certificate of Incorporation to increase the Company's authorized
number of shares of Common Stock from 10,000,000 shares to 25,000,000 shares.
The additional Common Stock to be authorized by adoption of the amendment would
have rights identical to the currently outstanding Common Stock of the Company.
Adoption of the proposed amendment and issuance of the Common Stock would not
affect the rights of the holders of currently outstanding Common Stock of the
Company, except for effects incidental to increasing the number of shares of the
Company's Common Stock outstanding, such as dilution of the earnings per share
and voting rights of current holders of Common Stock. If the amendment is
adopted, it will become effective upon filing of a Certificate of Amendment of
the Company's Certificate of Incorporation with the Secretary of State of the
State of Delaware.
In addition to the 4,808,650 shares of Common Stock outstanding at October 31,
2003, the Board has reserved 1,958,034 shares for issuance upon exercise of
options and rights granted under the Company's stock option and stock purchase
plans, and up to approximately 211,629 shares of Common Stock that may be issued
upon exercise of outstanding warrants.
Although at present the Board has no other plans to issue the additional shares
of Common Stock, it desires to have such shares available to provide additional
flexibility to use its capital stock for business and financial purposes in the
future. The additional shares may be used, without further stockholder approval,
for various purposes including, without limitation, raising capital, providing
equity incentives to employees, officers or directors, establishing strategic
relationships with other companies and expanding the company's business or
product lines through the acquisition of other businesses or products.
The additional shares of Common Stock that would become available for issuance
if the proposal were adopted could also be used by the Company to oppose a
hostile takeover attempt or delay or prevent changes in control or management of
the Company. For example, without further stockholder approval, the Board could
adopt a "poison pill" which would, under certain circumstances related to an
acquisition of shares not approved by the Board, give certain holders the right
to acquire additional shares of Common Stock or Preferred Stock at a low price,
or the Board could strategically sell shares of Common Stock or Preferred Stock
in a private transaction to purchasers who would oppose a takeover or favor the
current Board. Although this proposal to increase the authorized Common Stock
has been prompted by business and financial considerations and not by the threat
of any hostile takeover attempt (nor is the Board currently aware of any such
attempts directed at the Company), nevertheless, stockholders should be aware
that approval of this proposal could facilitate future efforts by the Company to
deter or prevent changes in control of the Company, including transactions in
which the stockholders might otherwise receive a premium for their shares over
then current market prices. The Company has no present intent to issue Common
Stock or Preferred Stock for this purpose.
The affirmative vote of the holders of a majority of the Company's outstanding
Common Stock will be required to approve this amendment to the Company's
Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.
20
PROPOSAL 5
APPROVAL TO AMEND CERTIFICATE OF INCORPORATION TO PROVIDE
THAT DIRECTORS MAY BE REMOVED BY THE STOCKHOLDERS WITHOUT CAUSE
The Board has adopted, subject to stockholder approval, an amendment to the
Company's certificate of incorporation to provide that directors may be removed
by the stockholders without cause.
The Certificate of Incorporation, approved by the stockholders when the Company
reincorporated in Delaware in December 1997, provides that, subject to the
rights of the holders of any series of Preferred Stock, no director of the
Company will be removed without cause. This provision was recommended by the
Company because it helps deter hostile takeover attempts. In 2002, the Company
moved from the Nasdaq National Market to the Nasdaq SmallCap Market and as a
result lost the federal exemption from certain California securities regulations
afforded to companies traded on the Nasdaq National Market. While there is no
California law or regulation prohibiting the current director removal provision
of the Company's certificate of incorporation, the Company has been informed
that in order to obtain a permit from the California Department of Corporations
with respect to the 1996 Plan and the Directors' Plan (which, as described in
Proposals 2 and 3, would allow the Company to make equity incentive grants in
the same manner as it did prior to its move to the Nasdaq SmallCap Market), the
Company must amend its Certificate of Incorporation to provide that directors
may be removed by the stockholders without cause.
The affirmative vote of the holders of two thirds of the Company's outstanding
Common Stock will be required to approve this amendment to the Company's
Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 5.
21
PROPOSAL 6
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Audit Committee has selected BDO Seidman, LLP as the Company's independent
auditors for the fiscal year ending October 31, 2004 and has further directed
that management submit the selection of independent auditors for ratification by
the stockholders at the Annual Meeting. BDO Seidman, LLP has audited the
Company's financial statements for fiscal 2003. Representatives of BDO Seidman,
LLP are expected to be present at the Annual Meeting, will have an opportunity
to make a statement if they so desire and will be available to respond to
appropriate questions.
Stockholder ratification of the selection of BDO Seidman, LLP as the Company's
independent auditors is not required by the Company's Bylaws or otherwise.
However, the Board is submitting the selection of BDO Seidman, LLP to the
stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify the selection, the Audit Committee will reconsider
whether or not to retain that firm. Even if the selection is ratified, the Audit
Committee in its discretion may direct the appointment of different independent
auditors at any time during the year if it determines that such a change would
be in the best interests of the Company and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of BDO Seidman, LLP.
AUDITOR'S FEES
AUDIT FEES. The aggregate fees billed by PricewaterhouseCoopers LLP in the
fiscal year ended October 31, 2002, and by PricewaterhouseCoopers LLP and BDO
Seidman, LLP in the fiscal year ended October 31, 2003, for the audit of the
Company's financial statements for such fiscal period and for the review of the
Company's interim financial statements were $75,890, $7,780 and $60,000,
respectively.
AUDIT-RELATED FEES. The aggregate fees billed by PricewaterhouseCoopers LLP in
the fiscal year ended October 31, 2002, and by PricewaterhouseCoopers LLP and
BDO Seidman, LLP in the fiscal year ended October 31, 2003, for audit-related
services, including filing SEC Form S-1 registration work related a June 2003
private placement of SBE common stock and the audit work related to the
acquisition of Antares Microsystems, inc. on August 7, 2003, were $28,000,
$14,500 and $95,150, respectively
TAX FEES. The aggregate fees billed by PricewaterhouseCoopers LLP in the fiscal
year ended October 31, 2002, and by PricewaterhouseCoopers LLP and BDO Seidman,
LLP in the fiscal year ended October 31, 2003, for tax services, including
corporate state and federal income tax compliance were $15.305, $0 and $9,500,
respectively.
ALL OTHER FEES. The aggregate fees billed by PricewaterhouseCoopers LLP in the
fiscal year ended October 31, 2002, and by PricewaterhouseCoopers LLP and BDO
Seidman, LLP in the fiscal year ended October 31, 2003, for all other services
were $0, $0 and $0, respectively.
The Audit Committee has determined that the rendering of non-audit services by
PricewaterhouseCoopers LLP and BDO Seidman, LLP is compatible with maintaining
the auditor's independence.
During the fiscal year ended October 31, 2003, 100% of the total hours expended
on the Company's financial audit by PricewaterhouseCoopers LLP were provided by
persons other than PricewaterhouseCoopers LLP's full-time permanent employees.
During the fiscal year ended October 31, 2003, 100% of the total hours expended
on the Company's financial audit by BDO Seidman, LLP were provided by BDO
Seidman, LLP's full-time permanent employees.
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES
The Audit Committee has not approved any formal policy concerning pre-approval
of the auditors to perform both audit and non-audit services (services other
than audit, review and attest services). Instead, on a case by case basis, any
audit or non-audit services proposed to be performed are considered by and, if
deemed appropriate, approved by the Audit Committee in advance of the
performance of such services. All of the fees earned by PricewaterhouseCoopers
LLP and BDO Seidman, LLP described above were attributable to services
pre-approved by the Audit Committee.
22
CHANGE IN INDEPENDENT ACCOUNTANTS
On April 22, 2003, the Company dismissed PricewaterhouseCoopers LLP as its
independent accountants. The Company's Audit Committee participated in and
approved the decision to change independent accountants.
PricewaterhouseCoopers LLP's report on the Company's consolidated financial
statements for the fiscal year ended October 31, 2002 contained a paragraph
expressing substantial doubt as to the Company's ability to continue as a going
concern. PricewaterhouseCoopers LLP's reports on the Company's consolidated
financial statements for the fiscal years ended October 31, 2002 and 2001 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles,
except as noted previously.
During the fiscal years ended October 31, 2002 and 2001 and through April 22,
2003, there were no disagreements between the Company and PricewaterhouseCoopers
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of PricewaterhouseCoopers LLP, would have caused
PricewaterhouseCoopers LLP to make reference to the subject matter of the
disagreement in their report.
During the fiscal years ended October 31, 2002 and 2001 and through April 22,
2003, there were no reportable events, as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
PricewaterhouseCoopers LLP has furnished the Company with a letter addressed to
the Securities and Exchange Commission stating that it agreed with the above
statements. A copy of such letter, dated April 23, 2003, was filed by the
Company as Exhibit 16.1 to a Current Report on Form 8-K on April 25, 2003.
The Company engaged BDO Seidman, LLP as its new independent accountants as of
April 22, 2003. During the fiscal years ended October 31, 2002 and 2001, and
through the date of the engagement of BDO Seidman, LLP, the Company did not
consult BDO Seidman, LLP regarding either (a) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements,
or (b) any matter that was the subject of a disagreement (as defined in Item
304(a)(1)(iv) of Regulation S-K and its related instructions) or a reportable
event (as defined in Item 304(a)(1)(iv) of Regulation S-K).
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 6.
23
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
the Company's Common Stock as of December 31, 2003 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table; (iii) all executive officers and directors of the Company as
a group; and (iv) all those known by the Company to be beneficial owners of more
than five percent of its Common Stock.
Beneficial Ownership(1)
-----------------------------
Number of Percent of
Beneficial Owner Shares Total (2)
----------------------------------------------------- ----------- -----------
Leviticus Partners L.P.
30 Park Avenue, Suite 12F
New York, New York, 10016 ........................... 314,400 6.3%
Mr. William B. Heye, Jr. (3)(4)
2305 Camino Ramon, Suite 200
San Ramon, CA 94583 ................................ 250,050 5.0%
Mr. Raimon L. Conlisk (3) ........................... 42,437 *
Dr. Randall L-W. Caudill (3) ........................ 30,188 *
Mr. Ronald J. Ritchie (3) ........................... 24,500 *
Mr. Kirk Anderson (3) ............................... 155,584 3.1%
Mr. David Brunton (3) ............................... 245,000 4.9%
Mr. Daniel Grey (3) ................................. 229,190 4.6%
All executive officers and directors as a group (9
persons) (3) ........................................ 1,026,949 20.6%
---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors
and principal stockholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise
indicated in the footnotes to this table and subject to community
property laws where applicable, the Company believes that each of the
stockholders named in this table has sole voting and investment power
with respect to the shares indicated as beneficially owned.
(2) Applicable percentages are based on 4,994,127 shares outstanding on
December 31, 2003, adjusted as required by rules promulgated by the
SEC.
(3) Includes 250,000, 18,750, 13,750, 170,000, 155,584, 229,190 and 18,750
shares that Messrs. Heye, Conlisk, Ritchie, Anderson, Brunton, Grey and
Dr. Caudill, respectively, have the right to acquire within 60 days
after the date of this table under the Company's option plans.
(4) Includes 50 shares held by Joan G. Heye, the wife of Mr. Heye.
24
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than ten percent stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended October 31, 2003 all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with.
25
COMPENSATION OF DIRECTORS
During fiscal 2003, each non-employee director of the Company received for his
services a quarterly retainer of $3,000 plus fees of $1,000 for each Board and
Committee meeting attended and a fee of $500 for each telephonic Board or
Committee meeting in which such director participated. Each Committee chairman
also receives an additional quarterly fee of $750. The Chairman of the Board
receives, in lieu of all other fees, a fee of $40,000. In December 2001, the
Board approved the payment of 50% of the director fees and committee member fees
for the non-employee directors for meetings held between March 1, 2002 and
October 31, 2002 to be paid in the form of stock bonuses under the 1996 Plan. In
December 2002, the Board extended this arrangement until October 31, 2003, at
which time the practice was discontinued by the Board. The exact number of
shares issued in each case is determined by dividing the gross amount of the
cash payment foregone by the closing price of the Company's Common Stock on the
Nasdaq National Market on the business day prior to the date of the applicable
Board or committee meeting. During fiscal 2003, the Company granted 36,387
shares to the non-employee directors in the form of stock bonuses in lieu of 50%
of their cash compensation for attendance at Board and Committee meetings. In
December 2003, the Company discontinued granting shares to the non-employee
directors in the form of stock bonuses in lieu of 50% of their cash compensation
for attendance at Board and Committee meetings. In the fiscal year ended October
31, 2003 the total compensation paid in cash or stock consideration to
non-employee directors was $91,000. The members of the Board are also eligible
for reimbursement for their expenses incurred in connection with attendance at
Board meetings in accordance with Company policy.
In addition, each non-employee director of the Company also receives stock
option grants under the 2001 Non-Employee Directors' Stock Option Plan. In
January 1991, the Board adopted, and the stockholders subsequently approved, the
Company's 1991 Non-Employee Directors' Stock Option Plan (the "1991 Directors'
Plan"). In January 2001, the Board approved, and the stockholders subsequently
approved, an amended and restated 1991 Directors' Plan, and renamed the 1991
Directors' Plan the 2001 Non-Employee Directors' Stock Option Plan (the "2001
Directors' Plan"). Options granted under the 2001 Directors' Plan are
non-discretionary. Upon initial election a non-employee director is granted an
option to purchase 15,000 shares of Common Stock of the Company. In addition, on
April 1 of each year (or the next business day should such date be a legal
holiday), each non-employee director is automatically granted under the
Directors' Plan, without further action by the Company, the Board or the
stockholders of the Company, an option to purchase 5,000 shares of Common Stock
of the Company. Prior to the adoption of the 2001 Directors' Plan in March 2001,
upon initial election to the Board a non-employee director was granted an option
to purchase 5,000 shares of Common Stock. Options granted under the 2001
Directors' Plan have a seven year term and become vested on the one year
anniversary of the date of option grant, provided that the optionholder has,
during the entire year preceding the one year anniversary date, provided
continuous service to the Company or an affiliate of the Company. Options
granted under the 1991 Directors' Plan have a five- year term and vest in four
equal installments commencing on the date one year after the grant of the
option, provided that the optionholder has, during the entire year prior to each
such vesting date, provided continuous service to the Company or an affiliate of
the Company. The exercise price of options granted under the 2001 Directors'
Plan is 100% of the fair market value of the Common Stock subject to the option
on the date of the option grant. In the event of a merger of the Company with or
into another corporation or a consolidation, acquisition of assets or other
change-in-control transaction involving the Company, the vesting of each option
will accelerate and the option will terminate if not exercised prior to the
consummation of the transaction unless any surviving corporation assumes such
options or substitutes similar options for such options. During fiscal 2003, the
Company granted options covering an aggregate of 15,000 shares to the
non-employee directors of the Company at an exercise price of $0.70 per share,
the fair market value of such Common Stock on the date of grant (based on the
closing sales price as reported on the Nasdaq National Market on the date of
grant). As of December 31, 2003, 5,000 options had been exercised under the
Directors' Plan.
26
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION/2/
The Compensation Committee of the Board is responsible for the administration of
the compensation programs in effect for the Company's executive officers. The
Committee currently consists of Ronald J. Ritchie, Randall L-W. Caudill and
Raimon L. Conlisk, none of whom is an employee of the Company. The compensation
programs have been designed to ensure that the compensation paid to the
executive officers is substantially linked to both Company and individual
performance. Accordingly, a significant portion of the compensation for which an
executive officer is eligible is comprised of variable components based upon
individual achievement and Company performance measures.
Executive Compensation Principles
The design and implementation of the Company's executive compensation programs
are based on a series of general principles. These principles may be summarized
as follows:
o Align the interests of management and stockholders to build
stockholder value by the encouragement of consistent, long-term
Company growth.
o Attract and retain key executive officers essential to the long-term
success of the Company.
o Reward executive officers for long-term corporate success by
facilitating their ability to acquire an ownership interest in the
Company. o Provide direct linkage between the compensation payable to
executive officers and the Company's attainment of annual and
long-term financial goals and targets.
o Emphasize reward for performance at the individual and corporate
level.
Components of Executive Compensation in Fiscal 2003
For fiscal 2003, the Company's executive compensation programs included the
following components:
o Base Salary
o Cash Bonus
o Long-Term Incentives
o Benefits and Perquisites
Each component is calibrated to a competitive market position, with market
information provided by compensation surveys prepared by independent consulting
firms and information collected from companies selected by the Company's
Compensation Committee as appropriate comparators of compensation practices. The
companies selected by the Compensation Committee as appropriate comparators are
generally represented in the Nasdaq Computer Manufacturing Index, whose
performance over the past five years is compared to that of the Company in the
chart appearing under the heading "Performance Measurement Comparison."
Base Salary
The base salary for each executive officer is determined on the basis of
individual performance, the functions performed by the executive officer and the
scope of the executive officer's ongoing responsibilities, and the salary levels
in effect for comparable positions based on information provided by the
compensation surveys referenced above and comparator information. The weight
given to each of these factors varies from individual to individual. In general,
base salary is designed primarily to be competitive within the relevant industry
and geographic market.
Each executive officer's base salary is reviewed annually to ensure
appropriateness, and increases to base salary are made to reflect competitive
market increases and individual factors. Company performance does not play a
significant role in the determination of base salary.
-------------
/2/ The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act or the Exchange Act, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
27
Cash Bonus
The Company's Management Incentive Plan provides for the funding of a bonus pool
based upon the Company's year-to-year rate of revenue growth and profit before
tax. No funding of the bonus pool occurs if profit before tax does not exceed a
threshold determined by comparing the cost of capital to the return on assets
employed. Executive officers are eligible to receive cash performance bonuses
ranging from 0% to 150% of their salary. In fiscal 2003, no executive officer
received a cash bonus under this plan. Additionally, each officer is eligible to
participate in the Company's Savings and Investment Plan and Trust and receive
matching and profit sharing contributions as determined by the Board.
Long-Term Incentives
Long-term incentives are provided through stock option grants. These option
grants are intended to motivate the executive officers to manage the business to
improve long-term Company performance. Customarily, option grants are made with
exercise prices equal to the market price of the shares on the date of grant and
will be of no value unless the market price of the Company's outstanding common
shares appreciates, thereby aligning a substantial part of the executive
officer's compensation package with the return realized by the stockholders.
The size of each option grant is designed to create a meaningful opportunity for
stock ownership and is based upon several factors, including relevant
information contained in the compensation surveys described above, an assessment
of the option grants of comparable companies and the individual performance of
each executive officer.
Each option grant allows the executive officer to acquire shares of the
Company's Common Stock at a fixed price per share (customarily the market price
on the grant date) over a specified period of time (customarily seven years).
The option generally vests in equal installments over a period of four years,
contingent upon the executive officer's continued employment with the Company.
Accordingly, the option will provide a return to the executive officer only if
the executive officer remains employed by the Company and the market price of
the underlying shares appreciates over the option term.
In fiscal 2003, the Committee did not grant any stock options to the Named
Executive Officers. The Committee believes that stock options, particularly
incentive stock options, encourage long-term Company stock ownership, and
therefore that such grants are in the best interests of the Company and its
stockholders.
Benefits and Perquisites
The benefits and perquisites component of executive compensation is generally
similar to that which is offered to all of the Company's employees or that are
typical in the industry for an executive's position or circumstances.
Chief Executive Officer (CEO) Compensation
In setting the compensation payable to the Chief Executive Officer, William B.
Heye, Jr., the goal is to provide compensation competitive with other companies
in the industry while at the same time making a significant percentage of Mr.
Heye's potential earnings subject to consistent, positive, long-term Company
performance. In general, the factors utilized in determining Mr. Heye's
compensation were similar to those applied to the other executive officers in
the manner described in the preceding paragraphs.
Ronald J. Ritchie, Chairman
Randall L-W. Caudill
Raimon L. Conlisk
28
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, during the fiscal year ended October 31, 2003, the Compensation
Committee consisted of Mr. Ritchie, Mr. Conlisk and Dr. Caudill. None of these
non-employee directors has any interlocking or other type of relationship that
would call into question his independence as a committee member.
Performance Measurement Comparison/3/
The following graph shows the total stockholder return of an investment of $100
in cash on October 31, 1998 for (i) the Company's Common Stock, (ii) the Total
Return for the Nasdaq Stock Market (United States companies) ("Nasdaq Stock
Market") and (iii) the Nasdaq Telecommunications Index ("Nasdaq
Telecommunications"). All values assume reinvestment of the full amount of all
dividends and are calculated as of October 31 of each year:
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG SBE, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX
[CHART]
-------------------
/3/ The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act or the Exchange Act, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
29
Certain Transactions
In November 1998, the Company amended a stock option that entitled William B.
Heye, Jr., the Company's President and Chief Executive Officer, to acquire
139,400 shares of the Company's Common Stock at $4.25 per share to provide that
such option could be exercised pursuant to a deferred payment alternative.
Thereafter, Mr. Heye exercised such option pursuant to the deferred payment
alternative, with a net value realized (the difference between the exercise
price and the fair market value of such shares, based on the closing sales price
reported on the Nasdaq National Market for the date of exercise) of $331,075. In
connection with such exercise, Mr. Heye borrowed $743,950 from the Company, an
amount equal to the sum of the exercise price for such option and certain taxes
payable by Mr. Heye upon such exercise. Such loan was evidenced by a full
recourse promissory note in the amount of $743,950, the payment of which is
secured by all shares of the Company's Common Stock (including after-acquired
shares) held by Mr. Heye. In October 2000, the Board extended the term of the
note to November 2001. In December 2001, the Board amended, restated and
consolidated the note to extend the term of the note to December 2003 and to
require certain mandatory repayments of principal of between $25,000 to $100,000
each year while the note is outstanding. Such loan bears interest at a rate of
2.48% per annum, with interest payments due annually and the entire principal
amount due in December 2003. Such loan was repaid in full by Mr. Heye prior to
the due date.
The Company has entered into indemnity agreements with certain officers and
directors that provide, among other things, that the Company will indemnify such
officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings to which he is or may be made a party
by reason of his position as a director, officer or other agent of the Company,
and otherwise to the full extent permitted under Delaware law and the Company's
Certificate of Incorporation, as amended, and the Company's By-Laws.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
/S/ DAVID W. BRUNTON
David W. Brunton
Secretary
February 17, 2004
DELIVERY OF THIS PROXY STATEMENT
The SEC has adopted rules that permit companies and intermediaries (e.g.,
brokers) to satisfy the delivery requirements for proxy statements and annual
reports with respect to two or more stockholders sharing the same address by
delivering a single proxy statement addressed to those stockholders. This
process, which is commonly referred to as "householding," potentially means
extra convenience for stockholders and cost savings for companies.
This year, a number of brokers with account holders who are SBE, Inc.
stockholders will be "householding" our proxy materials. A single proxy
statement will be delivered to multiple stockholders sharing an address unless
contrary instructions have been received from the affected stockholders. Once
you have received notice from your broker that they will be "householding"
communications to your address, "householding" will continue until you are
notified otherwise or until you revoke your consent. If, at any time, you no
longer wish to participate in "householding" and would prefer to receive a
separate proxy statement and annual report, please notify your broker, direct
your written request to David Brunton, Chief Financial Officer, SBE, Inc., 2305
Camino Ramon, Suite 200, San Ramon, California 94583 or contact David Brunton at
(925) 355-7700.
30
Stockholders who currently receive multiple copies of the proxy statement at
their address and would like to request "householding" of their communications
should contact their broker.
ANNUAL REPORT
A copy of the Company's Annual Report to the Securities and Exchange Commission
on Form 10-K for the fiscal year ended October 31, 2003 is included with the
Proxy Statement. The Company's audited consolidated financial statements,
management's discussion and analysis of financial condition and results of
operations, and supplementary financial information are incorporated in this
Proxy Statement by reference to pages 39, 19 through 29 and 37 through 62 of
this report.
31
ANNUAL MEETING OF STOCKHOLDERS OF
SBE, INC.
March 16, 2004
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
/ Please detach along perforated line and mail in the envelope provided. /
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED
BELOW AND FOR PROPOSALS 2, 3, 4, 5, AND 6. PLEASE SIGN, DATE AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN
HERE |X|
--------------------------------------------------------------------------------
1. To elect two directors to hold office until the 2007 Annual Meeting of
Stockholders and until their successors are elected and duly qualified.
NOMINEES:
o John Reardon
o Marion M. (Mel) Stuckey
|_| FOR ALL NOMINEES
|_| WITHHOLD AUTHORITY FOR ALL NOMINEES
|_| FOR ALL EXCEPT
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s),
----------- mark "FOR ALL EXCEPT" and fill in the circle next to each
nominee you wish to withhold, as shown here:
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. To approve the Company's 1996 Stock Option Plan, as amended, to [ ] [ ] [ ]
increase the aggregate number of shares of Common Stock reserved for
issuance under such Plan by 1,000,000 shares.
3. To approve the Company's 2001 Non-Employee Director's Stock Option [ ] [ ] [ ]
Plan, as amended, to increase the aggregate number of shares of Common
Stock reserved for issuance under such plan by 200,000 shares.
4. To approve an amendment to the Company's Certificate of Incorporation [ ] [ ] [ ]
to increase the authorized number of shares of Common Stock from
10,000,000 to 25,000,000 shares.
5. To approve an amendment to the Company's Certificate of Incorporation [ ] [ ] [ ]
to allow stockholders to remove directors without cause.
6. To ratify selection of BDO Seidman, LLP as the Company's independent [ ] [ ] [ ]
auditors for the fiscal year ending October 31, 2004.
--------------------------------------------------------------------------------
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this method.
--------------------------------------------------------------------------------
Signature of Stockholder Date
------------------------------- -------------------
Signature of Stockholder Date
------------------------------- -------------------
Note: Please sign exactly as your name or names appear on this Proxy.
When shares are held jointly, each holder should sign. When signing
as executor, administrator, attorney, trustee or guardian, please
give full title as such. If the signer is a corporation, please
sign full corporate name by duly authorized officer, giving full
title as such. If signer is a partnership, please sign in
partnership name by authorized person.
PROXY
SBE, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 16, 2004
The undersigned hereby appoints WILLIAM B. HEYE, JR. and DAVID W.
BRUNTON, and each of them, as attorneys and proxies of the undersigned, with
full power of substitution, to vote all of the shares of stock of SBE, Inc. that
the undersigned may be entitled to vote at the Annual Meeting of Stockholders of
SBE, Inc. to be held at 2305 Camino Ramon, Suite 200, San Ramon, California, on
Tuesday, March 16, 2004 at 9:00 a.m. (local time), and at any and all
postponements, continuations and adjournments thereof, with all powers that the
undersigned would possess if personally present, upon and in respect of the
following matters and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the meeting.UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE
VOTED FOR THE NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4, 5 AND 6,
AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS
ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
(Continued and to be signed on the reverse side)