<PAGE>
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:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Red Brick Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF RED BRICK SYSTEMS APPEARS HERE]
April 6, 1998
TO THE STOCKHOLDERS OF RED BRICK SYSTEMS, INC.
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Red Brick Systems, Inc. (the "Company"), which will be held at the Garden
Court Hotel, 520 Cowper Street, Palo Alto, California 94301, on Friday, May
15, 1998, at 10:00 a.m. local time.
Details of the business to be conducted at the Annual Meeting are given in
the attached Proxy Statement and the Notice of Annual Meeting of Stockholders.
It is important that your shares be represented and voted at the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE, AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. Returning the proxy does NOT deprive you of your right to attend the
Annual Meeting. If you decide to attend the Annual Meeting and wish to change
your proxy vote, you may do so automatically by voting in person at the
meeting.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company. We
look forward to seeing you at the Annual Meeting.
Sincerely,
Christopher G. Erickson
President, Chief Executive
Officer and Chairman of the
Board of Directors
<PAGE>
[LOGO OF RED BRICK SYSTEMS, INC. APPEARS HERE]
RED BRICK SYSTEMS, INC.
485 ALBERTO WAY
LOS GATOS, CALIFORNIA 95032
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 15, 1998
The Annual Meeting of Stockholders ("Annual Meeting") of Red Brick Systems,
Inc. (the "Company") will be held at the Garden Court Hotel, 520 Cowper
Street, Palo Alto, California 94301, on Friday, May 15, 1998, at 10:00 a.m.
local time for the following purposes:
1. To elect four members of the Board of Directors to serve until the next
Annual Meeting or until their successors have been duly elected and
qualified;
2. To approve an amendment to the Company's Certificate of Incorporation to
increase the number of shares of Common Stock that the Company is
authorized to issue from 20,000,000 to 50,000,000;
3. To approve an amendment to the 1995 Stock Option Plan, including an
increase to the number of shares available for issuance thereunder and
an increase to the per person limit on the maximum number of shares that
may be awarded each year, as set forth in the accompanying proxy;
4. To approve the adoption of the Company's 1998 Employee Stock Purchase
Plan;
5. To ratify the appointment of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ending December 31,
1998; and
6. To transact such other business as may properly come before the meeting
or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the attached
Proxy Statement.
Only stockholders of record at the close of business on April 1, 1998, are
entitled to notice of, and to vote at, the Annual Meeting and at any
adjournments or postponements thereof. A list of such stockholders will be
available for inspection at the Company's headquarters located at 485 Alberto
Way, Los Gatos, California, during ordinary business hours for the ten-day
period prior to the Annual Meeting.
By Order of the Board of Directors,
Margaret R. Brauns
Secretary
Los Gatos, California
April 6, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE, AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-
PAID ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL
MEETING. IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR
PROXY VOTE, YOU MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
<PAGE>
RED BRICK SYSTEMS, INC.
485 ALBERTO WAY
LOS GATOS, CALIFORNIA 95032
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 15, 1998
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors of Red Brick Systems, Inc., a Delaware
corporation (the "Company"), for the Annual Meeting of Stockholders (the
"Annual Meeting") to be held at the Garden Court Hotel, 520 Cowper Street,
Palo Alto, California 94301, on Friday, May 15, 1998, at 10:00 a.m., and at
any adjournment or postponement of the Annual Meeting. These proxy materials
were first mailed to stockholders on or about April 6, 1998.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual Meeting
are summarized in the accompanying notice of Annual Meeting of Stockholders.
Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Company's Common Stock is the only type of security entitled to vote at
the Annual Meeting. On April 1, 1998, the record date for determination of
stockholders entitled to vote at the Annual Meeting, there were
shares of Common Stock outstanding. Each stockholder of record on April 1,
1998, is entitled to one vote for each share of Common Stock held by such
stockholder on April 1, 1998. Shares of Common Stock may not be voted
cumulatively. All votes will be tabulated by the inspector of election
appointed for the meeting, who will separately tabulate affirmative and
negative votes, abstentions and broker non-votes.
QUORUM REQUIRED
The Company's bylaws provide that the holders of a majority of the Company's
Common Stock issued and outstanding and entitled to vote at the Annual
Meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at the Annual Meeting. Abstentions and broker
non-votes will be counted as present for the purpose of determining the
presence of a quorum.
VOTES REQUIRED
PROPOSAL 1. Directors are elected by a plurality of the affirmative votes
cast by those shares present in person, or represented by proxy, and entitled
to vote at the Annual Meeting. The four nominees for director receiving the
highest number of affirmative votes will be elected. Abstentions and broker
non-votes are not counted toward a nominee's total. Stockholders may not
cumulate votes in the election of directors.
PROPOSAL 2. Approval of the adoption of the amendment to the Company's
Certificate of Incorporation requires the affirmative vote of a majority of
the Company's Common Stock issued and outstanding and entitled to vote at the
Annual Meeting. Abstentions and broker non-votes are not affirmative votes
and, therefore, will have the same effect as votes against the proposal.
PROPOSAL 3. Approval of the adoption of the amendment to the Company's 1995
Stock Option Plan requires the affirmative vote of a majority of those shares
present in person, or represented by proxy, and entitled to vote at the Annual
Meeting. Abstentions will be treated as votes against the proposal. Broker
non-votes will be treated as not entitled to vote on this matter and thus will
have no effect on the outcome of the vote.
1
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PROPOSAL 4. Approval of the adoption of the Company's 1998 Employee Stock
Purchase Plan requires the affirmative vote of a majority of those shares
present in person, or represented by proxy, and entitled to vote at the Annual
Meeting. Abstentions will be treated as votes against the proposal. Broker
non-votes will be treated as not entitled to vote on this matter and thus will
have no effect on the outcome of the vote
PROPOSAL 5. Ratification of the appointment of Ernst & Young LLP as the
Company's independent public accountants for the fiscal year ending December
31, 1998, requires the affirmative vote of a majority of those shares present
in person, or represented by proxy, and cast whether affirmatively or
negatively at the Annual Meeting. Abstentions and broker non-votes will not be
counted as having been voted on the proposal.
PROXIES
Whether or not you are able to attend the Company's Annual Meeting, you are
urged to complete and return the enclosed proxy, which is solicited by the
Company's Board of Directors and which will be voted as you direct on your
proxy when properly completed. In the event no directions are specified, such
proxies will be voted FOR the Nominees of the Board of Directors (as set forth
in Proposal No. 1), FOR Proposals Nos. 2, 3, 4 and 5, and in the discretion of
the proxy holders as to other matters that may properly come before the Annual
Meeting. You may also revoke or change your proxy at any time before the
Annual Meeting. To do this, send a written notice of revocation or another
signed proxy with a later date to the Secretary of the Company at the
Company's principal executive offices before the beginning of the Annual
Meeting. You may also automatically revoke your proxy by attending the Annual
Meeting and voting in person. All shares represented by a valid proxy received
prior to the Annual Meeting will be voted.
SOLICITATION OF PROXIES
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this Proxy Statement, the
proxy, and any additional solicitation material furnished to stockholders.
Copies of solicitation material will be furnished to brokerage houses,
fiduciaries, and custodians holding shares in their names that are
beneficially owned by others so that they may forward this solicitation
material to such beneficial owners. In addition, the Company may reimburse
such persons for their costs of forwarding the solicitation material to such
beneficial owners. The original solicitation of proxies by mail may be
supplemented by solicitation by telephone, telegram, or other means by
directors, officers, employees, or agents of the Company. No additional
compensation will be paid to these individuals for any such services. The
Company has also retained Corporate Investor Communications, Inc. ("CIC") to
assist in the solicitation of proxies. CIC will receive a fee for such
services of approximately $6,000, plus out-of-pocket expenses, which will be
paid by the Company. Except as described above, the Company does not presently
intend to solicit proxies other than by mail.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The bylaws of the Company provide that the authorized number of directors of
the Company shall be set by resolution of the Board of Directors. As of the
date of this Proxy Statement, the number of directors presently authorized by
the Board of Directors is five directors. One of the present directors of the
Company, Thomas H. Bredt, will not be standing for re-election at the Annual
Meeting and his term will expire upon the date of the Annual Meeting. The
Board of Directors has adopted a resolution, effective upon the date of the
Annual Meeting, that reduces the authorized number of directors of the Company
to four. The directors who are being nominated for election to the Board of
Directors (the "Nominees"), their ages as of February 28, 1998, their
positions and offices held with the Company and certain biographical
information are set forth below. The proxy holders intend to vote all proxies
received by them in the accompanying form FOR the Nominees listed below unless
otherwise instructed. In the event any Nominee is unable or declines to serve
as a director at the time of the Annual Meeting, the proxies will be voted for
any nominee who may be designated by the present Board of Directors to
2
<PAGE>
fill the vacancy. As of the date of this Proxy Statement, the Board of
Directors is not aware of any Nominee who is unable or will decline to serve
as a director. The four Nominees receiving the highest number of affirmative
votes of the shares entitled to vote at the Annual Meeting will be elected
directors of the Company to serve until the next Annual Meeting or until their
successors have been duly elected and qualified.
<TABLE>
<CAPTION>
NOMINEES AGE POSITIONS AND OFFICES HELD WITH THE COMPANY
-------- --- -------------------------------------------
<S> <C> <C>
Christopher G. Erickson 49 President, Chief Executive Officer and Chairman
(1).................... of the Board
Andrew K. Ludwick....... 52 Director
John F. Shoch (2)....... 49 Director
John E. Warnock (3)..... 57 Director
</TABLE>
- --------
(1) Member of Stock Option Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Erickson joined the Company in February 1993 as President and Chief
Executive Officer and as a director. In September 1995, Mr. Erickson was also
elected Chairman of the Board of the Company. From November 1980 to January
1993, Mr. Erickson was employed by Tandem Computers Incorporated ("Tandem"), a
manufacturer of computers and related products. From 1985 to 1989, as Director
of Software Product Management, he was responsible for the planning and
marketing of Tandem software products, including NonStop SQL(TM), the software
industry's first specialized relational database management system. From 1989
to 1993, Mr. Erickson served as President of Tandem Telecommunications
Systems, Inc., a wholly-owned subsidiary of Tandem, and most recently as Vice
President and General Manager, Tandem Telecom Division. Prior to joining
Tandem, Mr. Erickson was employed by Wells Fargo Bank, N.T. & S.A., a banking
institution, Burroughs Computer Corporation, a manufacturer of computers and
related products, and Data Point Corporation, a computer products and services
company. Mr. Erickson holds a B.A. in economics from the University of
California, Santa Barbara and an M.B.A. from the University of California,
Berkeley.
Mr. Ludwick became a director of the Company in October 1996. From October
1994 to October 1996, Mr. Ludwick served as President and Chief Executive
Officer of Bay Networks, Inc. ("Bay Networks"), the company created in October
1994 by the merger of SynOptics Communications, Inc., which he co-founded in
July 1985, and Wellfleet Communications, Inc. Prior to co-founding SynOptics
Communications, Inc., Mr. Ludwick worked for Xerox Corporation, a document
management company, in a variety of positions in marketing, market planning,
and sales operations. Mr. Ludwick serves on the Board of Directors of Bay
Networks. Mr. Ludwick holds a B.A. from Harvard College and an M.B.A. from the
Harvard Business School.
Dr. Shoch became a director of the Company in October 1989. Since 1985, Dr.
Shoch has been a general partner at Asset Management Company, a venture
capital management firm. From 1971 to 1985, Dr. Shoch was employed by the
Xerox Corporation, a document management company, most recently as President
of the Office Systems Division. Dr. Shoch is also a director of Conductus,
Inc. and Remedy Corporation. Dr. Shoch holds a B.S. in political science and
an M.S. and a Ph.D. in computer science from Stanford University.
Dr. Warnock became a director of the Company in April 1991. Dr. Warnock is a
co-founder of Adobe Systems Incorporated ("Adobe"), and has been its Chairman
of the Board since 1989. He has served as Adobe's Chief Executive Officer and
a director since December 1982. Prior to co-founding Adobe, Dr. Warnock was
principal scientist of the Imaging Sciences Laboratory at Xerox Corporation's
Palo Alto Research Center. Dr. Warnock also serves as a director of Netscape
Communications Corporation and Evans & Sutherland Computer Corporation and as
Chairman of the Board of the Tech Museum of Innovation. Dr. Warnock holds a
B.S. in mathematics and philosophy, an M.S. in mathematics, and a Ph.D. in
electrical engineering from the University of Utah.
3
<PAGE>
Each director holds office until the next annual meeting of stockholders or
until his successor is duly elected and qualified. The officers serve at the
discretion of the Board. There are no family relationships among the directors
and officers of the Company.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1997, the Board of Directors held
eight meetings and acted by written consent on two occasions. For the fiscal
year, each of the current directors during the term of their tenure attended
or participated in at least 75% of the aggregate of (i) the total number of
meetings or actions by written consent of the Board of Directors and (ii) the
total number of meetings held by all committees of the Board of Directors on
which each such director served. The Board of Directors has three standing
committees: the Audit Committee, the Compensation Committee, and the Stock
Option Committee.
During the fiscal year ended December 31, 1997, the Audit Committee of the
Board of Directors met four times. The Audit Committee reviews, acts on, and
reports to the Board of Directors with respect to various auditing matters,
including the selection of the Company's auditors, the scope of the annual
audits, fees to be paid to the Company's auditors, the performance of the
Company's auditors, and the accounting practices of the Company. The members
of the Audit Committee during 1997 were Dr. Bredt and Dr. Shoch.
During the fiscal year ended December 31, 1997, the Compensation Committee
of the Board of Directors acted by written consent in lieu of a meeting on
eight occasions. The Compensation Committee reviews the performance and sets
the compensation of the Chief Executive Officer of the Company, and approves
the compensation of the other executive officers of the Company and reviews
the compensation programs for other key employees, including salary and cash
bonus levels as recommended by the Chief Executive Officer. The Compensation
Committee administers the 1995 Stock Option Plan and the Employee Stock
Purchase Plan and will administer the 1998 Employee Stock Purchase Plan. The
members of the Compensation Committee during 1997 were Dr. Bredt and Dr.
Warnock.
During the fiscal year ended December 31, 1997, the Stock Option Committee
of the Board of Directors acted by written consent in lieu of a meeting on 13
occasions. The Stock Option Committee approves stock option grants (up to a
maximum number of shares set by the Board of Directors) to employees and
consultants of the Company who are not officers. Mr. Erickson was the sole
member of the Stock Option Committee during 1997.
DIRECTOR COMPENSATION
Except for grants of stock options, directors of the Company do not receive
compensation for services provided as directors. The Company also does not pay
compensation for committee participation or special assignments of the Board
of Directors.
Non-employee Board members are eligible for option grants pursuant to the
provisions of the Automatic Option Grant Program under the Company's 1995
Stock Option Plan (the "1995 Plan"). Under the Automatic Option Grant Program,
each individual who first becomes a non-employee Board member after the date
of the Company's initial public offering will be granted an option to purchase
15,000 shares on the date such individual joins the Board, provided such
individual has not been in the prior employ of the Company. In addition, at
each Annual Meeting of Stockholders, each individual who continues to serve as
a Board member after such Annual Meeting and has served as a non-employee
Board member for at least six months prior to such Annual Meeting will receive
a non-statutory option grant to purchase 1,000 shares of Common Stock.
Accordingly, on October 18, 1996, Mr. Ludwick was granted an option to
purchase 15,000 shares at an exercise price of $25.25, on May 21, 1997 each of
Messrs. Bredt, Ludwick, Shoch and Warnock were granted an option to purchase
1,000 shares at an exercise price of $8.625 per share, and on May 15, 1998
each of Messrs. Ludwick, Shoch and Warnock will be granted an option to
purchase 1,000 shares at an exercise price equal to the fair market value on
that date. See Proposal No. 3.
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Board members who are also employees of the Company are eligible to receive
discretionary options under the 1995 Plan, and employee-directors, other than
Mr. Erickson, are also eligible to participate in the Company's 1998 Employee
Stock Purchase Plan. See Proposal No. 4.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES LISTED HEREIN.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 28, 1998, certain information
with respect to shares beneficially owned by (i) each person who is known by
the Company to be the beneficial owner of more than five percent of the
Company's outstanding shares of Common Stock, (ii) each of the Company's
directors and the executive officers named in the Summary Compensation Table,
and (iii) all current directors and executive officers as a group. Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within sixty (60) days of
the date as of which the information is provided; in computing the percentage
ownership of any person, the amount of shares is deemed to include the amount
of shares beneficially owned by such person by reason of such acquisition
rights. As a result, the percentage of outstanding shares of any person as
shown in the following table does not necessarily reflect the person's actual
voting power at a particular date.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AS OF FEBRUARY 28, 1998 (1) (2)
-----------------------------------
NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER SHARES CLASS
- ---------------- ----------------- -----------------
<S> <C> <C>
Cowen & Company (3)....................... 738,600 5.92%
Financial Square, Thirty-first Floor
New York, NY 10005-3597
Christopher G. Erickson (4)............... 871,825 6.93%
485 Alberto Way
Los Gatos, CA 95032
Phillip M. Fernandez (5).................. 230,631 1.82%
Robert C. Hausmann (6).................... 138,045 1.11%
Anthony W. Layzell........................ 7,122 *
Alexander Wilson (7)...................... 85,745 *
Thomas H. Bredt (8)....................... 46,619 *
Andrew K. Ludwick (9)..................... 16,000 *
John F. Shoch (10)........................ 239,874 1.92%
John E. Warnock (11)...................... 135,781 1.09%
All current directors and executive
officers as a group
(9 persons, including any listed above)
(12)..................................... 1,547,852 12.08%
</TABLE>
- --------
* Less than 1% of the outstanding shares of Common Stock
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. To the Company's knowledge, the entities named in the table have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them except as otherwise disclosed
below.
5
<PAGE>
(2) The number of shares of Common Stock deemed outstanding includes shares
issuable pursuant to stock options that may be exercised within sixty
(60) days after February 28, 1998.
(3) Includes shares owned directly by Cowen & Company, Cowen Incorporated and
Joseph M. Cohen. Information regarding ownership by Cowen & Company,
Cowen Incorporated and Joseph M. Cohen is stated as of December 31, 1997,
and was obtained from a Schedule 13G filed by such owners with the
Securities and Exchange Commission on February 18, 1998. According to SEC
filings, Cowen Incorporated is a parent holding company of Cowen &
Company under Rule 13d-1(b)(ii)(G) and Joseph M. Cohen may be deemed to
control Cowen Incorporated. The Company is not responsible for any errors
or omissions in such information.
(4) Includes options exercisable into 94,955 shares of Common Stock.
(5) Includes options exercisable into 174,480 shares of Common Stock.
(6) Represents 138,045 shares held by the Robert C. Hausmann and Lori Anne
Hausmann Revocable Living Trust dated November 21, 1991.
(7) Includes options exercisable into 53,217 shares of Common Stock
(8) Includes options exercisable into 16,000 shares of Common Stock.
(9) Represents options exercisable into 16,000 shares of Common Stock.
(10) Includes 17,918 shares owned by Asset Management Associates 1989, L.P.
("Asset"). Dr. Shoch, a director of the Company, is a general partner of
AMC Partners 89 L.P. ("AMC Partners"), which is the general partner of
Asset. Dr. Shoch disclaims beneficial ownership of the shares held by
Asset except to the extent of his pecuniary interest therein arising from
his interests in Asset and AMC Partners. Dr. Shoch's shares include 2,000
shares of Common Stock held by his spouse and options exercisable into
16,000 shares of Common Stock.
(11) Includes options exercisable into 16,000 shares of Common Stock.
(12) Includes options exercisable into 333,435 shares of Common Stock.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
The Compensation Committee of the Board of Directors, as plan administrator
of the 1995 Plan, has the authority to provide for accelerated vesting of the
shares of Common Stock subject to outstanding options held by the Named
Officers and any other officer or any shares actually held by such individual
in connection with certain changes in control of the Company or the subsequent
termination of the officer's employment following the change in control event.
None of the Company's executive officers have employment agreements with the
Company, and their employment may be terminated at any time.
The Company has adopted a severance plan for executive officers that
provides that upon an involuntary termination of an officer's employment, he
or she shall be entitled to six months of salary (one year of salary in the
case of the Chief Executive Officer) and certain benefits and, upon an
involuntary termination of an officer's employment following certain
acquisitions or changes in control of the Company, he or she shall be entitled
to one year of salary and accelerated vesting of option shares or restricted
stock as if the officer remained employed for one additional year.
6
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COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company's Board of Directors (the
"Committee") has the authority to establish the level of base salary payable
to the Chief Executive Officer ("CEO") and to administer the Company's 1995
Plan and Employee Stock Purchase Plan. In addition, the Committee has the
responsibility for approving the individual bonus program to be in effect for
the CEO. The CEO has the authority to establish the level of base salary
payable to all other employees of the Company, including all other executive
officers, subject to the approval of the Committee. In addition, the CEO has
the responsibility for approving the bonus programs to be in effect for all
other executive officers and other key employees each fiscal year, subject to
the approval of the Committee.
For fiscal 1997, the process utilized by the Company in determining
executive officer compensation levels took into account both qualitative and
quantitative factors. Among the factors considered by the Company were
commercially-prepared surveys and informal surveys conducted by Company
personnel among local companies with an emphasis on companies in the software
industry. However, the CEO made the final compensation decisions concerning
the officers, other than the CEO.
General Compensation Policy. The Company's fundamental policy is to offer
the Company's executive officers competitive compensation opportunities based
upon overall Company performance, their individual contribution to the
financial success of the Company and their personal performance. It is the
Company's objective to have a substantial portion of each officer's
compensation contingent upon the Company's performance, as well as upon his or
her own level of performance. Accordingly, each executive officer's
compensation package consists of: (i) base salary, (ii) cash bonus awards, and
(iii) long-term stock-based incentive awards.
In preparing the performance graph for this Proxy Statement, the Company
selected the Nasdaq Stock Market U.S. Total Return Index and the Nasdaq Stock
Market Computer & Data Processing Index. The companies included in the
Company's surveys are not necessarily those included in the indices, because
those companies were determined not to be competitive with the Company for
executive talent or because compensation information was not available to the
Company.
Base Salary. The base salary for each executive officer is set on the basis
of personal performance and the salary level in effect for comparable
positions at companies that compete with the Company for executive talent on
the basis of informal surveys conducted by the Company. In general, the
Company seeks to set base salaries at the 50-75th percentile.
Annual Cash Bonuses. Each executive officer has an established bonus target
each fiscal year. The annual pool of bonuses for executive officers is
determined on the basis of the Company's achievement of the financial
performance targets established at the start of the fiscal year. Specifically,
a target is established at the beginning of the fiscal year using an agreed-
upon formula based on Company revenue and profit and the executive's
individual objectives. Each fiscal year, the annual incentive plan is
reevaluated with a new achievement threshold and new targets for revenue and
profit. Actual bonuses paid reflect an individual's accomplishment of both
corporate and functional objectives, with greater weight being given to
achievement of corporate rather than functional objectives. Actual bonuses are
listed in the Summary Compensation Table.
Long-Term Incentive Compensation. During fiscal 1997, the Committee made
option grants to the Named Officers as set forth in the table entitled "Option
Grants in Last Fiscal Year" on page 12. Generally, a significant grant is made
in the year that an officer commences employment. In subsequent years, smaller
grants may be made or no options granted in the discretion of the Committee.
Generally, the size of each grant is set at a level that the Committee deems
appropriate to create a meaningful opportunity for stock ownership based upon
the individual's position with the Company, the individual's potential for
future responsibility and promotion, the individual's performance in the
recent period, and the number of unvested options held by the individual at
the time of the new grant. The relative weight given to each of these factors
will vary from individual to individual at the Committee's discretion.
7
<PAGE>
CEO Compensation. The annual base salary for Mr. Erickson, the Company's
President and CEO, was established by the Committee on March 19, 1997. The
Committee's decision was made primarily on the basis of the Committee's
subjective judgment of Mr. Erickson's personal performance of his duties.
The remaining components of the CEO's fiscal 1997 incentive compensation
were dependent upon the Company's financial performance as well as the CEO's
personal performance and provided no dollar guarantees. The bonus paid to the
CEO for fiscal 1997 was based on the same incentive plan as for all other
officers who receive bonuses. The option grant made to the CEO was awarded on
the basis of Mr. Erickson's position with the Company, his performance in the
recent period and the number of unvested options he held at the time of the
grant.
Tax Limitation. Under the Federal tax laws, a publicly-held company such as
the Company will not be allowed a Federal income tax deduction for
compensation paid to certain executive officers to the extent that
compensation exceeds $1 million per officer in any year. In order to qualify
option grants under the Company's 1995 Stock Option Plan for an exemption
available to performance-based compensation, the stockholders have approved
certain provisions of the Plan, including a limit on the maximum number of
shares of Common Stock for which any one participant may be granted stock
options each calendar year over the term of the Plan. Accordingly, any
compensation deemed paid to an executive officer when he or she exercises an
outstanding option under the 1995 Stock Option Plan with an exercise price
equal to the fair market value of the option shares on the grant date will
qualify as performance-based compensation that will not be subject to the $1
million limitation. Since it is not expected that the cash compensation to be
paid to the Company's executive officers for the 1998 fiscal year will exceed
the $1 million limit per officer, the Committee will defer any decision on
whether to limit the dollar amount of the cash compensation payable to the
Company's executive officers to the $1 million cap.
Compensation Committee
Thomas H. Bredt
John E. Warnock
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in October 1993
and was comprised of Dr. Bredt and Dr. Warnock during the 1997 fiscal year.
None of these individuals was at any time during 1997, or at any other time,
an officer or employee of the Company. No member of the Compensation Committee
of the Company serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
8
<PAGE>
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return
on the Company's Common Stock between January 23, 1996 (the date the Company's
Common Stock commenced public trading) and December 31, 1997, with the
cumulative total return of (i) the Nasdaq Stock Market Total Return Index
(U.S. Companies) (the "Nasdaq Stock Market--U.S. Index") and (ii) the Nasdaq
Stock Market Computer & Data Processing Index (the "Nasdaq Computer & Data
Processing Index"), over the same period. The graph assumes the investment of
$100.00 on January 23, 1996, in the Company's Common Stock, the Nasdaq Stock
Market--U.S. Index and the Nasdaq Computer & Data processing Index, and
assumes the reinvestment of dividends, if any.
The comparisons shown in the graph below are based upon historical data and
the Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future
performance of the Company's Common Stock. Information used in the graph was
obtained from The Nasdaq Stock Market, Inc., a source believed to be reliable,
but the Company is not responsible for any errors or omissions in such
information.
[STOCK PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
NASDAQ NASDAQ COMPUTER
RED BRICK STOCK MARKET-- & DATA PROCESSING
SYSTEMS, INC. U.S. INDEX INDEX
------------- -------------- -----------------
<S> <C> <C> <C>
January 23, 1996................. 100.00 100.00 100.00
March 29, 1996................... 142.15 107.31 108.83
June 28, 1996.................... 121.49 116.07 120.96
September 30, 1996............... 79.34 120.22 123.37
December 31, 1996................ 76.03 126.11 128.37
March 28, 1997................... 46.28 119.33 119.10
June 30, 1997.................... 23.76 141.20 152.73
September 30, 1997............... 28.10 165.09 167.02
December 31, 1997................ 23.14 154.83 157.63
</TABLE>
9
<PAGE>
The Company effected its initial public offering on January 22, 1996, and
trading began on January 23, 1996, at a per share price of $18.00. The closing
price of Common Stock on January 23, 1996, was $30.25 per share and the graph
above commences with such price.
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, that might incorporate this
Proxy Statement or future filings made by the Company under those statutes,
the Compensation Committee Report and Stock Performance Graph shall not be
deemed filed with the Securities and Exchange Commission and shall not be
deemed incorporated by reference into any of those prior filings or into any
future filings made by the Company under those statutes.
10
<PAGE>
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the three other most highly
compensated executive officers who were serving as such at the end of fiscal
1997, each of whose aggregate compensation for fiscal 1997 exceeded $100,000
for services rendered in all capacities to the Company and its subsidiaries
for that fiscal year, and one other individual who was not serving as an
executive officer at the end of the fiscal year but whose salary and bonus
exceeded $100,000 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------- ---------------------
RESTRICTED SECURITIES
FISCAL OTHER ANNUAL STOCK UNDERLYING
NAME AND PRESENT PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS OPTIONS
- ----------------------------------- ------ -------- ------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Christopher G. Erickson. 1997 $204,750 $33,735 $4,056 0 40,000
President, Chief
Executive Officer 1996 $188,750 $65,869 $5,643 0 0
and Chairman of the
Board 1995 $170,000 $61,520 $5,711 110,145 84,956
Phillip M. Fernandez.... 1997 $185,000 $99,876 $1,365 0 25,000
Sr. Vice President,
Engineering 1996 $156,820 $55,675 $2,117 0 0
& Services 1995 $137,280 $54,226 $2,104 39,652 46,079
Anthony Layzell......... 1997 $ 80,881(2) $46,001 0 0 150,000
Sr. Vice President, 1996 --
Sales & Marketing 1995 --
Robert C. Hausmann...... 1997 $120,714 $18,113 0 0 25,000
Former Vice President, 1996 $133,000 $50,757 $ 863 0 0
Finance and
Administration, 1995 $111,627 $44,366 $1,204 26,435 34,886
Chief Financial Officer
and Secretary
Alexander Wilson........ 1997 $210,756(3) $15,000 0 35,000
Former Vice President, 1996 $223,201(4) $46,202 0 0 0
Worldwide Sales 1995 $148,693(5) $24,000 0 0 0
</TABLE>
- --------
(1) Represents imputed interest on outstanding loans.
(2) Mr. Layzell commenced employment on July 15, 1997.
(3) Includes commissions of $70,756.
(4) Includes commissions of $103,201.
(5) Includes commissions of $57,978.
As of the last day of the fiscal year, the Named Officers held the number of
shares of restricted Common Stock set forth below. Also, see "Certain
Relationships and Related Transactions" below.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
NAME UNVESTED SHARES UNVESTED SHARES
---- --------------- ---------------
<S> <C> <C>
Christopher G. Erickson......................... 29,831 $199,271
Phillip M. Fernandez............................ 10,739 $ 71,737
Anthony W. Layzell.............................. 0 $ 0
Robert C. Hausmann.............................. 0 $ 0
Alexander Wilson................................ 0 $ 0
</TABLE>
11
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to each of the Named Officers in the fiscal year ended 1997. No stock
appreciation rights were granted to these individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------ POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED(1) IN 1997(2) ($/SH)(3) DATE 5%($) 10%($)
---- ---------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Christopher G. Erickson. 40,000 1.80% $6.625 4/18/07 166,657 422,341
Phillip M. Fernandez.... 25,000 1.13% $6.625 4/18/07 104,161 263,964
Anthony W. Layzell...... 100,000 4.50% $8.125 7/16/07 510,977 1,294,916
5,000 0.23% $8.125 7/16/07 25,549 64,746
30,000 1.35% $7.25 11/19/07 136,785 346,639
15,000 0.68% $7.25 11/19/07 68,392 173,320
Robert C. Hausmann...... 25,000 1.13% $6.625 4/18/07 104,161 263,964
Alexander Wilson........ 35,000 1.58% $6.625 4/18/07 145,825 369,549
</TABLE>
- --------
(1) Each of the options listed in the table granted to Messrs. Erickson,
Fernandez, Hausmann and Wilson were granted on April 18, 1997 and become
exercisable with respect to 50% of the Option Shares after one (1) year of
service from the grant date and for the balance in 24 equal monthly
installments thereafter. The first two options granted to Mr. Layzell were
granted on July 16, 1997 and the third option was granted on November 19,
1997; each becomes exercisable to the extent of 25% of the shares after
one year from the vesting commencement date and for the balance in 36
equal monthly installments thereafter. The fourth option was granted on
November 19, 1997 and becomes exercisable with respect to 50% of the
shares after one year from the grant date and the remainder in 24 equal
monthly installments thereafter. The plan administrator has the
discretionary authority to reprice the options through the cancellation of
those options and the grant of replacement options with an exercise price
based on the fair market value of the option shares on the regrant date.
The options have a maximum term of 10 years measured from the option grant
date, subject to earlier termination in the event of the optionee's
cessation of service with the Company. Under each of the options, the
option shares will vest upon an acquisition of the Company by merger or
asset sale, unless the acquiring entity or its parent corporation assumes
the outstanding options. Any options that are assumed or replaced in the
transaction and do not otherwise accelerate at that time shall
automatically accelerate (and any unvested option shares which do not
otherwise vest at that time shall automatically vest) in the event the
optionee's service terminates by reason of an involuntary or constructive
termination within 12 months following the transaction.
(2) Based on a total of 2,220,650 options granted in 1997.
(3) The exercise price for each option may be paid in cash, in shares of
Common Stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares, together with any federal and state income tax liability incurred
by the optionee in connection with such exercise.
(4) In accordance with the rules of the Securities and Exchange Commission
("SEC"), the table sets forth the hypothetical gains or "option spreads"
that would exist for the options at the end of their respective ten-year
terms based on assumed annualized rates of compound stock price
appreciation of 5% and 10% from the dates the options were granted to the
end of the respective option terms. Actual gains, if any, on option
exercises are dependent on the future performance of the Company's Common
Stock and overall market conditions. There can be no assurance provided to
any executive officer or any other holder of the Company's securities that
the actual stock price appreciation over the 10-year option term will be
at the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants made to the executive
officers.
12
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning exercises of options
by the Named Officers and option holdings as of the end of fiscal 1997 with
respect to each of the Named Officers. No stock appreciation rights were
exercised during such year or were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END(#) AT FY-END($)(2)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Christopher G. Erickson. 325,750 $2,079,914 42,478 82,477 $ 27,478 $42,477
Phillip M. Fernandez.... 0 $ 0 144,491 48,739 $825,081 $20,614
Anthony W. Layzell...... 0 $ 0 0 150,000 $ 0 $ 0
Robert C. Hausmann...... 0 $ 0 0 0 $ 0 $ 0
Alexander Wilson........ 5,000 $ 112,950 26,955 104,607 $ 0 $21,843
</TABLE>
- --------
(1) Market price at exercise less exercise price.
(2) Market value of underlying securities at fiscal year end, December 31,
1997 ($7.00), minus the exercise price.
13
<PAGE>
PROPOSAL NO. 2
AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
The Board of Directors has determined that it is in the best interests of
the Company and its stockholders to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock of
the Company from 20,000,000 to 50,000,000 shares. Accordingly, the Board of
Directors has unanimously approved the proposed Certificate of Amendment to
the Amended and Restated Certificate of Incorporation of the Company, in the
form attached hereto as Exhibit A (the "Certificate of Amendment"), and hereby
solicits the approval of the Company's stockholders of the Certificate of
Amendment. If the stockholders approve the Certificate of Amendment, the Board
of Directors currently intends to file the Certificate of Amendment with the
Secretary of State of the State of Delaware as soon as practicable following
such stockholder approval. If the Certificate of Amendment is not approved by
the stockholders, the Company's existing Amended and Restated Certificate of
Incorporation will continue in effect.
The objectives of the increase in the authorized number of shares of Common
Stock are to ensure that the Company has sufficient shares available for
future issuances. The Board of Directors believes that it is prudent to
increase the authorized number of shares of Common Stock to the proposed level
in order to provide a reserve of shares available for issuance to meet
business needs as they arise. Such future activities may include, without
limitation, financings, establishing strategic relationships with corporate
partners, providing equity incentives to employees, officers or directors, or
effecting stock splits or dividends. The additional shares of Common Stock
authorized may also be used to acquire or invest in complementary businesses
or products or to obtain the right to use complementary technologies. Although
the Company has no present obligation to issue additional shares of Common
Stock (except pursuant to employee stock incentive plans), the Company may
continue to evaluate potential acquisitions of or investments with third
parties. However, the Company currently has no specific plans to enter into
any such transaction.
POSSIBLE EFFECTS OF THE PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION
If the stockholders approve the proposed Certificate of Amendment, the Board
of Directors may cause the issuance of additional shares of Common Stock
without further vote of the stockholders of the Company, except as provided
under Delaware corporate law or under the rules of any securities exchange or
quotation system on which shares of Common Stock of the Company are then
listed. Current holders of Common Stock have no preemptive or similar rights,
which means that current stockholders do not have a prior right to purchase
any new issue of Common Stock of the Company in order to maintain their pro
rata ownership thereof. The issuance of additional shares of Common Stock
would decrease the proportionate equity interest of the Company's current
stockholders and, depending upon the price paid for such additional shares,
could result in dilution to the Company's current stockholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT
TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
PROPOSAL NO. 3
AMENDMENT OF THE 1995 STOCK OPTION PLAN
The Red Brick Systems, Inc. 1995 Stock Option Plan ("1995 Plan") was adopted
by the Board of Directors on September 20, 1995 and stockholders approved the
1995 Plan as of December 1, 1995. The 1995 Plan was created in order to assist
the Company in the recruitment, retention and motivation of key employees,
directors, and consultants of outstanding ability who are in a position to
make material contributions to the Company's
14
<PAGE>
success. The limited number of skilled and experienced employees in this
industry are in demand by a growing number of employers. The Board believes
that stock options are critical in attracting and retaining these key
contributors.
The stockholders are being asked to vote on a proposal to approve an
amendment to the 1995 Plan to provide for an automatic annual increase in the
share reserve in 1999, to increase the per person limit on the number of
shares issuable each year under the 1995 Plan from 100,000 to 300,000 shares,
with a maximum of 500,000 in a year when an optionee commences service, and to
expand the Board's authority to amend the 1995 Plan, all as described below.
The proxy holders intend to vote all proxies received by them FOR the
amendment to the 1995 Plan.
The 1995 Plan was adopted by the Board on September 20, 1995 as the
successor to the 1991 Stock Option Plan ("1991 Plan"). To date, the Company
has reserved 3,310,217 shares for issuance under the 1995 Plan. The Board and
the stockholders have previously approved an amendment to the 1995 Plan on May
21, 1997 to establish an annual limit on option grants per person of 100,000
shares or 300,000 shares in the year an individual commences service.
SUMMARY OF 1995 STOCK OPTION PLAN
The principal terms and provisions of the 1995 Plan are summarized below.
The summary, however, is not intended to be a complete description of all the
terms of the 1995 Plan. A copy of the 1995 Plan will be furnished by the
Company to any stockholder upon written request to the Chief Financial Officer
at the executive offices in Los Gatos, California.
Structure. The 1995 Plan contains two separate equity incentive programs:
(i) a Discretionary Option Grant Program under which eligible persons may be
granted options to purchase shares of Common Stock, and (ii) an Automatic
Option Grant Program under which option grants will be made at specified
intervals to the non-employee Board members.
Administration. The 1995 Plan is currently administered by the Compensation
Committee of the Board of Directors (the "Committee"). The 1995 Plan may also
be administered by the Board or a secondary committee comprised of one or more
Board members with respect to optionees who are not executive officers subject
to the short-swing profit rules of federal securities laws. Committee members
serve for such period of time as the Board may determine. The Committee (or
Board or secondary committee to the extent acting as plan administrator) has
full authority (subject to the express provisions of the 1995 Plan) to
determine the eligible individuals who are to receive grants under the 1995
Plan, the number of shares to be covered by each granted option, the date or
dates on which the option is to become exercisable, the maximum term for which
the option is to remain outstanding, whether the granted option will be an
incentive stock option ("Incentive Option") that satisfies the requirements of
section 422 of the Internal Revenue Code (the "Code") or a nonstatutory option
not intended to meet such requirements, and the remaining provisions of the
option grant.
Administration of the Automatic Option Grant Program is self-executing in
accordance with the terms of that program, and no plan administrator shall
exercise any discretionary functions with respect to grants made thereunder.
Eligibility. Employees (including officers), consultants and independent
contractors who render services to the Company or its parent or subsidiary
corporations (whether now existing or subsequently established) are eligible
to receive option grants under the Discretionary Option Grant Program. A non-
employee member of the board of directors of any parent or subsidiary
corporation is also eligible for option grants under the Discretionary Option
Grant Program. Non-employee members of the Board are eligible solely for
automatic grants under the Automatic Option Grant Program of the 1995 Plan.
Securities Subject To 1995 Plan. The maximum number of shares of Common
Stock that may be issued over the term of the 1995 Plan is 3,310,217 shares.
The 1995 Plan originally provided that the number of shares
15
<PAGE>
of Common Stock available for issuance under the 1995 Plan would automatically
increase on the first trading day of the 1997 and 1998 calendar years by an
amount equal to five percent (5%) of the shares of Common Stock and Common
Stock equivalents outstanding on December 31 of the immediately preceding
calendar year and such automatic increases could not exceed 600,000 shares. As
a result, 567,325 shares of Common Stock were added to the pool on January 1,
1997 and 600,000 shares of Common Stock were added to the pool on January 1,
1998. The amendment to the 1995 Plan that is the subject of this Proposal No.
3 would extend the automatic increase by one more year. Therefore, assuming
that the stockholders approve the amendment, the number of shares of Common
Stock available for issuance under the 1995 Plan would automatically increase
on the first trading day of 1999 by an amount equal to five percent (5%) of
the shares of Common Stock and Common Stock equivalents outstanding on
December 31, 1998; the automatic annual increase may not exceed 800,000
shares. Shares of Common Stock subject to outstanding options, including
options granted under the 1991 Stock Option Plan, which expire or terminate
prior to exercise will be available for future issuance under the 1995 Plan.
No one person participating in the 1995 Plan may receive options for more
than 300,000 shares of Common Stock per calendar year or 500,000 shares of
Common Stock in the calendar year in which an individual first commences
service. Prior to the amendment which is the subject of this Proposal No. 3,
no one person could receive options under the 1995 Plan for more than 100,000
shares of Common Stock per calendar year or 300,000 shares of Common Stock in
the calendar year in which an individual first commenced service.
The holder of an option shall have no stockholder rights with respect to the
shares subject to the option until such person shall have exercised the
option, paid the exercise price and become the stockholder of record of the
purchased shares. Options are not assignable or transferable other than by
will or the laws of descent and distribution, and during the optionee's
lifetime, the option may be exercised only by the optionee.
DISCRETIONARY OPTION GRANT PROGRAM
Price And Exercisability. The option exercise price per share may not be
less than eighty-five percent (85%) of the fair market value of the Common
Stock on the grant date. Options granted under the Discretionary Option Grant
Program become exercisable at such time or times, and during such period, as
the Committee may determine and set forth in the instrument evidencing the
option grant. In any event, options granted under the 1995 Plan may not have a
term in excess of 10 years.
The exercise price for options granted under the 1995 Plan may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised
on a cashless basis through the same-day sale of the purchased shares. The
Committee may also permit the optionee to pay the exercise price through a
promissory note payable in installments over a period of years. The amount
financed may include any federal or state income and employment taxes incurred
by reason of the option exercise.
Termination Of Service. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the designated post-
service exercise period. Under no circumstances may any option be exercised
after the specified expiration date of the option term. Each such option will
normally, during such limited period, be exercisable only to the extent of the
number of shares of Common Stock in which the optionee is vested at the time
of cessation of service. The optionee will be deemed to continue in service
for so long as such individual performs services for the Company (or any
parent or subsidiary corporation), whether as an employee, independent
contractor, consultant or Board member.
The Committee has complete discretion to extend the period following the
optionee's cessation of service during which his or her outstanding options
may be exercised and/or to accelerate the exercisability of such options in
whole or in part. Such discretion may be exercised at any time while the
options remain outstanding, whether before or after the optionee's actual
cessation of service.
The shares of Common Stock acquired upon the exercise of one or more options
may be subject to repurchase by the Company at the original exercise price
paid per share upon the optionee's cessation of service
16
<PAGE>
prior to vesting in such shares. The Committee has complete discretion in
establishing the vesting schedule to be in effect for any such unvested shares
and may cancel the Company's outstanding repurchase rights with respect to
those shares at any time, thereby accelerating the vesting of the shares
subject to the canceled rights.
Incentive Options. Incentive Options may only be granted to individuals who
are employees of the Company or its parent or subsidiary corporation. During
any calendar year, the aggregate fair market value (determined as of the grant
date(s)) of Common Stock for which one or more options granted to any employee
under the 1995 Plan (or any other option plan of the Company or its parent or
subsidiary corporations) may for the first time become exercisable as
incentive stock options under section 422 of the Code shall not exceed
$100,000.
If an employee to whom an Incentive Option is granted is the owner of stock
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any of its parent or subsidiary
corporations, then the option price per share will be at least one hundred and
ten percent (110%) of the fair market value per share on the grant date, and
the option term will not exceed five (5) years, measured from the grant date.
Stock Appreciation Rights. The Committee is authorized to issue limited and
tandem stock appreciation rights in connection with option grants under the
Discretionary Option Grant Program. Tandem stock appreciation rights provide
the holders with the right, subject to the Committee's approval, to surrender
their options for a distribution from the Company equal in amount to the
excess of (a) the fair market value of the vested shares of Common Stock
subject to the surrendered option over (b) the aggregate exercise price
payable for such shares. Such distribution may, at the discretion of the
Committee, be made in cash or in shares of Common Stock or partly in shares of
Common Stock and partly in cash. Limited stock appreciation rights provide the
holders with the right to surrender their options for a cash distribution from
the Company upon the occurrence of certain hostile takeovers.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, non-employee Board members will
receive option grants at designated dates during their period of Board
service. These special grants may be summarized as follows:
. Each individual who first becomes a non-employee Board member after
January 22, 1996, whether through election by the stockholders or
appointment by the Board, will automatically be granted, at the time of
such initial election or appointment, a nonstatutory stock option to
purchase 15,000 shares of Common Stock. Each individual who was a non-
employee Board member on January 22, 1996 was automatically granted on
that date a nonstatutory stock option to purchase 15,000 shares of
Common Stock.
. On the date of each Annual Stockholders Meeting beginning with the
meeting held on May 21, 1997, each individual who is a non-employee
Board member and continues to serve as a Board member after such meeting
shall automatically be granted a nonstatutory stock option to purchase
1,000 shares of Common Stock, provided such individual has served as a
Board member for at least six months.
Each option grant under the Automatic Option Grant Program will be subject
to the following terms and conditions:
(1) The option price per share will be equal to 100% of the fair market
value per share of Common Stock on the automatic grant date and each
option is to have a maximum term of ten years measured from the grant
date.
(2) Each automatic option will be immediately exercisable for all of the
option shares, but the shares purchasable under the option will be
subject to repurchase at the original exercise price in the event the
optionee's Board service should cease prior to vesting. The repurchase
right will lapse and the
17
<PAGE>
optionee vest in a series of four (4) successive annual installments,
measured from the grant date, provided such optionee continues service
as a Board member.
(3) The option will remain exercisable for a twelve (12)-month period
following the optionee's termination of service as a Board member for
any reason. Should the optionee die while serving as a Board member or
during the twelve (12)-month period following his or her cessation of
Board service, then such options may be exercised during the twelve
(12)-month period following such optionee's cessation of service by
the personal representatives of the optionee's estate or the person to
whom the grant is transferred by the optionee's will or the laws of
inheritance. In no event, however, may the option be exercised after
the expiration date of the option or for more than the number of
vested shares (if any) for which it is exercisable at the time of the
optionee's cessation of Board service.
(4) The option shares will become fully exercisable and fully vested in
the event of a Corporate Transaction (as defined below) or a Change in
Control (as defined below). The option shares will become fully
exercisable and fully vested in the event of the optionee's cessation
of Board service by reason of death or permanent disability.
(5) Upon the occurrence of a hostile tender offer, each option which has
been held for at least six (6) months shall be automatically canceled
(to the extent the optionee is vested in such option shares) and the
optionee will in return be entitled to a cash distribution from the
Company in an amount per canceled option share equal to the excess of
(i) the highest reported price per share of Common Stock paid in the
tender offer or, if greater, the fair market value per share of Common
Stock over (ii) the option exercise price payable per share.
(6) Option grants under the Automatic Option Grant Program will be made in
strict compliance with the express provisions of that program. The
remaining terms and conditions of the options will in general conform
to the terms described above for option grants under the Discretionary
Option Grant Program and will be incorporated into the option
agreement evidencing the automatic grant.
GENERAL PROVISIONS
Acceleration Of Options/Termination Of Repurchase Rights. Upon the
occurrence of either of the following transactions (a "Corporate
Transaction"):
(i) the sale, transfer, or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of
the Company, or
(ii) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction,
each outstanding option under the 1995 Plan will, immediately prior to the
effective date of the Corporate Transaction, become fully exercisable for all
of the shares at the time subject to such option. However, an outstanding
option shall not accelerate if and to the extent: (a) such option is, in
connection with the Corporate Transaction, either to be assumed by the
successor corporation (or parent) or to be replaced with a comparable option
to purchase shares of the capital stock of the successor corporation (or
parent), (b) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or (c) the acceleration of such option is subject to other
limitations imposed by the Committee at the time of the option grant.
Immediately following the consummation of the Corporate Transaction, all
outstanding options will terminate and cease to be exercisable, except to the
extent assumed by the successor corporation.
Also upon a Corporate Transaction, the Company's outstanding repurchase
rights will terminate automatically and the shares of Common Stock subject to
those terminated rights shall vest in full unless assigned
18
<PAGE>
to the successor corporation or accelerated vesting is precluded by other
limitations imposed by the Committee at the time the repurchase right is
issued.
Any options which are assumed or replaced in the Corporate Transaction and
do not otherwise accelerate at that time shall automatically accelerate in
full (and any of the Company's outstanding repurchase rights which do not
otherwise terminate at the time of the Corporate Transaction shall
automatically terminate and the shares of Common Stock subject to those
terminated rights shall immediately vest in full) in the event the optionee's
service should subsequently terminate by reason of an involuntary or
constructive termination within twelve (12) months following the effective
date of such Corporate Transaction. Any options so accelerated shall remain
exercisable for fully vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured
from the effective date of the employment termination. In addition, the
Committee has discretion to accelerate vesting of options or option shares at
any time.
Should (i) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) acquire beneficial ownership of more than
fifty percent (50%) of the Company's outstanding voting stock without the
Board's recommendation or (ii) there be a change in the composition of the
Board over a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases by reason of a proxy contest(s) to be
comprised of individuals who are continuing Board members or have been elected
or nominated by continuing Board members ("Change in Control"), then the
Committee has the discretion to accelerate outstanding options and terminate
the Company's outstanding repurchase rights.
The Committee generally has the discretion to accelerate outstanding options
and terminate the Company's outstanding repurchase rights. The acceleration of
options in the event of a Corporate Transaction or Change in Control may be
seen as an anti-takeover provision and may have the effect of discouraging a
merger proposal, a takeover attempt, or other efforts to gain control of the
Company.
Valuation. For purposes of establishing the option price and for all other
valuation purposes under the 1995 Plan, the fair market value of a share of
Common Stock on any relevant date will be the closing price per share of
Common Stock on that date, as such price is reported on the Nasdaq Stock
Market. The fair market value of the Common Stock on February 27, 1998 as
reported on the Nasdaq Stock Market was $5.75 per share.
Change In Capitalization. In the event any change is made to the Common
Stock issuable under the 1995 Plan by reason of any stock split, stock
dividend, combination of shares, exchange of shares, or other change effecting
the outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the 1995 Plan, (ii) the maximum
number and/or class of securities for which any one person may be granted
options per calendar year or over the term of the Plan, (iii) the number
and/or class of securities for which automatic option grants are to be
subsequently made per director under the Automatic Option Grant Program and
(iv) the number and/or class of securities and the exercise price per share in
effect under each outstanding option (including any option incorporated from
the 1991 Plan) in order to prevent the dilution or enlargement of benefits
thereunder.
Each outstanding option that is assumed in connection with a Corporate
Transaction will be appropriately adjusted to apply and pertain to the number
and class of securities that would otherwise have been issued, in consummation
of such Corporate Transaction, to the option holder had the option been
exercised immediately prior to the Corporate Transaction. Appropriate
adjustments will also be made to the option price payable per share and to the
class and number of securities available for future issuance under the 1995
Plan on both an aggregate and a per-participant basis.
1995 Plan Amendments. The Board may amend or modify the 1995 Plan in any and
all respects whatsoever. The approval of the Company's stockholders will be
obtained to the extent required by applicable law. Prior to the amendment that
is the subject of this Proposal No. 3, the Board could not amend the 1995 Plan
without
19
<PAGE>
stockholder approval if such amendment would (i) materially increase the
maximum number of shares issuable under the 1995 Plan, (ii) materially modify
the eligibility requirements for option grants, or (iii) increase materially
the benefits accruing to participants under the 1995 Plan.
Unless sooner terminated by the Board, the 1995 Plan will in all events
terminate on September 19, 2005. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the
instruments evidencing such grants.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE 1995 PLAN
Options granted under the 1995 Plan may be either incentive stock options
that satisfy the requirements of Section 422 of the Internal Revenue Code or
nonstatutory options that are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as follows:
Incentive Stock Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. However, the excess of the fair market value
of the purchased shares on the exercise date over the exercise price paid for
the shares generally is includable in alternative minimum taxable income. The
optionee will recognize taxable income in the year in which the purchased
shares are sold or otherwise made the subject of disposition.
For federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two holding
periods prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of
those shares on the date the option was exercised over (ii) the exercise price
paid for the shares will be taxable as ordinary income. Any additional gain
recognized upon the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction for the taxable
year in which such disposition occurs equal to the excess of (i) the fair
market value of such shares on the date the option was exercised over (ii) the
exercise price paid for the shares. In no other instance will the Company be
allowed a deduction with respect to the optionee's disposition of the
purchased shares. The Company anticipates that any compensation deemed paid by
the Company upon one or more disqualifying dispositions of incentive stock
option shares by the Company's executive officers will remain deductible by
the Company and will not have to be taken into account for purposes of the $1
million limitation per covered individual on the deductibility of the
compensation paid to certain executive officers of the Company.
Nonstatutory Options. No taxable income is recognized by an optionee upon
the grant of a nonstatutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
Special provisions of the Internal Revenue Code apply to the acquisition of
Common Stock under a nonstatutory option if the purchased shares are subject
to repurchase by the Company. These special provisions may be summarized as
follows:
20
<PAGE>
(i) If the shares acquired upon exercise of the nonstatutory option are
subject to repurchase by the Company at the original exercise price in the
event of the optionee's termination of service prior to vesting in such
shares, the optionee will not recognize any taxable income at the time of
exercise but will have to report as ordinary income, as and when the
Company's repurchase right lapses, an amount equal to the excess of (a) the
fair market value of the shares on the date such repurchase right lapses
with respect to such shares over (b) the exercise price paid for the
shares.
(ii) The optionee may, however, elect under Section 83(b) of the Internal
Revenue Code to include as ordinary income in the year of exercise of the
nonstatutory option an amount equal to the excess of (a) the fair market
value of the purchased shares on the exercise date (determined as if the
shares were not subject to the Company's repurchase right) over (b) the
exercise price paid for such shares. If the Section 83(b) election is made,
the optionee will not recognize any additional income as and when the
repurchase right lapses.
The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised nonstatutory option. The deduction will in general be allowed for
the taxable year of the Company in which such ordinary income is recognized by
the optionee. The Company anticipates that the compensation deemed paid by the
Company upon the exercise of nonstatutory options with exercise prices equal
to the fair market value of the option shares on the grant date will remain
deductible by the Company and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
Company.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the
amount of the appreciation distribution. The Company will be entitled to a
business expense deduction equal to the appreciation distribution for the
taxable year of the Company in which the ordinary income is recognized by the
optionee.
The foregoing is only a summary of the federal income taxation consequences
to the optionee and the Company with respect to options and rights granted
under the 1995 Plan. In addition, the summary does not discuss the tax
consequences of an optionee's death or the income tax laws of any city, state
or foreign country in which the optionee may reside.
New Plan Benefits. As of February 28, 1998, options covering 2,256,025
shares were outstanding under the 1995 Plan, 466,809 shares remained available
for future option grants, and 1,187,383 shares have been issued under the 1995
Plan. The expiration dates for all such options range from March 2001 to
February 2008.
Except as set forth above under the caption "Automatic Option Grant
Program," grants to be made under the 1995 Plan in the future are at the
discretion of the Committee and are not determinable at this time. The
following table shows all option grants made during the fiscal year ending
December 31, 1997 and through February 28, 1998, including options granted
outside of the 1995 Plan, to the indicated individuals, all current executive
officers as a group, all current directors who are not executive officers as a
group, and all employees (including all current officers who are not executive
officers) as a group, respectively:
21
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
OPTION SHARES
-------------
<S> <C>
Christopher G. Erickson.................................... 240,000
Phillip M. Fernandez....................................... 125,000
Anthony W. Layzell......................................... 250,000
Robert C. Hausmann......................................... 25,000
Alexander Wilson........................................... 35,000
Thomas H. Bredt............................................ 1,000
Andrew K. Ludwick.......................................... 1,000
John F. Shoch.............................................. 1,000
John E. Warnock............................................ 1,000
All current executive officers as a Group (5 persons)...... 865,000
All current Directors who were not employees (4 persons)... 4,000
All Employees (including officers who are not executive
officers)................................................. 1,473,625
</TABLE>
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT
TO THE COMPANY'S 1995 STOCK OPTION PLAN.
PROPOSAL NO. 4
ADOPTION OF THE 1998 EMPLOYEE STOCK PURCHASE PLAN
The stockholders are being asked to approve the adoption of the 1998
Employee Stock Purchase Plan (the "1998 Purchase Plan") to be effective June
1, 1998. The 1998 Purchase Plan is intended to replace the previous Employee
Stock Purchase Plan that was adopted by the Board on September 20, 1995,
approved by the stockholders on June 9, 1995 and that exhausted its share
reserve effective with the purchase made on January 30, 1998.
The 1998 Purchase Plan, and the right of participants to make purchases
thereunder, is intended to meet the requirements of an "employee stock
purchase plan" as defined in Section 423 of the Internal Revenue Code (the
"Code").
The following summary of certain 1998 Purchase Plan provisions is qualified,
in its entirety, by reference to the 1998 Purchase Plan. Copies of the 1998
Purchase Plan document may be obtained by a stockholder upon written request
to the Secretary of the Company at the executive offices in Los Gatos,
California.
Purpose. The purpose of the 1998 Purchase Plan is to provide employees of
the Company and designated parent or subsidiary corporations (collectively,
"Participating Companies") an opportunity to participate in the ownership of
the Company by purchasing Common Stock of the Company through payroll
deductions. The Company and certain of its subsidiaries will participate in
the 1998 Purchase Plan.
The 1998 Purchase Plan is intended to benefit the Company as well as its
stockholders and employees. The 1998 Purchase Plan gives employees an
opportunity to purchase shares of Common Stock at a favorable price. The
Company believes that the stockholders will correspondingly benefit from the
increased interest on the part of participating employees in the profitability
of the Company. Finally, the Company will benefit from the periodic
investments of equity capital provided by participants in the 1998 Purchase
Plan.
Administration. The 1998 Purchase Plan is to be administered by the
Compensation Committee of the Board (the "Committee") and may also be
administered by the Board. All costs and expenses incurred in plan
administration will be paid by the Company without charge to participants. All
cash proceeds received by the Company from payroll deductions under the 1998
Purchase Plan shall be credited to a non-interest bearing book account.
22
<PAGE>
Shares and Terms. The stock issuable under the 1998 Purchase Plan is the
Company's authorized but unissued or reacquired Common Stock. The maximum
number of shares of Common Stock that may be issued under the 1998 Purchase
Plan is 1,500,000, adjusted as described in the "Adjustment" section of this
description. Common Stock subject to a terminated purchase right shall be
available for purchase pursuant to purchase rights subsequently granted.
Adjustments. If any change in the Common Stock occurs (through
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares, or other change affecting the outstanding Common Stock as a class
without the Company's receipt of consideration), appropriate adjustments shall
be made by the Company to the class and maximum number of shares subject to
the 1998 Purchase Plan, to the class and maximum number of shares purchasable
by each participant on any one purchase date, and the class and number of
shares and purchase price per share subject to outstanding purchase rights in
order to prevent the dilution or enlargement of benefits thereunder.
Eligibility. Generally, any individual who is customarily employed by a
Participating Company more than 20 hours per week and for more than five
months per calendar year is eligible to participate in the 1998 Purchase Plan.
The 1998 Purchase Plan grants the Committee discretion to impose an
eligibility service period of any length. It is presently contemplated that
for the first offering period an employee will be required to complete sixty
(60) days of employment before he or she is eligible to participate in the
1998 Purchase Plan. From time to time, prior to commencement of a purchase
period within an offering period, the Committee may impose a longer
eligibility service requirement of up to two (2) years or may provide for a
shorter or no eligibility service period. Approximately 264 employees
(including 4 officers) would have been eligible to participate in the 1998
Purchase Plan as of February 28, 1998 if the 1998 Purchase Plan were in effect
on that date.
Offering Periods. The 1998 Purchase Plan will be implemented by offering
periods that generally have a duration of twenty-four months; each offering
period will be comprised of a series of one or more successive purchase
periods, which will generally have a duration of six (6) months. The initial
offering period will have a duration of twenty-six (26) months and will
commence on June 1, 1998 and will end on July 31, 2000, unless terminated
earlier; the next offering period will commence on August 1, 2000 and will end
on the last business day in July 2002, unless terminated earlier. The purchase
periods during the initial offering period will end on January 31, 1999, July
31, 1999, January 31, 2000, and July 31, 2000. The Committee in its discretion
may vary the beginning date and ending date of the offering periods prior to
their commencement, provided no offering period, following the initial
offering period, shall exceed twenty-four (24) months in length.
The participant will have a separate purchase right for each offering period
in which he or she participates. The purchase right will be granted on the
first day of the offering period and will be automatically exercised in
successive installments on the last day of each purchase period within the
offering period.
Purchase Price. The purchase price per share under the 1998 Purchase Plan is
85% of the lower of (i) the fair market value of a share of Common Stock on
the first day of the applicable offering period, or (ii) the fair market value
of a share of Common Stock on the purchase date. Generally, the fair market
value of the Common Stock on a given date is the closing sale price of the
Common Stock, as reported on the Nasdaq National Market System. The market
value of the Common Stock as reported on the Nasdaq Stock Market as of
February 28, 1998, was $5.75 per share.
Limitations. The plan imposes certain limitations upon a participant's
rights to acquire Common Stock, including the following:
1. No purchase right shall be granted to any person who immediately
thereafter would own, directly or indirectly, stock or hold outstanding
options or rights to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of
the Company or any of its parent or subsidiary corporations.
23
<PAGE>
2. In no event shall a participant be permitted to purchase more than 1,000
shares on any semi-annual purchase date. If a purchase period is longer
or shorter than six months, the 1,000-share limit may be correspondingly
adjusted.
3. The right to purchase Common Stock under the 1998 Purchase Plan (or any
other employee stock purchase plan that the Company or any of its
subsidiaries may establish) in an offering intended to qualify under
Section 423 of the Code may not accrue at a rate that exceeds $25,000 in
fair market value of such Common Stock (determined at the time such
purchase right is granted) for any calendar year in which such purchase
right is outstanding.
The purchase right shall be exercisable only by the participant during the
participant's lifetime and shall not be assignable or transferable by the
participant.
Payment of Purchase Price; Payroll Deductions. Payment for shares by
participants shall be by accumulation of after-tax payroll deductions during
the purchase period. The deductions may not exceed 10% of a participant's cash
compensation paid during a purchase period. Compensation for this purpose will
include elective contributions that are not includible in income under Code
Sections 125 or 401(k) and all bonuses, overtime, commissions, and other
amounts to the extent paid in cash.
The participant will receive a purchase right for each offering period in
which he or she participates to purchase up to the number of shares of Common
Stock determined by dividing such participant's payroll deductions accumulated
prior to the purchase date by the applicable purchase price (subject to the
"Limitations" section). No fractional shares shall be purchased. Any payroll
deductions accumulated in a participant's account that are not sufficient to
purchase a full share will be retained in the participant's account for the
subsequent purchase period. No interest shall accrue on the payroll deductions
of a participant in the 1998 Purchase Plan.
Termination and Change to Payroll Deductions. A purchase right shall
terminate at the end of the offering period or earlier if (i) the participant
terminates employment and then any payroll deductions that the participant may
have made with respect to a terminated purchase right will be refunded or (ii)
the participant elects to withdraw from the 1998 Purchase Plan. Any payroll
deductions that the participant may have made with respect to a terminated
purchase right under clause (ii) will be refunded unless the participant
elects to have the funds applied to the purchase of shares on the next
purchase date. The Committee may permit a participant to increase or decrease
his or her payroll deductions during an offering period.
Amendment and Termination. The 1998 Purchase Plan shall continue in effect
until the earlier of (i) the last business day in January 2008, (ii) the date
on which all shares available for issuance under the 1998 Purchase Plan shall
have been issued or (iii) the occurrence of a Corporate Transaction, unless
the 1998 Purchase Plan is earlier terminated by the Board in its discretion.
The Board has retained the power to at any time to alter, amend, suspend or
discontinue the 1998 Purchase Plan, including the power to shorten an offering
period or to change the length of an offering period or purchase period.
Stockholder approval of an amendment of the 1998 Purchase Plan will be
obtained to the extent required by applicable law or to retain the tax
benefits of Section 423, to the extent the Board deems it necessary or
desirable to retain those benefits.
In addition, the Company has specifically reserved the right, exercisable in
the sole discretion of the Board, to amend or terminate the 1998 Purchase Plan
immediately following any purchase period. If the Board chooses to terminate
the 1998 Purchase Plan, then the 1998 Purchase Plan will terminate in its
entirety and no further purchase rights will be granted or exercised, and no
further payroll deductions shall thereafter be collected under the 1998
Purchase Plan.
Corporate Transaction. In the event of (i) a merger or consolidation in
which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are transferred
to a person or persons different from the persons holding those securities
immediately prior to such
24
<PAGE>
transaction or (ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete liquidation or
dissolution of the Company (a "Corporate Transaction"), each purchase right
under the 1998 Purchase Plan will automatically be exercised immediately
before consummation of the Corporate Transaction as if such date were the last
purchase date of the offering period. The purchase price per share shall be
equal to eighty-five percent (85%) of the lower of the fair market value per
share of Common Stock on the start date of the offering period or the fair
market value per share of Common Stock immediately prior to the effective date
of such Corporate Transaction. Any payroll deductions not applied to such
purchase shall be promptly refunded to the participant.
The grant of purchase rights under the 1998 Purchase Plan will in no way
affect the right of the Company to adjust, reclassify, reorganize, or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
Proration of Purchase Rights. If the total number of shares of Common Stock
for which purchase rights are to be granted on any date exceeds the number of
shares then remaining available under the 1998 Purchase Plan, the Committee
shall make a pro rata allocation of the shares remaining.
Federal Income Tax Consequences. The following is a general description of
certain Federal income tax consequences of the 1998 Purchase Plan. This
description does not purport to be complete.
The 1998 Purchase Plan is currently intended to qualify as an "employee
stock purchase plan" under Section 423 of the Code. Under a plan that so
qualifies, no taxable income will be reportable by a participant, and no
deductions will be allowable to the Company, by reason of the grant or
exercise of the purchase rights issued thereunder. A participant will,
however, recognize taxable income in the year in which the purchased shares
are sold or otherwise made the subject of disposition.
A sale or other disposition of the purchased shares will be a disqualifying
disposition if made before the later of two years after the start of the
offering period in which such shares were acquired or one year after the
shares are purchased. If the participant makes a disqualifying disposition of
the purchased shares, then the Company will be entitled to an income tax
deduction, for the taxable year in which such disposition occurs, equal to the
amount by which the fair market value of such shares on the date of purchase
exceeded the purchase price, and the participant will be required to satisfy
the employment and income tax withholding requirements applicable to such
income. In no other instance will the Company be allowed a deduction with
respect to the participant's disposition of the purchased shares.
Any additional gain or loss recognized upon the disposition of the shares
will be a capital gain, which will be medium or long-term if the shares have
been held for more than one (1) year following the date of purchase under the
1998 Purchase Plan.
The foregoing is only a summary of the federal income taxation consequences
to the participant and the Company with respect to the shares purchased under
the 1998 Purchase Plan. In addition, the summary does not discuss the tax
consequences of a participant's death or the income tax laws of any city,
state or foreign country in which the participant may reside.
New Purchase Plan Benefits. Since purchase rights are subject to discretion,
including an employee's decision not to participate in the 1998 Purchase Plan,
awards under the 1998 Purchase Plan for the current fiscal year are not
determinable. However, each of the Named Officers, except Christopher G.
Erickson, purchased that number of shares of Common Stock set forth opposite
his name at $6.375 per share on July 31, 1997, and $4.72855 per share on
January 30, 1998, respectively, under the prior Employee Stock Purchase Plan:
<TABLE>
<CAPTION>
JULY 31, 1997 JANUARY 30, 1998
------------- ----------------
<S> <C> <C>
Phillip M. Fernandez....................... 220 1,092
Robert C. Hausmann......................... 945 0
Alexander Wilson........................... 802 0
Anthony W. Layzell......................... 0 3,422
</TABLE>
25
<PAGE>
Under the 1998 Purchase Plan, each of the Named Officers, except Christopher
G. Erickson, has the right to purchase up to 1,000 shares of Common Stock on
each of January 29, 1999, July 30, 1999, January 31, 2000, and July 31, 2000
at a purchase price that will not exceed 85% of the fair market value per
share on June 1, 1998.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE COMPANY'S
1998 EMPLOYEE STOCK PURCHASE PLAN.
PROPOSAL NO. 5
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Company is asking the stockholders to ratify the appointment of Ernst &
Young LLP as the Company's independent public accountants for the fiscal year
ending December 31, 1998. Ernst & Young LLP has served as the Company's
independent public accountants since January 1994. The affirmative vote of the
holders of a majority of shares present or represented by proxy and voting at
the Annual Meeting will be required to ratify the appointment of Ernst & Young
LLP. In the event the stockholders fail to ratify the appointment, the Board
of Directors will reconsider its selection. Even if the appointment is
ratified, the Board of Directors, in its discretion, may direct the
appointment of a different independent accounting firm at any time during the
year if the Board of Directors feels that such a change would be in the
Company's and its stockholders' best interests. Representatives of Ernst &
Young LLP are expected to be present at the Annual Meeting, will have the
opportunity to make a statement if they desire to do so, and will be available
to respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
SELECTION OF ERNST & YOUNG LLP TO SERVE AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Christopher G. Erickson, the Company's President, Chief Executive Officer
and Chairman of the Board, purchased shares of restricted Common Stock awarded
on January 18, 1995, at a purchase price of $0.32 by delivery of a promissory
note on February 14, 1995. The 1995 loan is full recourse, bears interest at
the rate of 7.96% per annum, is due February 14, 1999, and is secured by a
portion of the shares of Common Stock purchased with the proceeds of the loan.
Mr. Erickson also purchased shares of restricted Common Stock awarded on
December 21, 1993, by delivery of a promissory note on January 24, 1994. The
1994 loan is full recourse, bears interest at the rate of 5.32% per annum, was
due January 24, 1998, and is secured by a portion of the shares of Common
Stock purchased with the proceeds of the loan. The largest aggregate amount of
indebtedness outstanding during 1997 was $77,910.65. Prior to March 31, 1998,
Mr. Erickson paid off the 1994 loan and made a payment on the 1995 loan. The
amount of Mr. Erickson's indebtedness to the Company on March 31, 1998 was
$7,331.29.
The Company's Certificate of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary
26
<PAGE>
under Delaware law. The Company has also entered into indemnification
agreements with its officers and directors containing provisions that may
require the Company, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers, and to advance their expenses incurred as
a result of any proceeding against them as to which they could be indemnified.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The members of the Board of Directors, the executive officers of the
Company, and persons who hold more than 10% of the Company's outstanding
Common Stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, which require them to file
reports with respect to their ownership of the Company's Common Stock and
their transactions in such Common Stock. Based upon (i) the copies of Section
16(a) reports that the Company received from such persons for their fiscal
1997 transactions in the Common Stock and their Common Stock holdings and (ii)
the written representations received from one or more of such persons that no
annual Form 5 reports were required to be filed by them for the 1997 fiscal
year, the Company believes that all reporting requirements under Section 16(a)
for such fiscal year were met in a timely manner by its executive officers,
Board members, and greater than 10% stockholders, except that John F. Shoch
filed late a Form 4 for November 1997 reporting one transaction.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S FORM 10-K REPORT FOR FISCAL 1997, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULES, AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO RED
BRICK SYSTEMS, INC., 485 ALBERTO WAY, LOS GATOS, CALIFORNIA 95032, ATTN:
INVESTOR RELATIONS.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Stockholder proposals that are intended to be presented at the 1999 Annual
Meeting that are eligible for inclusion in the Company's proxy statement and
related proxy materials for that meeting under the applicable rules of the
Securities and Exchange Commission must be received by the Company not later
than December 7, 1998, in order to be included. Such stockholder proposals
should be addressed to Red Brick Systems, Inc., 485 Alberto Way, Los Gatos,
California 95032, Attention: Investor Relations.
27
<PAGE>
OTHER MATTERS
The Board knows of no other matters to be presented for stockholder action
at the Annual Meeting. However, if other matters do properly come before the
Annual Meeting or any adjournments or postponements thereof, the Board intends
that the persons named in the proxies will vote upon such matters in
accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
Margaret R. Brauns
Secretary
Los Gatos, California
April 6, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE, AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-
PAID ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL
MEETING. IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR
PROXY VOTE, YOU MAY DO SO AUTOMATICALLY BY VOTING INPERSON AT THE MEETING.
THANK YOU FOR YOUR ATTENTION TO THIS MATTER. YOUR PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE ANNUAL MEETING.
28
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
RED BRICK SYSTEMS, INC.
Red Brick Systems, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors adopted a resolution setting forth a
proposed amendment to the Amended and Restated Certificate of Incorporation of
said Corporation and declaring said amendment advisable and directing that
said amendment be submitted to the stockholders of said Corporation entitled
to vote in respect thereof for their approval. The resolution setting forth
said amendment is as follows:
"RESOLVED, that Amended and Restated Certificate of Incorporation of the
Corporation be amended by replacing in its entirety the first paragraph of
Article IV thereof so that such paragraph shall be and read as follows:
"This corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of shares of Common Stock authorized to be issued is Fifty
Million (50,000,000), par value $0.0001 per share, and the number of shares of
Preferred Stock authorized to be issued is Two Million (2,000,000), par value
$0.0001 per share."
SECOND: That thereafter said amendment was duly adopted in accordance with
the provisions of Section 242 and Section 245 of the General Corporation Law
by obtaining a majority vote of the Common Stock in favor of said amendment in
the manner set forth in Section 222 of the General Corporation Law.
IN WITNESS WHEREOF, this Certificate of Amendment of the Amended and
Restated Certificate of Incorporation has been signed by the President and the
Secretary of the Corporation this day of May, 1998.
RED BRICK SYSTEMS, INC.
By:
----------------------------------
Christopher G. Erickson,
President
ATTEST:
By:
-------------------------------------
Margaret R. Brauns, Secretary
<PAGE>
PROXY PROXY
RED BRICK SYSTEMS, INC.
485 ALBERTO WAY, LOS GATOS, CALIFORNIA 95032
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 15, 1998
The undersigned hereby appoints Christopher G. Erickson, Chairman of
the Board, President and Chief Executive Officer of Red Brick Systems, Inc. (the
"Company"), and Margaret R. Brauns, Vice President, Chief Financial Officer and
Secretary of the Company, and each of them proxies for the undersigned, each
with the full power to appoint this or her substitute, and hereby authorizes
them, to represent and to vote as designated on this Proxy Card, all the shares
of Common Stock of the Company held of record by the undersigned on April 1,
1998 and entitled to be voted at the Annual Meeting of Stockholders to be held
at The Garden Court Hotel, 520 Cowper Street, Palo Alto, California 94301 at
10:00 a.m., on Friday, May 15, 1998, or any adjournment of postponement
thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF DIRECTORS
AND FOR PROPOSALS 2, 3, 4 AND 5.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY
IN THE ENCLOSED ENVELOPE.
(Continued and to be signed on the reverse side.)
<PAGE>
RED BRICK SYSTEMS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
1. Election of Directors--
Nominees: Christopher G. Erickson, Andrew K. Ludwick, John F. Shoch and
John E. Warnock
_______________________________________________________________
(Except nominees written above)
For All [_] Withhold All [_] For All Except [_]
2. Approval of the adoption of an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock that the
Company is authorized to issue, as set forth in the accompanying Proxy
Statement.
For [_] Against [_] Abstain [_]
3. Approval of the adoption of an amendment to the Company's 1995 Stock Option
Plan to increase the number of shares available for issuance thereunder and
to increase the per person limit on the maximum number of shares which may
be awarded each year, as set forth in the accompanying Proxy Statement.
For [_] Against [_] Abstain [_]
4. Approval of the adoption of the Company 1998 Employee Stock Purchase Plan,
as set forth in the accompanying Proxy Statement.
For [_] Against [_] Abstain [_]
5. Ratification of the appointment of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ending December 31,
1998.
For [_] Against [_] Abstain [_]
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this Proxy will be
voted FOR the election of Directors and FOR Proposals 2, 3, 4 and 5.
In their discretion, the proxies are authorized to vote upon such business as
may properly come before the meeting.
The undersigned acknowledge(s) receipt of the Notice of Annual Meeting of
Stockholders and of the Proxy Statement.
Date_________________ 1998
Signature(s)______________________________________
__________________________________________________
NOTE: Please sign exactly as name appears hereon.
Joint owners should each sign. When signing as
attorney, executor, stockholder, trustee or
guardian, please give full title as such.
