<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
HI/FN, 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)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(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):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[hifn logo]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
FEBRUARY 25, 2000
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Hi/fn,
Inc., a Delaware corporation (the "Company"), will be held on Friday, February
25, 2000 at 10:00 a.m., at the Pruneyard Inn, 1995 S. Bascom Ave, Campbell,
California 95032, for the following purposes:
1. To elect one director to the Board of Directors.
2. To approve an amendment to the Company's 1996 Equity Incentive Plan to
increase the number of shares of the Company's Common Stock reserved for
issuance thereunder from 3,049,900 shares to 3,474,900 shares.
3. To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ending September 30, 2000.
4. To transact such other business as may properly come before the meeting
or any adjournment(s) thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on January 14, 2000
are entitled to notice of and to vote at the Annual Meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy as promptly as possible in the postage
prepaid envelope enclosed for that purpose. Any stockholder attending the
meeting may vote in person even if he or she has returned a proxy.
By order of the Board of Directors
/s/ WILLIAM R. WALKER
William R. Walker
Secretary
Los Gatos, California
January 21, 2000
<PAGE> 3
[hifn logo]
PROXY STATEMENT
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of
Hi/fn, Inc. (the "Company") for use at the Annual Meeting of Stockholders to be
held on Friday, February 25, 2000 at 10:00 a.m. at the Pruneyard Inn, 1995 S.
Bascom Ave, Campbell, California 95032, or at any adjournment or adjournments
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting. The Company's principal executive offices are located at 750
University Avenue, Los Gatos, California 95032, and its telephone number is
(408) 399-3500.
These proxy solicitation materials and the Annual Report on Form 10-K for
the year ended September 30, 1999 were first mailed on or about January 25, 2000
to all stockholders entitled to vote at the meeting.
RECORD DATE; OUTSTANDING SHARES; PROCEDURAL MATTERS
Stockholders of record as of the close of business on January 14, 2000 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. On
January 14, 2000, 8,785,846 shares of the Company's common stock, $.001 par
value (the "Common Stock"), were issued and outstanding. Each share has one vote
on all matters. For information regarding holders of more than 5% of the
outstanding Common Stock, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT." The closing sale price of the Company's Common Stock as
reported on the Nasdaq National Market System on January 14, 2000 was $42.5625
per share.
REVOCABILITY OF PROXIES
A stockholder may revoke any proxy given pursuant to this solicitation by
attending the Annual Meeting and voting in person, or by delivering to the
Company's Corporate Secretary at the Company's principal executive offices
referred to above prior to the Annual Meeting a written notice of revocation, or
by delivering a duly executed proxy bearing a date later than that of the
previous proxy.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR ANNUAL MEETING FOR FISCAL YEAR
2000
Proposals of stockholders that are intended to be presented by such
stockholders at the Company's 2000 Annual Meeting must be received by the
Company no later than September 30, 2000 to be included in the proxy statement
and form of proxy relating to that meeting.
The attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the meeting. If a stockholder intends to submit a
proposal at the next annual meeting of stockholders, which is not eligible for
inclusion in the proxy statement relating to that meeting, the stockholder must
give notice to the Company in accordance with the requirements set forth in the
Securities Exchange Act of 1934, as amended, no later than December 7, 2000,
forty-five (45) days prior to the date of this year's proxy.
If a stockholder does not comply with the foregoing notice provision, the
proxy holders will be allowed to use their discretionary voting authority when
and if the proposal is raised at the next annual meeting of stockholders.
FISCAL YEAR END
The Company's Fiscal Year ends on September 30. The Company's last fiscal
year ended on September 30, 1999 and is referred to herein as the "Last Fiscal
Year."
<PAGE> 4
PROPOSAL NO. 1
ELECTION OF DIRECTOR
There are currently five members of the Board of Directors, divided into
three classes. Class I presently consists of one director who is serving a
three-year term expiring at this Annual Meeting. Class II presently consists of
two directors who are serving three-year terms expiring in 2001. Class III
presently consists of two directors who are serving three-year terms expiring in
2002. At each annual meeting of stockholders, directors elected to succeed those
in the class whose terms expire will be elected to a three-year term so that the
term of one class of directors will expire each year. In each case, a director
serves for the designated term and until his or her respective successor is
elected and qualified.
One Class I director is to be elected at this Annual Meeting to serve a
three-year term expiring in 2003. The Board has nominated Raymond J. Farnham for
election to the board seat. Holders of proxies solicited by this Proxy Statement
will vote the proxies received by them as directed on the proxy card or if no
direction is made, for the election of the Board of Directors' nominee. If the
nominee is unable or declines to serve as a director at the time of the Annual
Meeting, the proxy holders will vote for a nominee designated by the present
Board of Directors to fill the vacancy. It is not presently expected that the
nominee will be unable or will decline to serve as a director.
The name of the nominee of the Company and certain information about him as
of December 15, 1999 is set forth below. The names of and certain information
about the Company's current directors as of December 15, 1999 are also set forth
below. Information as to the stock ownership of each director and all current
directors and executive officers of the Company as a group is set forth below
under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE PRINCIPAL OCCUPATION AND DIRECTORSHIP DIRECTOR SINCE
---------------- --- ------------------------------------- --------------
<S> <C> <C> <C>
CLASS I DIRECTOR
Raymond J. Farnham(1)........ 52 Chairman of the Board of Directors, President, 1998
Chief Executive Officer of the Company
CLASS II DIRECTORS
Taher Elgamal................ 44 President, Kroll-O'Gara Information Security 1998
Group
Robert W. Johnson............ 50 Private Investor 1998
CLASS III DIRECTORS
Douglas Whiting.............. 43 Chief Technology Officer of the Company 1996
Albert E. Sisto.............. 50 President and Chief Executive Office of 1998
Phoenix Technology
</TABLE>
- ---------------
(1) Nominee for Class I Director.
Raymond J. Farnham has served as Chairman of the Board of Directors and
President and Chief Executive Officer of Hi/fn since October 1998. From 1996
through 1998, he served as Executive Vice President of Integrated Device
Technology, Inc., a supplier of microprocessor, logic and memory integrated
circuits to communication and computer customers worldwide. Mr. Farnham was
President and Chief Executive Officer of OPTi, a fabless semiconductor company
from 1994 through 1995. From 1972 through 1993, he had numerous management
responsibilities at National Semiconductor Corp., with his final position being
President of the Communication and Computing Group from 1991 through 1993. He
received a B.S. in Electrical Engineering from Pennsylvania State University.
Taher Elgamal, Ph.D. has served as a director of Hi/fn since December 1998.
He has also served as president of Kroll-O'Gara Information Security Group since
January 1999. Dr. Elgamal is the founder and Chairman of Securify, a private
company providing assessments of companies' Internet security efforts and a
subsidiary of Kroll-O'Gara. He served as Chairman and Chief Executive Officer of
Securify from March 1998 to January 1999. From 1995 to 1998, Dr. Elgamal held
the position of Chief Scientist of Netscape Communications Corp., a provider of
Internet software and services, where he pioneered Internet security
technologies such as SSL, the standard for web security. From 1991 to 1993, he
served as Director of
2
<PAGE> 5
Engineering at RSA Data Security, Inc., a provider of encryption technology and
a subsidiary of Security Dynamics Technologies, Inc., where he produced the RSA
cryptographic toolkits, the industry standards for developers of
security-enabled applications and systems. Dr. Elgamal received a Ph.D. from
Stanford University.
Robert W. Johnson has been a private investor since July 1988 and has
served as a director of Hi/fn since November 1998. From 1983 to July 1988, he
was first a principal and subsequently a general partner of Southern California
Ventures, a private venture capital firm. He is a director of Proxima
Corporation and ViaSat, Inc., both publicly held technology companies. Mr.
Johnson holds undergraduate and graduate degrees from Stanford University and
Harvard University.
Douglas L. Whiting, Ph.D. has served as Chief Technology Officer of Hi/fn
since October 1997 and as a director of Hi/fn since November 1996. He also
served as Vice President of Technology of Stac from 1985 to 1998 and has served
as a director of Stac from 1983 to 1999. He was President of Stac from 1984 to
1986. Dr. Whiting received a Ph.D. in Computer Science from the California
Institute of Technology.
Albert E. Sisto has served as a director of Hi/fn since December 1998.
Since June 1999 he has been President and Chief Executive Officer of Phoenix
Technology, a provider of Internet platform-enabling software. From November
1997 to June 1999, he was Chief Operating Officer of RSA Data Security, Inc., a
provider of encryption technology and a subsidiary of Security Dynamics
Technologies, Inc. From September 1994 to October 1997, Mr. Sisto was Chairman,
President and CEO of Documagix, a software developer of document imaging
software. Mr. Sisto is a director of Jetfax, Inc., Insignia Solutions plc and
Tekgraf, Inc., all publicly traded technology companies, and also is a director
of nCipher Corporation Ltd. and Trintech Group Ltd. Mr. Sisto holds a B.E.
degree from the Stevens Institute of Technology.
There are no family relationships between any director or executive officer
of the Company.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of nine meetings during
the Last Fiscal Year. No incumbent director attended less than 75% of the
aggregate of all meetings of the Board of Directors and any committees of the
Board on which he served, if any, during his tenure as a director. The Board of
Directors has an Audit Committee and a Compensation Committee, but does not have
a nominating committee or a committee performing the functions of a nominating
committee.
The Compensation Committee of the Board of Directors during the Last Fiscal
Year consisted of Mr. Elgamal and Mr. Sisto. During the Last Fiscal Year, the
Compensation Committee held two meetings. The Compensation Committee reviews and
makes recommendations to the Board concerning the Company's executive
compensation policy.
The Audit Committee of the Board of Directors, currently consisting of Mr.
Johnson and Mr. Sisto, met two times during the Last Fiscal Year. The Audit
Committee recommends engagement of the Company's independent auditors, and is
primarily responsible for approving the services performed by the Company's
independent auditors and for reviewing and evaluating the Company's accounting
policies and its systems of internal accounting controls.
DIRECTORS' FEES
Directors who are not employees of the Company receive $4,000 per year for
serving on the Company Board and an additional $1,000 for each meeting attended
(other than committee meetings). An additional $500 will be paid to any
non-employee director who serves on the Compensation Committee or the Audit
Committee. Under the 1998 Stock Plan, each outside director of the Company is
granted options to purchase 10,000 shares of Common Stock at the time of initial
appointment or election to the Board, and 2,000 shares of Common Stock annually
thereafter on the date of each Annual Meeting of the Stockholders; provided the
Director has been a member of the Board for at least six months. The Company
also reimburses non-employee directors for travel and related expenses incurred
in attending meetings of the Board and its committees.
3
<PAGE> 6
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Company's Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
REQUIRED VOTE
A nominee receiving a majority of affirmative votes will be elected as
director of the Company.
RECOMMENDATION
THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEE LISTED
ABOVE.
4
<PAGE> 7
PROPOSAL NO. 2
APPROVAL OF THE AMENDMENT TO THE
1996 EQUITY INCENTIVE PLAN
The Company's 1996 Equity Incentive Plan ("the Plan") was approved by the
stockholders in November 1996. The Plan is designed to retain, motivate and
reward senior personnel by providing such personnel long term equity
participation in the Company relating directly to the financial performance and
long-term growth of the Company. A total of 3,049,900 shares of the Company's
Common Stock have been reserved for issuance upon the exercise of options
granted under the Plan. In January 1999, the Board of Directors adopted, subject
to stockholder approval, an amendment to the Plan to increase the number of
shares reserved for issuance thereunder from 3,049,900 shares to 3,474,900
shares. Including the proposed 425,000 share increase, a total of 954,511 shares
remain available for grant under the Plan on January 14, 2000.
In 1993, Section 162(m) was added to the Internal Revenue Code of 1986, as
amended (the "Code"). Section 162(m) limits the Company's deduction in any one
fiscal year for federal income tax purposes to $1,000,000 per person with
respect to the Company's Chief Executive Officers and its four other highest
paid executive officers who are employed on the last day of the fiscal year
unless the compensation was not otherwise subject to the deduction limit.
Compensation which is performance-based and approved by the Company's
stockholders is not subject to the deduction limit.
PROPOSAL
The proposed amendment to the Company's Plan is to increase the number of
shares of the Company's Common Stock reserved for issuance thereunder from
3,049,900 shares to 3,474,900 shares.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDMENT OF THE 1996
EQUITY INCENTIVE PLAN AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE
INCREASE TO THE PLAN.
DESCRIPTION OF 1996 EQUITY INCENTIVE PLAN
The essential features of the Plan are outlined below. Such outline is
qualified in its entirety by the provisions of the 1996 Equity Incentive Plan, a
copy of which was filed by the Company with the Securities and Exchange
Commission and is incorporated herein by reference. Copies of the Plan are
available upon written request to the Company at 750 University Avenue, Los
Gatos, California 95032, Attn: Chief Financial Officer.
General
The 1996 Equity Incentive Plan was approved by the stockholders in November
1996. The Plan authorizes the Board of Directors (the "Board"), or one or more
committees which the Board may appoint from among its members (a "Committee"),
to grant stock options and stock purchase rights. To date, a total of 3,049,900
shares of Common Stock has been reserved for issuance under the Plan. Options
granted under the Plan may be either "Incentive Stock Options" (ISO) as defined
in Section 422 of the Code, or nonstatutory stock options (NSO), as determined
by the Board or the Committee.
Additionally, the Plan provides for the automatic grant of nonstatutory
stock options to purchase 10,000 shares of Common Stock to outside directors at
the time of such director's initial appointment or election to the Board, and
the automatic grant of nonstatutory stock options to purchase 2,000 shares of
Common Stock annually thereafter on the date of each Annual Meeting of
Stockholders, provided the director has been a member of the Board for at least
six months.
5
<PAGE> 8
Purpose
The general purpose of the Plan is to attract and retain quality personnel
for positions of substantial responsibility, to create additional incentive for
senior personnel of the Company by offering long term equity participation in
the Company, and to promote the success of the Company's business.
Eligibility
The Option Plan provides that options and stock purchase rights may be
granted thereunder to employees, consultants and directors ("Optionees") of the
Company. The Board of Directors selects the Optionees and determines the number
of shares subject to each option or repurchase right. In making such
determination, the duties and responsibilities of the Optionee, the value of the
Optionee's services, his or her present and potential contributions to the
success of the Company and other relevant factors are considered.
Administration
The Plan may be administered by the Board or a Committee (collectively the
"Administrator"). Subject to the other provisions of the Plan, the Administrator
has the authority to: (i) determine the fair market value of the Common Stock;
(ii) select the Optionees to whom options may be granted thereunder; (iii)
determine the number of shares of Common Stock to be covered by each option and
stock purchase right granted thereunder; (iv) approve forms of agreement for use
under the Plan; (v) determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted thereunder (such terms and
conditions include, but are not limited to, the exercise price, the time or
times when options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any option or stock purchase right or
the shares of Common Stock relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall determine); (vi) reduce the
exercise price of any option or stock purchase right to the then current fair
market value if the fair market value of the Common Stock covered by such option
or stock purchase right shall have declined since the date the option or stock
purchase right was granted; (vii) institute an Option Exchange Program; (viii)
construe and interpret the terms of the Plan and awards granted pursuant to the
Plan; (ix) prescribe, amend and rescind rules and regulations relating to the
Plan, including rules and regulations relating to sub-plans established for the
purpose of qualifying for preferred tax treatment under foreign tax laws; (x)
modify or amend each option or stock purchase right, including the discretionary
authority to extend the post-termination exercisability period of options or
stock purchase right longer than is otherwise provided for in the Plan; (xi)
allow optionees to satisfy withholding tax obligations by electing to have the
Company withhold from the shares to be issued upon exercise of an option or
stock purchase right that number of shares having a fair market value equal to
the amount required to be withheld; (xii) authorize any person to execute on
behalf of the Company any instrument required to effect the grant of an option
or stock purchase right previously granted by the Administrator; and (xiii) make
all other determinations deemed necessary or advisable for administering the
Plan.
Terms and Conditions of Options
Each option or stock purchase right granted under the Plan is evidenced by
a written stock option agreement ("Notice of Grant") between the Optionee and
the Company and is subject to the following terms and conditions:
(a) Option Price. The option exercise price for each share covered by
an ISO may not be less than the fair market value of a share of Common
Stock on the date of grant of such option. In the case of an ISO granted to
a shareholder possessing more than 10% of the voting power of all classes
of stock of the Company or any parent or subsidiary of the Company, the
option exercise price for each share covered by such option may not be less
than 110% of the fair market value of a share of Common Stock on the date
of grant of such option. The exercise price for each share covered by an
NSO may be determined by the Administrator.
6
<PAGE> 9
(b) Form of Consideration. The means of payment for shares issued upon
exercise of an option or stock purchase right shall be determined by the
Administrator (for ISOs, the Administrator shall determine the acceptable
form of consideration at the time of grant) and generally may be made by
cash, check, promissory note, other shares of Common Stock of the Company
owned by the Optionee, consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan reduction of any Company liability to the Optionee or, by a
combination thereof.
(c) Term of Option. Each stock option agreement will specify the term
of the option and the date when the option is to become exercisable.
However, in no event shall an option granted under the Plan be exercised
more than 10 years after the date of grant or such shorter term as may be
provided in the Notice of Grant. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Incentive Stock Option is
granted, owns stock representing more the ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any parent
or subsidiary of the Company, the term of the Incentive Stock Option shall
be five (5) years from the date of grant or such shorter term as may be
provided in the Notice of Grant.
(d) Termination of Employment. Upon termination of an Optionee's
continuous status as an employee or consultant with the Company, other than
upon optionee's death or disability, such Optionee may exercise his or her
option to the extent that he or she was entitled to exercise it as of the
date of such termination. Such exercise may occur only before the end of
the period determined by the Administrator for exercise following
termination. In the absence of a specified time in the Option Agreement,
the option shall remain exercisable for three months following the
Optionee's termination. In no event shall such period extend beyond the
expiration date of the term of the option as set forth in the applicable
option agreement. If, on the date of termination, the Optionee is not
vested as to his or her entire option, the shares covered by the unvested
portion of the option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her option within the time specified by
the Administrator, the option shall terminate, and the shares covered by
such option shall revert to the Plan.
(e) Disability. If an employee is unable to continue as an employee or
consultant with the Company as a result of disability, then all options
held by such Optionee under the Plan shall expire upon the earlier of (i)
twelve months after the date of termination of the Optionee's employment or
(ii) the expiration date of the term of such option. The Optionee may
exercise all or part of his or her option at any time before such
expiration to the extent that such option was exercisable at the time of
termination of employment. To the extent that the Optionee is not entitled
to exercise his or her option at the date of such termination, or if the
Optionee does not exercise such option to the extent so entitled within the
time specified herein, the option shall terminate, and the shares covered
by such option shall revert to the Plan.
(f) Death. Upon the death of an Optionee, the option may be exercised
at any time within twelve (12) months following the date of death (but in
no event later than the expiration of the term of such option as set forth
in the Notice of Grant), by the Optionee's estate or by a person who
acquired the right to exercise the option by bequest or inheritance, only
to the extent that the Optionee was entitled to exercise the option at the
date of death. If at the time of death, the Optionee was not entitled to
exercise his or her entire option, the shares of Common Stock covered by
the unexercisable portion of the option shall immediately revert to the
Plan. If, after death, the Optionee's estate or person who acquired the
right to exercise the option by bequest or inheritance does not exercise
the option within the time specified herein, the option shall terminate,
and the shares covered by such option shall revert to the Plan.
(g) Stock Purchase Rights. The Stock Plan permits the granting of
stock purchase rights to employees, including officers, and consultants of
the Company ("Stock Purchase Rights" or "SPRs"). The grant is accepted by
execution of a restricted stock purchase agreement in the form determined
by the Administrator. Unless the Administrator determines otherwise, the
restricted stock purchase agreement grants the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
restricted stock purchase
7
<PAGE> 10
agreement is the original price paid by the purchaser, and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option lapses at a rate determined by the Administrator.
(h) Nontransferability of Options. In general, an option may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may
be exercised, during the lifetime of the Optionee, only by the Optionee. If
the Administrator makes an option or Stock Purchase Right transferable,
such option or stock purchase right shall contain such additional terms and
conditions as the Administrator deems appropriate.
(i) Value Limitation. If the aggregate fair market value of all shares
of Common Stock subject to an Optionee's Incentive Stock Option which are
exercisable for the first time during any calendar year exceeds $100,000,
the excess options shall be treated as nonstatutory stock options.
(j) Other Provisions. The stock option agreement may contain such
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Board or Committee.
Adjustments Upon Changes in Capitalization, Dissolution Liquidation, Merger
or Asset Sale
In the event that the capital stock of the Company is changed by reason of
recapitalization, dissolution, liquidation, merger or asset sale, the following
provisions will apply:
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered
by each outstanding option, and the number of shares of Common Stock which
have been authorized for issuance under the Plan but as to which no options
or stock purchase rights have yet been granted or which have been returned
to the Plan upon cancellation or expiration of an option or stock purchase
right, as well as the price per share of Common Stock covered by each such
outstanding option or stock purchase right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of
Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option or stock
purchase right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for
an Optionee to have the right to exercise his or her Option until ten (10)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company
repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock Purchase Right shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for
the Option or Stock Purchase Right, the Optionee shall fully vest in and
have the right to exercise the Option or Stock Purchase Right as to all of
the Optioned Stock, including Shares as to which it would not otherwise be
vested or exercisable. If an Option or Stock Purchase Right becomes fully
vested and exercisable in lieu of assumption or substitution in the event
of
8
<PAGE> 11
a merger or sale of assets, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be
fully vested and exercisable for a period of fifteen (15) days from the
date of such notice, and the Option or Stock Purchase Right shall terminate
upon the expiration of such period. For the purposes of this paragraph, the
Option or Stock Purchase Right shall be considered assumed if, following
the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option
or Stock Purchase Right immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for
each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by
the holders of a majority of the outstanding Shares); provided, however,
that if such consideration received in the merger or sale of assets is not
solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or
Stock Purchase Right, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
(d) Change in Control. Effective upon the consummation of a Change in
Control (as defined below) of the Company, the number of shares under each
option granted hereunder as to which such option is vested and fully
exercisable shall be accelerated such that each option shall be immediately
vested as to that additional number of shares as would be vested on the
date one year following consummation of a Change in Control if all
conditions to such vesting were satisfied. For purposes of the foregoing, a
"Change in Control" shall be deemed to have occurred upon any person or
entity, together with all affiliates (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) thereof
becoming the beneficial owner (as defined under Section 13(d) of the
Exchange Act and Rule 13d-3 thereunder) of more than 50% of the Company's
then outstanding shares of Common Stock.
Amendments, Suspensions and Termination of the Plan
The Board may amend, suspend or terminate the Plan at any time; provided,
however, that stockholder approval is required for any amendment to the extent
necessary to comply with Section 422 of the Code, or any similar rule or
statute. In any event, the Plan will terminate automatically in 2007.
Federal Tax Information for Plan
The following is a summary of the effect of federal income taxation upon
the Optionee and the Company with respect to the grant and exercise of options
under the Plan. Options granted under the Plan may be either "Incentive Stock
Options," as defined in Section 422 of the Code, or nonstatutory stock options.
An Optionee who is granted an Incentive Stock Option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the Optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the Optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (i)
the fair market value of the shares at the date of the option exercise or (ii)
the sale price of the shares. A different rule for measuring ordinary income
upon such a premature disposition may apply if the Optionee is also an officer,
director, or 10% stockholder of the Company. The Company will be entitled to a
deduction in the same amount as the ordinary income recognized by the Optionee.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as
long-term or short-term capital gain or loss, depending on the holding period.
All other options which do not qualify as Incentive Stock Options are
referred to as nonstatutory stock options. An Optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory
9
<PAGE> 12
stock option. However, upon its exercise, the Optionee generally will recognize
taxable income generally measured as the excess of the then fair market value of
the shares purchased over the purchase price. Any taxable income recognized in
connection with an option exercise by an Optionee who is also an employee of the
Company may be subject to tax withholding by the Company. Upon resale of such
shares by the Optionee, any difference between the sales price and the
Optionee's purchase price, to the extent not recognized as taxable income as
described above, will be treated as long-term or short-term capital gain or
loss, depending on the holding period. The Company will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the Optionee
with respect to shares acquired upon exercise of a nonstatutory stock option.
THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE SUMMARY OF THE EFFECT OF
FEDERAL INCOME TAXATION UPON HOLDERS OF OPTIONS OR UPON THE COMPANY. IT ALSO
DOES NOT REFLECT PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR
FOREIGN COUNTRY IN WHICH AN OPTIONEE MAY RESIDE.
PLAN BENEFITS
The Company cannot now determine the exact number of options to be granted
in the future under the Plan to the executive officers named under "EXECUTIVE
OFFICER COMPENSATION -- Summary Compensation Table," all current executive
officers as a group or all employees (including executive officers) as a group.
See "EXECUTIVE OFFICER COMPENSATION -- Stock Option Grants and Exercises" for
the number of stock options granted to the executive officers named in the
Summary Compensation Table in the fiscal year ended September 30, 1999.
REQUIRED VOTE
The affirmative vote of the majority of the Votes Cast will be required
under Delaware law to approve the amendment to the Plan. For this purpose, the
term "Votes Cast" is defined under Delaware law to be the shares of the
Company's Common Stock present in person or represented by proxy at the Annual
Meeting and "entitled to vote on the subject matter." Votes that are cast
against the proposal will be counted for purposes of determining (i) the
presence or absence of a quorum for the transaction of business and (ii) the
total number of Votes Cast with respect to the proposal. While there is no
definitive statutory or case law authority in Delaware as to the proper
treatment of abstentions in the counting of votes with respect to a proposal
such as the amendment to the Plan, the Company believes that abstentions should
be counted for purposes of determining both (i) the presence or absence of a
quorum for the transaction of business and (ii) the total number of Votes Cast
with respect to the proposal. In the absence of controlling precedent to the
contrary, the Company intends to treat abstentions in this manner. Accordingly,
abstentions will have the same effect as a vote against the proposal. In a 1988
Delaware case, Berlin v. Emerald Partners, the Delaware Supreme Court held that,
while broker nonvotes may be counted for purposes of determining the presence or
absence of a quorum for the transaction of business, broker nonvotes should not
be counted for purposes of determining the number of Votes Cast with respect to
the particular proposal on which the broker has expressly not voted.
Accordingly, broker nonvotes with respect to this proposal will not be counted
as Votes Cast.
10
<PAGE> 13
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed PricewaterhouseCoopers LLP as the
Company's independent auditors to audit the books, records and accounts of the
Company for the current fiscal year ending September 30, 2000. Such appointment
is being presented to the stockholders for ratification at the Annual Meeting.
PricewaterhouseCoopers LLP has acted as the Company's independent auditors since
inception. Representatives of PricewaterhouseCoopers LLP will 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 from
stockholders.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
The affirmative votes of a majority of the Votes Cast is required to ratify
the appointment of PricewaterhouseCoopers LLP as the Company's independent
auditors for the fiscal year ending September 30, 2000.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR THE RATIFICATION OF ITS
APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
11
<PAGE> 14
MANAGEMENT
In addition to Messrs. Farnham and Whiting, the executive and other
officers of the Company and their ages as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William R. Walker........ 58 Vice President of Finance, Chief Financial Officer and
Secretary
Stephen A. Farnow, 50 Vice President of Operations
Ph.D...................
</TABLE>
William R. Walker has served as Vice President and Chief Financial Officer
of Hi/fn since November 1997. He was Hi/fn's Acting Chief Executive Officer and
Acting President from July 1998 through October 1998. From 1996 to 1997, Mr.
Walker was Vice President, Chief Financial Officer and Secretary at MMC
Networks, Inc., a networking company. From 1984 to 1996, Mr. Walker held the
position of Senior Vice President and Chief Financial Officer at Zilog, Inc., a
semiconductor supplier. Mr. Walker has a B.S. in Economics from University of
Wisconsin and an M.B.A. from University of Maryland, and he is a certified
public accountant.
Stephen A. Farnow, Ph.D. has served as Vice President of Operations at
Hi/fn since 1996. From 1990 through 1996, he worked as an independent consultant
in the area of general management with an emphasis on setting up or
re-engineering operations functions. From 1986 through 1990, he was Vice
President of Operations at Weitek Corp., a semiconductor supplier. He received a
B.S. in Physics from UCLA and a Ph.D. from Stanford University.
CERTAIN TRANSACTIONS
Creation of Hi/fn. The Company was incorporated as a wholly owned
subsidiary of Stac, Inc. ("Stac") on August 14, 1996. On November 21, 1996, Stac
transferred its semiconductor business to the Company pursuant to an Assignment,
Assumption and License Agreement (the "Assignment Agreement") in exchange for
6,000,000 shares of Series A Preferred Stock and 100 shares of the Company's
Common Stock issued by the Company to Stac pursuant to a Stock Purchase
Agreement. The 6,000,000 shares of Series A Preferred Stock were converted into
6,000,000 shares of Common Stock of the Company prior to the spin-off of the
Company from Stac on December 16, 1998. The assets transferred to the Company
pursuant to the Assignment Agreement included $1,000,000 of available cash, the
accounts receivable and inventory of the semiconductor business, Stac's rights
under certain sales and license agreements, and the fixed assets, trademarks,
patents and proprietary technology specified on schedules attached to the
Assignment Agreement. The Assignment Agreement also provided for the assignment
by Stac and the assumption by the Company of the accounts payable relating to
the semiconductor business and current and unpaid payroll and related benefits
expenses related to former employees of Stac who became employees of the
Company.
At the time of the transfer of the semiconductor business to the Company,
Stac and the Company also entered into a Cross License Agreement pursuant to
which the Company granted Stac a limited, worldwide, perpetual, non-exclusive,
non-transferable, royalty-free license to the patents previously transferred by
Stac to the Company pursuant to the Assignment Agreement. The parties further
agreed that for a ten-year period (i) Stac would transfer ownership to the
Company of any derivative works created by Stac from the licensed technology and
(ii) the Company would transfer ownership to Stac of all future commercial
releases of software implementations of the licensed technology developed by the
Company.
Stac's Spin-Off of Hi/fn. On December 16, 1998, Stac distributed all of the
Company's Common Stock held by Stac to Stac stockholders. The spin-off was
designed to separate the semiconductor business of the Company from the software
business of Stac, and to offer each company the financial flexibility to raise
capital on a more cost-effective basis and create targeted incentives for each
company's management and employees. Prior to the spin-off, Stac received a
letter ruling from the IRS confirming that, among other things, the distribution
of the Company's Common Stock to Stac stockholders would not result in
recognition of taxable income or gain to Stac or its stockholders under Section
355 of the Code (except to the extent of cash received in lieu of fractional
shares).
12
<PAGE> 15
If the distribution were not to constitute a tax-free spin-off, then Stac
would be treated as recognizing a taxable gain equal to the difference between
(i) the fair market value of the Company's Common Stock that was distributed to
Stac stockholders on December 16, 1998 and (ii) Stac's adjusted basis of such
Common Stock. In addition, under the consolidated tax return rules of the Code,
each member of Stac's consolidated group (including the Company) would be
severally liable for such tax liability. Furthermore, in connection with the
spin-off, the Company (and the other members of the Stac consolidated group)
entered into a Tax Allocation and Indemnity Agreement with Stac whereby each
group member agreed that if any party to the Tax Allocation and Indemnity
Agreement took actions after the spin-off that caused Section 355(e) of the Code
to apply to the Company's Common Stock, then whichever party first caused
Section 355(e) of the Code to apply to the Company's Common Stock would be
obligated to bear all taxes of Stac resulting from such action. Under recently
enacted Section 355(e) of the Code, if the spin-off were considered to be a part
of a plan or series of related transactions (a "Plan") in which, after the
spin-off, a 50% or greater interest in the Company or Stac was acquired by one
or more persons, the IRS would claim that the spin-off was taxable at the
corporate level. Although neither the Company nor Stac believes the spin-off is
part of a Plan to effect a 50% change in ownership of either the Company or
Stac, the IRS has issued no guidance on the definition of a Plan and for the
first two years following the spin-off, any cumulative 50% change of ownership
within the two-year period will be rebuttably presumed to be the result of a
Plan.
Hi/fn's Relationship With Stac After the Spin-Off. As of December 16, 1998,
Stac ceased to own any shares of the Company. In order to provide for an orderly
transition to becoming an independent company, the Company and Stac entered into
the following agreements prior to the spin-off: (i) Distribution Agreement,
which provided for, among other things, the distribution of the Company's Common
Stock held by Stac to Stac stockholders and certain indemnification obligations
of each company to the other; (ii) Employee Benefits Allocation Agreement, which
provided for an allocation of liabilities for employee benefits between the
Company and Stac and set forth formulas for adjustments to Stac options; (iii)
Tax Allocation and Indemnity Agreement whereby the Company and Stac agreed to
allocate tax liabilities that related to periods prior to December 16, 1998; and
(iv) Transitional Services Agreement under which Stac agreed to provide certain
services to the Company on a transitional basis. The Company has since
transitioned from all of Stac's administrative systems other than its financial
accounting system.
Loans to Officers. On December 31, 1997, the Company made a loan to William
Walker, the Company's Vice-President and Chief Financial Officer, in the
aggregate principal amount of $100,000 and bearing interest at the rate of 6.00%
per annum, in order to fund the exercise price of stock options held by him. The
loan was evidenced by a full recourse promissory note, which matured on the
earlier to occur of (i) November 3, 2001, or (ii) the date on which Mr. Walker
ceases to be an employee, director or consultant of the Company. The promissory
note was secured by a pledge of 50,000 shares of Company Common Stock owned by
Mr. Walker and held in escrow. The entire principal amount and accrued interest
on the loan to Mr. Walker was paid in full on March 31, 1999.
Indemnification Agreements. The Company has entered into indemnification
agreements with each of its directors and executive officers.
OTHER INFORMATION
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires certain of the Company's
executive officers, as well as its directors and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission.
Based solely on its review of the copies of such forms received by the
Company, or written representations from certain reporting persons, the Company
believes that during the Last Fiscal Year all executive officers and directors
complied with their filing requirements under Section 16(a) for all reportable
transactions during the year.
13
<PAGE> 16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1999 information relating
to the beneficial ownership of the Company's Common Stock by each person known
by the Company to be the beneficial owner of more than five percent (5%) of the
outstanding shares of Common Stock, by each director and nominee for director,
by each of the executive officers named in the Summary Compensation Table, and
by all directors and executive officers as a group. As of December 31, 1999,
8,753,879 shares of the Company's Common Stock were outstanding. Unless
otherwise indicated, all persons named as beneficial owners of Common Stock have
sole voting power and sole investment power with respect to the shares indicated
as beneficially owned.
<TABLE>
<CAPTION>
NO. OF SHARES APPROXIMATE
NAME(1) OWNED PERCENTAGE OWNED
------- ------------- ----------------
<S> <C> <C>
Capital Research & Management Company....................... 957,000 10.9%
Robert W. Johnson(2)........................................ 438,156 5.0
Douglas L. Whiting(3)....................................... 312,314 3.6
Robert A. Monsour(4)........................................ 118,904 1.4
Raymond J. Farnham(5)....................................... 99,999 1.1
Stephen A. Farnow(6)........................................ 12,632 *
William R. Walker(7)........................................ 21,144 *
Taher Elgamal(8)............................................ 2,333 *
Albert E. Sisto(9).......................................... 2,333 *
All executive officers and directors as a group (9
persons).................................................. 1,032,815 11.8
</TABLE>
- ---------------
* Less than one percent (1%).
(1) This table is based upon information supplied by officers, directors, and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Commission with regard to Hi/fn Common Stock. Unless otherwise indicated in
the footnotes to this table and subject community property and marital
property laws where applicable, each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 8,753,879 shares
outstanding on December 31, 1999, adjusted by rules promulgated by the
Commission.
(2) Includes 2,333 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999.
(3) Includes 20,416 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999.
(4) Includes 11,875 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999. Mr.
Monsour resigned from the Company in December 1999.
(5) Includes 99,999 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999.
(6) Includes 11,865 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999.
(7) Includes 10,625 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999.
(8) Includes 2,333 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999.
(9) Includes 2,333 shares issuable upon exercise of options to purchase Common
Stock and that will be exercisable within 60 days of December 31, 1999.
14
<PAGE> 17
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, as to each Chief Executive Officer during the
Last Fiscal Year, each of the four other most highly compensated executive
officers whose salary plus bonus exceeded $100,000 and up to two former
executive officers who would have been included if they had been executive
officers at the end of the Last Fiscal Year (the "Named Officers"), information
concerning compensation paid for services to the Company in all capacities
during the Last Fiscal Year as well as the total compensation paid to each such
individual for the Company's previous two fiscal years (if such person was the
Chief Executive Officer or an executive officer, as the case may be, during any
part of the Last Fiscal Year).
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
---------------------------- COMPENSATION
OTHER ANNUAL ------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
--------------------------- ---- ---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Raymond J. Farnham............. 1999 233,020 104,202 0 375,000 225
President and Chief 1998 0 0 0 0 0
Executive Officer 1997 0 0 0 0 0
William R. Walker.............. 1999 147,071 49,588 0 20,000 240
Vice President of Finance and 1998 128,333 17,850 0 100,000 0
Chief Financial Officer 1997 0 0 0 0 0
Stephen A. Farnow.............. 1999 150,000 57,104 0 35,000 220
Vice President of Operations 1998 132,853 27,183 0 0 0
1997 100,000 12,600 0 72,000 0
Robert A. Monsour.............. 1999 160,000 48,927 0 19,000 269
Vice President of Marketing 1998 154,808 69,334 0 0 0
1997 17,885 2,910 0 127,500 0
Douglas L. Whiting............. 1999 150,000 52,684 0 75,000 251
Chief Technology Officer 1998 140,000 25,918 0 0 0
1997 0 0 0 0 0
</TABLE>
15
<PAGE> 18
STOCK OPTION GRANTS AND EXERCISES
The following tables set forth information with respect to options granted
to the Named Officers and the options exercised by such Named Officers during
the Last Fiscal Year.
STOCK OPTION GRANTS IN FISCAL YEAR 1999
The Option Grant Table sets forth for each of the Named Officers the
hypothetical gains or "option spreads" for the options at the end of their
respective five-year terms, as calculated in accordance with the rules of the
Securities and Exchange Commission. Each gain is based on an arbitrarily assumed
annualized rate of compound appreciation of the market price at the date of
grant of five percent (5%) and ten percent (10%) from the date the option was
granted to the end of the option term. Actual gains, if any, on option exercises
are dependent on the future performance of the Company's Common Stock and
overall market conditions.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE OF ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------ ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Raymond J. Farnham................ 375,000 31.6% $ 3.00 10/27/08 $707,506 $1,792,960
President and Chief
Executive Officer
William R. Walker................. 15,000 1.3 5.00 12/04/08 47,167 119,531
Vice President of Finance and 5,000 0.4 42.00 04/23/09 132,068 334,686
Chief Financial Officer
Stephen A. Farnow................. 30,000 2.5 5.00 12/04/08 94,334 239,061
Vice President of Operations 5,000 0.4 42.00 04/23/09 132,068 334,686
Robert A. Monsour................. 15,000 1.3 5.00 12/04/08 47,167 119,531
Vice President of Marketing 4,000 0.3 42.00 04/23/09 105,654 267,748
Douglas L. Whiting................ 70,000 5.9 5.00 12/04/08 220,113 557,810
Chief Technology Officer 5,000 0.4 42.00 04/23/09 132,068 334,686
</TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1999 AND YEAR-END VALUES
The following table sets forth information with respect to the Named
Officers concerning the exercise of options during 1999, and unexercised options
held as of September 30, 1999.
<TABLE>
<CAPTION>
TOTAL NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTION HELD
ACQUIRED HELD AT FISCAL YEAR END AT FISCAL YEAR END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raymond J. Farnham.............. 0 0 0 375,000 0 40,218,750
President and Chief Executive
Officer
William R. Walker............... 0 0 0 74,167 0 7,332,500
Vice President of Finance and
Chief Financial Officer
Stephen A. Farnow............... 14,192 532,170 4,673 52,135 512,394 5,377,603
Vice President of Operations
Robert A. Monsour............... 0 0 4,062 63,688 445,398 6,751,789
Vice President of Marketing
Douglas L. Whiting.............. 0 0 0 75,000 0 7,708,750
Chief Technology Officer
</TABLE>
- ---------------
(1) Calculated using a market value of $110.25 at September 30, 1999
16
<PAGE> 19
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors establishes the
general compensation policies of the Company as well as the compensation plans
and specific compensation levels for executive officers. It also administers the
Company's employee stock benefit plan for executive officers. The Compensation
Committee is currently composed of independent, non-employee directors who,
except as disclosed under "OTHER INFORMATION -- Compensation Committee
Interlocks and Insider Participation," have no interlocking relationships as
defined by the Securities and Exchange Commission.
The Compensation Committee believes that the compensation of the executive
officers, including that of the Chief Executive Officer (collectively the
"Executive Officers"), should be influenced by the Company's performance. The
Committee establishes the salaries and bonuses of all of the Executive Officers
by considering (i) the Company's financial performance for the past year, (ii)
the achievement of certain objectives related to the particular Executive
Officer's area of responsibility, (iii) the salaries and bonuses of executive
officers in similar positions of comparably-sized companies and (iv) the
relationship between revenue and executive officer compensation. The Committee
believes that the Company's executive officer salaries and bonuses in the Last
Fiscal Year were comparable in the industry for similarly-sized businesses.
In addition to salary and bonus, the Committee, from time to time, grants
options to Executive Officers. The Committee thus views option grants as an
important component of its long-term, performance-based compensation philosophy.
Since the value of an option bears a direct relationship to the Company's stock
price, the Committee believes that options motivate Executive Officers to manage
the Company in a manner which will also benefit shareholders. As such, options
are granted at the current market price. And one of the principal factors
considered in granting options to an Executive Officer is the Executive
Officer's ability to influence the Company's long-term growth and profitability.
Compensation Committee
Taher Elgamal
Albert E. Sisto
17
<PAGE> 20
PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return among Hi/Fn, Inc., Russell 2000 Tech Index and the
Nasdaq Composite Index, from December 15, 1998 through September 30, 1999, the
end of the Last Fiscal Year.
TOTAL RETURN TO STOCKHOLDERS (ASSUMES $100 INVESTMENT ON 12/15/98)
[PERFORMANCE GRAPH]
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee has a relationship that would
constitute an interlocking relationship with executive officers or directors of
another entity.
OTHER MATTERS
The Board of Directors does not intend to bring before the meeting any
matters other than those set forth herein, and has no present knowledge that any
other matters will or may be brought before the meeting by others. If, however,
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the proxies in accordance
with their judgment.
Dated: January 21, 2000
BY ORDER OF THE
BOARD OF DIRECTORS
18
<PAGE> 21
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF
HI/FN, INC.
2000 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of hi/fn, inc., a Delaware corporation
("hi/fn"), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement of hi/fn, each dated January 21, 2000, and
hereby appoints Raymond J. Farnham and William R. Walker, or either of them,
proxies and attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the undersigned at the
2000 Annual Meeting of Stockholders of hi/fn to be held on February 25, 2000, at
10:00 a.m., local time, at the Pruneyard Inn, 1995 S. Bascom Ave, Campbell,
California and at any adjournment or adjournments thereof, and to vote all
shares of Common Stock of hi/fn ("Common Stock"), which the undersigned would be
entitled to vote if then and there personally present, on the matters set forth
on the reverse side of this proxy.
THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR THE ELECTION OF RAYMOND J. FARNHAM AS DIRECTOR OF HI/FN; FOR
THE AMENDMENT TO THE HI/FN 1996 EQUITY INCENTIVE PLAN; FOR THE RATIFICATION OF
THE APPOINTMENT OF PRICEWATERHOUSECOOPERS, LLP AS INDEPENDENT AUDITORS; AND AS
SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING.
1. ELECTION OF DIRECTOR:
NOMINEE: Raymond J. Farnham
FOR THE NOMINEES LISTED ABOVE [ ] WITHHOLD AUTHORITY TO VOTE FOR THE
NOMINEE LISTED ABOVE
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE
BELOW
2. PROPOSAL TO RATIFY AND APPROVE AN AMENDMENT TO THE HI/FN 1998 STOCK
OPTION PLAN TO PROVIDE FOR AN INCREASE IN THE NUMBER OF SHARES
AVAILABLE FOR ISSUANCE THEREUNDER BY 425,000 SHARES TO 3,474,900
SHARES:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP
AS INDEPENDENT AUDITORS OF HI/FN FOR THE FISCAL YEAR ENDING
SEPTEMBER 30, 2000:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(This Proxy should be marked, dated and signed by the stockholder(s) exactly as
his or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.)
Signature: ______________ Date: _____ Signature: _____________ Date: _____
