<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] 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 Materials Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
IRVINE SENSORS CORPORATION
(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:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check the 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>
IRVINE SENSORS CORPORATION
3001 Redhill Avenue, Building III
Costa Mesa, California 92626
January 23, 1998
To the Stockholders of Irvine Sensors Corporation:
The Annual Meeting of Stockholders of Irvine Sensors Corporation will be
held at The Center Club, 650 Town Center Drive, Costa Mesa, California, on
Friday, February 27, 1998, at 2:00 p.m., California time.
The Annual Report for fiscal 1997 is enclosed herewith. At the
stockholders' meeting, we will discuss in more detail the subjects covered in
the Annual Report as well as other matters of interest to stockholders.
The enclosed proxy statement explains the items of business to come
formally before the Annual Meeting. As a stockholder, it is in your best
interest to express your views regarding these matters by signing and returning
your proxy. This will ensure the voting of your shares if you do not attend the
Annual Meeting.
Your vote is important regardless of the number of shares of the Company's
Stock you own, and all stockholders are cordially invited to attend the Annual
Meeting. To ensure your representation at the Annual Meeting, please mark, sign,
date and mail the enclosed proxy promptly in the return envelope provided, which
requires no postage if mailed in the united states. The giving of a proxy will
not affect your right to vote in person if you attend the Annual Meeting. Please
note, however, that if your shares are held of record by a broker, bank or other
nominee and you wish to vote at the Annual Meeting, you must obtain from the
record holder a proxy issued in your name.
Sincerely yours,
/s/ James Alexiou
James Alexiou
Chairman of the Board
<PAGE>
IRVINE SENSORS CORPORATION
Notice of Annual Meeting of Stockholders - February 27, 1998
TO THE STOCKHOLDERS OF IRVINE SENSORS CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Irvine
Sensors Corporation, a Delaware corporation (the "Company"), will be held on
Friday, February 27, 1998 at 2:00 p.m., California time, at The Center Club, 650
Town Center Drive, Costa Mesa, California for the following purposes:
1. To elect directors to serve for the ensuing year.
2. To approve an amendment to the Company's 1995 Stock Option Plan to
increase the number of shares of Common Stock which may be subject to
options under the plan to an aggregate of 1,650,000.
3. To approve an amendment to the Company's 1995 Stock Option Plan to
give the Board of Directors discretion to increase up to the fifth
anniversary date the period during which non-statutory stock options
may be exercised following the optionee's termination for causes other
than death or disability.
4. To ratify the appointment of Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending September 27,
1998.
5. To transact such other business as may properly come before the
Meeting or any postponement(s) or adjournment(s) thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on December 29, 1997
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the Annual Meeting and any adjournment or postponement thereof.
All stockholders are cordially invited to attend the Annual Meeting in
person. Whether or not you expect to attend the Annual Meeting in person, in
order to ensure your representation at the Annual Meeting, you are urged to
mark, sign, date and return the enclosed Proxy card as promptly as possible in
the postage-prepaid envelope enclosed for that purpose. Any stockholder
attending the Annual Meeting may vote in person even if he or she returned a
proxy.
By Order of The Board of Directors
/s/ Joanne S. Carson
Joanne S. Carson,
Secretary
Costa Mesa, California
January 23, 1998
<PAGE>
IRVINE SENSORS CORPORATION
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
SOLICITATION AND VOTING RIGHTS
General
The enclosed proxy is solicited by and on behalf of Irvine Sensors
Corporation (the "Company") for use at the Annual Meeting of Stockholders to be
held on Friday, February 27, 1998 at 2:00 p.m., California time, or at any
postponements or adjournments thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at The Center Club, 650 Town Center Drive, Costa Mesa, California.
All expenses incurred in connection with this solicitation, including postage,
printing, handling and the actual expenses incurred by brokerage houses,
custodians, nominees and fiduciaries in forwarding proxy material to beneficial
owners, will be paid by the Company. In addition to solicitation by mail,
certain officers, directors and regular employees of the Company, who will
receive no additional compensation for their services, may solicit proxies by
telephone, telegram or personal call. These proxy solicitation materials were
mailed on or about January 23, 1998, together with the Company's 1997 Annual
Report to Stockholders, to all stockholders entitled to vote at the Annual
Meeting.
The Company's principal executive offices are located at 3001 Redhill
Avenue, Building III, Costa Mesa, California 92626 and its telephone number is
(714) 549-8211.
Voting of Securities
Irvine Sensors Corporation is a corporation existing and organized under
the laws of the State of Delaware. The Company's Board of Directors has fixed
the close of business on December 29, 1997 as the record date (the "Record
Date") for determining the stockholders of the Company entitled to notice of and
to vote at the Annual Meeting and at any adjournments or postponements thereof.
The Company has authorized two classes of voting securities: Common Stock
(40,000,000 shares authorized) and Preferred Stock (500,000 shares authorized).
As of the Record Date, there are 22,490,806 shares of Common Stock outstanding,
8,785 shares of Series B Preferred Stock outstanding 4,974 shares of Series C
Preferred Stock outstanding and 13,000 shares of Series D Preferred Stock
outstanding. The presence in person or by proxy of the holders of a majority of
the outstanding shares of Common Stock and Preferred Stock entitled to vote at
the Annual Meeting will constitute a quorum for the purpose of transacting
business at the Annual Meeting.
On each matter that may come before the Annual Meeting, each stockholder is
entitled to one vote for each share of Common Stock and that number of shares of
Common Stock into which the Series B Preferred Stock and Series C Preferred
Stock, as the case may be, are currently convertible. The holders of outstanding
Series D Preferred Stock are not entitled to vote on any matters being brought
before this meeting. The Series B and C Preferred convert into 50 shares of
Common Stock for each share of Preferred and the Series D Preferred convert into
100 shares of Common stock for each share of Preferred. As a class, the
Preferred Stock is entitled to 687,950 votes on each matter to come before the
Annual Meeting; however, in all matters to come before the Annual Meeting, the
Common Stock and the Series B and C Preferred Stock will vote together as a
single class. Abstentions and broker-non-votes are counted for purposes of
determining the presence or absence of a quorum for the transaction of business.
Abstentions are counted in tabulations of the votes cast on proposals presented
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to stockholders and therefore will have the effect of a negative vote. Broker-
non-votes are not counted for purposes of determining whether a proposal has
been approved.
Under the Company's Certificate of Incorporation, cumulative voting is
permitted in the election of directors. Under cumulative voting rules, every
stockholder voting in the election of directors may cumulate such stockholder's
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which the stockholder's
shares are entitled, or distribute the stockholder's votes on the same principle
among as many candidates as the stockholder thinks fit, provided that votes
cannot be cast for more candidates than are provided for by the By-laws at the
time of voting. However, no stockholder will be entitled to cumulate votes
unless the name of the candidate or candidates for whom such votes would be cast
has been placed in nomination prior to the voting and any stockholder has given
notice, at the Annual Meeting and prior to the commencement of voting, of such
stockholder's intention to cumulate his votes. The candidates receiving the
highest number of votes, up to the number of directors to be elected, shall be
elected.
All votes will be tabulated by the inspector of election appointed for the
Annual Meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker "non-votes."
Revocability of Proxies
At the Annual Meeting, valid proxies will be voted as specified by the
stockholder. Any stockholder giving a proxy in the accompanying form retains
the power to revoke it at any time prior to the exercise of the powers conferred
in the proxy and may do so by taking any of the following actions: (i)
delivering written notice to the Secretary of the Company, (ii) delivering to
the Secretary of the Company a duly executed proxy bearing a later date or (iii)
personally attending the Annual Meeting and revoking the proxy. A stockholder's
attendance at the Annual Meeting will not revoke the stockholder's proxy unless
the stockholder affirmatively indicates at the Annual Meeting the intention to
vote the stockholder's shares in person. Please note, however, that if a
stockholders' shares are held of record by a broker, bank or other nominee and
he wishes to vote in person at the Annual Meeting, he must obtain from the
record holder a proxy issued in his name.
Deadline for Receipt of Stockholder Proposals
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's Annual Meeting to be held in 1999 must be
received by the Company no later than September 25, 1998, in order for them to
be considered for inclusion in the Company's Proxy Statement and form of Proxy
relating to that meeting. It is recommended that stockholders submitting
proposals direct them to the Secretary of the Company and utilize certified
mail-return receipt requested in order to provide proof of timely receipt. No
such proposals were received with respect to the Annual Meeting scheduled for
February 27, 1998.
PROPOSAL NO. 1
NOMINATION AND ELECTION OF DIRECTORS
Nominees
Although the By-laws provide for a board of ten directors, the Company
proposes that a board of eight directors be elected at the Annual Meeting. Each
director to be elected will hold office until the next annual meeting of
stockholders and until his or her successor is elected and has qualified, or
until such director's earlier death, resignation or removal. The Board has the
power between meetings of stockholders to elect directors to fill vacancies thus
created and the Board is presently pursuing candidates to fill one or more of
these vacancies. Unless otherwise instructed, the Proxy holders will vote the
Proxies received by them FOR the Company's eight nominees named below, seven of
whom are presently directors of the Company elected by the stockholders.
Proxies cannot be voted for a greater
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number of persons than the number of nominees named. In the event that any
nominee of the Company is unable or declines to serve as a director at the time
of the Annual Meeting or any postponements or adjournments thereof, the Proxies
will be voted for any substitute nominee who shall be designated by the Proxy
holders or Board of Directors to fill the vacancy. In the event that additional
persons are nominated for election as directors, the Proxy holders intend to
vote all Proxies received by them in such a manner in accordance with cumulative
voting as will assure the election of as many of the nominees listed below as
possible, and, in such event, the specific nominees to be voted for will be
determined by the Proxy holders. Accordingly, the Company seeks discretionary
authority to cumulate votes. It is not expected that any nominee will be unable
or will decline to serve as director.
Required Vote
Directors are elected by a plurality of the votes present and in person or
represented by proxy and entitled to vote on the proposal. Votes may be cast in
favor or withheld; votes that are withheld will be excluded entirely from the
vote and will have no effect. A broker-non-vote will not be treated as entitled
to vote on this matter.
The Board recommends voting "FOR" the eight nominees listed below.
The names of the Company's nominees for director, their ages as of February
27, 1998 and certain information about them, are set forth below:
<TABLE>
<CAPTION>
Name Age Position with Company/Principal Occupation
---- --- ------------------------------------------
<S> <C> <C>
James Alexiou(1)(2) 65 Chairman of the Board
James D. Evert 55 President, Chief Executive Officer and a
Director
John C. Carson 59 Senior Vice President, Chief Technical
Officer and a Director
Joanne S. Carson 59 Director and Secretary
Marc Dumont(1) 54 Director
Walter Garrigan 71 Director
Frank P. Ragano(1) 69 Director
Vincent F. Sollitto, Jr. 49 Director
</TABLE>
______________
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Alexiou is a co-founder of the Company and has served as Chairman of
the Board and a director since its inception in 1974. He also served as the
Company's President from 1974 until September 1992 and its Chief Executive
Officer from 1974 until he retired from this position in September 1994. He was
subsequently re-elected to the positions of President and Chief Executive
Officer in October 1996 but resigned those positions in January 1997. Mr.
Alexiou also serves as Chairman of the Board of MicroSensors, Inc. ("MSI") a
wholly owned subsidiary of the Company (since October 1997) and Novalog,
Inc.("Novalog") a subsidiary of the Company in which the Company is the majority
stockholder (since October 1996). Mr. Alexiou is also President of the Orange
County Philharmonic Society. Mr. Alexiou holds a B.S. in business management and
an M.A. in economics from Boston University.
3
<PAGE>
Mr. Evert has been President, Chief Executive Officer and a director of the
Company since February 1997. He also serves in those capacities for Novalog
since February 1997 and as a director of MSI since October 1997. Prior to
joining the Company, Mr. Evert was an independent management consultant. In
that role from December 1993 until January 1995, he assisted Fujitsu
Microelectronics, Inc. in the formation of a graphics product subsidiary and
subsequently served as Vice-President of that unit from January 1995 to February
1996. Prior to his association with Fujitsu, Mr. Evert served as Director of
Manufacturing for SuperComputer Systems, Inc. from August 1972 to February 1993
and spent nearly thirty years in various management positions within
International Business Machines Corporation ("IBM"). Mr. Evert is a graduate of
Syracuse University with a B.S. degree in Electrical Engineering.
Mr. Carson is a co-founder of the Company and has served as a Senior Vice
President since the Company's inception in 1974 and a director since April 1982.
He was elected Chief Technical Officer in February 1997. Mr. Carson also
serves as a director of MSI (since October 1997). Mr. Carson has been awarded 15
patents for Smart Sensors, 3D packaging and single processing architectures,
including neural networks. Mr. Carson holds a B.S. in Physics from the
Massachusetts Institute of Technology.
Mrs. Carson has been a director of the Company since its inception and
became the Company's Secretary in December 1981.
Mr. Dumont became a director of the Company in April 1994. Mr. Dumont has
been an international consultant and investment banker for more than five years.
Mr. Dumont is also on the Board of Directors of Novalog since October 1996.
From January 1981 to March 1995, Mr. Dumont was President of PSA International
S.A., a PSA Peugeot Citroen Group company. Mr. Dumont is a graduate of the
University of Louvain, Belgium with degrees in Electrical Engineering and
Applied Economics and holds an MBA from the University of Chicago.
Mr. Garrigan served as a director of the Company from February 1989 until
he retired in 1994. He was re-elected to the Board in February 1997. Mr.
Garrigan is a retired investment banker and financial consultant. Mr. Garrigan
holds AB and Juris Doctor degrees from Rutgers University and is a member of the
Bar of the District of Columbia.
General Ragano became a director of the Company in June 1985. Since
December 1988, General Ragano has been Chairman and Chief Executive Officer of
CMS, Inc., a manufacturer of defense munitions. General Ragano is also on the
Board of Directors of MSI (since October 1997). General Ragano retired from the
U.S. Army in July 1980 after serving as the Commander of the U.S. Army Missile
Command since June 1978. General Ragano holds a B.S. degree from Duquesne
University and an MBA from Syracuse University.
Mr. Sollitto has been a director of the Company since October 1997. He is
Chief Executive Officer of Photon Dynamics, Inc., a position he has held since
June 1996. Prior to joining Photon Dynamics, Mr. Sollitto was with Fujitsu
Microelectronics, Inc. ("FMI") from September 1993 to February 1996 as General
Manager of its Business Unit Operations. He served as Executive Vice President
of Technical Operations at SuperComputer Systems, Inc., from April 1991 to July
1993. Mr. Sollitto also spent 21 years in various positions at IBM, including
Director of Technology and Process, prior to joining SuperComputer Systems, Inc.
A graduate of Tufts College, Mr. Sollitto holds a B.S. degree in Electrical
Engineering.
Directors and officers are elected on an annual basis. The term of each
director expires at the Company's next annual meeting of stockholders or at such
time as his or her successor is duly elected and qualified. Officers serve at
the discretion of the Board of Directors.
There are no family relationships between any director, executive officer
or other key personnel and any other director, executive officer or other key
personnel of the Company, other than between John C. Carson and Joanne S.
Carson, who are husband and wife.
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Compensation of Directors
Directors who are employees of the Company are not separately compensated
for their services as directors or as members of committees of the Board of
Directors. During fiscal 1997, directors who were not employees of the Company
received $1,600 for each board meeting attended and were reimbursed for
reasonable travel and other expenses. No compensation is paid for attendance at
meetings of the committees of the Board of Directors.
Board Meetings and Committees
The Board of Directors held a total of 7 meetings during the fiscal year
ended September 28, 1997 and took 3 actions by unanimous written consent. No
director attended fewer than 75% of the meetings of the Board of Directors or
committees of which he or she was a member during the fiscal year ended
September 28, 1997.
The Audit Committee of the Board of Directors met 1 time during the fiscal
year ended September 28, 1997. This Committee reviews the independence of the
Company's independent certified public accountants, recommends the engagement
and discharge of independent accountants and reviews accounting policies,
internal accounting controls and results of audit engagements. During fiscal
1997, neither the Board of Directors nor the Company's independent certified
public accountants raised any issues with respect to matters which required
formal review.
The Compensation Committee of the Board of Directors met 5 times during the
fiscal year ended September 28, 1997. This Committee makes recommendations to
the Board of Directors as to the salaries of officers, administers the Company's
executive bonus programs and recommends to the Board the award of stock options
to key employees, officers and directors.
The Company does not have a nominating committee or any committee
performing the functions of a nominating committee.
Executive Officers
The names of the Company's executive officers who are not also directors of
the Company and certain information about each of them are set forth below:
Mr. John J. Stuart, age 58, joined the Company in January 1983 as its
Manager of Special Projects and Communications, became the Company's Chief
Financial Officer and Treasurer in July 1985, and a Vice President in June 1995.
He relinquished the Treasurer position in February 1995. Mr. Stuart is also a
member of the Board of Directors and is Vice President of Finance and Chief
Financial Officer of both Novalog (since October 1995) and MSI (since October
1997). Mr. Stuart holds a B.S. in Industrial Management from the Massachusetts
Institute of Technology.
Mr. David Pinto, age 65, joined the Company in October 1984 as Controller
and was named Treasurer in February 1995. He also serves as Treasurer of
Novalog (since October 1995) and MSI (since October 1997). Mr. Pinto is a
graduate of St. George's College in Jamaica.
Mr. Floyd Eide, age 61, joined the Company in August 1997 as Vice President
and General Manager - MicroElectronics Division. From November 1987 to August
1997, Mr. Eide was Chief Operating Officer and Vice President, Engineering of
Dense-Pac Microsystems Inc. He is a graduate of Fairleigh Dickenson University
with a M.S. in Solid State Physics and a B.S. in Physics.
5
<PAGE>
PROPOSALS 2 AND 3 - ADOPTION OF AMENDMENTS TO THE 1995 STOCK OPTION PLAN
In 1995, the Board of Directors adopted and the shareholders approved the
1995 Stock Option Plan (the "Plan"), under which an aggregate of 700,000 shares
of the Company's Common Stock was authorized for issuance pursuant to incentive
and nonstatutory stock options. In August 1997, the Board of Directors amended
the Plan, subject to stockholder approval, to increase the number of shares of
Common Stock which may be subject to option by an aggregate of 950,000 shares to
an aggregate of 1,650,000 shares. The Board of Directors believes that this
amendment is necessary to enable the Company to provide meaningful equity
incentives to attract, motivate and retain its employees. The Board of Directors
recommends that the stockholders vote for approval of the amendment to the Plan.
The Board of Directors also proposes that the 1995 Stock Option Plan be
amended to give the Board discretion to extend the vesting and exercise periods
for non-statutory stock options held by employees or directors whose employment
or directorship is terminated for any reason except death or disability, from
the current period of up to 90 days from the Termination Date (as defined in the
Plan) to up to the applicable Fifth Anniversary Date. Specifically, stockholder
approval is sought to amend section 7(d) to read in full as follows:
"(d) Subject to the provisions of Subsection 7(e) hereinbelow involving
the death or disability of an Optionee while an employee, director, consultant
or advisor of the Company or an Affiliated Company, as of the effective date of
the termination of employment or directorship of an Optionee of the Company (or
Affiliated Company) for any reason other than death or disability (the
"Termination Date"), any unexercised Accrued Installments of the Option granted
hereunder to such terminated Optionee shall expire and become unexercisable as
of the earlier of (i) the applicable expiration date of the Option; or (ii) 30
days following said Termination Date; provided, however, that the Board may
extend such 30-day period for a period up to the applicable Fifth Anniversary
Date with respect to non-statutory stock options. Any installments under said
Option which have not accrued as of said Termination Date shall expire and
become unexercisable as of said Termination Date. Any portion of an Option that
expires hereunder shall remain unexercisable and be of no effect whatsoever
after such expiration notwithstanding that such Optionee may be reemployed by,
or again become a director of or consultant or advisor to the Company or an
Affiliated Company."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
PROPOSALS 2 AND 3
A summary of the principal provisions of the 1995 Stock Option Plan is set
forth below.
Purpose. The purpose of the Plan is to attract and retain the best
--------
available personnel, provide additional incentive to the employees of the
Company, and to promote the success of the Company's business and to enable the
employees to share in the growth and prosperity of the Company by providing them
with an opportunity to purchase stock in the Company on favorable terms.
Administration. The Plan may be administered by the Board of Directors or,
---------------
upon appointment by the Board, by a committee appointed by the Board consisting
of not less than three members, one of which must be the Company's President
(the "Committee"). The Board of Directors or the Committee then administering
the Plan is referred to herein as the "Administrator". To the extent that the
Administrator determines it to be desirable to qualify options as "performance-
based compensation" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code") the Plan shall be administered by a
Committee of two or more "outside" directors within the meaning of Section
162(m) of the Code. The Plan is currently being administered by the Board of
Directors.
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The interpretation and construction of any provision of the Plan is within the
sole discretion of the members of the Board of Directors or its committee, which
determinations shall be final and binding.
Eligibility. The Plan provides that options may be granted to employees,
------------
including officers of the Company and its subsidiaries, consultants and
advisors. The Board of Directors or a committee of the Board selects the
optionees and the number of shares to be subject to each option. In making such
determination, there is taken into account the duties and responsibilities of
the individual, the value of the individual's services, their present and
potential contribution to the success of the Company, the anticipated number of
years of future service of the individual, and other relevant factors. The Plan
provides for neither a maximum nor minimum number of option shares that may be
granted to any one individual, although there is a limit on the aggregate market
value of shares subject to all incentive stock options granted to an individual
during a calendar year under the Plan as currently in effect.
Terms of Options. Options granted under the Plan may be either "incentive
-----------------
stock options," as defined in section 422 of the Internal Revenue Code, as
currently in effect, or nonstatutory stock options. The terms of options are
determined by the Administrator. Each option granted under the Plan is
evidenced by a written stock option agreement between the Company and the
optionee specifying the type of stock options (incentive or nonstatutory), the
number of shares subject to the option, the option price, the exercise period,
the terms of the options and certain other terms and conditions of the option.
The form of payment for shares to be issued upon the exercise of an option
may, in the discretion of the Administrator, consists of cash, check, promissory
note, an exchange of shares of Common Stock, a combination thereof, or such
other consideration as determined by the Board of Directors and as permitted
under the Internal Revenue Code.
The exercise price of an option granted under the Plan is determined by the
Administrator and may not be less than 85% in the case of a nonstatutory stock
option and 100% in the case of an incentive stock option, of the fair market
value of the Company's Common Stock on the date of the grant of the option.
With respect to optionees owning more than 10% of the Company's voting stock at
the time of grant, the exercise price for an incentive stock option must be at
least 110% of the fair market value. The fair market value of such Common Stock
will be determined as of the date of grant of the option and will be equal to
the closing price of the Common Stock as of the date of the grant of the option.
Options may not be exercised for one year from the date of grant, are generally
exercisable in installments, and are not transferable except in the case of
death.
If an optionee ceases to be an employee of the Company for any reason,
other than death or disability, the optionee may exercise an option within 30
days (or such other period of time as determined by the Administrator) after the
date of termination of employment to the extent such option was exercisable on
such date.
In the event of termination of employment due to death or disability, an
option may be exercised by the optionee or his or her legal representative, as
the case may be, at any time within one year of the date of such termination of
employment, but only to the extent that such option was exercisable at the date
of his or her termination of employment.
Number of Shares Subject to the Plan. Prior to the proposed amendment, a
------------------------------------
total of 700,000 shares were reserved for issuance upon exercise of options
granted under the Plan. If the amendment is approved a total of 1,650,000 shares
will be reserved for issuance.
7
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Adjustment Upon Changes in Capitalization. In the event that a change,
------------------------------------------
such as a stock split, reverse stock split, stock dividend, reorganization,
recapitalization or reclassification is made in the Company's capitalization
which effects the Company's Common Stock, appropriate adjustment will be made in
the exercise price of outstanding options and in the number of shares available
for issuance under the Plan upon proper authorization of the Board.
Nontransferability of Options. An option is nontransferable by the
------------------------------
optionee, other than by will or the laws of dissent and distribution, and is
exercisable only by the optionee during his or her lifetime, or in the event of
death of the optionee, a person who has acquired the right to exercise the
option by bequest or inheritance or by reason of the death of the optionee.
Amendment and Termination of the Plan. The Board of Directors may amend
--------------------------------------
the Plan at any time or from time to time or may terminate the Plan without
approval of the shareholders; provided, however, that approval of the holders of
the majority of the outstanding shares of the Company's stock is required for
any amendments to the Plan which increase the number of shares which may be
optioned thereunder, or adversely affects an optionee's rights under the Plan
with respect to any option granted prior to the adoption of the amendment. In
any event, the Plan will terminate on January 8, 2005, provided that any options
then outstanding under the Plan shall remain outstanding until they expire by
their terms.
Federal Income Tax Consequences.
- --------------------------------
The federal tax consequences of options are complex and subject to change.
The following discussion is only a summary of the general rules applicable to
options. A taxpayer's particular situation may be such that some variation of
the general rules may be applicable.
Incentive Stock Options. Favorable federal income tax treatment is
------------------------
provided for stock options which qualify as "incentive stock options" under
section 422 of the Code.
The discussion in this Proxy Statement of the federal income tax
consequences associated with incentive stock options is based on the Code,
temporary and proposed regulations, and, where the Company believes it is
reasonable and appropriate, prior regulations and rulings.
Grant. There are no federal income tax consequences to the optionee by
------
reason of the grant of an incentive stock option.
Exercise. Upon exercise of an incentive stock option, the optionee does
---------
not recognize taxable income. The amount by which the fair market value of the
stock acquired at the time of exercise exceeds the option price is an item of
tax preference, subject to the alternative minimum tax (see "Alternative Minimum
Tax" below).
Disposition. A disposition includes any transfer of legal title, such as a
------------
transfer by sale, exchange or gift, but it does not include a transfer into
joint ownership with right of survivorship if the optionee remains one of the
joint owners, a pledge, a transfer by request or inheritance, an exchange of
common stock for common stock in the same corporation, an exchange of stock in a
tax-free reorganization or a transfer by an insolvent individual to a fiduciary
in a bankruptcy or similar proceeding. However, changes in the tax laws
designed to prevent the "pyramiding" or exercises of incentive stock options
provide that if an optionee exchanges stock acquired through the exercise of an
incentive stock option as payment of the exercise price of any other incentive
stock option, then such exchange will be treated as a disposition of such stock
and will be a disqualifying disposition unless the applicable holding periods of
such stock were met (see "Disqualifying Disposition" below).
8
<PAGE>
The federal income tax consequences of disposing of stock acquired through
the exercise of an incentive stock option depend on the timing of the
disposition in relation to the dates on which the option was granted and
exercised.
Qualifying Disposition. If the optionee holds stock acquired through
-----------------------
exercise of an incentive stock option for more than two years from the date on
which the option was granted and more than one year from the date on which the
shares were transferred to the optionee upon exercise of the option, any gain or
loss on a subsequent disposition of such stock will be taxed to the optionee as
a long-term capital gain or loss equal to the difference between the amount
received upon such disposition and the optionee's basis in such stock.
Disqualifying Disposition. If the optionee disposes of the stock before
--------------------------
the expiration of either holding period described above, and the transaction is
one in which any loss, if sustained, would be recognized under the Code, then,
in general, at the time of disposition the optionee will recognize taxable
ordinary income equal to the lesser of the excess, if any, of the stock's fair
market value on the date of exercise over the optionee's basis in the stock, or
the optionee's actual gain, if any, on the purchase and sale (i.e., the excess,
if any, of the amount received upon disposition over the optionee's basis in the
stock.) Under proposed regulations, somewhat different rules would apply to
officers subject to section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act").
If the amount received upon disposition exceeds the stock's fair market
value on the date of exercise, then the optionee will have capital gain to the
extent of such excess. If the optionee has incurred a loss on the purchase and
sale, then the optionee will realize no ordinary income and the loss will be a
capital loss. Such capital gain or loss will be long-term or short-term
depending on whether the stock was held for more than the applicable long-term
capital gains holding period.
If the optionee disposes of the stock before the expiration of either
holding period described above, and the transaction is one in which loss is not
recognized under the Code (for example, the sale of the stock to the optionee's
spouse), then the optionee will realize ordinary income equal to the excess, if
any, of the stock's fair market value on the date of exercise over the
optionee's basis in the stock. The optionee will have capital gain to the extent
of the excess, if any, of the amount received upon disposition over the stock's
fair market value on the day of exercise, which capital gain will be long-term
or short-term depending on whether the stock was held for more than the
applicable long-term capital gains holding period from the date of exercise. If
the amount received upon disposition is less than the stock's fair market value
on the date of exercise, the optionee will still have ordinary income equal to
the excess, if any, of the stock's fair market value on the date of exercise
over the optionee's basis in the stock; however, no loss will be recognized, and
the ultimate tax consequences to the optionee will be determined under the
section of the Code which governs such nonrecognition.
Consequences to the Company. There are no federal income tax consequences
----------------------------
to the Company by reason of the grant or exercise of an incentive stock option.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will be entitled (subject to the
requirement of reasonableness and the satisfaction of any income tax withholding
obligation) to a corresponding business expense deduction in the tax year in
which the disposition occurs. Otherwise, there are no federal income tax
consequences to the Company by reason of the disposition of stock acquired
through exercise of an incentive stock option.
Alternative Minimum Tax. The exercise of an option of disposition of stock
------------------------
acquired on such exercise may give rise to two types of tax preference items
which could potentially subject the optionee to the alternative minimum tax (or
additional alternative minimum tax if the optionee is already subject to such
tax). The difference between the exercise price of an incentive stock option
and the fair market value of the stock on exercise is an item of tax preference.
9
<PAGE>
The alternative minimum tax is imposed only if and to the extent it exceeds
the optionee's regular tax for the taxable year.
Nonstatutory Stock Options. Nonstatutory stock options granted under the
---------------------------
Plan do not qualify as "incentive stock options" and will not qualify for any
special tax benefits to the optionee. An optionee will not recognize any taxable
income at the time he or she is granted a nonstatutory option. However, upon its
exercise, the optionee will recognize ordinary income for federal tax purposes
measured by the excess of the then fair market value of the shares over the
option price. The income realized by the optionee will be subject to income tax
withholding by the Company out of the current earnings paid to the optionee. If
such earnings are insufficient to pay the tax, the optionee will be required to
make a direct payment to the Company for the tax liability.
Notwithstanding the foregoing, the holder of a nonstatutory option will not
recognize income at the time such option is exercised if sale of the shares is
received upon exercise of the option at a profit would subject him to possible
liability under section 16(b) of the Exchange Act. This section applies only to
officers, directors and 10% shareholders of the Company. In this case, the
optionee may not recognize ordinary income until the restrictions imposed by
section 16(b) of the Exchange Act with respect to such shares lapse. The amount
of ordinary income recognized will be the excess of the fair market value of the
shares at the time such restrictions lapse over the exercise price. The
optionee may avoid this deferral provision by filing an election under section
83(b) of the Internal Revenue Code within 30 days after the nonstatutory stock
option is exercised. If such an election is filed, the optionee will be taxed
at the same time and in the same manner as would a holder of a nonstatutory
stock option who is not subject to the provisions of section 16(b) of the
Exchange Act.
Upon a resale of any shares acquired pursuant to the exercise of a
nonstatutory stock option, the difference between the sale price and the
optionee's basis in the shares will be treated as a capital gain or loss and
will qualify for long-term gain or loss treatment if the shares have been held
for more than six months at the date of their disposition. The optionee's basis
for determination of gain or loss upon any subsequent disposition of shares
acquired upon the exercise of a nonstatutory stock option will be the amount
paid for such shares plus any ordinary income recognized as a result of the
exercise of such option.
In general, there will be no federal tax consequences to the Company upon
the grant or termination of a nonstatutory stock option or sale or disposition
of the shares acquired upon exercise of a nonstatutory stock option. However,
upon the exercise of a nonstatutory stock option, the Company will be entitled
to a deduction to the extent and in the year that ordinary income from the
exercise of the option is recognized by the optionee, provided the Company has
satisfied its withholding obligations under the Code.
PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected the accounting firm of Price Waterhouse
LLP to continue to serve as the Company's independent accountants for the fiscal
year ending September 27, 1998. A representative of Price Waterhouse LLP is
expected to attend the Annual Meeting and will be available to respond to
stockholders' questions or make a statement if he desires to do so.
Accounting services provided by Price Waterhouse LLP in fiscal 1997
included the examination of the Company's consolidated financial statements for
the fiscal year ended September 28, 1997 and the review of various filings with
the Securities and Exchange Commission. During fiscal 1997, the Company paid
Price Waterhouse LLP the sum of $78,000 for their services.
10
<PAGE>
OTHER INFORMATION
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of December 19, 1997, the number and
percentage of Common and Preferred Stock owned by (i) persons known by the
Company to beneficially own more than 5% of an outstanding class of voting
securities, (ii) each director and nominee for director, (iii) each executive
officer named in the Summary Compensation Table, and (iv) all directors and
executive officers as a group. The Company knows of no arrangements that will
result in a change in control subsequent to the date hereof. Except as
otherwise indicated, each person has sole investment and voting power with
respect to the shares shown, subject to community property laws, where
applicable.
Amount and Nature of Beneficial Ownership
<TABLE>
<CAPTION>
Sole Voting Shared Voting Percent
Title of or Investment or Investment Aggregate of
Name Class Power Power(1) Amount Class(2)
- ---- --------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
James Alexiou Common 909,402(3) 2,449,900(4) 3,359,302 14.70%
3001 Redhill Ave., Bldg III Preferred - 13,759 13,759 100.00%
Costa Mesa, California
James D. Evert Common 29,722 - 29,722 (7)
3001 Redhill Ave., Bldg III
Costa Mesa, California
John C. Carson(5) Common 644,089(3) 2,449,900(4) 3,093,989 13.54%
3001 Redhill Ave., Bldg III Preferred - 13,759 13,759 100.00%
Costa Mesa, California
Joanne S. Carson(5) Common 316,210 - 316,210 1.47%
Marc Dumont Common 49,666(6) - 49,666 (7)
Walter Garrigan Common - - -
Frank P. Ragano Common 45,368(8) - 45,368 (7)
Vincent F. Sollitto, Jr. Common - - -
John J. Stuart, Jr. Common 278,839 2,449,900(4) 2,728,739 12.28%
3001 Redhill Ave., Bldg III Preferred - 13,759 13,759 100.00%
Costa Mesa, California
All directors and
executive officers Common 1,659,496(3)(6) 2,449,900 (4) 4,109,396 17.97%
as a group (10 persons) Preferred - 14,011 14,011 100.00%
</TABLE>
___________
(1) Such shares of Common and Series B and Series C Preferred Stock are held by
the Company's Stock Bonus Plan; the named individual shares the power to
vote and dispose of such shares.
(2) Percentages have been calculated based upon the number of outstanding
shares on December 19, 1997 plus Common Stock deemed outstanding at such
date pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act of
1934.
(3) Includes 613,800 shares issuable to R & D Leasing Ltd. ("RDL") upon
exercise of common stock warrants, all of which are currently exercisable,
as to which the named individual, a general partner of RDL, may be deemed
to be the beneficial owner.
11
<PAGE>
(4) Includes 1,761,950 shares of Common Stock and 687,950 shares issuable upon
conversion of Series B and Series C Preferred Stock, all of which are held
by the Company's Stock Bonus Plan, by virtue of the named individual's
shared power to vote and dispose of such shares.
(5) The amounts and percentages for each of John C. Carson and Joanne S.
Carson, who are husband and wife, exclude amounts held by the other spouse
as separate property.
(6) Includes 16,666 shares issuable upon exercise of currently exercisable
common stock options.
(7) Less than 1%.
(8) Includes 3,333 shares issuable upon exercise of currently exercisable
common stock options.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a class of the Company's equity
securities registered under the Exchange Act, to file with the Commission
reports of ownership and changes in ownership of Common Stock and other equity
securities of the Company. Executive officers, directors and greater than ten
percent stockholders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on
review of this information, including written representations that no other
reports were required, the Company believes that during the fiscal year ended
September 28, 1997, each of the Company's executive officers, directors and
holders of ten percent or more of the Company's Common Stock timely filed all
reports required to be filed pursuant to Section 16(a) of the Exchange Act.
EXECUTIVE COMPENSATION
Compensation of Executive Officers
For fiscal years ended September 28, 1997, September 29, 1996, and October
1, 1995, the compensation awarded or paid to, or earned by each of the Chief
Executive Officers who held that position during fiscal 1997, and each of the
two other executive officers of the Company whose annual salary and bonus
exceeded $100,000 in fiscal 1997 (the "Named Executive Officers"), is shown in
the following table:
12
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
------------------------------ -------------------------------
Other
Name Annual Restricted
and Compen- Stock Options/ LTIP All Other
Principal Fiscal sation Awards SARs Payouts Compensa-
Position(s) Year Salary($) Bonus($) ($)(1) ($) (#) ($) tion($)(2)
- ----------- ------ --------- -------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Alexiou(3) 1997 73,991 - - - 110,000 - 112,766
Chairman of the Board 1996 135,553 - 1,309 - - - -
1995 149,968 - 13,152 - - - 16,823
James D. Evert(4) 1997 92,288 47,500 - 7,500 300,000 - 8,770
President and Chief 1996 - - - - - - -
Executive Officer 1995 - - - - - - -
John C. Carson 1997 146,500 - 3,865 - 100,000 - 14,255
Senior Vice President 1996 146,500 - 1,080 - - - 18,033
1995 130,000 - 11,686 - - - 14,656
John J. Stuart, Jr. 1997 120,000 - 5,091 - 100,000 - 11,888
Vice President and 1996 120,000 - 1,044 - - - 16,050
Chief Financial Officer 1995 110,032 10,000 4,415 - - - 12,352
</TABLE>
___________
(1) As permitted by the rules promulgated by the SEC, no amounts are shown for
"perquisites," where such amounts for the Named Executive Officers do not
exceed the lesser of 10% of the sum of such executive bonus salary or
$50,000.
(2) Amounts in this column represent the value of shares contributed to the
named individual's account in the Employee Stock Bonus Plan. See "Employee
Stock Bonus Plan." Also includes payment of $105,734 to Mr. Alexiou from
the Company's Executive Compensation Retirement Plan.
(3) Effective October 14, 1996, Mr. Alexiou was appointed President and Chief
Executive Officer and resigned from these positions in January 1997.
(4) Effective February 3, 1997, Mr. Evert was appointed President and Chief
Executive Officer.
Employment Agreements
The Company had no employment agreements with any of its executive officers
during the fiscal year ended September 28, 1997 and has not entered into any
such agreements in the current fiscal year.
Option Grants
The following table sets forth certain information regarding grants of
stock options made during the fiscal ended September 28, 1997 to the Named
Executive Officers. No stock appreciation rights ("SARs") were granted during
fiscal 1997.
13
<PAGE>
Options Granted in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise or Option Term(3)
Options Employees in Base Price Expiration -----------------------
Name Granted(1) Fiscal Year(2) ($/Share) Date 5% ()$ 10% ($)
- ---- ---------- -------------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
James Alexiou 10,000 0.8% 1.4375 12/01/2000 2,300 4,800
James Alexiou 100,000 8.4% .98 8/17/2001 15,400 32,400
James D. Evert 300,000 25.1% 1.50 2/27/2001 70,900 149,000
John C. Carson 100,000 8.4% .98 8/17/2001 15,400 32,400
John J. Stuart, Jr. 100,000 8.4% .98 8/17/2001 15,400 32,400
</TABLE>
- -------------------
(1) Options granted become exercisable at the rate of 33% annually over a three
year period from the date of grant.
(2) Based on an aggregate of 1,196,000 options granted under the Company's
option plans in the fiscal year ended September 28, 1997.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and are not intended to forecast possible future
appreciation, if any, in the price of the Common Stock. The gains shown are
net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise of the options or the sale
of the underlying shares. The actual gains, if any, on the stock option
exercises will depend on the future performance of the Common Stock, the
optionholder's continued employment through the option vesting period and
the date on which the options are exercised.
Option Exercises In Last Fiscal Year And Fiscal Year-End Values
The following table contains information relating to the exercise of stock
options granted under the 1991 and 1995 Stock Option Plans by the Named
Executive Officers in fiscal 1997, as well as the number and value of their
unexercised options as of September 28, 1997.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Shares Value Unexercised Options In-the-Money Options
Acquired on Realized at Fiscal Year End(#)(2) at Fiscal Year End($)(3)
Exercise(#) ($)(1) --------------------------- --------------------------
----------- -------- Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Name
- ----
James Alexiou - - - 110,000 - 30,000
James D. Evert - - - 300,000 - -
John C. Carson - - 100,000 - 30,000
John J. Stuart, Jr. - - - 100,000 - 30,000
</TABLE>
- --------------------
14
<PAGE>
(1) Represents the fair market value of the Company's Common Stock on the date
of exercise (based on the closing sales price reported on the Nasdaq
SmallCap Market or the actual sales price if the shares were sold by the
optionee), less the exercise price, and does not necessarily indicate that
the shares were sold by the optionee.
(2) Includes both in-the-money and out-of-the money options.
(3) Fair market value of the Company's Common Stock on the last trading day of
fiscal 1997 ($1.28 per share), less the applicable exercise prices,
multiplied by the number of options.
Employee Stock Bonus Plan
All of the Company's employees are eligible to participate in the Employee
Stock Bonus Plan, which has been established by the Company in lieu of a
retirement plan. Employees are enrolled in the plan as of the day following the
date on which the employee completes at least one hour of work. In order to
share in the Company's contribution to the Plan in any Plan year, an employee
must have worked a minimum of 1,000 hours during the Plan year, and be employed
by the Company at the end of the Plan year. To date, the Plan has been funded
only with previously unissued shares of the Company's Common and Preferred
stock; thus the Company has not incurred any cash expense in connection
therewith. The Plan's assets are allocated annually to the participating
employees' accounts in the respective ratios that each participating employee's
compensation bears to the total compensation of participating employees. An
employee's participation in the Plan terminates on his retirement, disability or
death, at which time the employee will receive that portion of his account which
has vested. Generally, an employee's account vests at a rate of 20% per year
after completing three years of employment and is 100% vested after seven years
of employment. All executive officers named in the Summary Compensation Table
participate in the Company's Employee Stock Bonus Plan. In the fiscal years
ended September 28, 1997, September 29, 1996 and October 1, 1995, the Company
contributed 347,600, 172,900 and 68,000 shares of Common Stock, respectively, to
the Plan, valued at $445,500, $687,400 and $472,300, respectively, as of the
date of contribution.
The value of contributions to the accounts of the Named Executive Officers
for the fiscal year ended September 28, 1997 has been included in "All Other
Compensation" in the table.
The Company maintains an Executive Compensation Retirement Plan wherein
certain executives may receive compensation based on a combination of age,
length of service and a percentage of average salary during the 36 months
preceding their retirement date. Mr. Alexiou was eligible to receive such
compensation in fiscal 1997.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended September 28, 1997, Messrs. Alexiou, Dumont
and Ragano served as members of the Compensation Committee. Except for Mr.
Alexiou, during fiscal 1997, all of the members of the Compensation Committee
were non-employee directors. Mr. Alexiou did not participate in any decisions
regarding his own compensation. None of the Company's executive officers has,
during fiscal 1997, served on the Board of Directors or the compensation
committee of any other entity, any of whose officers served either on the Board
of Directors or the Compensation Committee of the Company.
15
<PAGE>
Compensation Committee Report/1/
The Company's executive compensation philosophy is to attract and retain
executive officers capable of leading the Company to fulfillment of its business
objectives by offering competitive compensation opportunities that in large part
reward individual contributions as well as including a component that recognizes
overall corporate performance. In addition, long-term equity compensation is
awarded to align the interests of management and stockholders. The Company
provides executive officers (and key employees) of the Company with a
substantial economic interest in the long-term appreciation of the Company's
stock through the grant of stock options and participation in the Employee Stock
Bonus Plan, subject to vesting restrictions.
To further these objectives, the compensation program for executive officers
generally consists of four components: (i) base cash salaries, (ii) annual cash
bonus plans (iii) stock options, and (iv) employee retirement plan. Total
compensation paid by the Company to its executive officers is designed to be
competitive with the compensation packages paid to the management of comparable
companies in the electronic manufacturing industry. The Committee generally
evaluates corporate and individual performance based on factors such as
achieving profitability, increasing stockholders' value and continued growth.
As a result, a significant component of the evaluation involves a subjective
assessment of qualitative factors. Moreover, the Committee does not base its
considerations on any single performance factor, nor does it specifically assign
relative weight to factors, but rather considers a mix of factors and evaluates
the Company and individual performance against that mix.
Base Salaries
The Committee approves salary changes for executive officers in accordance
with the salary administrative policy. Salary adjustments are generally made
following the end of the fiscal year. The salary administrative policy is a
long-standing one that is periodically reviewed by the Committee. The policy
reflects both performance objectives and accomplishments and competitive salary
data of other Companies. Adjustments to base salaries are recommended on the
basis of these factors.
Cash Bonuses
Cash bonuses are awarded based on the achievement of corporate and
individual goals recommended by the Chief Executive Officer and approved by the
Compensation Committee and Board of Directors, as well as the financial
condition and prospects for the Company. Under the bonus plan applicable to
executive officers, award levels range from zero to 50% of base salaries. For
the fiscal 1997 year, which ended September 28, 1997, a bonus of $40,000 was
awarded to Mr. Evert. See "- Chief Executive Officer Compensation." No other
bonuses were awarded to other executive officers.
Stock Options
Long-term equity incentives are granted to executive officers and other
selected employees from time to time on a discretionary basis. Options are
typically granted with an exercise price equal to the Common Stock's market
value on the date of grant, and generally become incrementally exercisable after
one year of continued employment following the grant date and expire three years
thereafter. Options are
- --------------------
/1/ This Report is not "soliciting material," is not deemed "filed" with the SEC
and is not to be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or the Exchange Act, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
16
<PAGE>
granted based upon recommendations of management as to the grantees, number of
options that should be granted and other terms. Options are granted to key
employees, including the executive officers, based on current performance,
anticipated future contribution based on that performance and ability to impact
corporate and/or business results. During fiscal 1997, options to purchase
635,000 shares of common stock were granted to executive officers.
Employee Retirement Plan
The Company maintains an employee retirement plan which provides for annual
contributions to the Company's Stock Bonus Trust on behalf of the employees,
including executives. At the discretion of the Compensation Committee,
contributions not to exceed 15% of total payroll are made in the Company's
Common Stock at market value. Individual employees gain a vested interest over
a seven year period of service.
Chief Executive Officer Compensation
The Company's policy is to compensate its officers, including the Chief
Executive Officer, with salary commensurate with the base compensation paid by
competitive employers, supplemented by compensation in recognition of
performance. Mr. Alexiou was named Chief Executive Officer effective October
14, 1996, and the Committee set Mr. Alexiou's base salary at $149,968, which was
the same base salary paid to Mr. Alexiou when he had previously served as the
Company's Chief Executive Officer. Mr. Alexiou retired from this position in
January 1997, and Mr. James D. Evert was hired as President, Chief Executive
Officer and a member of the Board of Directors. Mr. Evert's compensation
package included a base salary of $149,968, options to purchase 300,000 shares
of the Company's common stock at $1.50 per share and an employment bonus of
$7,500 cash and $7,500 in shares of the Company's common stock. Mr. Evert is
also eligible to receive a supplemental package allowing for the possibility of
bonuses up to 50% of salary based on financial, operational and strategic
objectives for the Company. The Committee based this compensation package on an
assessment of various factors related to the Company and specifically to Mr.
Evert. As in previous years, in making its compensation decisions, the
Committee also took into consideration executive compensation information from
other companies in the industry, including industry surveys, publicly available
information and reports from compensation consulting firms.
Section 162(m) of the Internal Revenue Code (the "Code") limits the Company to
a deduction for federal income tax purposes of no more than $1,000,000 of
compensation paid to certain Named Executive Officers in a taxable year.
Compensation above $1,000,000 may be deducted if it is "performance-based
compensation" within the meaning of the Code. The statute containing this law
and the applicable proposed Treasury regulations offer a number of transitional
exceptions to this deduction limit for pre-existing compensation plans,
arrangements and binding contracts. As a result, the Compensation Committee
believes that at the present time it is quite unlikely that the compensation
paid to any Named Executive Officer in a taxable year which is subject to the
deduction limit will exceed $1,000,000. Therefore, the Compensation Committee
has not yet established a policy for determining which forms of incentive
compensation awarded to its Named Executive Officers shall be designed to
qualify as "performance-based compensation." The Compensation Committee intends
to continue to evaluate the effects of the statute and any final Treasury
regulations and to comply with Code Section 162(m) in the future to the extent
consistent with the best interests of the Company.
Compensation Committee of the Board of Directors
James Alexiou
Marc Dumont
General Frank Ragano
17
<PAGE>
Stock Performance Graph
The following graph compares the cumulative stockholder returns on the
Company's Common Stock, Nasdaq and the Electronic Equipment Manufacturers Group
Index. The graph covers the five-year period from September 27, 1992 through
September 28, 1997, the end of the Company's last completed fiscal year, and
assumes a $100 investment was made on September 27, 1992. Each of the three
measures of cumulative total return assumes reinvestment of dividends. The
stock performance shown on the graph below is not necessarily indicative of
future performance.
[Graph]
Assumes $100 invested on September 27, 1992 in Irvine Sensors Corporation Common
Stock, Nasdaq index and Electronic Equipment Manufacturers Group. Total return
assumes reinvestment of dividends.
<TABLE>
<CAPTION>
9/27/92 10/3/93 10/2/94 10/1/95 9/29/96 9/28/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Irvine Sensors Corp $ 100 $ 155 $ 187 235 $ 65 $ 32
Nasdaq $ 100 $ 130 $ 138 $ 167 $ 195 $ 265
Peer Group(1) $ 100 $ 183 $ 187 $ 316 $ 299 $ 494
</TABLE>
(1) The Peer Group Index is based on the Electronic Equipment
Manufacturers Group.
18
<PAGE>
Certain Transactions
In April 1980, the Company entered into an agreement with R & D Leasing
Ltd., ("RDL"), a limited partnership in which James Alexiou, the Company's
Chairman of the Board and John C. Carson, a Senior Vice President, are general
partners with beneficial interests, to design an electronic circuit, to develop
certain fabrication processes and to build equipment for testing electronic
integrated circuits. In connection with the development of the electronic test
equipment under the RDL agreement, certain other proprietary fabrication
processes were developed to which RDL retained ownership. Upon the occurrence
of certain specified events, such as the use of patented fabrication processes
in connection with contracts, the agreement with RDL provides that the Company
will pay RDL a royalty fee of 3.5% of revenues from sales of the basic devices
using the processes created during the development of this equipment.
In October 1989, the Board of Directors approved an amendment to the RDL
agreement. Under the amendment the Company will pay RDL a royalty of 3.5% of
all sales of the basic devices sold by the Company. In addition, RDL is
entitled to receive an amount equal to 7% of all royalties earned by the Company
from sales by the Company's sublicensees. The Company's exclusive rights to the
technology extend to all uses, both government and commercial. RDL agreed to
defer its royalty claims and subordinate them with respect to all other
creditors in exchange for options to purchase up to 1,000,000 shares of the
Company's Common Stock, which are exercisable by applying the deferred royalties
to the purchase. The initial 500,000 options vested immediately at the time of
the initial five year deferral period in October 1989. In October 1994, the
remaining 500,000 options vested upon RDL's extended deferral. The 1,000,000
options are exercisable at $1.00 until October 1999. If RDL exercises its
option in whole or in part, title to RDL's technology will transfer to the
Company and all further royalty obligations will cease. If the option expires
unexercised, the subordination provisions will terminate and the accrued
royalties will be due and payable in the same manner as any other corporate
obligation.
As of September 28, 1997, the Company had accrued $613,800 in deferred
royalties. During fiscal year 1997, no royalties were paid by the Company. The
Company believes that the terms of the foregoing transactions were no less
favorable to the Company than would have been obtained from a nonaffiliated
third party for similar services.
19
<PAGE>
OTHER MATTERS
The Company currently knows of no other matters to be submitted at the
Annual Meeting other than those described herein. If any other matters properly
come before the Annual Meeting, it is the intention of the persons named in the
enclosed Proxy card to vote the shares they represent in accordance with their
respective best judgments.
By Order of The Board of Directors
/s/ Joanne S. Carson
Joanne S. Carson
Secretary
Costa Mesa, California
January 23, 1998
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1997 is available without charge upon written request to
Investor Relations, Irvine Sensors Corporation, 3001 Redhill Avenue, Building
III, Costa Mesa, California 92626. The Company's Annual Report on Form 10-K,
as well as certain other reports, proxy statements and other information
regarding the Company, is available on the Securities and Exchange Commission's
Web site (http://www.sec.gov)
20
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4. ADDITIONALLY, THE COMPANY
IS GRANTED DISCRETIONARY AUTHORITY TO CUMULATE VOTES.
1. Election of Directors: James Alexiou, Marc Dumont, John C. Carson, James D.
Evert, Joanne S. Carson, Frank P. Ragano, Walter Garrigan, Vincent F. Sollitto,
Jr.
FOR WITHHELD FOR ALL
[_] [_]
WITHHELD FOR: (Write that nominee's name in the space provided below).
_______________________________________________________________________________
2. To approve an Amendment to the Company's 1995 Stock Option Plan increasing
the number of shares optionable to 1,650,000.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. To approve an Amendment to the 1995 Stock Option Plan to give the board
discretion to extend the option period following termination for causes other
than death or disability, for non-statutory options.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. To ratify the appointment of Price Waterhouse as the Company's independent
accountants.
FOR AGAINST ABSTAIN
[_] [_] [_]
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
FOR AGAINST ABSTAIN
[_] [_] [_]
ANY ONE OF SUCH ATTORNEYS-IN-FACT OR SUBSTITUTES AS SHALL BE PRESENT AND SHALL
ACT AT SAID MEETING OR ANY ADJOURNMENT(S) THEREOF SHALL HAVE AND MAY EXERCISE
ALL POWERS OF SAID ATTORNEYS-IN-FACT HEREUNDER.
I PLAN TO ATTEND MEETING [_]
COMMENTS/ADDRESS CHANGE
PLEASE MARK THIS BOX IF YOU HAVE
WRITTEN COMMENTS/ADDRESS CHANGE ON
THE REVERSE SIDE [_]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
SIGNATURE(S)___________________________________________ DATED______________
NOTE: Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
FOLD AND DETACH HERE
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
IRVINE SENSORS CORPORATION
ANNUAL MEETING OF STOCKHOLDERS-FEBRUARY 28, 1997
The undersigned stockholder of Irvine Sensors Corporation, a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement each dated January 23, 1998 and Annual Report
to Stockholders for the fiscal year ended September 28, 1997, and hereby
appoints James Alexiou and John C. Carson, and each 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 Annual Meeting of
Stockholders of Irvine Sensors Corporation (the "Company") to be held on
February 27, 1998 at 2:00 p.m., California time, at The Center Club, 650 Town
Center Drive, Costa Mesa, California, and at any adjournment or adjournments
thereof, and to vote all shares of Common and Preferred Stock to which the
undersigned would be entitled, if then and there personally present, on the
matters set forth:
- -------------------------------------------------------------------------
COMMENTS/ADDRESS CHANGE: PLEASE MARK COMMENT/ADDRESS BOX ON REVERSE SIDE
(Continued and to be signed on other side)
+ FOLD AND DETACH HERE +
