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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 Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
IRVINE SENSORS CORPORATION
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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IRVINE SENSORS CORPORATION
3001 Redhill Avenue, Building III
Costa Mesa, California 92626
January 25, 1999
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 26, 1999, at 2:00 p.m., California time.
The Annual Report for fiscal 1998 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 26, 1999
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 26, 1999 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 the adoption of the Company's 1999 Stock Option Plan.
3. To ratify the appointment of Grant Thornton LLP as independent
accountants of the Company for the fiscal year ending September 26,
1999.
4. 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 28, 1998
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 25, 1999
<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 26, 1999 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 25, 1999, together with the Company's 1998 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 28, 1998 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 28,457,763 shares of Common Stock outstanding,
6,966 shares of Series B Preferred Stock outstanding, 3,964 shares of Series C
Preferred Stock outstanding and 4,400 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 546,500 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 2000 must be
received by the Company no later than September 27, 1999, 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 26, 1999.
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 seeking 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, all 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
26, 1999 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) 66 Chairman of the Board
James D. Evert 56 President, Chief Executive Officer and a
Director
John C. Carson 60 Senior Vice President, Chief Technical
Officer and a Director
Joanne S. Carson 60 Director and Secretary
Marc Dumont(1) 55 Director
Walter Garrigan(2) 72 Director
Frank P. Ragano(1) 70 Director
Vincent F. Sollitto, Jr.(2) 50 Director
</TABLE>
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(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.
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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. 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. Mrs. Carson holds a degree in Business
from the Chandler School for Woman.
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 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. 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.
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 1998, directors who were not employees of the Company
received $1,600 for each board meeting attended and were reimbursed for
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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 four meetings during the fiscal year
ended September 27, 1998 and took 10 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 27, 1998.
The Audit Committee of the Board of Directors met once during the fiscal year
ended September 27, 1998. 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
1998, 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 four times during the
fiscal year ended September 27, 1998. 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 59, 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 position of Treasurer in February 1995. Effective October 1998,
Mr. Stuart re-assumed the position of Treasurer in addition to his other
responsibilities. 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 has also been Chief
Financial Officer of Imagek since its organization in August 1998. Mr. Stuart
holds a B.S. in Industrial Management from the Massachusetts Institute of
Technology.
Mr. Floyd Eide, age 62, 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
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PROPOSAL NO. 2
1999 IRVINE SENSORS CORPORATION
STOCK OPTION PLAN
In 1991, the Company adopted the 1991 Stock Option Plan (the "1991 Plan")
under the terms of which options to purchase up to 675,000 shares of Common
Stock may be granted. As of September 27, 1998, an aggregate of 322,400 shares
of Common Stock have been purchased through exercise of options granted under
the 1991 Plan and 259,800 options pursuant to the 1991 Plan remain outstanding.
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan") under
the terms of which options to purchase up to 700,000 shares were originally
authorized. In February 1998 a vote of shareholders authorized an increase of
the shares issuable pursuant to the 1995 Plan to an aggregate of 1,650,000
shares. As of September 27, 1998, 8,300 shares of Common Stock have been
purchased through exercise of options under the 1995 Plan and options to
purchase 1,641,000 shares are outstanding pursuant to the 1995 Plan. It has been
determined by the Board that the nominal number of shares available for grant
pursuant to the 1991 Plan and the 1995 Plan do not provide adequate flexibility
for the Company to continue to attract, motivate and retain key employees deemed
essential to its business plan. Accordingly, the Board has authorized the
creation of a 1999 Stock Option Plan (the "1999 Plan" or the "Plan") permitting
the grant of up to 1,000,000 incentive or non-statutory stock options in the
discretion of the Plan Administrator.
The Company intends to register the 1999 Plan on Form S-8 under the
Securities Act of 1933 as soon as practicable after receiving shareholder
approval.
Summary of the 1999 Stock Option Plan
The text of the 1999 Plan is set forth in Exhibit A to this Proxy
Statement. The following is intended to be a summary of the 1999 Plan's
principal terms and does not purport to be a complete statement of the plan's
terms. It is subject to and qualified in its entirety by reference to Exhibit
A.
General. The 1999 Plan provides for the grant of up to 1,000,000
-------
incentive stock options and nonstatutory stock options as approved by the Board
of Directors or a committee thereof (the "Committee") Incentive stock options
granted under the 1999 Plan are intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Nonstatutory stock options granted under the 1999 Plan
are intended not to qualify as incentive stock options under the Code. See
"Federal Income Tax Consequences" for a discussion of the tax treatment of
incentive and nonstatutory stock options.
Purpose. The purpose of the 1999 Plan is to attract and retain the best
-------
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.
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Eligibility. The Board (or the Committee, if so authorized by the Board)
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may, in its discretion, grant one or more Incentive Stock Options under the Plan
to any employee of the Company or its Affiliated Companies, including any
employee who is a Director of the Company or of any of its Affiliated Companies
presently existing or hereafter organized or acquired. Such Incentive Stock
Options may be granted to one or more such employees without being granted to
other eligible employees, as the Board (or Committee) may deem fit.
No incentive option may be granted under the 1999 Plan to any person who,
at the time of the grant, owns (or is deemed to own) stock processing more than
10% of the total combined voting power of the company, unless the option
exercise price is at least 110% of the fair market value of the stock subject to
the option on the date of the grant, and the term of the option does not exceed
ten years from the date of grant. For incentive stock options granted under the
1999 Plan, the aggregate fair market value, determined at the time of grant, of
the shares of Common Stock with respect to which such options are exercisable
for the first time by an Optionee during any calendar year, may not exceed
$100,000.
The Board (or the Committee, if so authorized by the Board), may, in its
discretion, grant one or more Nonstatutory Stock Options under the Plan to any
employee, including officers or directors of the Company or any Affiliated
Company, any director of the Company or any Affiliated Company, or any
consultants or advisors of the Company or any Affiliated Company presently
existing or hereafter organized or acquired. Such Nonstatutory Stock Options may
be granted to one or more such persons without being granted to other eligible
persons, as the Board may deem fit.
Administration. The 1999 Plan shall be administered by the Board of
--------------
Directors of the Company. The Board shall have sole authority, in its absolute
discretion, to determine which of the eligible persons of the Company and its
Affiliated Companies shall receive Options, and, subject to the express
provisions and restrictions of the 1999 Plan, shall have sole authority, in its
absolute discretion, to determine the time when Options shall be granted, the
terms and conditions of an Option other than those terms and conditions fixed
under this Plan, the number of shares that may be issued upon exercise of an
Option and the means of payment for such shares, and shall have authority to do
everything necessary or appropriate to administer the 1999 Plan. The Board of
Directors is authorized to delegate the administration of the 1999 Plan to a
committee. The Board or the committee, as the case may be, is referred to as the
"Administrator".
Number of Shares Subject to the 1999 Plan. The maximum aggregate number of
-----------------------------------------
shares that may be optioned and sold under the 1999 Plan is 1,000,000 shares of
authorized Common Stock of the Company. This constitutes an absolute cumulative
limitation on the total number of shares that may be optioned under the Plan.
All shares to be optioned and sold under the 1999 Plan may be either authorized
but unissued shares or shares held in the treasury.
Option Price. The Option Price for Incentive Stock Option shares of Common
-------------
Stock to be issued under the 1999 Plan shall be not less than 100% of the fair
market value of such shares on the date on which the Option covering such shares
is granted by the Board, except that if on the date on which such Incentive
Stock Option is granted the Optionee is a Restricted Stockholder, then such
Option Price shall be not less than 110% of the fair market value of the shares
of Common Stock subject to the Option on the date such Option is granted by the
Board . The fair market value of shares of Common Stock for all purposes of the
Plan is to be determined by the Board in its sole discretion, exercised in good
faith.
The Option Price for Nonstatutory Stock Option shares of Common Stock
to be issued under the 1999 Plan shall be determined by the Board and shall not
be less than 100% of the fair market value of such shares on the date on which
the Option covering such shares is granted by the Board . The fair market value
of shares of Common Stock for all purposes of the 1999 Plan is to be determined
by the Board in its sole discretion, exercised in good faith.
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Term of Plan. The 1999 Plan shall become effective upon February 26, 1999,
------------
and shall continue in effect until February 26, 2009, unless terminated earlier
by action of the Board. No Option hereunder may be granted after February 26,
2009.
Exercise of Option. Options under the 1999 Plan terminate within such
-------------------
period determined by the Administrator up to 30 days after the grantee ceases to
be employed by the Company, 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, unless (i) the termination of employment
is due to such person's permanent and total disability (as defined by the Code),
in which case the option may be exercised at any time within 12 months of that
termination; (ii) the optionee dies while employed by the Company, in which case
the option may be exercised within such period determined by the Administrator
between six and 12 months of the optionee's death by the person or persons to
whom the rights to such option passed by will or by the laws of descent and
distribution.
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 1999 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 1999 Plan at any time or from time to time or may terminate the 1999 Plan
without approval of the stockholders; 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 1999 Plan which increase the number of shares
which may be optioned thereunder, or adversely affects an optionee's rights
under the 1999 Plan with respect to any option granted prior to the adoption of
the amendment. In any event, the 1999 Plan will terminate on February 26, 2009,
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.
8
<PAGE>
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).
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.) Somewhat different rules apply to persons 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
9
<PAGE>
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.
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
---------------------------
1999 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% stockholders 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
10
<PAGE>
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.
Required Vote
The affirmative vote of the holders of a majority of the voting shares
represented and voting at the Annual Meeting is required to approve the 1999
Stock Option Plan. Unless marked to the contrary, proxies received will be voted
FOR the Company's 1999 Stock Option Plan.
The Board of Directors of the Company recommends a vote FOR the approval of
the Company's 1999 Stock Option Plan.
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected the accounting firm of Grant Thornton
LLP to serve as the Company's independent accountants for the fiscal year ending
September 26, 1999. A representative of Grant Thornton 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 Grant Thornton LLP in fiscal 1998 included
the examination of the Company's consolidated financial statements for the
fiscal year ended September 27, 1998 and the review of various filings with the
Securities and Exchange Commission.
Required Vote
The affirmative vote of the holders of a majority of the voting shares
represented and voting at the Annual Meeting is required to approve the
ratification of appointment of Grant Thornton LLP as the Company's independent
accountants for the fiscal year ending September 26, 1999. Unless marked to the
contrary, proxies received will be voted FOR the ratification of appointment of
Grant Thornton LLP.
The Board of Directors of the Company recommends a vote FOR the
ratification of appointment of Grant Thornton LLP as the Company's independent
accountants for the fiscal year ending September 26, 1999.
11
<PAGE>
OTHER INFORMATION
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of December 28, 1998, 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 1,153,636(3) 2,263,700(4) 3,417,335 11.44%
3001 Redhill Ave., Bldg. III Preferred - 10,930 10,930 100.00%
Costa Mesa, California
James D. Evert Common 127,563 - 127,563 (7)
3001 Redhill Ave., Bldg. III
Costa Mesa, California
John C. Carson (5) Common 859,822(3) 2,263,700(4) 3,123,522 10.46%
3001 Redhill Ave., Bldg. III Preferred - 10,930 10,930 100.00%
Costa Mesa, California
Joanne S. Carson (5) Common 274,543 - 274,543 (7)
Marc Dumont Common 54,665(6) - 54,665 (7)
Walter Garrigan Common - - -
Frank P. Ragano Common 53,701(8) - 53,701 (7)
Vincent F. Sollitto, Jr. Common - - -
John J. Stuart, Jr. Common 296,833 2,263,700(4) 2,560,533 8.82%
3001 Redhill Ave., Bldg. III Preferred - 10,930 10,930 100.00%
Costa Mesa, California
All directors and
executive officers Common 2,077,895(3)(6)(8) 2,263,700(4) 4,341,595 17.97%
as a group (10 persons) Preferred - 10,930 10,930 100.00%
</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 28, 1998 plus Common Stock deemed outstanding at such
date pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act of
1934.
(3) Includes 826,200 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.
12
<PAGE>
(4) Includes 1,717,200 shares of Common Stock and 546,500 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 21,665 shares issuable upon exercise of currently exercisable
common stock options.
(7) Less than 1%.
(8) Includes 11,666 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 27, 1998, 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.
13
<PAGE>
EXECUTIVE COMPENSATION
Compensation of Executive Officers
For fiscal years ended September 27, 1998, September 28, 1997, and
September 29, 1996, the compensation awarded or paid to, or earned by the
Company's Chief Executive Officer, and each of the three other executive
officers of the Company whose annual salary and bonus exceeded $100,000 in
fiscal 1998 (the "Named Executive Officers"), is shown in the following table:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------
Annual Compensation Awards Payouts
------------------------------ --------------------- -------
Other
Annual Restricted
Name and Compen- Stock Options/ LTIP All Other
Principal Fiscal sation Awards SARs Payouts Compensa-
Position(s) Year Salary($) Bonus($) ($)(1) ($) (#) ($) tion($)(2)
- ----------- ------ --------- -------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James D. Evert 1998 200,000 77,700 1,392 - 200,000 - 15,974
President and Chief 1997 92,288 47,500 - 7,500 300,000 - 8,770
Executive Officer 1996 - - - - - -
John C. Carson 1998 146,500 8,240 3,229 - 50,000 - 25,124
Senior Vice President 1997 146,500 - 3,865 - 100,000 - 14,255
1996 146,500 - 1,080 - - - 18,033
John J. Stuart, Jr. 1998 120,000 10,360 7,552 - 50,000 - 12,660
Vice President, Treasurer 1997 120,000 - 5,091 - 100,000 - 11,888
Chief Financial Officer 1996 120,000 - 1,044 - - - 16,050
Floyd L. Eide 1998 120,000 7,500 - - - - 15,971
Vice President 1997 13,848 - - - 100,000 - 945
</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
$50,000.
(2) Amounts in this column represent the value of shares contributed to the
named individual's account in the Employee Stock Bonus Plan. See "Employee
Stock Bonus Plan."
Employment Agreements
The Company had no employment agreements with any of its executive officers
during the fiscal year ended September 27, 1998 and has not entered into any
such agreements in the current fiscal year.
Option Grants
The following table sets forth certain information regarding grants of
stock options made during the fiscal ended September 27, 1998 to the Named
Executive Officers. No stock appreciation rights ("SARs") were granted during
fiscal 1998.
14
<PAGE>
Options Granted During Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise or Option Term(3)
Options Employees in Base Price Expiration ----------------------
Name Granted(1) Fiscal Year(2) ($/Share) Date 5% ($) 10% ($)
- ---- ----------- -------------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
James D. Evert 200,000 28.5% 1.5937 02/26/2002 50,200 105,500
John C. Carson 50,000 7.1% 1.50 05/06/2002 11,800 24,800
John J. Stuart, Jr. 50,000 7.1% 1.50 05/06/2002 11,800 24,800
</TABLE>
_______________
(1) Options granted become exercisable at the rate of 33% annually over a
three year period after one year from the date of grant.
(2) Based on an aggregate of 701,500 options granted under the Company's option
plans in the fiscal year ended September 27, 1998.
(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 During 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 1998, as well as the number and value of their
unexercised options as of September 27, 1998.
Aggregated Option Exercises During Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Value at Fiscal Year End(#)(2) at Fiscal Year End($)(3)
Acquired on Realized --------------------------- ---------------------------
Name Exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James D. Evert - - 75,000 425,000 22,500 108,800
John C. Carson - - 33,333 116,667 27,300 69,700
John J. Stuart, Jr. - - 33,333 116,667 27,300 69,700
</TABLE>
- ----------------------------
(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 1998 ($1.80 per share), less the applicable exercise prices,
multiplied by the number of options.
15
<PAGE>
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 27, 1998, September 28, 1997 and September 29,1996, the Company
contributed 333,300, 347,600 and 172,900 shares of Common Stock, respectively,
to the Plan, valued at $500,000, $445,500 and $687,400, 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 27, 1998 has been included in "All Other
Compensation" in the Summary Compensation 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 1998.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended September 27, 1998, Messrs. Alexiou, Dumont
and Ragano served as members of the Compensation Committee. During fiscal 1998,
all of the members of the Compensation Committee were non-employee directors.
None of the Company's executive officers has, during fiscal 1998, 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.
16
<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 1998 year, which ended September 27, 1998, Mr. Evert earned a bonus
of $77,700. See "--Chief Executive Officer Compensation." Other executive
officers earned bonuses for the fiscal 1998 year as follows: Mr. John Carson
earned a bonus of $8,240, Mr. John Stuart earned a bonus of $10,360, and Mr.
Floyd Eide earned a bonus of $7,500.
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
___________________________
/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.
17
<PAGE>
are 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 1998, 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. In January 1997, Mr. James D. Evert was hired as President, Chief
Executive Officer and a member of the Board of Directors. Mr. Evert's
compensation package for fiscal 1998, included a base salary of $200,000, and
options to purchase 200,000 shares of the Company's Common Stock at $1.5937 per
share. 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. For fiscal 1998, the Committee established targets
with respect to revenue, results, cash flow and various specific product
development and bookings objectives for the measurement of Mr. Evert's
performance. In addition, a special objective was established to successfully
consummate closure of the Company's Vermont plant. Upon review of his
performance against these objectives, the Committee authorized payment of a
bonus of $77,700 for fiscal 1998, or 39 percent of his base salary. 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
18
<PAGE>
Stock Performance Graph
The following graph compares the cumulative stockholder returns on the
Company's Common Stock, Nasdaq and the Commercial Physical Research Group Index.
The graph covers the five-year period from October 3, 1993 through September 27,
1998, the end of the Company's last completed fiscal year, and assumes a $100
investment was made on October 3,1993. 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.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Irvine Sensors Corp 100.00 120.83 152.08 41.67 20.83 30.21
SIC Code Index 100.00 74.10 116.82 111.03 133.28 107.45
Nasdaq Market Index 100.00 105.82 128.48 150.00 203.88 211.88
</TABLE>
Assumes $100 invested on October 3,1993 in Irvine Sensors Corporation Common
Stock, Nasdaq index and Commercial Physical Research Group. Total return assumes
reinvestment of dividends.
<TABLE>
<CAPTION>
10/3/93 10/2/94 10/1/95 9/29/96 9/28/97 9/27/98
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Irvine Sensors Corp $ 100 $ 121 $ 152 $ 42 $ 21 $ 30
Nasdaq $ 100 $ 106 $ 128 $ 150 $ 204 $ 212
Peer Group(1) $ 100 $ 74 $ 117 $ 111 $ 133 $ 107
</TABLE>
(1) The Peer Group Index is based on the Commercial Physical Research
Group.
19
<PAGE>
Certain Transactions
In April 1980, the Company entered into an agreement with R & D Leasing
Ltd., ("RDL"), a limited partnership in which the Company's Chairman of the
Board and a Senior Vice President, are general partners with beneficial
interests, to develop certain processes and technology related to chip stacking.
The Company has exclusively licensed this technology from RDL. The Company's
exclusive rights to the technology extent to all uses, both government and
commercial. Since entering into the licensing agreement, the Company has accrued
royalty obligations to RDL at the rate of 3.5% of all company sales of chip
stacks using the licensed technology. In addition, RDL is entitled to receive an
amount equal to 7% of all royalties earned by the company from sales of those
products by the Company's sublicenses, although to date, no such sublicense
royalty income has been earned.
In October 1989, 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 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 would 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 27, 1998, the Company had accrued $826,200 in deferred
royalties pursuant to this agreement. Due to the RDL subordination, royalties
accrued, but none were paid by the company during the fiscal years 1998, 1997
and 1996.
The Company has entered into an Assignment of Patent and Intellectual
Rights (the "Assignment") with Floyd L. Eide ("Eide"), a Vice-President of the
Company. As part of this employment agreement, Eide, has assigned to the Company
all rights and interests to five U.S. Provisional Patent Applications owned by
him. In consideration for this Assignment, Eide will receive a 1% royalty on
the gross sales revenues of any products incorporating elements of the assigned
technology for the lifetime of any patents resulting from the Provisional Patent
Applications. This assignment was executed in February 1998.
The Company entered into a sale and licensing of intellectual property
rights related to the Electronic Film System(TM) ("EFS(TM)") to Advanced
Technology Products, LLC ("ATPL"), a related party which funded early
development of this technology in which the Company's Chief Technology Officer,
Mr. John Carson, serves as Managing Member. In September 1998, the Company
assigned the rights and royalty obligations of the ATPL license to Imagek, a
majority-owned subsidiary of the Company. Concurrent with this assignment, ATPL
reduced its royalty entitlements under the license in consideration for the
issuance of 1,221,875 shares of Imagek's common stock. ATPL retains a royalty
entitlement of 2% of the first $30 million of EFS sales, declining thereafter as
a function of sales volume.
Relationships with Independent Accountants
On October 1, 1998, the Company dismissed Pricewaterhousecoopers LLP as its
independent accountants effective as of the Company's fiscal year ended
September 27, 1998. The Company's Audit Committee participated in and approved
the decision to change independent accountants.
The reports of Pricewaterhousecoopers LLP on the financial statements for
fiscal years 1996 and 1997 contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle. In connection with its audits for fiscal years 1996 and 1997 and
through October 1, 1998 there were no disagreements with Pricewaterhousecoopers
LLP on any matter of accounting principle or practices, financial statement
disclosure, or auditing scope or procedure,
20
<PAGE>
which disagreements if not resolved to the satisfaction of
Pricewaterhousecoopers LLP would have caused them to make reference thereto in
their reports on the financial statements for such fiscal years. During fiscal
years 1996 and 1997 and through October 1, 1998, there was a single reportable
event (as defined in Regulation S-K Item 304(a)(1)(v). In connection with the
audit of the Company's financial statements for the fiscal year ended September
29, 1996, Pricewaterhousecoopers LLP reported to the Audit Committee of the
Board of Directors that they noted a material weakness in the Company's
procedures for valuing inventory at its Computer Products Operation located in
Vermont. The Company subsequently closed this Operation. The Company requested
that Pricewaterhousecoopers LLP furnish it with a letter addressed to the SEC
stating its agreement with the above statements, which Pricewaterhousecoopers
LLP provided, dated October 2, 1998, and which was filed as Exhibit 16 to the
Company's Form 8-K, dated October 2, 1998, which was filed to disclose the
change in independent accountants.
On October 1, 1998, the Company selected Grant Thornton LLP to act as its
independent accountants effective as of the Company's fiscal year ended
September 27, 1998. During fiscal years 1996 and 1997 and through October 1,
1998, the Company had not consulted Grant Thornton LLP regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements, or a written report provided to the Company
or advice provided that Grant Thornton LLP concluded was an important factor
considered by the Company in reaching a decision as to an accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of
a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions to Item 304 of Regulation S-K, or a reportable
event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
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 25, 1999
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended September 27, 1998 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).
21
<PAGE>
Exhibit A
1999 IRVINE SENSORS CORPORATION
STOCK OPTION PLAN
1. Name, Effective Date and Purpose
--------------------------------
(a) This Plan document is intended to implement and govern the 1999 Stock
Option Plan of Irvine Sensors Corporation, a Delaware corporation (the
"Company"). The Plan provides for the granting of options that are either (i)
intended to qualify as incentive stock options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) for the granting of options that are not intended
to so qualify ("Nonstatutory Stock Options"). Unless specified otherwise, all
the provisions of this Plan relate equally to both incentive and Nonstatutory
Stock Options.
(b) This Stock Option Plan is established effective as of February 26,
1999. The purpose of this Plan is to promote the growth and general prosperity
of the Company and its Affiliated Companies by permitting the Company, through
the grant of Incentive Stock Options and Nonstatutory Stock Options ("Options")
to purchase shares of its common stock, $0.01 par value ("Common Stock"), to
attract and retain the best available persons for positions of substantial
responsibility and to provide certain key employees, directors, consultants and
advisors with an additional incentive to contribute to the success of the
Company and its Affiliated Companies. For purposes of this Plan, the term
"Affiliated Companies" shall mean any component member of a controlled group of
corporations, as defined under Section 1563 of the Code, in which the Company is
also a component member.
2. Administration
--------------
(a) The Plan shall be administered by the Board of Directors of the Company
(the "Board").
(b) The Board shall have sole authority, in its absolute discretion, to
determine which of the eligible persons of the Company and its Affiliated
Companies shall receive Options ("Optionees"), and, subject to the express
provisions and restrictions of this Plan, shall have sole authority, in its
absolute discretion, to determine the time when Options shall be granted, the
terms and conditions of an Option other than those terms and conditions fixed
under this Plan, the number of shares that may be issued upon exercise of an
Option and the means of payment for such shares, and shall have authority to do
everything necessary or appropriate to administer the Plan, including but not
limited to (i) setting different terms and conditions for different Options and
(ii) interpreting the Plan. All decisions, determinations and interpretations of
the Board shall be final and binding on all Optionees.
22
<PAGE>
(c) The Board shall have the authority to delegate some or all of the
powers granted to it pursuant to this Section 2 to a committee (the "Committee")
appointed by the Board. The Board may from time to time remove members from, or
add members to, the Committee, and vacancies on the Committee shall be filled by
the Board. All decisions, determinations and interpretations of the Committee
shall be final and binding on all Optionees, unless otherwise determined by the
Board.
(d) The following definitions shall apply to the Plan:
(i) Restricted Stockholder. An individual who, at the time an Option
is granted under the Plan, beneficially owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or of its
Parent Corporation or Subsidiary Corporations, if any, with stock ownership to
be determined in light of the attribution rules set forth in Section 425 (d) of
the Internal Revenue Code.
(ii) Parent Corporation. A corporation as defined in Section 425(e)
of the Code.
(iii) Subsidiary Corporation. A corporation as defined in Section
425(f) of the Code.
(iv) Employment. Includes the formal employment relationships, as
well as directorships and/or consulting or other advisory relationships with the
Company or any of its Affiliated Companies; however, the term "employee," as
used in Section 3 of the Plan refers to the formal employment relationship only.
3. Eligibility
-----------
(a) The Board (or the Committee, if so authorized by the Board) may, in its
discretion, grant one or more Incentive Stock Options under the Plan to any
employee of the Company or its Affiliated Companies, including any employee who
is a Director of the Company or of any of its Affiliated Companies presently
existing or hereafter organized or acquired. Such Incentive Stock Options may be
granted to one or more such employees without being granted to other eligible
employees, as the Board (or Committee) may deem fit.
(b) The Board (or the Committee, if so authorized by the Board), may, in
its discretion, grant one or more Nonstatutory Stock Options under the Plan to
any employee, including officers or directors of the Company or any Affiliated
Company, any director of the Company or any Affiliated Company, or any
consultants or advisors of the Company or any Affiliated Company presently
existing or hereafter organized or acquired. Such Nonstatutory Stock Options may
be granted to one or more such persons without being granted to other eligible
persons, as the Board may deem fit.
4. Stock to be Optioned
--------------------
The maximum aggregate number of shares that may be optioned and sold under
the Plan is 1,000,000 shares of authorized Common Stock of the Company. This
constitutes an absolute cumulative limitation on the total number of shares that
may be optioned under the Plan. All shares
23
<PAGE>
to be optioned and sold under the Plan may be either authorized but unissued
shares or shares held in the treasury. Shares of Common Stock that (a) are
repurchased by the Company after issuance hereunder pursuant to the exercise of
an Option or (b) are not purchased by the Optionee prior to the expiration of
the applicable Option Period (as described hereinbelow) shall again become
available to be covered by Options to be issued hereunder and shall not, as of
the effective date of such repurchase or expiration, be counted as covered by an
outstanding Option for purposes of the above-described maximum number of shares
that may be optioned hereunder.
5. Option Price
------------
(a) The Option Price for Incentive Stock Option shares of Common Stock to
be issued under the Plan shall be not less than 100% of the fair market value of
such shares on the date on which the Option covering such shares is granted by
the Board (or the Committee, if so authorized by the Board), except that if on
the date on which such Incentive Stock Option is granted the Optionee is a
Restricted Stockholder, then such Option Price shall be not less than 110% of
the fair market value of the shares of Common Stock subject to the Option on
the date such Option is granted by the Board (or the Committee, if so
authorized). The fair market value of shares of Common Stock for all purposes
of the Plan is to be determined by the Board (or the Committee, if so authorized
by the Board) in its sole discretion, exercised in good faith.
(b) The Option Price for Nonstatutory Stock Option shares of Common Stock
to be issued under the Plan shall be determined by the Board (or the Committee,
if so authorized by the Board) and shall not be less than 100% of the fair
market value of such shares on the date on which the Option covering such shares
is granted by the Board (or the Committee, if so authorized by the Board). The
fair market value of shares of Common Stock for all purposes of the Plan is to
be determined by the Board (or the Committee, if so authorized by the Board) in
its sole discretion, exercised in good faith.
6. Term of Plan
------------
The Plan shall become effective upon February 26, 1999, and shall continue
in effect until February 26, 2009, unless terminated earlier by action of the
Board. No Option hereunder may be granted after February 26, 2009.
7. Exercise of Option
------------------
Subject to the restrictions, conditions and/or limitations set forth in
this Plan document and/or any applicable Stock Option Agreement entered into
hereunder, Options granted under this Plan shall be exercisable in accordance
with the following rules:
(a) Subject to the specific provisions of this Section 7, Options shall
become exercisable at such times and in such installments (which may be
cumulative) as the Board shall provide in the terms of each individual Option;
provided, however, that by a resolution adopted after an Option is granted the
Board may, on such terms and conditions as it may determine to be appropriate
and subject to the specific provisions of this Section 7, accelerate the time at
which such Option or installment thereof may be exercised. For the purposes of
this Plan, any accrued installment of an Option granted hereunder shall be
referred to as an "Accrued Installment."
24
<PAGE>
(b) Subject to the provisions of Subsections 7(c), (d) or (e) concerning
the expiration of Options under the circumstances specified therein, an Option
may be exercised when Accrued Installments accrue as provided in the terms under
which such Option was granted and at any time thereafter within a period of ten
years from the Option Grant Date of Incentive Stock Options (five years for
Restricted Stockholders), and within a period of ten years from the Option Grant
Date of Nonstatutory Stock Options, subject, however, to the further
restrictions contained in this Section 7. In no event shall any Option be
exercised on or after the tenth anniversary (fifth anniversary as to Restricted
Stockholders) of the date on which the Option is granted by the Board, or by the
Committee, if so authorized (hereafter the "Option Grant Date") of such
Incentive Stock Options, or on or after the tenth anniversary of the Option
Grant Date of such Nonstatutory Stock Options regardless of the circumstances
then existing (including but not limited to the death or termination of
employment of the Optionee). The fifth anniversary of the Option Grant Date and
the tenth anniversary of the Option Grant Date shall be hereafter designated the
"Fifth Anniversary Date" and the "Tenth Anniversary Date," respectively.
(c) Notwithstanding the foregoing provisions of this Section 7, in the
event a formal agreement is executed by the Company and other concerned parties
with respect to any of the following transactions (a "Corporate Transaction"),
outstanding Options will become fully exercisable for all of the shares at the
time subject to such Option unless the successor company or parent thereof, if
any, assumes the Options or issues substitute options as part of the Corporate
Transaction. Corporate Transactions include: (i) the direct or indirect sale or
exchange by the stockholders of the Company of all or substantially all of the
stock of the Company; (ii) a merger or consolidation in which the Company is not
the surviving corporation or in which the stockholders do not retain at least a
majority of the voting stock of the Company; (iii) the sale, exchange or other
transfer of all or substantially all of the assets of the Company (other than a
sale, exchange or transfer to one or more Affiliated Companies); or (iv) a
liquidation or dissolution of the Company. In the event of a Corporate
Transaction, the immediately fully exercisable Options shall be exercisable
until the earlier of (a) the applicable expiration date of the Option; or (b)
the date of the Corporate Transaction. Notwithstanding the foregoing, in the
event that any agreement pertaining to a Corporate Transaction shall be
terminated without consummating the Corporate Transaction, any unexercised
unaccrued installments that had become exercisable solely by reason of the
provisions of this Subsection 7(c) shall again become unaccrued and
unexercisable as of said termination of such agreement, subject, however, to
such installments accruing pursuant to the normal accrual schedule provided in
the terms under which such Option was granted. Any exercise of an installment
prior to said termination of said agreement shall remain effective
notwithstanding that such installment became exercisable solely by reason of the
Company entering into said agreement to dispose of the stock or assets of the
Company.
(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 of 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
25
<PAGE>
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.
(e) Notwithstanding the foregoing provisions of this Section 7, in the
event of the death of an Optionee while an employee, director, consultant or
advisor of the Company (or an Affiliated Company), or in the event of the
termination of employment by reason of the Optionee's permanent and total
disability, the unexercised Accrued Installments of the Option granted hereunder
to such Optionee shall expire and become unexercisable as of the earlier of (i)
the applicable expiration date of the Option, or (ii) the date determined by the
Board (or Committee) that is between six and 12 months from the date of the
Optionee's death (if applicable), or (iii) the 12 months from the date of the
termination of employment, directorship, consulting or advisory relationship by
reason of disability (if applicable). Any such Accrued Installments of a
deceased Optionee may be exercised prior to their expiration by (and only by)
the person or persons to whom the Optionee's Option rights shall pass by will or
by the laws of descent and distribution, if applicable, subject, however, to
all terms and conditions of this Plan and the applicable Stock Option Agreement
governing the exercise of Options granted hereunder. Any installments under a
deceased Optionee's Option that have not accrued as of the date of his or her
death shall expire and become unexercisable as of said date of death.
Installments continue to accrue during the post-termination period of
exercisability for Optionees who have suffered a permanent and total disability.
For purpose of this Subsection 7(e), an Optionee shall be deemed employed by the
Company (or Affiliated Company) during any period of leave or absence from
active employment as authorized by the Company (or Affiliated Company).
(f) An Option shall be deemed exercised when written notice of such
exercise has been given to the Company at it principal business office by the
person entitled to exercise the Option and full payment in cash or cash
equivalents (or other acceptable forms of payment as provided in Section 10 of
this Plan) for the shares with respect to which the Option is exercised has been
received by the Company. Until the issuance of the stock certificates, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to optioned shares notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other rights for which the record date
is prior to the date the stock certificate is issued except as provided in
Section 20.
(g) An Option may be exercised in accordance with this Section 7 as to all
or any portion of the shares covered by an Accrued Installment of the Option
from time to time during the applicable option period, but shall not be
exercisable with respect to fractions of a share.
(h) As soon as practicable after any proper exercise of an Option in
accordance with the provisions of this Plan, the Company shall, without transfer
or issue tax to the Optionee, deliver to the Optionee at the main office of the
Company, or such other place as shall be mutually acceptable, a certificate or
certificates representing the shares of Common Stock as to which the Option has
been exercised. The time of issuance and delivery of the Common Stock may be
postponed by the Company for such period as may be required for it with
reasonable diligence to comply with any applicable listing requirements of any
national or regional securities exchange and any law or regulation applicable to
the issuance and delivery of such shares.
(i) During the lifetime of an Optionee, an Option may be exercised only by
the Optionee.
26
<PAGE>
8. Authorization to Issue Options and Stockholder Approval
-------------------------------------------------------
Options granted under the Plan shall be conditioned upon the Company
obtaining any required permits from appropriate governmental agencies, free of
any conditions not acceptable to the Board, authorizing the Company to issue
such Options, provided, however, such condition shall lapse as of the effective
date of issuance of such permit(s) in a form to which the Company does not
object within 60 days. The grant of Options under the Plan also is conditioned
on approval of the Plan by the vote or written consent of the holders of a
majority of the outstanding shares of the Company's Common Stock; and no Option
granted hereunder shall be effective or exercisable unless and until the Plan
has been so approved.
9. Limit on Value of Optioned Shares
---------------------------------
With respect to Incentive Stock Options granted, the aggregate fair market
value, as determined at the time the Option is granted, of the shares of Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any single Optionee during any calendar year under this Plan and
any other plans of the Company or an Parent or Subsidiary, may not exceed
$100,000.
10. Payment of Exercise Price
-------------------------
Options may be exercised by payment of the option price (i) in cash or cash
equivalent; (ii) by tender to the Company of shares of the Company's Common
Stock owned by the Optionee having a value, as determined by the Board not less
than the exercise price, and which either have been owned by the Optionee for
more than six months or which were not acquired, directly or indirectly, from
the Company; (iii) by the assignment of the proceeds of a sale of some or all of
the shares being acquired upon exercise of the option ("Same Day Sale"), (iv) in
the case of employees of the Company or any Affiliated Company, by the
Optionee's recourse promissory note, (v) by the withholding of shares being
acquired upon exercise of the Option having a value, as determined by the Board,
not less than the exercise price; or (vi) by such other consideration and method
of payment as the Board, in its sole discretion, may allow. The Board (or
Committee, if so authorized) may restrict the forms of payment permitted in
connection with any Option grant. Any permitted promissory note shall be due and
payable not more than five years after the Option is granted, and interest shall
be payable at least annually and be at least equal to the minimum interest rate
necessary to avoid imputed interest under the Code. The Board has the authority
to permit or require the Optionee to secure any promissory note used to exercise
an Option with the shares of stock acquired on exercise of the Option and/or
with other collateral acceptable to the Company. Optionees may elect to have
shares withheld upon exercise to satisfy tax withholding obligations.
11. Stock Option Agreement
----------------------
The terms and conditions of Options granted under the Plan shall be
evidenced by a Stock Option Agreement (hereinafter referred to as the
"Agreement") executed by the Company and the person to whom the Option is
granted. Each Agreement shall contain the following provisions approved by the
Board (or the Committee):
(a) A provision fixing the number of shares which may be issued upon
exercise of the Option:
27
<PAGE>
(b) A provision establishing the Option price per share:
(c) A provision establishing the times and the installments in which
Options may be exercised;
(d) A provision incorporating therein this Plan by reference;
(e) A provision clarifying which Options are intended to be Incentive Stock
Options and which are intended to be Nonstatutory Stock Options;
(f) A provision fixing the maximum duration of an Option as not more than
ten years from the Option Grant Date, except in the case of Options granted to
Restricted Stockholders, in which instance such maximum duration shall not
exceed five years;
(g) Such representations and warranties by the Optionee as may be required
by Section 21 of this Plan or as may be required by the Board (or the Committee)
in its discretion;
(h) Any other restrictions (in addition to those established under this
Plan) as may be established by the Board (or the Committee) with respect to the
exercise of the Option, the transfer of the Option, and/or the transfer of the
shares purchased by exercise of the Option, provided that such restrictions are
not in conflict with this Plan; and
(i) Such other terms and conditions not inconsistent with this Plan as may
be established by the Board (or the Committee).
12. Taxes, Fees and Expenses
------------------------
The Company shall pay all original issue and transfer taxes (but not income
taxed, if any) with respect to the grant of Options and/or the issue and
transfer of shares pursuant to the exercise of such Options, and all other fees
and expenses necessarily incurred by the Company in connection therewith, and
will from time to time use its best efforts to comply with all laws and
regulations which, in the opinion of counsel for the Company, shall be
applicable thereto.
13. Withholding of Taxes
--------------------
The grant of Options hereunder and the issuance of Common Stock pursuant to
the exercise of such Options is conditioned upon the Company's reservation of
the right to withhold, in accordance with any applicable law, from any
compensation payable to the Optionee any taxes required to be withheld by
federal, state or local law as a result of the grant or exercise of any such
Option.
14. Amendment or Termination of the Plan
------------------------------------
(a) The Board may amend this Plan from time to time in such respects as the
Board may deem advisable, provided, however, that no such amendment shall
operate to (i) change the class of persons eligible to receive Options under the
Plan; (ii) affect adversely an Optionee's rights under this Plan with respect to
any Option granted hereunder prior to the adoption of such amendment, except as
may be necessary, in the judgment of counsel to the Company, to comply
28
<PAGE>
with any applicable law; or (iii) increase the maximum aggregate number of
shares which may be optioned and sold under the Plan, unless such increase is
approved by the stockholders of the Company in accordance with Delaware law.
(b) The Board may at any time terminate this Plan. Any such termination of
the Plan shall not, without the written consent of the Optionee, alter the
terms of Options already granted, and such Options shall remain in full force
and effect as if this Plan had not been terminated.
15. Options Not Transferable
------------------------
Options granted under this Plan may not be sold, pledged, hypothecated,
assigned, encumbered, gifted or otherwise transferred or alienated in any
manner, either voluntarily or involuntarily by operation of law, otherwise than
by will or the laws of descent or distribution, and may be exercised during the
lifetime of an Optionee only by such Optionee.
16. No restrictions on Transfer of Stock
------------------------------------
Common Stock issued pursuant to the exercise of an Option granted under
this Plan (hereinafter "Optionee Stock"), or any interest in such Optioned
Stock, may be sold, assigned, gifted, pledged, hypothecated, encumbered or
otherwise transferred or alienated in any manner by the holder(s) thereof,
subject, however, to any representations or warranties requested under Section
21 of this Plan and also subject to any restrictions imposed pursuant to Section
11(h) of this Plan and to compliance with any applicable federal, state or other
local law, regulation or rule governing the sale or transfer of stock or
securities.
17. Reservation of Shares of Common Stock
-------------------------------------
The Company, during the term of this Plan, will at all times reserve and
keep available such number of shares of its Common Stock as shall be sufficient
to satisfy the requirements of the Plan.
18. Restrictions on Issuance of Shares
----------------------------------
The Company, during the term of this Plan, will use its best efforts to
seek to obtain from the appropriate regulatory agencies any requisite
authorization in order to issue and sell such number of shares of its Common
Stock as shall be sufficient to satisfy the requirements of the Plan. The
inability of the Company to obtain from any such regulatory agency having
jurisdiction thereof the authorization deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any shares of its stock hereunder
to the inability of the Company to confirm to its satisfaction that any issuance
and sale of any shares of such stock will meet applicable legal requirements
shall relieve the Company of any liability in respect of the non-issuance or
sale of such stock as to which such authorization or confirmation have not been
obtained.
19. Notices
-------
Any notice to be given to the Company pursuant to the provisions of this
Plan shall be addressed to the Company in care of its Secretary at its principal
office, and any notice to be given to an Optionee to whom an Option is granted
hereunder shall be addressed to him or her at the address given beneath such
Optionee's signature on the Stock Option Agreement, or at such other address as
such Optionee or his transferee (upon the transfer of Optionee Stock) may
hereafter
29
<PAGE>
designate in writing to the Company. Any such notice shall be deemed duly given
when enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
registered or certified, and deposited, postage and registry or certification
fee prepaid, in a post office or branch post office regularly maintained by the
United States Postal Service. It shall be the obligation of each Optionee and
each transferee holding Optionee Stock to provide the Secretary of the Company,
by letter mailed as provided hereinabove, with written notice of his or her
correct mailing address.
20. Adjustments Upon Changes in Capitalization
------------------------------------------
If the outstanding shares of Common Stock of the Company are increased,
decreased, changed into or exchanged for a different number or kind of shares of
the Company through reorganization, recapitalization, reclassification, stock
dividend, stock split or reverse stock split, upon proper authorization of the
Board, an appropriate and proportionate adjustment shall be made in the number
and kind of shares which may be issued upon exercise of Options granted under
the Plan; provided, however, that no such adjustment need be made if, upon the
advice of counsel, the Board determines that such adjustment may result in the
receipt of federally taxable income to holders of Options granted hereunder or
the holders of Common Stock or other classes of the Company's securities.
21. Representations and Warranties
------------------------------
As a condition to the exercise of any portion of an Option, the Company may
require the person exercising such Option to make any representation and/or
warranty to the Company as may, in the judgment of counsel to the Company, be
required under any applicable law or regulation, including but not limited to a
representation and warranty that the shares are being acquired only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is
required under the Securities Act of 1933, as amended (the "Securities Act"), or
any other applicable law, regulation or rule of any governmental agency.
22. No Enlargement of Employee Rights
---------------------------------
This Plan is purely voluntary on the part of the Company, and while the
Company hopes to continue it indefinitely, the continuance of the Plan shall not
be deemed to constitute a contract between the Company and any employee, or to
be consideration for or a condition of the employment of any employee. Nothing
contained in the Plan shall be deemed to give any employee the right to be
retained in his employ of the Company or its Affiliated Companies, or to
interfere with the right of the Company or an Affiliated Company to discharge or
retire any employee thereof at any time. No employee shall have any right to or
interest in options authorized hereunder prior to the grant of such an Option to
such employee, and upon such grant such employee shall have only such rights and
interests as are expressly provided herein, subject, however, to all applicable
provisions of the Company's Certificate of Incorporation, as the same may be
amended from time to time.
30
<PAGE>
23. Legends on Stock Certificates
-----------------------------
Unless an appropriate registration statement is filed pursuant to the
Securities Act , with respect to the shares of Common Stock issuable under this
Plan, each certificate representing such Common Stock shall be endorsed on its
face with the following legend or its equivalent:
"Neither the Option pursuant to which the shares represented by this
certificate are issued nor said shares have been registered under the
Securities Act of 1933, as amended (the "Act"). Transfer or sale of such
securities or any interest therein is unlawful except after registration,
or pursuant to an exemption from the registration requirements thereunder."
24. Specific Performance
--------------------
The Options granted hereunder and the Optionee Stock issued pursuant to the
exercise of such an Option cannot be readily purchased or sold in the open
market, and, for that reason among others, the Company and its stockholders will
be irreparably damaged in the event that this Plan is not specifically enforced.
Should any dispute arise concerning the sale or other disposition of an Option
and/or Optionee Stock, an injunction may be issued restraining such sale or
other disposition of such Option and/or Optionee Stock pending the determination
of such controversy. In the event of any controversy concerning the right or
obligation to purchase or sell any such Option or Optionee Stock, such right or
obligation shall be enforceable in a court of equity by a decree of specific
performance. Such remedy shall, however, be cumulative and not exclusive, and
shall be in addition to any other remedy which the parties may have.
25. Invalid Provisions
------------------
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions shall
be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
26. Applicable Law
--------------
This Plan shall be governed by and construed in accordance with the laws of
the State of California.
27. Successors and Assigns
----------------------
This Plan shall be binding on and inure to the benefit of the Company and
the employees, directors, consultants, advisers and/or independent contractors
to whom an Option is granted hereunder, and such Optionees' heirs, executors,
administrators, legatees, personal representatives, assignees and transferees.
31
<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 the Adoption of the Company's 1999 Stock Option Plan.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. To ratify the appointment of Grant Thornton LLP as the Company's independent
accountants.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. 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 26, 1999
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 25, 1999 and Annual Report
to Stockholders for the fiscal year ended September 27, 1998, 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 26, 1999 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 +
